New South Wales Supreme Court CITATION : SEE v HARDMAN & ANOR [2002] NSWSC 287 CURRENT JURISDICTION: EQUITY FILE NUMBER(S) : SC 3682 of 2001 HEARING DATE(S) : 20, 21, 22, 25, 26, 27 & 28/3/02 JUDGMENT DATE : 12 April 2002 PARTIES : Louise Mary See - Plaintiff William Patrick Hardman - Defendant JUDGMENT OF : Bryson J at 1 COUNSEL : Oakes SC and Fendekian - Plaintiff Whittle SC and BJ Burke - Defendant SOLICITORS : Watson & Watson - Plaintiff Hickson Wisewoulds - Defendant CATCHWORDS : TRUSTS and TRUSTEES - removal of trustee - application for removal of trustee of will on grounds of failures to investigate possible claims arising out of transactions by testatrix - review of information available to trustee and to court - no reasonable basis for supposed claims - removal of trustee refused. - WILLS PROBATE and ADMINISTRATION - Executor - removal of executor - removal refused. Miller v. Cameron (1936) 54 CLR 572 Letterstedt v. Broers & Anor (1884) 9 App Cas 371 Hunter v. Hunter & Anor [1938] NZLR 520 McLean v. Burns Phillip Trustee Co. (1985) 2 NSWLR 623 CASES CITED : Pope v. DRP Nominees Pty Ltd (1999) 74 SASR 78 Donowa v. Caddell (Court of Appeal Unreported 2 June 1980). Mavrideros v. Mack (1998) 45 NSWLR 80 Bates v. Messner (1967) 67 SR (NSW) 187 In the Goods of Loveday [1900] P 154 DECISION : Judgment for defendant - see [83] IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J FRIDAY 12 APRIL 2002 3682/01 LOUISE MARY SEE v. WILLIAM PATRICK HARDMAN JUDGMENT 1 HIS HONOUR: Florence Amy Hardman of Balmain, hotel proprietor, aged 83 years, died at St Vincent's Private Hospital Darlinghurst on 25 May 2000 and probate of her last will dated 24 March 2000 was granted by this Court on 25 July 2000 to the defendant William Patrick Hardman senior, her only surviving son. 2 The will revoked all previous dispositions and appointed the defendant trustee and executor. By cl.3 Mrs Hardman gave her jewellery to her three daughters in equal shares. By cl.4 Mrs Hardman left the freehold of the Unity Hall Hotel at 292-294 Darling Street Balmain to her four surviving children in equal shares as tenants in common. The plaintiff, the defendant and their sisters Mrs Bernadette Deane and Mrs Maree Bell are the beneficiaries of this gift. The gift was "… subject nevertheless to any lease or agreement to grant a lease which I may have entered into in respect of the said property and subject to any mortgage which I may give or have given in order to secure borrowings of William Patrick Hardman (junior)". William Patrick Hardman junior, who was born in 1972, is the grandson of Mrs Hardman and the son of the defendant. Clause 5 of the Will gave the rest and residue of the estate to her trustee to convert into money and divide the proceeds of conversion after payment of debts and funeral expenses into five equal shares; one share to each of her surviving children and the fifth share to be divided among her surviving grandchildren. There are seventeen surviving grandchildren, including Mr Hardman junior, and they are not parties to these proceedings. The property of the deceased shown in the probate inventory includes the Unity Hall Hotel in Balmain, a home-unit in Coolangatta Queensland, money in bank accounts, a motor car, a life insurance policy, shareholdings in two public companies and 1000 shares in Holilol Pty Ltd the value of which was shown in the probate inventory at $172,000. The assets which the issues in these proceedings most concern are the Unity Hall Hotel and the shares in Holilol Pty Ltd. 3 Holilol was formed in 1990 and became the owner of the Hotelier's licence in that year. A search of registered particulars shows that in the last months of Mrs Hardman's life its principal place of business was the Unity Hall Hotel. Its directors were Mrs Florence Hardman who became a director in 1990, Mr Hardman junior who became a director in 1995 and Mr Francis Robert Larosa, who became a director on 23 May 2000, two days before Mrs Hardman's death. Mrs Hardman was Secretary of the company and had been since 1990. The company had $1000 issued shares on which $1000 had been paid; according to the registered particulars Mrs Hardman was the holder and beneficial owner of 999 shares and Mr Hardman junior was the holder and beneficial owner of one share; this is slightly different to the probate inventory. 4 Mrs Hardman granted a General Power of Attorney to Mr Hardman junior on 24 March 2000. On 24 March 2000 Mrs Hardman made her last will, executed the power of attorney and swore an affidavit verifying the application to transfer the Hotelier's licence, all in the presence of Mr Osburg, solicitor of Messrs Hicksons. This Power was in a standard form and extended to authorising execution of an assurance or doing any act whereby a benefit was conferred on the attorney. It was an enduring power in case of loss of capacity through unsoundness of mind; there is no evidence that that ever happened. The power of attorney was registered in the Land Titles Office Book 4273 No. 291 on 19 May 2000. 5 On 19 April 2000 Mrs Hardman attended a meeting with Mr Peter Robinson at Westpac; also present were Mr Osburg, Mr Hardman junior and Mr McGlynn. At the meeting security documents relating to Mr Hardman junior's application for finance were signed, and Mrs Hardman signed the guarantee and indemnity as guarantor for Hawksun in favour of Westpac. Other documents of the same date are a mortgage by Hawksun to Westpac of the lease (which had not yet been granted) and a fixed and floating charge by Hawksun to Westpac. That meeting took place early in the day and later in the day Mrs Hardman travelled to Brisbane, where she visited the defendant and his family and remained until she returned to Sydney on 29 April. Mrs Hardman was last admitted to hospital on 16 May, and remained there until her death. On and after 22 May she was incapable of communication. She did not participate in the events of 23 and 24 May. 6 Mrs Hardman was one of the parties to an agreement in writing dated 23 May 2000. The parties were Holilol referred to as the vendor, Hawksun Pty Ltd referred to as the purchaser, Mr Hardman junior referred to as the covenantor and Mrs Hardman referred to as the licensee. Hawksun Pty Ltd was and is a company wholly controlled by Mr Hardman junior. The recitals include a statement that Holilol was presently carrying on business as hotelier at the Unity Hall Hotel, and that Mrs Hardman held the hotelier's licence, and that she held three poker machine permits of which Holilol was the beneficial owner. The facts so recited are not in dispute in these proceedings. The recitals do not say in terms that Holilol was the beneficial owner of the hotelier's licence but the agreement provides for Holilol to sell and dispose of assets including the hotelier's licence as if it was fully entitled to do so. Recitals also state to the effect that Holilol had agreed to sell to Hawksun the business, the furniture, plant, stock, goodwill and hotelier's licence, and that Mr Hardman junior was a director of Hawksun Pty Ltd. The total purchase price was $4,203,000 which "… must be paid in cash on completion which must take place on or before 24 May 2000", the day after the date of the agreement. The purchase price was allocated as follows:- Furniture, plant and effects $ 745,047.00 Goodwill and licence $2,923,960.00 The permits $ 534,000.00 TOTAL: $4,203,000.00 7 The agreement contained clauses appropriate for the sale of a hotel business and transfer of licence, with stock at valuation, a guarantee by Mr Hardman junior of the obligations of Hawksun Pty Ltd to Holilol and, by cl.20, an essential term that Holilol would cause Mrs Hardman to grant Holilol a lease for 10 years with an option for 10 years in the form annexed to the agreement. The agreement was executed on 23 May by Mr Hardman junior as director for Holilol, as sole director for Hawksun, as a principal himself and as attorney under power for Mrs Hardman; that is, he signed for all four parties. This agreement was completed on 24 May 2000. There was no active participation of Mrs Hardman in these events, as she was then in St Vincent's Hospital where she died on 25 May. 8 Mrs Hardman was the lessor in a lease of the land on which the hotel stands (later registered 7040409L) granted on 23 May 2000 for 10 years commencing on 23 May 2000. This lease was as provided for by cl.20 of the agreement for sale of the business. On 23 May Mr Jones, solicitor, produced a final draft of the lease, adopting amendments requested by solicitors acting for Westpac, and sent the final draft to Mr McGlynn. The lease was executed on behalf of Mrs Hardman by Mr Hardman junior as attorney under power; he also executed the lease as sole director and secretary of the lessee Hawksun. On 23 May Mr Hardman junior appointed Mr Larosa as a director of Holilol. The appointment took the form of minutes of a meeting conducted at 4.45 pm at which Mr Hardman was present in his own capacity and as attorney for Mrs Hardman. Mr Hardman junior executed the lease on 23 May. Mr Osburg sent the security documents signed by Mrs Hardman to Westpac on 23 May. Mr McGlynn's firm recorded, in several letters, that the sale was completed on 24 May. Westpac accounted to Mrs Hardman in writing on 24 May showing how the proceeds of sale of $4,203,000 were disbursed by Westpac out of its advance to Hawksun, to pay off various debts of Mrs Hardman to the bank and to credit her account with a balance of $3,131,808.60. 9 The lease provided for rent of $6,731 weekly in advance for the first two and a half years with provision for review thereafter. Part 8 of the Lease declared that the hotelier's licence was to remain the property of the lessee and that on the expiration or termination of the lease the lessee was to be entitled to remove the licence. By Pt.9 the lessee was given an option to take a further lease for 10 years on giving three months' notice before expiry. Part 10 gave the lessee a right of pre-emption. Part 11 gave the lessee an option to purchase the reversion during the first five years by a stated procedure and at "… a valuation to be made of the current market value of the reversion to the freehold on the basis that the same is subject to this lease and as the hotelier's licence attaching thereto is the property of the lessee, the parties agree the valuation shall be valued as though the demised premises were de-licensed premises, and the valuation shall be based on comparable sales of non-licensed premises …". The lease did not contain any guarantee or other personal obligations by Mr Hardman junior. 