New South Wales Supreme Court CITATION : Ryder v Frohlich [2006] NSWSC 833 HEARING DATE(S) : 6, 7 and 8 March 2006 and 12 May 2006. JUDGMENT DATE : 18 August 2006 JURISDICTION : Equity Division JUDGMENT OF : Associate Justice McLaughlin at 1 DECISION : I determine that: (a) As at the date of termination of the partnership (being 2 March 2001) (i) The partnership had no assets, and the value of the partnerships assets was nil; (ii) No moneys were owing to Mr. Ryder referrable to the value of the business as at 2 March 2001, and Mr. Ryder owed moneys to Mr. Frohlich. (b) Mr. Ryder is indebted to Mr. Frohlich in the sum of $29,650. (2). I refer the matter to the Court of Appeal to deal with the costs of the proceedings before me, and to make final orders consequent upon my foregoing determinations. CATCHWORDS : Partnership. Inquiry as to nature and value of partnership assets. Business of partnership. Hedge fund. Indebtedness of one partner to the other. LEGISLATION CITED : Corporations Act 2001 Nicholas John Ryder (First Plaintiff) PARTIES : Protected Equity Investments Pty Limited (ACN 086 671 516) (Second Plaintiff) Peter Frohlich (First Defendant) Coastal Capital Limited (ACN 061 336 445) (Second Defendant) FILE NUMBER(S) : SC 2314 of 2003 COUNSEL : Mr. M. Young (Plaintiffs) Mr. R. McHugh (Defendants) SOLICITORS : Grahame Jackson & Associates (Plaintiffs) Speed and Stracey (Defendants) - 23 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ASSOCIATE JUSTICE McLAUGHLIN Friday, 18 August 2006 2314 of 2003 - NICHOLAS JOHN RYDER and ANOR –v- PETER FROHLICH and ANOR JUDGMENT 1 HIS HONOUR: After a hearing occupying four days Acting Justice Cripps, for the reasons set forth in his judgment of 19 May 2004, dismissed the application of the Plaintiffs for a declaration that a partnership between the First Plaintiff, Nicholas John Ryder, and the First Defendant, Peter Frohlich continued after a fundamental breach. His Honour, having made declarations that a partnership did not exist between the First Plaintiff and the First Defendant and that the conduct of the First Plaintiff in March 2001 had the consequence that thereafter the partnership was dissolved, made the following order, (4). The matter should be remitted to the Master to determine as at the date of dissolution of the partnership (being March 2001) whether moneys were owing to Mr. Ryder referable to the value of the business at that date and whether Mr. Ryder owed moneys to Mr. Frohlich – being those referred to in the cross-claim to which I have already referred but have not, at the request of the parties, determined. 2 An appeal by the Plaintiffs to the Court of Appeal was unsuccessful. However, the Court of Appeal on 21 December 2004 varied the foregoing order of Cripps AJ (such variation being described by McColl JA as "only a fine-tuning of the order referring the matter to the Master") by substituting the following for the order of Cripps JA, (3). The matter be remitted to the Master to determine: (a) as at the date of termination of the partnership (being 2 March 2001): (i) the nature and value of the partnership assets, including the nature of the "right" Mr. Ryder and Mr. Frohlich had to manage the Diversified Fund and whether it had a goodwill value which survived the dissolution of the partnership (but not including any other interest in the Diversified Fund); (ii) whether moneys were owing to Mr. Ryder referable to the value of the business as at 2 March 2001 and whether Mr. Ryder owed moneys to Mr. Frohlich – being those referred to in Mr. Frohlich's cross-claim; (b) whether, in the light of the identification of the partnership assets and their use, if any, after 2 March 2001, Mr. Ryder is entitled to a share of profits pursuant to section 42 of the Partnership Act 1892 (NSW) and, if so, to determine the amount of that share; (c) in the light of the findings made, the respective indebtedness of Mr. Ryder and Mr. Frohlich. 3 The matter has come before me for the carrying out of the tasks committed to me by the foregoing orders of the Court of Appeal. 4 However, the extent of those tasks was somewhat reduced by the fact that the First Plaintiff is not pursuing any claim under section 42 of the Partnership Act 1892, his abandonment of such claim having been noted by Campbell J. when the matter was before him on 6 May 2005. In consequence, it is not necessary for me to make a determination pursuant to order 3(b) of the foregoing orders of the Court of Appeal. 5 The factual history of the relationship between the parties and the procedural history of the litigation between them appear from the respective judgments of Cripps AJ at first instance and of the Court of Appeal (particularly that of McColl JA). It is unnecessary for me now to rehearse those histories. 