10 In order to obtain finance for completion of the sale to it of the hotel business Hawksun borrowed all the funds required from Westpac Banking Corporation, and gave Westpac a Fixed and Floating Charge and a mortgage over the lease. The mortgage bears date 19 April 2000 and was later registered 9040410C. The Fixed and Floating Charge was granted by Hawksun to Westpac on 19 April 2000. The security obtained by Westpac for the financing also included a guarantee by Mrs Hardman. She herself executed the guarantee on 19 April 2000. The guarantee contained a provision charging the guarantor's obligations on the Unity Hall Hotel and limiting recourse to the real property so that Mrs Hardman incurred no personal obligation. It will be recalled that cl.4 of the Will, made a month earlier, made the gift of the freehold property subject to such a lease as was later granted, and also subject to a mortgage to secure borrowings. So far as evidence shows there was no mortgage, but according to its terms the guarantee liability is probably secured by two mortgages over the Unity Hall Hotel which Mrs Hardman granted to Westpac in 1990 when she acquired the freehold. 11 The defendant has embarked on administration of Mrs Hardman's estate and has attended to much of his duties as executor, and has made some interim distributions to beneficiaries. However he has not completed his executorial duties by transmitting registered proprietorship of the hotel to himself and his sisters as tenants in common in equal shares; this is an executorial duty as the freehold was not given to him as trustee. The obstacle to completing this task is a requirement by Westpac Bank that the four devisees join in executing a further guarantee and mortgage, again limiting recourse to the property. It is not clear to me that Westpac needs this additional protection, but however that may be, registration of transmission cannot take place without the bank's co-operation by production of the certificate of title. The plaintiff has refused to join in the grant of another mortgage, although the defendant and Mrs Deane and Mrs Bell have executed one. Executing the mortgage would not impose any discernible disadvantage on the devisees. The plaintiff's response to a request to join in the mortgage was a refusal conveyed orally by her solicitor, with the observation that the present mortgage should not be on the title. 12 In my opinion the defendant's executorial duties include establishing whether Mrs Hardman's interest in Holilol shares is an interest in 999 shares or in 1000 shares, and seeing that her shares are registered in his own name. When that happens it will be his duty as trustee to convert the shares into money by whatever means available, probably by causing the company to be liquidated. His evidence left it unclear whether he has completed the executorial stage of dealing with these shares, although it spoke of some steps to sell Holilol's assets. 13 In Miller v. Cameron (1936) 54 CLR 572 Dixon J, with the concurrence of Evatt and McTiernan JJ, stated the jurisdiction of the court to remove a trustee and indicated grounds on which the court acts at 580-581: The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. 14 Observation of other members of the High Court do not differ in principle from this passage; see Latham CJ at 575 and Starke J at 579, who referred to the opinion of the Privy Council in Letterstedt v. Broers & Anor (1884) 9 App Cas 371, to which courts frequently refer in this context. That opinion includes (at 386): It seems to their Lordships that the jurisdiction which a Court of Equity has no difficulty in exercising under the circumstances indicated by Story is merely ancillary to its principal duty, to see that the trusts are properly executed. This duty is constantly being performed by the substitution of new trustees in the place of original trustees for a variety of reasons in non-contentious cases. And therefore, though it should appear that the charges of misconduct were either not made out, or were greatly exaggerated, so that the trustee was justified in resisting them, and the Court might consider that in awarding costs, yet if satisfied that the continuance of the trustee would prevent the trust being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate. 15 (The reference to Story's Equity Jurisprudence is to a passage at S1289 dealing with positive misconduct by a trustee.) 16 At 387 their Lordships said: In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle above enunciated, that their main guide must be the welfare of the beneficiaries. 17 Within the principle so stated the court has power to remove a trustee who has not acted in breach of trust and has not been guilty of misconduct, and the court might decide, for the purpose of seeing that trusts are properly executed, to remove a trustee whose conduct had not been improper in any way. This could only happen rarely. A state of conflict with a beneficiary or other interested person might, at least in concept, so interfere with the administration of a trust as to cause the court to remove the trustee. An application for removal naturally tends to take the form of charges of misconduct against the trustee, but is not necessarily to be disposed of according to findings upholding or dismissing those charges. The true issue is not whether there have been breaches of trust or misconduct. See Hunter v. Hunter & Anor [1938] NZLR 520 at 529 (Myers CJ) and at 556 where Northcroft J said: The court, however, is not concerned with a vindication of the appellants, but with the welfare of those for whom the trust was created. 18 There may be other means than removal for the court to perform its principal duty of seeing that trusts are properly executed. The court may take the execution of trusts wholly or partly under the control of the court; this was done in the distant past by ready use of the court's power to order general administration of a trust under the court's directions, now virtually superseded by granting directions and relief directed to remedying some specific problem or difficulty; see McLean v. Burns Phillip Trustee Co. (1985) 2 NSWLR 623 and Pope v. DRP Nominees Pty Ltd (1999) 74 SASR 78 at 88 (Bleby J). The powers of the court in this respect are very wide and would in my opinion extend to the appointment of a receiver to manage all or part of the trust property, or to manage some piece of litigation for the protection of trust property, in the name of and without removing the trustee. Receivership as an aspect of or means of carrying out general administration of an estate under the control of the court was referred to and treated as appropriate in the judgment of Mahoney JA in Donowa v. Caddell (Court of Appeal Unreported 2 June 1980). 19 The principles on which the court acts when a claim is made for revocation of a grant of probate are found in different authorities but generally resemble the principles relating to removal of trustees. In Mavrideros v. Mack (1998) 45 NSWLR 80 at 101-102 Sheller JA with the concurrence of Priestley and Beazley JJA stated that the principles to be applied are those stated by the Court of Appeal in Bates v. Messner (1967) 67 SR (NSW) 187 and set out significant passages in the judgments of Sugerman JA at 189 and Asprey JA at 191-192 which establish those principles. Both judgments adopted a passage in the judgment of Jeune P in In the Goods of Loveday [1900] P 154 at 156 of which Asprey JA said at 191 … the real object which the court must always keep in view is the due and proper administration of the estate in the interests of the parties beneficially entitled thereto on the part of the person to whom and by whose oath as to the faithful performance of his duties the court has been induced to entrust the office of executor. 20 To my reading however Asprey JA, in the passage cited by Sheller JA at 102, stated the law so as to show a somewhat greater concentration on the capacity and conduct of the executor than is found in authorities relating to the removal of trustees. While both are difficult and unusual exercises, practical experience is that seeking the removal of an executor is more difficult than seeking the removal of a trustee, notwithstanding similarities in authoritative statements of principle. 21 The main burden of the many claims in the Statement of Claim is that the defendant should be removed from his office as executor and trustee and that estate affairs should be put in the hands of Mr Martin Green or another qualified person. Mr Green is a practising chartered accountant who has many times been appointed Official Liquidator of companies by courts and is well qualified by training and experience to act as professional trustee, receiver and manager and similar capacities. In summary the remedies claimed are revocation of the grant of probate to the defendant, grant of administration to Mr Green, removal of the defendant as trustee of the estate and appointment of Mr Martin as Receiver and Manager, and ancillary orders relating to vesting and otherwise securing control of assets, documents and records, taking accounts and inquiries, administration of assets under the direction of the court and other orders. 22 The Statement of Claim has been amended twice. It alleges a series of events in the history of ownership of the hotel, of which Mrs Hardman and earlier during his lifetime her late husband were lessees from Tooth & Co. for many years until Mrs Hardman bought the property in 1990. The Second Amended Statement of Claim alleges uncontentious facts about the history of Holilol Pty Ltd and Mr Hardman junior's becoming the director, renovations, developments and extensions of the hotel building, the history of Hawksun Pty Ltd, and then alleges a history of events leading up to the transactions of 23 and 24 May 2000. It became known on 15 December 1999 that Mrs Hardman suffered from cancer which would be terminal. After living in the hotel for many years she moved at the suggestion of Mr Hardman junior to accommodation in Macquarie Street in January 2000, of which she was the tenant and the rent on which was paid by Holilol. The Second Amended Statement of Claim then alleges a series of events including a letter of advice of 4 February 2000 from Mr Frank Larosa, accountant who had acted as Mrs Hardman's accountant for some years and was also Holilol's accountant, dealing with her wishes that there was to be a sale of the whole of the business assets to Mr Hardman junior and grant of a lease to him, and an acknowledgment signed by Mrs Hardman on 16 February 2000 that she had read the letter, in which she declared her approval of matters in it and her understanding of the risk of granting a first mortgage over the land. It is then alleged that Mr Ron Roberts valued the hotel as a going concern as at 1 March 2000 at $8,530,000 on a mortgage valuation; and it is alleged that as 8 March 2000 the market value of the hotel as a going concern was not less than $12,000,000. The pleading then alleges the relevant terms of the will, the power of attorney, and the mortgage from Hawksun to Westpac. 23 The pleading also alleges Mr Larosa's appointment as a director of Holilol on 23 May, the agreement of 23 May 2000 relating to the sale of the business by Holilol to Hawksun, the lease and the terms of the lease and a solicitor's report by letter on 24 May of the sale having been completed. The pleading also alleges history relating to Mrs Hardman's health: she was hospitalised at St Vincent's Hospital from 16 May 2000, her condition deteriorated on 22 May when she lapsed in and out of consciousness and she was unable to communicate intelligently, and she so remained on 23 and 24 May and died on 25 May. 24 Much of the material alleged could not be contentious. The contentious allegations include para.15, that as at 1 March 2000 the market value of the hotel as a going concern was not less than $12,000,000. In paras 34 to 40 a number of matters are charged against the defendant. In para 34 it was alleged that the defendant as executor or as trustee failed to collect the rent from Hawksun until prompted by letters from the plaintiff's solicitor. This was adequately explained and ceased to be subject of complaint during the hearing. By para.35 it was complained that the defendant failed until prompted by letters from the plaintiff's solicitor to give her any advice about the rent and did not give her any accounting until there had been a threat of proceedings. These complaints all relate to events which happened less than 12 months after the death of the deceased and I do not treat them as complaints of substance. Paragraph 36 charges that the defendant has failed to consider properly the available evidence, to investigate properly the sale of the business and the lease, and to cause Holilol to recover its loss. These and other matters charged against the defendant are set out more fully later in these reasons. 25 There are other expressions of matters complained of by the plaintiff in correspondence between solicitors during the pendency of the litigation. The plaintiff's solicitors wrote to the defendant's solicitors on 27 September 2001 and made comments on the plaintiff's understanding that the sale was to be at market value, that Mr Roberts was engaged to perform a market valuation and that the assets were to be sold at the value which he determined, and it was contended that the valuation was not a market valuation. It was then said that the defendant had been requested to investigate the transaction, that investigation would have shown that the sale was clearly and significantly at an undervalue in breach of Mrs Hardman's intention, that the defendant could have asked his solicitors Messrs Hickson Wisewoulds to perform the investigation by providing information in their hands from which it would be concluded that the transactions did not reflect Mrs Hardman's intentions, and that the defendant was ideally placed to resolve the problem and if not resolved to commence proceedings on behalf of Holilol Pty Ltd and on behalf of the estate; the plaintiff's solicitors called for proceedings to be commenced against Hawksun. In a letter of 3 October the plaintiff's solicitors contended that the defendant had sufficient information to conclude that the sale in May 2000 was at an undervalue and not in accordance with the wishes of Mrs Hardman, and that it was clear that Mr Hardman junior as a director of Holilol had breached his fiduciary duties of that company, used his position as a director to gain a benefit and had incurred liability therefor. The plaintiff's solicitors went on to say that the plaintiff sought to bring proceedings on behalf of Holilol, and to put a contention that the defendant could facilitate this by putting her in a position to become a member or by authorising her to bring the proceedings. In his opening address the plaintiff's counsel dealt further with the form which litigation by or in the interest of Holilol could take so as to obtain remedies against Mr Hardman junior. 26 In the presentation of the case many matters were put as aspects of matters complained of, it is difficult to gather them all together and to relate them all in a connected way to the claims for relief, and the ones which have a claim for adjudication are the matters charged against the defendant in the Second Amended Statement of Claim. One principal ground related to market value; that in advice given by Mr Larosa on 4 February 2000 the subject matter under consideration was a sale at market value to be determined by Mr Roberts, but the valuation given by Mr Roberts was expressed to be for mortgage purposes, and further it was alleged that valuation evidence called by the plaintiff showed that the value given by Mr Roberts was far less than market value of the business and business assets on a correct view. The other principal matter of complaint related to the defendant's not having investigated in an appropriate way and with appropriate intensity the prospects of making a claim on behalf of Mrs Hardman's estate or of promoting a claim by Holilol against Mr Hardman junior and Hawksun for remedies relating to the sale of the business and business assets from Holilol to Hawksun. 27 I regard it as important to keep in view that it was Holilol and not Mrs Hardman which owned the business and the business assets including the hotelier's licence and sold them, and that the sale transaction to which Mrs Hardman was party as licensee took place on the basis that Holilol was the beneficial owner of the licence and she held it on Holilol's behalf, and there is no evidence and there is no reason to think that this basis was not correct. Although considerable attention including attention by Mr Valuer Robertson was given to the value overall of the hotel including both the freehold and the business and business assets with the licence, Mrs Hardman did not own all those assets at the relevant time; she owned shares in Holilol, and aspects of the transaction in which she was treated as owner of the freehold without having the benefit of owning the hotelier's licence reflected the actual state of affairs; it was Holilol and not she which had the disposition of business and the licence. It is little to the point to consider what economic advantages there would have been in putting all elements together and dealing with them at the one time on an arm's-length basis; that was not done and Mrs Hardman did not ever consider it. Respects in which the lease, the leasing transaction and the guarantee taken together represent large and unusual benefits conferred on Hawksun and consequently on Mr Hardman junior do not bear on any remedy which could be sought on behalf of Holilol against anyone. These respects are striking and they include that the lease did not contain a personal guarantee by Mr Hardman junior and the fact that Mrs Hardman gave security over the hotel for her guarantee of the loan by Westpac to Hawksun for the purpose of buying the business; these things would not happen in an arm's-length transaction. 28 There is no basis and no allegation of any basis on which the lease and the guarantee could be set aside on any equitable principle or for want of capacity; nothing in the nature of fraud, undue influence, unconscionable conduct, overreaching behaviour or any such matter. Provisions of the lease relating to determination of the price on exercise of the option to purchase without treating the premises as licensed follow the logic of Holilol's ownership and disposition of the licence. 29 It is significant that Mrs Hardman had a good relationship with Mr Hardman junior, who was a chartered accountant by profession and, after working in that profession for several years, assisted in the management of the hotel, returned to accountancy and then for several years before Mrs Hardman's death worked as a manager at the hotel. He was energetic and successful and Mrs Hardman approved of his work, regarded him as of great assistance to her and did not see any other member of the family as an appropriate person to assist her in managing the hotel, or to become the owner of the hotel business after her death. In particular she did not regard Mrs See or her husband, who lived at the hotel with their children, as persons to whom she would give the hotel, or the responsibility of managing it. Indications of her confidence in and regard for Mr Hardman junior included his being a director of Holilol since December 1995, she and he being the only directors. During this time the premises were extensively renovated and the ground floor of No. 294 Darling Street became a bottle shop. This contributed significantly to profitability. Previously No. 294 had been let out and not used as part of the business premises of the hotel. Another significant contribution came from installation of poker machines and purchasing permits for three extra poker machines, a total of 18. An application to Leichhardt Council for development consent to use the first floor of No. 294 as a bar and gaming room was made in September 1999; however Council's consent was not obtained until September 2000. 30 I address issues in the pleadings which are contentious and significant in the order of the allegations in the Second Amended Statement of Claim. 31 In para.7 of SASC it is alleged that on 15 December 1999 the deceased was diagnosed as suffering from cancer, and that the plaintiff Mrs See told Mr Hardman junior on that day. This is not admitted but Mrs See's evidence dealing with this matter was not challenged, and I accept it. 32 In para.10 of SASC it is alleged that Mr Hardman junior is the beneficial owner of the share capital of Hawksun; this is not admitted but his ultimate control of the shares appears from particulars he furnished for transfer of the licence – Exhibit J. 33 In para.11 of SASC the plaintiff alleges the circumstances in which in January 2000 Mrs Hardman moved to live in a rented home unit at 7 Macquarie Street, paid for by Holilol; and that she moved to the home unit at the suggestion of Mr Hardman junior, who directed Holilol to pay the rent. It is also alleged that Mrs See and her family moved to the home unit to care for Mrs Hardman. These allegations were not admitted, but the evidence of them was not challenged and is accepted. 