6 I have had the benefit of receiving various detailed and carefully prepared written outlines of submissions from Counsel for the respective parties. Those documents will be retained in the Court file. 7 From those submissions it emerged that the parties were in agreement that the essential matters for determination in the present hearing were: (a). "The nature and value of the partnership assets"; and (b). "The quantum of moneys due to Mr. Frohlich pursuant to the cross-claim". 8 (See Plaintiffs' Submissions, 27 February 2006, paragraph 3; Defendants' Outline of Argument in Anticipation of Valuation Hearing, 2 March 2006, paragraph 2.) 9 However, at the outset of the hearing before me it was noted that it was agreed between the parties that the amount due by the First Plaintiff to the First Defendant under the First Defendant's cross-claim is $29,650. That agreement disposes of the second limb of order 3(a)(ii) of the foregoing orders of the Court of Appeal. 10 The nature of the partnership business was the subject of discussion, both in the respective written submissions of Counsel and in their oral submissions. Ultimately Counsel for the Plaintiffs accepted the statement set forth in paragraph 14 of the Defendants' Outline of Argument, 2 March 2006, that [T]he partnership's business consisted of the arrangement between Coastal and the partnership whereby the two partners (Mr. Frohlich and Mr. Ryder) together managed the Diversified Fund on behalf of Coastal in return for the right to receive whatever net profits Coastal might generate from managing the Fund after deducting Coastal's expenses of so doing; … ). 11 (The reference to "Coastal" is a reference to Coastal Capital Limited, which was Mr. Frohlich's family company.) 12 It is a basic submission on behalf of the Defendants that Coastal's legal right to manage the Coastal Magnum Diversified Fund (referred to as "the Diversified Fund" or "the DPF") was never an asset of the partnership. 13 Nevertheless, it was submitted on behalf of the Plaintiffs, in consequence of the agreed nature of the partnership's business, that the "nature of the partnership's [sic] assets" is that the partnership had a right to receive the net profits generated from managing the Diversified Fund after the deduction of Coastal's expenses related to its role as responsible entity of the Fund. The "nature of the right" is an arrangement between the partnership and Coastal – in other words, a contractual right as against the responsible entity of the Diversified Fund. 14 The Plaintiffs submit that it follows that the value of the partnership's assets will thus be the value of the business of managing the Diversified Fund. Further, that there is no evidence from either of the valuers (or from any other source) that the management of the Diversified Fund was less valuable to the partnership because of the existence of Coastal as a "middleman" between the partnership and the Fund's investors, in Coastal's role as responsible entity. 15 Regarding the assets of the partnership, and the submission of Counsel for the Defendants that, essentially in consequence of the intervention of Coastal, the right to manage the fund was not an asset of the partnership, Counsel for the Plaintiffs placed reliance on the following statement in the judgment of McColl JA (at paragraph 196), referring to what had taken place during the hearing before Cripps AJ, In addition, in my opinion, Mr. McHugh [Counsel for the Defendants] acknowledged that if a partnership was found to exist, the right to manage the fund was an asset of the partnership … 16 It is, however, now submitted on behalf of the Defendants, that, even if the right to manage the fund be treated as an asset of the partnership, nevertheless that asset had no value as at the date of the termination of the partnership, being 2 March 2001. 17 Despite the foregoing expression of opinion by Justice McColl, the Court of Appeal did not resolve the issue of the nature of partnership assets, and McColl JA stated (at paragraph 198), that It is for the Master to determine the nature of the "right" to manage the Diversified Fund in order to value the business as at March 2001 as well as whether that right had a goodwill value that could enure to Mr. Ryder's benefit. 18 The reason for the foregoing conclusion by the Court of Appeal was that the finding by Cripps AJ as to the identity of the partnership business was "elliptical and arguably inconsistent" (paragraph 196). Both at the trial and upon appeal the Plaintiff and the Defendants were in fundamental disagreement as to the nature of the partnership business (although, as I have already recorded, at the hearing before me there was agreement on this matter). 19 Cripps AJ found that Coastal was the responsible entity of the Diversified Fund. (That phrase "responsible entity" is the subject of Part 5C.2 of the Corporations Act 2001 (formerly the Corporations Law). Section 601FA provides, The responsible entity of a registered scheme must be a public company that holds an Australian financial services licence authorising it to operate a managed investment scheme. 