34 Paragraphs 12 and 12A of SASC allege circumstances of negotiations which led to the letter of advice dated 4 February 2000 from Mr Frank Larosa, an accountant, to Mrs Hardman. The letter sets out the results of negotiations which, according to the letter, had taken place by then, records arrangements which had emerged from the negotiations and points out some matters which Mr Larosa wished to draw to Mrs Hardman's attention. Mr Larosa gave in evidence an account of negotiations and events which preceded this letter; I am satisfied that his evidence is correct in substance, although he had some difficulty in establishing the dates of particular events in the course of negotiations, and I find that what he said in his letter of 4 February had occurred was a fair representation of the actual events. Mr Larosa was unable, even with the assistance of diary notes, which contained very little information, to establish the dates on which he saw Mrs Hardman, and for events in the first week of January 2000 there is the anomaly that, as records of St Vincent's Private Hospital clearly show, Mrs Hardman was a hospital patient during that period. While I do not see clearly how these circumstances can be reconciled, it is not impossible or even difficult to accept that while Mrs Hardman was a patient in St Vincent's Private Hospital at Darlinghurst she may on several occasions have been able to be present at serious business meetings at the home unit in Macquarie Street, or in a law office in the MLC Centre; the distances are not great, her condition as recorded in the hospital notes does not seem to preclude her being absent on leave from the hospital during the day, even for periods of some hours, and there are sometimes intervals as long as seven hours in nursing notes of observations of her. Another witness Mr Tom Jones, solicitor of Freehills, had a clear recollection supported by diary notes that Mrs Hardman was present for several hours at a conference at his office in the MLC Centre on 11 January. The hospital records do not directly falsify evidence that these meetings took place and, while a sense of anomaly continues, the balance of evidence strongly favours accepting evidence that the meetings occurred. 35 Mr Larosa's letter of 4 February contains statements to which para.12 of SASC particularly refers to the effect that Mrs Hardman's wishes were that there was to be a sale of the whole of the business assets as a going concern to Mr Hardman junior on a market value basis at a value to be determined by Ron Roberts, that a lease should be granted to Mr Hardman junior at a rent to be determined as though the Unity Hall Hotel were a commercial property not as a hotel, and that there would be an option to purchase. It was stated that Mr Roberts' preliminary valuation was in the vicinity of $4.25 to $4.75 million. The letter stated that the transaction was outside the normal course in leasing a freehold hotel, and also stated that the draft lease included the normal provisions of reversionary goodwill and that the business assets would not revert to the owner after the expiration of the lease. The letter also suggests that Mrs Hardman would need to offer the Unity Hall Hotel as security for Mr Hardman junior's finance through Westpac. Mrs Hardman gave Mr Larosa an acknowledgment, by signing a form of acknowledgment which he enclosed with his letter of 4 February 2000; her signature on the acknowledgment was dated 16 February 2000 and witnessed by Mr Hardman junior. She acknowledged that she had read the letter and she declared that the sale of the business assets and the matter in the letter relating to a lease to Mr Hardman junior were in accordance with her instructions and met with her approval. She also acknowledged that she understood the potential risk of granting a first mortgage in respect of a loan facility to Mr Hardman junior, and that this was in accordance with her instructions and met with her approval. There is in the evidence no reason to suppose that the acknowledgement meant anything less than it directly stated; or to suppose that Mrs Hardman did not fully understand the letter of 4 February 2000 and the arrangements recorded and proposed in it. 36 The plaintiff's counsel recurringly said of this letter that Mrs Hardman was told that the valuation would be at market value. It was also a strong theme of the presentation of the case that market value for the hotel was in the order of $12 million and that far less value than that was actually obtained. The references to market value in the letter are: "Ron Roberts has been engaged to perform a market valuation of the business specifically in relation to the Business assets of the Hotel", (and "The whole of the business assets are to be sold to Will Hardman at the value, which Ron determines") and "Will Hardman has the option to purchase the Land and Buildings at its market value within the first five years of the rental agreement." The sale of the freehold and the business and business assets in one line was not under discussion and the letter emphasised and explained in detail departures from the ordinary course in selling a freehold hotel and aspects of the sale which were obviously highly concessional and would obviously operate to some degree as benefactions to Mr Hardman junior. These aspects were the sale of the business assets including the Hotelier's licence permanently, so that at the end of the lease they would not come back to the freeholder, the determination of the rent and the price on exercise of option on the basis of commercial premises, not licensed premises, and the provision by the freeholder of the freehold as security for finance to enable the purchaser to borrow all money needed to purchase the business. These are obviously concessional and mark the transaction as not being an arm's length transaction which would realise the full value of Mrs Hardmans' position as freeholder and controlling shareholder of the company which owned the business. There is no reason to find, on the evidence, that the concessional and beneficent character of the transactions was not originated by Mrs Hardman herself, but even if that were not the case and the transaction was in a form proposed to her by Mr Hardman junior or someone acting in his interests and accepted by her, she would not have been in a position to maintain that its character was not known and understood by her, in view of the terms of the letter of 4 February and her acknowledgement of 16 February 2000. 37 Disposing of the beneficial interest in the hotelier's licence so that it was separated from beneficial ownership of the freehold had adverse implications for the value of the freehold; it is adverse in that, subject to practical difficulties of obtaining other suitable premises and to obtaining town planning approvals and the approval of the licensing court, the licensee might at the conclusion of the lease remove the licence. (There is a reciprocal injurious contingency for the value of the hotelier's licence in the hands of the licensee on expiry or other termination of the lease; he might have a licence and no premises). To Mrs Hardman as a business woman with long experience in the hotel trade this effect was, with fair certainty, obvious, but in any event it was pointed out to her by Mr Larosa and by Mr Jones. 38 Mr Larosa pointed out to her the desirability of obtaining a market valuation and of the transaction being at market valuation; it seems unlikely that she needed to have this pointed out to her, but the fact that Mr Larosa pointed it out may be an indication that she was embarking on dispositions of property with an element of benefaction and was not primarily concerned with maximising economic opportunities. 39 Paragraphs 12 and 12A of SASC include allegations that Mr Larosa was, on 4 February 2000 and in the negotiations the results of which were presented in the letter of that date, the accountant for Mrs Hardman and for Holilol and for Mr Hardman junior, and that Mr Larosa had a conflict of interest. Mr Larosa was Mrs Hardman's accountant from 1991 onwards. Clearly Mr Larosa was the accountant for Holilol as he kept its accounts and prepared its Annual Returns. Although in point of evidence it has been established that he became the accountant for Mr Hardman junior early in the year 2000, it has not been established that that event had already happened by 4 February. The opening statement in his letter is "In accordance with your instructions I have represented your interests in the sale of the business…," and his evidence shows that he saw himself as acting on behalf of and in the interest of Mrs Hardman in the negotiations. There is no evidence that he had a conflict of duty in so doing, in that there is no evidence either that he had in some way been commissioned or empowered to conduct the negotiations on behalf of or in the interest of Mr Hardman junior, or that he actually did behave in any way directed to upholding or advancing Mr Hardman junior's interests in the negotiations. Certainly aspects of what Mrs Hardman decided to do and Mr Larosa recorded were markedly advantageous to Mr Hardman junior, but there is every reason on the evidence to think that the advantages arose from her own wish and intention to confer benefits on him. Evidence of Mr Larosa and also of Mr Valuer Roberts, whom Mrs Hardman knew from several earlier valuations over a decade and in whom she had great confidence, shows that she had a well-thought-out scheme in which she would put Mr Hardman junior into the strong position of owning the business and the business assets and having a lease with an option to purchase, while obtaining sufficient money from the sale of the business and the business assets to achieve well-thought-out purposes of her own. Those purposes included having a sum of capital which she could divide among her children, having an income from the lease on which she could live, and putting the hotel in the hands of the family member whom she regarded as the appropriate person to conduct it. In forming and acting on this scheme there is no substantial reason for supposing that she acted under the influence of any professional advisor or of any other person, or that she was susceptible to influence or was of less than full capacity to make momentous decisions about the disposition of her resources. The disposition would not leave her impoverished or without significant resources, and would put her in a position to make other significant benefactions in cash from the proceeds of the sale. 40 The subject of benefaction was obviously on Mrs Hardman's mind at the time as she made a comprehensive will in January 2000, and made a further will in March which differed only by expressing recognition of the arrangements she had in hand to grant a lease and to give security. Overall the arrangements benefited Mr Hardman junior in a markedly favourable way in comparison with other family members, but there is no reason to think that Mrs Hardman was not aware of the disparity, and her benefaction was not inofficious in that large benefits were made available for other family members. The events have to be assessed in the context that Mrs Hardman learnt on 15 December 1999 that she suffered from a terminal illness, that in January 2000 she was receiving hospital treatment for that illness, that retirement from conduct of the hotel business was appropriate in her circumstances, and that Mr Hardman junior was, in her judgment and so far as appears from the evidence on an objective view, a family member who was able and appropriate to carry on the business. 41 Mr Roberts' affidavit evidence includes (para 9) that on a visit to the hotel in January 2000 at which he saw Mrs Hardman in the presence of Mr Hardman junior, she said "I need you to do a valuation of the leasehold to determine what price Will should pay me for it. It also needs to be suitable for submission to Peter Robinson in order for Will to be in a position to buy the lease as he is looking at borrowing the money from Westpac". Mr Roberts said to both Mrs Hardman and Mr Hardman junior "Then I will need to assess the value that will satisfy the bank's requirements as they relate to the hotel value and at the same time it will have to be a value that won't disadvantage other members of the family. As I understand the position, any value assessed must be able to withstand the scrutiny of other family members." Mrs Hardman replied "That's right". At a later meeting (affidavit para 11) Mrs Hardman said to Mr Roberts "I want to acknowledge Will's input to the hotel and to pay full credit for the significant contribution he has made turning it from the old Unity Hall into the highly successful operation it is now." And "My daughters aren't interested in running the pub. Will wants to and he does it well, so I want to make sure Will can continue to run it." 42 Mr Roberts said (aff. Para 14) that on an occasion when he visited Mrs Hardman in hospital in February 2000 he said "I've determined a preliminary figure and I want to tell you the figure prior to giving it to the bank. The figure is just over 4 million". After a moment or two Mrs Hardman replied "I've done my sums and I will need a minimum of 4.2 in order to allow me to make the distribution that I had planned to my children." He then explained some considerations which he thought made it possible to rework his worksheet and provide an extra $150,000 in the valuation. He said "That will bring it up to $4.2." and she replied "That would be good." 43 The defendant's own affidavit evidence was to the effect that, with his three sisters, he visited Mrs Hardman at St Vincent's Hospital on 7 January 2000. She called for Mr Hardman junior who attended and gave them a short account of the proposed lease. On a later occasion when Mrs Hardman visited the defendant and his wife in Queensland at Easter she said several times to the effect that she would not ever let the plaintiff and her husband get their hands on the hotel. 44 Mr Larosa's affidavit evidence was (para 11) that he visited Mrs Hardman at the hotel early in January (and the date 3 January which he gives may well not be exactly correct) and she said to him, among other things "I want to sell the hotel. I don't want my children to run the business after I'm gone, because none of them are able to do it and whatever value there is now will end up being nothing." After some discussion she called Mr Hardman junior and discussed with him and Mr Larosa Mr Hardman junior's buying the hotel and borrowing funds to do it. After Mr Larosa referred to selling at a proper market valuation Mrs Hardman said "I know. If I do anything else, there will be trouble from Louise and Robert. I want Will to be able to stay at the hotel and I don't want them interfering in running the business." There were other meetings and discussions in January in which Mrs Hardman told Mr Larosa her wishes; and he attended the conference with Mr Jones solicitor with her on 11 January 2000 and explained her wishes to Mr Jones in her presence. Mr Jones explained at length the implications of separating ownership of the freehold and beneficial ownership of the licence, Mr Larosa said to the effect that was what Mrs Hardman wanted, and she concurred. On 2 February he took the draft of his letter of advice to Mrs Hardman, went through the draft and explained each paragraph to her in a meeting which took well over an hour, and she confirmed that she wanted the proposed transaction. He then finalised the draft letter which became his letter of 4 February 2000, and posted it to her with the acknowledgment, and later received back the acknowledgment in the mail. His last meeting with her was at a football match early in May 2000 when she said to the effect "I am happy the sale to Will is all going according to plan." 45 The evidence of Mr Osburg showed that when in late 1999 he received instructions for her will from Mrs Hardman she said to the effect that she wanted to make sure that Mr Hardman junior was looked after and to make sure he kept the business, and commended his work in the hotel. She also said that she foresaw problems with the plaintiff and particularly her husband after her own death "… and I want to make sure that everything is settled now while I am still alive." On 7 January 2000 when Mr Osburg saw Mrs Hardman at St Vincent's Hospital and she signed a will, she said to the effect "I want Will to have the business. I want him to be able to keep running the hotel after I go." However she did not tell him any details about how she was going to achieve that. She spoke to Mr Osburg apparently late in February and said to the effect that she and Mr Larosa had been through the arrangements in great detail and discussed them with Mr Jones and "It's what I want". 46 Mr Jones' evidence also showed that at the conference on 11 January an explanation of the proposed transaction was given in Mrs Hardman's presence, Mr Jones gave her advice and she said to the effect that what was proposed was what she wanted to do. 47 Paragraphs 14 and 15 of SASC contained allegations dealing with the market value of the business and the premises, meaning the hotel business and business assets including the hotelier's licence and the freehold considered together as one asset. So far as appears from evidence Holilol did not have a lease of the premises from Mrs Hardman. Mrs Hardman did not dispose of the freehold to Mr Hardman junior or to any interest associated with him, but retained the freehold so as to be able, as she did, to dispose of it by Will to other persons. Mr Ron Roberts was instructed by Mrs Hardman to prepare and did prepare a valuation as of 1 March 2000 in which he said to the effect that the hotel including the land and improvements, the liquor licence, the additional three gaming permits, plant, furniture, fixtures and fittings and goodwill as a going concern but excluding stock was valued for mortgage purposes at $8,530,000. The reference to mortgage purposes indicates a degree of conservatism and concentration on the intending mortgagee's opportunity to sell the security if need should arise, which gives an intending mortgagee a different point of view to a purchaser whose attention might also be directed to the potential earnings which ownership would confer on him. In the contemplated transactions and the transactions which eventually took place, Westpac was in the position of being mortgagee of the assets included by Mr Roberts in this part of his valuation in that Mrs Hardman's guarantee of Westpac's loan to Hawksun was supported by a charge over the Hotel; Westpac also had Hawksun's mortgage of the lease and the Fixed and Floating Charge. 48 Paragraph 15 of SASC alleges that as at 1 March 2000 the market value of the business and premises as a going concern was some $12,000,000. This allegation was supported by the valuation dated 13 February 2001 by Mr Valuer Robertson, who was retained by the plaintiff. Mr Robertson's valuation was supported by two lines of reasoning; one based on capitalisation of the net operating profit of the hotel at $1,900,000 per annum derived from a statement by Mr Larosa in his letter of 4 February 2000, and another line of reasoning based on appraisal and analysis of what Mr Robertson regarded as comparable sales of hotels. The first part of this reasoning suffered the serious flaw of being based on Mr Larosa's estimate and not on the actual net operating profit for the six months period ending 31 December 1999, which was in fact available and which was referred to and relied on by Mr Roberts in his valuation. This greatly reduces the persuasive force of Mr Robertson's opinions on value. Mr Robertson's opinion based on his analysis of comparable sales is not supported by a second line of reasoning based on the known recent net operating profit of the Unity Hall Hotel, which would produce a markedly lower figure. 49 Mr Robertson's valuation and his evidence contained indications that his conclusion are not a final expression of his opinion. He described his report as preliminary and said to the effect that he would need a full investigation of all facts to provide a detailed report, and that he had not inspected the premises, or the financial records. He had not conducted a full valuation inspection of the hotel, although he had made visits to it, adopting the character of a hotel patron rather than of a valuer, and he did not have access to the history and the trading accounts, which were of importance for valuation. Although his report and his evidence offer criticism of Mr Roberts' valuation the report was made without a full copy of Mr Roberts' valuation. 50 Mr Roberts' approach to valuation did not include analysis of particular sales or the formation of a view that particular sales were comparable sales. In his method, the influence of comparable sales is exerted in the choice of a capitalisation rate based on continued observation of hotel sales and on consideration of the relationship between sale prices and operating profits. Mr Roberts has a very impressive body of experience as a hotel valuer and has been extremely active and successful in that field, but the method he adopts leaves a great deal to confidence to be reposed in him as a valuer without exposure for appraisal or confirmation of the facts and the basis in experience of his selection of a capitalisation rate. Large differences in valuation can flow from differences in the selection of a capitalisation rate to the operating profits of hotels. 51 The significance of the capitalisation rate adopted is illustrated by the capital values produced by applying different capitalisation rates to an operating profit of $1,473,503: 15% $9,823,353 15.83% $9,308,294 16% $9,209,394 17% $8,667,664 52 Mr Robertson regarded 15 to 16% as the appropriate range of capitalisation rates and educed to 15.83% as the capitalisation rate implied after a rounding process. Mr Roberts adopted and applied the capitalisation rate of 17%. Analysis of implied capitalisation rates in sales of hotels referred to by Mr Robertson in his survey of comparable sales showed a wide range from well below 15% to well above 17%. The selection of an appropriate capitalisation rate is very much a matter of valuing expertise, differences of opinion are only to be expected and, within the range of capitalisation rates of which Mr Roberts and Mr Robertson spoke, it could not be established that either was in error. In my finding all rates within the range of 15 to 17% are reasonably available to an expert valuer and it could not be said that the adoption of any capitalisation rate within this range was erroneous. The implied range of conclusions must be accepted as reasonably available. 