20 The role of the responsible entity of a registered scheme is set forth in section 601FB(1) as follows, The responsible entity of a registered scheme is to operate the scheme and perform the functions conferred on it by the scheme's constitution and this Act. 21 It was not in issue that Coastal was a public company and held a licence of the nature referred to in section 601FA. As such, Coastal had the management of the Diversified Fund, which was an investment fund. 22 It should be recognised that under the foregoing statutory provisions, the business of managing the Diversified Fund could not legally have been carried out by the partnership itself. At the relevant time, in the first half of 2001, it was an essential statutory requirement that the responsible entity of a registered scheme such as the Diversified Fund had to be a public company (as was Coastal) and had to have a security dealer's licence, now called an Australian financial security licence (as did Coastal). 23 It was not in dispute between the parties that Mr. Ryder and Mr. Frohlich had together managed the Diversified Fund on behalf of Coastal, under an arrangement by which each of the two partners was entitled to 50 percent of Coastal's net profits for managing the Diversified Fund (see judgment of McColl JA, paragraph 194). In this regard it was the submission of the Defendants that, crucially, the business of the partnership was the provision to Coastal of the services of both Mr. Ryder and Mr. Frohlich to manage the Fund on Coastal's behalf. The important distinction (so it was submitted on behalf of the Defendants) between the subject partnership and most other partnerships is that the underlying business – that of managing the Diversified Fund – was here being carried on on behalf of another person or entity, namely Coastal. 24 It is all very well for the Plaintiffs to characterise Coastal as being merely "a middleman" between the partners and the Diversified Fund in their management of that entity. The involvement of Coastal was no mere technicality or formality, but was an essential statutory requirement for the management of that fund. 25 Upon the abandonment of the partnership by Mr. Ryder on 2 March 2001 the partnership was no longer able to provide the conjoint services of both Mr. Ryder and Mr. Frohlich to manage the Fund on Coastal's behalf. That is, the partnership was thereby unable to continue its business. 26 It has not been suggested on behalf of the Plaintiffs that Mr. Frohlich continued to carry on, as a sole trader, the business that had previously been carried on by the partnership consisting of Mr. Ryder and Mr. Frohlich. 27 In my conclusion the partnership business of providing the services of both Mr. Ryder and Mr. Frohlich to manage the Diversified Fund on behalf of Coastal ceased to exist when on 2 March 2001 Mr. Ryder abandoned the partnership. 28 The practical situation was that after the termination of the partnership on 2 March 2001 Coastal simply managed the Diversified Fund in its own right. Mr. Frohlich continued in his role as the controller and the managing director of Coastal. As such, Mr. Frohlich was not free to walk away from the management of the Diversified Fund, since he had legal responsibilities as the managing director of the Fund's responsible entity. However, Mr. Ryder was free to walk away from the partnership, as indeed he did. 29 It was submitted, however, on the part of the Plaintiffs that the partnership business should be valued as at the last moment of the existence of the partnership between Mr. Ryder and Mr. Frohlich. I do not agree with that submission. If a business is destroyed or affected by one partner abandoning the partnership, the value of the business run by the partners must take into account the circumstances of the termination. I am in agreement with the response of the Defendants to the foregoing submission, that no purchaser is going to pay for a partnership business if the business has ceased to exist. It should also be borne in mind that, even assuming the correctness of the Plaintiffs' submission, that submission still ignores the fact that the business was being conducted on behalf of Coastal and that any new arrangement required Coastal's consent and, since Coastal was his family company, the consent of Mr. Frohlich. I note that Mr. Frohlich was not cross-examined on whether he would have agreed for Coastal to give that consent, and, if so, upon what conditions. 30 I am in agreement with the submission of the Defendants that the valuation evidence becomes of relevance only on a finding that, after the termination of the partnership, the partnership business remained a separate asset which could have been sold to a potential purchaser, and that Coastal's agreement to a new manager was unnecessary. 