53 In para.21 of SASC it is alleged that the building work to give effect to the proposed use of the first floor of 294 Darling Street as a bar and gaming room commenced on 15 May 2000. This allegation was not admitted. Mr Larosa's letter of 4 February 2000 noted the planned use of this area as a future bar and dance venue. The development approval (Exhibit O) is dated September 2000 and the defendant's evidence was to the effect that the area came into use after the development about 18 months before the hearing, which would suggest that that happened about September 2000. If work were carried out illegally before development approval was given it would not, on valuing principle, add value to the freehold. In any event there is no evidence which would show that the building work was carried out before the development approval, and there is no basis on which Mr Roberts' valuation should be thought to be erroneous in not having regard to that development. 54 In paras. 26 and 27 of SASC it is alleged to the effect that the market value of the business at 1 March 2000 greatly exceeded $4,203,000 which was the price in the sale agreement dated 23 May 2000 from Holilol to Hawksun and the sums determined by Mr Roberts. It is not admitted that there was a great excess as alleged. 55 Paragraphs 28A and 28B of SASC are: The market value of the Business as at 1 March 2000, upon the assumption of the Lease being entered into, was some $7,500,000. PARTICULARS (a) The valuation of John Robertson dated 23 September 2001 ("the Robertson valuation"). (b) The Robertson valuation valued the Business and Premises at some $12,000,000 at 1 March 2001 and the Premises as delicensed premises subject to the Lease at $4,500,000. (c) The value of the Business, assuming a value of the Premises is $4,500,000, is some $7,500,000. 28B. In the premises set forth in paragraph 28A, there exist facts, matters and circumstances warranting investigation and explanation as to whether there was a diversion of corporate opportunity from Holilol to Hawksun of a sum of some $3,000,000. 56 Significant matters of difference in the valuations of the business and business assets relate to gaming machine depreciation, gaming advertising and promotion and gaming wages allowance. In assessing net operating profit Mr Roberts brought into account gaming machine depreciation at a yearly rate of $90,380. Mr Robertson explained that it has been his practice to take depreciation out of profit and loss accounts when preparing a valuation; he attributed this practice to the majority of valuers whom he was associated with. The reasons given were that valuation is a non-accounting function, from which I understand him to mean that deducting depreciation is an accounting function. He also gave the reason that common ground for analysing hotel sales is gained by not having regard to depreciation because depreciation can vary from hotel to hotel. I take it that depreciation can vary because of variations in the age of machines and accounting policies for rates of depreciations and attributed life of machines. Mr Robertson conceded that some valuers, including one who was named in evidence and was highly regarded, did allow depreciation as Mr Roberts had. Mr Roberts adhered firmly to bringing gaming machine depreciation into account both as his own practice and as the practice of others. In my view valuing principle supports Mr Roberts' approach because excluding depreciation on gaming machines would mean that the calculation of net operating profit would not be a true reflex of the recurring annual profitability of the operation because regard would not be paid to aging and wear of machines or to depreciation in their value, and the hypothetical rational purchaser would want to know what truly was the recurring annual profitability. To my mind Mr Robertson's objective of attaining common ground in analysing hotel sales would require that the actual value of the machines be brought into account at some other part of the valuing exercise. In my view Mr Roberts' approach is in accordance with valuing principle. 57 Mr Roberts in calculating net operating profit brought into account gaming advertising and promotion expenditure of $110,587 for the period of six months to 31 December 1999, yielding a yearly figure of $221,000. It was Mr Robertson's view that the allowance of $221,000 per year was excessive and should be adjusted down to $75,000, which he regarded as sufficient on the basis that, on analysis of a number of hotels, gaming expenditure at relevant periods seldom was more than 2% of weekly profits from gaming machines whereas Mr Roberts' figure implied 11%. Mr Roberts was not cross-examined to challenge this item and was in a good position in terms of experience to make an assessment of an appropriate allowance. I am not satisfied that there was any error in his valuing method in this respect. 58 Mr Roberts allowed gaming wages at the rate of $99,960 per year in his assessment of the value of the possessional tenure of the lessee. When asked to explain this allowance he gave an explanation which I did not find clear or persuasive; in my understanding the allowance is based on his own assessment of what would be required to maintain an appropriate level of trade within the gaming room, with attendance during hours of trade which extended to 3 am. Mr Roberts had a standard procedure of checking and adjusting wages after considering hours of trade and the style and pattern of trade, and making an adjustment according to a formula in his computer which he did not explain. His explanation did not relate the allowance well to actual experience in the six months to 31 December 1999, in which significant expenditure was incurred for wages to which, as far as I understand his explanation, the allowance for gaming wages is an addition. A view that this allowance should not have been made, adopting Mr Roberts' capitalisation rate of 27.5% implies an additional $363,490 in the valuation of the business. 59 Financial statements prepared by Mr Larosa and available to Mr Roberts for the period of six months ending 31 December 1999 do not, to my reading, include an allowance for gaming wages such as that adopted by Mr Roberts; there is no expense for gaming wages brought into account in the gaming machine's trading statement at Exhibit 1 p244, and direct wages, casual wages and directors' salaries are brought into account in the trading, profit and loss statement at Exhibit 1, p242. In Mr Larosa's accounts the expenditures which are or include wages are found at p242 and they are Direct wages $187,050.97 Casual wages $ 600.00 Directors' salaries $ 52,000.00 Total: $239,650.00 60 In his work sheet Exhibit 1 pp250 and 253 Mr Roberts does not classify all outgoings in the same way as they were classified by Mr Larosa, but the outgoings include wages of $224,771.00, while his work sheets at Exhibit 1 pp249 and 252 include gaming wages $49,980.00, so that his allowances for all wages total $274,751.00, which is $35,101 greater than the wages which can be seen in Mr Larosa's figures for the period of six months, or $70,202 per annum. At a capitalisation rate of 17% that would produce a difference of $412,953 in the freehold value, and at a capitalisation rate of 27.5% that would produce a difference of $255,280 in the leasehold value. It cannot be clearly seen whether such adjustments to Mr Roberts' valuations would be appropriate, as he was not asked whether they would be, there was no evidence dealing with the subject by Mr Robertson, the error if it was one was not particularised and it was not squarely put to Mr Roberts that he had made an error, or that his valuation ought to be reconsidered. 61 In Mr Roberts' explanation of his valuation of the business there is a relation among the valuation of the business and business assets, the terms of the lease, and regard he paid to Mrs Hardman's wishes and objectives she wished to attain. 62 In his affidavit Mr Roberts gave the account of a conversation with Mrs Hardman in February 2000 which I set out at para 42 above. In his oral evidence (t66) after referring to the interaction between the terms of the lease and the value of the leasehold –"High premium, low rents" Mr Roberts said of the determination of the rental amount "It was done on the basis that Flo wanted $4 million for the premium for the lease hold. $4 million was because she required, she specifically said to me, 'Ron, I need a higher figure than $4 million in order to provide a distribution to the children' – whilst she was alive. Now, my initial value, if I had struck a market place rent would have been closer to two and a half million. Q. Per annum? A. No, two and a half million as being the premium value. If I had struck a $600,000 rent, a market place rent, then I would have had a low premium. What I was saying is that the rental struck is a direct function of the high premium which was the value that Flo required to make the distribution, and it was in line with the bank's requirements. As their understanding, there couldn't be a high value for lease hold and a high rental. So the two are a direct function of each other." Later at t83 while dealing with the rent of $350,000 Mr Roberts said "Q. Did those figures have any bearing on the 350,000 figure which you selected? A. Mr Oakes, they certainly could have but the end result was I arrived at 350,000 as a direct result of arriving at 4.2 million first. This may have had, because I was in possession of this at the time I did the assessment, this may have had an influence but those relative ratio between the rental and the value is a fixed ratio; if I utilised the 350 I arrived at 4.2. If I used 400 I probably would have arrived at 3.8 or whatever the relative figure is. It could be that these were an influence on me arriving at the 350. However, the number one parameter was to arrive at Flo's 4.2" 63 Criticisms offered by Mr Robertson of making the allowances for gaming machine depreciation and for gaming advertising and promotions have not in my view been established. Further criticism relating to the allowance for gaming wages was not a criticism made by Mr Robertson, and was not criticism which was fully explored in evidence, but there are grounds for feeling that Mr Roberts calculated the allowance in some way which he has not fully explained and that it may be excessive to the extent of some part or all of $70,202 per year, with implications of an undervalue of the sale of the business assets up to $255,280. I am unable to see that if Holilol under Mrs Hardman's control had sought in some way to rely on a discrepancy of that order in its understanding of the value of the business assets it would have obtained a remedy which set aside the sale. It should be kept in view that, as explained by Mr Roberts, there was an interrelation among the amount of the rent in the lease, the value calculated for the sale of the business assets, and Mrs Hardman's wishes for the amount to be realised from the transaction and available to her to dispose of. There might perhaps be some remedies available to Holilol if Mr Hardman junior, her co-director, had been the controlling mind of Holilol for the purpose of taking the company into these transactions, but there is no evidence that he was, and no indication that he did other than conform with her intentions, she being the dominant shareholder. 64 Mr Robertson did not embark on a valuation of the business and business assets sold by Holilol. His report was directed to the value of the freehold and business as a whole, and the value of the freehold reversion after granting the lease, and he did not in his report or in his affidavit endorse a conclusion to the effect that the value of business and business assets was the difference between the two. There were suggestions in advocacy for the plaintiff that that was the case, or that if it was not the case a significant amount of value of some millions of dollars had vanished (in counsel's words) "into the ether" through the transaction. As a matter of valuing principle, it is not necessarily true that the sum of values of the freehold reversion, the leasehold interest and the business and business assets is necessarily equal to the value of the freehold, the business and the business assets held by one person without there being any lease. During the hearing, which was expedited, and was remarkably lengthy in relation to the matters in dispute, I refused to allow an amendment which would have expanded the issues to enable debate of this matter. There was no transaction in which Mrs Hardman disposed of the freehold and the assets of Holilol in one line, she did not ever contemplate any such transaction and there is no reason to suppose that such a transaction was available to her, and the value of the freehold, the business and the business assets taken together in one line is at the most peripheral to any matter which she considered or any matter which the defendant ought to consider and investigate. 65 The indications that Mrs Hardman's transactions caused some significant part of the value or economic advantages of her whole position to vanish "into the ether" are not, to my mind, very strong. The amount payable to Holilol (although, of course, collected by Mrs Hardman) was: $4,203,324 The value of the reversion remaining was valued by Mr Robertson at $4,500,000 These total $8,703.324 I compare this total with valuations of the freehold derived from applying the capitalisation rates to the net operating profit of $1,473,503 calculated by Mr Roberts. These range from $8,667,664 at his capitalisation rate of 17% to $9,823,353 if the capitalisation rate were to be 15%. In exercises in valuation and opinion, I do not find the range remarkable. The view that there is a large discrepancy depends wholly on full acceptance of Mr Robertson's valuation based on comparable sales, the persuasiveness of which is shadowed by the discrepancy between the value of $12,000,000 which he placed on the Unity Hall Hotel and the results produced by the alternative method of applying the capitalisation rate to the net operating profit; at 15%, his capitalisation rate, the result is $9,823,353, significantly less than $12,000,000; but the capitalisation rate is debatable and at 17% produces $8,667,664. 66 In my view the evidence does not indicate that, to any extent sufficiently large to justify any remedy, Holilol disposed of its assets at a price which was not appropriate or that there was, in the expression used in SASC para 28B, a diversion of corporate opportunity; and there are no grounds for considering whether Holilol should, under the defendant's control, embark on any claim or proceedings against Hawksun or Mr Hardman junior notwithstanding his having been a director of Holilol at the time of the transactions. Apart from there being no serious discrepancy in value, the transaction took place in accordance with the wishes of Mrs Hardman, who was overwhelmingly the dominant shareholder, a director and, in these transactions and so it appears in all its transactions during her lifetime, the controlling mind of Holilol; she chose the valuer who was to determine the price, she accepted the mechanism of his valuation as the means of determining it, she indicated the outcome she desired which was close to the outcome which was achieved and she did so with as much access to professional advice as she chose to have. 67 There are other complaints in the pleadings of no real importance. 68 My conclusion overall is that the conduct of the defendant has not been subjected to any significant effective criticism, that not taking any action to challenge Mrs Hardman's transactions is not an indication of any failure, inadequacy or want of appropriate attention to the interest of beneficiaries, and that his proposed taking an interest in the hotel derived through those transactions is not, on a true view of their entitlements, adverse to the interest of beneficiaries. 69 SASC 31A alleges "Neither the deceased nor Holilol received any proper legal advice in or about the lease or the sale of the business." Particulars are given, but they do not indicate what is referred to as "any proper legal advice". Upon the evidence, there was no occasion when Mrs Hardman described the whole scheme of transactions into which she proposed to enter and to take Holilol to any one legal advisor and sought or obtained advice about whether she should go on with them. Some parts of the legal work were attended to on instructions by Mr Osburg solicitor of Messrs Hicksons, and some parts by Mr Jones solicitor of Messrs Freehills, but she did not seek or obtain their advice on whether she should enter into the whole scheme, or the parts of the scheme for which they were instructed to act. Mr McGlynn, solicitor who acted for Mr Hardman junior, drafted the agreement for sale of the business and took significant initiatives for carrying the business forward; as his client like Mrs Hardman wished the business to be carried forward, the participation and initiatives of Mr McGlynn are not remarkable. 70 Defendant's counsel pointed out, with references to authority, that even in cases of undue influence there is no requirement of independent advice, or of legal advice. However that area of the law is remote from the present facts. If there were any grounds for concluding, or for reasonably suspecting that Mrs Hardman acted under undue influence of Mr Hardman junior, or was in some relationship with him in which she was dependent on him or her freedom of decision was qualified, or that her capacity for dealings in business and property was less than complete, or that she had been subjected to any deception or unfair dealing, the question whether she or Holilol which she controlled had had any legal advice, or other independent advice, would be an element in addressing whether she could have been or her legal personal representative after her death now is entitled to have the transactions or some of them set aside, or should seek to do so. In my opinion nothing in her circumstances raises any question of the validity of her transactions for consideration, and whether or not legal advice or any other independent advice was sought by her or was available to her has no bearing on the effectiveness of her transactions. Unless there is some reason to investigate and consider whether an equitable remedy against a transaction was available to Mrs Hardman, the effectiveness of the transaction is not related to the availability of independent advice. 71 Particulars of para.31A raised five matters but do not indicate what is the advice the absence of which is complained of, nor do they indicate any circumstances in which the availability of proper legal advice was important. Particular (a) is: "McGlynn, the purchaser's solicitor, drafted the agreement for sale of the business." The facts alleged are correct. It is not the ordinary course for the solicitor for the purchaser of a business to draft the agreement for sale. Mrs Hardman did not retain or instruct any solicitor to draft the agreement for sale of business. The agreement as drafted did not depart in any significant way from her wishes so far as they are known from evidence, including most significantly Mr Larosa's letter of advice and her acknowledgement. Two aspects of the sale agreement which were complained of were the price and the inclusion of the hotelier's licence in the assets sold. The price was fixed by a mechanism of which Mrs Hardman clearly approved, that is, by Mr Ron Roberts' valuation, and although it has not been established whether or not Mrs Hardman saw the valuation and knew its contents, the value as determined by Mr Roberts was close to the range of values which he had indicated to her as the likely outcome. Mrs Hardman knew of the inclusion of the beneficial ownership of the hotelier's licence in the sale, with its obvious implications of relative advantage to the owner of the business and disadvantage to the owner of the freehold, which in turn were reflected in the valuation assumptions on exercise of the option to purchase in the lease, which it is also clear were in accordance with her wishes and instructions. Notwithstanding that the agreement for sale was drafted by Mr Hardman junior's solicitor, there is no reason to suppose that it did not accord with Mrs Hardman's wishes. 72 Particular (b) is: "Jones, as the deceased's solicitor on drafting the lease, apart from one meeting with the deceased in January 2000, received his instructions from Mr McGlynn." Mr Jones received his initial instructions at a lengthy conference on 11 January 2000 attended by Mrs Hardman, Mr Larosa, Mr Hardman junior and Mr McGlynn. With an exception in respect of a guarantee, Mr Jones acted in accordance with Mrs Hardman's wishes and instructions. Mr Jones directed attention to several aspects or possible aspects of a lease which would act to the advantage or protection of the lessor. There is no reason to suppose that his communications with Mr McGlynn led to his departing from instructions from Mrs Hardman or including in the lease any provision which did not accord with her wishes. It is unremarkable that he should have communicated with the solicitor acting for Mr Hardman junior who was the principal of Hawksun the lessee, and the allegation that Mr Jones received his instructions from Mr McGlynn is an inaccurate implication drawn from one infelicitous expression in a letter written by Mr Jones. Mr McGlynn when writing to Mr Jones asked Mr Jones to obtain instructions on a matter relating to the lease, clearly showing that Mr McGlynn did not regard himself as the channel for instructions to Mr Jones. 73 Particular (c) is: "Although suggested by Jones and accepted by McGlynn, the lease was never guaranteed by Hawksun's director, Will Hardman." The facts alleged are correct. Mr Jones saw that in the circumstances of Hawksun and the lease, a guarantee by Mr Hardman junior was appropriate, Mr McGlynn agreed, and the absence of a guarantee in the lease as later prepared by Mr Jones cannot be explained and must be attributed to error. There is no reason to attribute it to machination or deliberate suppression. Mr Jones gave the proper advice about obtaining a guarantee but through some error he did not carry out what he advised. Due payment of the rent was the subject of a separate complaint and inquiry and so far as the evidence goes there has not been a default. Hawksun seeks to exercise its option and buy the freehold of the hotel, and default by Hawksun in some obligation for which a personal guarantee would have been a protection is on the whole unlikely, although not impossible. 74 Particular (d) refers to the limited involvement of Mr Osburg solicitor in the arrangements for sale of the business. This particular is correct; Mr Osburg had no instructions which required him to advise on the sale of the business or attend to carrying it out. Mr Osburg regarded himself as not directly involved by Mrs Hardman in the arrangements for sale of the hotel business, but he was sent a draft agreement by Mr McGlynn in February 2000, and told her, by telephone, in outline what the documents provided for, and said that she would need to amend her will. She then gave him instructions for a power of attorney. In view of what he was instructed to do, Mr Osburg is not open to any criticism. 75 Particular (e) is: "No-one acted for Holilol." This is correct. Until 23 May Mrs Hardman and Mr Hardman junior were the directors of Holilol; Mr Larosa became the third director on 23 May and participated in its decision to execute the sale agreement after giving his own consideration to whether Holilol should do so. The transaction was in accordance with the wishes of Mrs Hardman. The directors did not retain any solicitor to conduct the sale transaction; it was not inherently a complex transaction and the purchaser's solicitor was relied on to take the necessary steps to make the transaction effective, as he did. What might be significant in there being no solicitor acting for Holilol it is not that there was no solicitor to attend to carrying out the transaction, but that there was no solicitor to advise on whether the transaction should be entered into at all. In the circumstances of the company, particularly Mrs Hardman's dominance in its affairs and her well-established wishes, the absence of any such advice is not remarkable. 76 SASC para.31B alleges "In the premises set forth above, there exist facts, matters and circumstances warranting investigation and exploration." 77 Paragraph 36 alleges: "The Defendant has failed: 36.1 to consider properly all the available evidence in the possession of his solicitor including the copy of the affidavit of John Robertson sworn July 2001 and filed herein 36.2 to investigate properly the sale of the Business and the lease of the Premises to Hawksun; and 36.3 to cause Holilol to recover its loss as a result of those dealings including, if proper ,commencing proceedings to recover its loss." 78 The only grounds on which the defendant as executor could seek to set aside any of the transactions are grounds which would have been available to Mrs Hardman had her life continued, and the object of any investigation by the defendant must be to ascertain whether she had any entitlement to a remedy of that kind. The plaintiff's allegations that there were circumstances which called for inquiry should be understood as referring to an inquiry into whether Mrs Hardman had any claim or entitlement of that kind which the executor could and should pursue. If there were such grounds it would remain a matter for decision in the discretion of the executor whether he should advance such a claim and involve the estate in expense and risk in so doing. 79 The information and means of investigation available to the defendant were relatively limited until this litigation made compulsory process for production of evidence available. It was open to him to refer for information to the professional persons who had been involved in Mrs Hardman's affairs at the significant times. On the reasonable assumption that they would have given him substantially the information which they gave on affidavit evidence in these proceedings, information available from them would not have indicated that there were any grounds on which to make a claim or bring proceedings to set aside any transaction, as legal personal representative of Mrs Hardman or in the interests of Holilol Pty Ltd. On the contrary, the information available to the defendant from those persons was strongly confirmatory of the effectiveness of the transactions and of the unavailability of any remedy against informed and well-considered dispositions of property, at a value and a rent supported by expert opinion. If the questions of value of the assets sold by Holilol, of the interest granted by the lease and of the freehold retained by Mrs Hardman had been investigated by obtaining the opinion of another valuer, an address to what might then have followed does not in my opinion suggest that the defendant should have taken any measures to attack the transaction. Valuations are matters of opinion and differences of view among valuers are only to be expected. Mr Robertson's valuation of the assets sold by Holilol differs from that of Mr Roberts in ways which are largely accountable by differences of opinion as to whether some factor should be regarded, and it would not in my view be possible to say that the view of either valuer was outside the range of reasonably available opinions or was negligent. My view after hearing the litigation, in which there was a much more searching examination of the facts than was open to the defendant to undertake, is that there is no claim or litigation which the defendant acting reasonably ought to have undertaken with a view to setting aside any of the transactions or with a view to any other remedy, and it cannot be said that the defendant has failed in any significant way. 80 Paragraphs 34 and 35 of SASC raised complaints about collecting rent under the lease and passing information about the state of payment to the plaintiff. These complaints have no substance. There was in fact no failure to pay rent, and the demands for information and the complaints were pressed with unreasonable intensity, less than 12 months after the date of death and after the defendant had made a significant distribution. 81 SASC para.36A alleges that the defendant has a conflict between his duty to the estate and his interest as a potential investor in Hawksun and his relationship with Mr Hardman junior. What underlies this is that in July 2001 Hawksun, under the control of Mr Hardman junior, indicated a wish to exercise its option to purchase. Hawksun gave notice of exercise of the option soon after commencement of these proceedings and on 13 November 2001 the progress and completion of the transaction were restrained by an undertaking given by the defendant to the court pending disposition of these proceedings. Hawksun has obtained an approval of finance for that purpose from the Commonwealth Bank, and the defendant has proposed, in an arrangement which is not clearly defined and which he could not explain in detail, to participate in some way in his son's venture of acquiring the freehold. An internal memorandum of the Commonwealth Bank records that the defendant was to acquire a 25% interest in Hawksun; this may not exactly represent what is proposed, but it is clear that the defendant does propose to participate in the venture in some way. The defendant's own economic interests are adverse to maintaining the invalidity of the lease, of the option to purchase or of the sale of business and business assets. If it were the defendant's duty as executor or as trustee to take a position adverse to the effectiveness of those transactions, his conflict of duty and interest would make him an altogether unsuitable person to conduct that part of estate affairs, and it would be within the court's power, by appointing a receiver or by some other means, to put effective control of that part of estate affairs into the hands of some other responsible person. How in detail that would be accomplished, and whether it would involve revoking the grant of probate or removing the defendant from office as trustee, or could be achieved by some lesser measure involving the appointment of a receiver or some other person need not be addressed in detail, as there is no good reason for making any such claim. 82 The defendant, Mrs Hardman's only surviving son, is the person whom she chose to appoint as her executor and trustee. In some ways her choice of the defendant seems less than ideal, as he resides in Queensland and was not closely familiar with her business affairs, and, on the basis of his evidence and demeanour in the witness box, he is not very well informed about estate affairs now and not adept in business of this kind. The testatrix had a legal right to choose her own executor. The choice was hers and she had the advantage of knowing her family and its relationships, who was available and what talents they had. The defendant has responsibility for assets of significant value, and the executorial and trust duties involve him in business requiring care, attention and professional assistance, but overall his duties are not unduly complicated and are unlikely to extend for many years or involve the exercise of significant discretions affecting the size of interests of beneficiaries. At a family meeting in Mr Osburg's office a few days after Mrs Hardman's death he said to the effect that he did not know her business at all and asked Mr Hardman junior to attend to estate business with Mr Osburg. There was no occasion for distance or hostility, Mr Hardman junior was in a good position to furnish information, and a request for his assistance and co-operation with Mr Osburg was reasonable. It could not discharge the defendant from his own responsibilities, and there is no real indication that he treated it as doing so. 83 Orders: (1) Give judgment for the defendant with costs. (2) Order that the costs payable by the plaintiff may be retained by the defendant out of any moneys or charged upon any assets to which the plaintiff may be entitled under the will of the testatrix. ********** Last Modified: 05/07/2002 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.