31 In my conclusion Coastal alone had the legal right to manage the Diversified Fund. As at 2 March 2001 (after the abandonment of the partnership by Mr. Ryder) the sole asset of the partnership was the business consisting of the arrangement between Coastal and the partnership whereby the two partners conjointly managed the Diversified Fund on behalf of Coastal in return for the right to receive whatever net profits Coastal might generate from managing the Fund. When Mr. Ryder abandoned the partnership on 2 March 2001 the partnership business of managing the Diversified Fund on behalf of Coastal ceased to exist. Accordingly, the value of the partnerhip's assets as at 2 March 2001 was zero. It follows that there are no moneys owing to Mr. Ryder referrable to the value of the business as at 2 March 2001. 32 My foregoing conclusions are sufficient to dispose of the task committed to me by the Court of Appeal. However, in the event that there be an appeal from my foregoing conclusions, it is desirable that I should set forth my views and findings concerning the valuation evidence which was presented at the hearing before me. 33 Each of Mr. Ryder and Mr. Frohlich engaged his own valuation experts to give opinions on the value of the partnership business as at the date of dissolution, 2 March 2001. All experts were chartered accountants. On behalf of Mr. Frohlich were filed and served affidavits of Mr. Jeffrey Lewis Hall, sworn respectively on 30 January 2004, 19 May 2005 and 23 February 2006, each affidavit annexing a report. Mr Hall is a director of Sumner Hall Pty Limited. 34 On behalf of Mr. Ryder were filed and served affidavits of Mark John Pittorino, sworn respectively on 29 April 2005 and 9 June 2005, each annexing a report. Mr. Pittorino is a partner of Deloitte Touche Tohmatsu ("Deloitte"), being the head of the valuations practice of that firm. However, before obtaining the reports from Mr. Pittorino, Mr. Ryder had engaged Mr. John Banks, a partner of KPMG, who had prepared a draft report ("the Banks report"), which he provided to Mr. Ryder. Mr. Ryder, however, did not file or serve the Banks report, with the conclusions wherein he was dissatisfied, but instead engaged Mr. Pittorino. Access to the Banks report was obtained by the Defendants only after a contested hearing before Justice Barrett, who held that legal professional privilege did not subsist in the Banks report. 35 It is not necessary that I should set forth in detail the content of each of those reports. For the present, it is sufficient that I observe that in his primary report, that of 29 April 2005 (annexed to his affidavit of the same date), Mr. Pittorino states that he has been instructed that the only asset of the partnership is its rights to manage the DPF (paragraph 4.2). Mr. Pittorino in valuing the partnership adopted the percentage of funds under management ("FUM") method. I would here observe that Mr. Hall also adopted the percentage of funds under management method. That method is used to value fund managers, by reference to comparable sales of other fund managers. 36 The evidence of Mr. Pittorino and his conclusions regarding the value of the business of the partnership were the subject of considerable criticisms by the Defendants. 37 I am in agreement with the submission on behalf of the Defendants that the quality of an expert report will depend in part on the quality of the instructions received by the expert. If those instructions are incorrect or are misleading the assumptions upon which an expert report is based will be incorrect and so will be the expert's conclusion. Mr. Pittorino and Mr. Hall, although each applied the same FUM methodology, reached two very different conclusions. Mr. Pittorino concluded that at the dissolution date the business had a value of $320,635 (report of 29 April 2005, paragraph 4.19). Mr. Hall, on the other hand, concluded that the most likely value of the business as at that date was nil (report of 30 January 2004, paragraph 8). 38 Mr. Ryder and Mr. Pittorino were each cross-examined concerning the instructions given by the former to the latter. I am in general agreement with the criticisms made on behalf of the Defendants concerning the nature, accuracy and extent of those instructions. Those criticisms are set forth in paragraphs 21 to 38 of the Defendant's Submissions of 27 April 2006. 39 I would, however, refer in particular to the instructions given by Mr. Ryder to Mr. Pittorino concerning the Austral Capital Pty Limited ("Austral") transaction. Mr. Ryder was a director, employee and shareholder of Austral, from which company he departed in 1999. It transpired that the information upon which paragraph 5.12 of Mr. Pittorino's report was based came from an attachment to an e-mail sent on 1 June 2005 by Mr. Ryder to Mr. Richard Norris, an Associate Director of Deloitte (exhibit 2), who was associated with Mr. Pittorino in preparing the latter's reports. Under cross-examination Mr. Pittorino agreed that the e-mail was misleading. I would also observe that, somewhat curiously, Mr. Pittorino appears not to have had available to him a copy of the judgment of Cripps AJ. He agreed that if he had been aware of findings made by Cripps AJ concerning the credit of Mr. Ryder, Mr. Pittorino would have approached Mr. Ryder's statements with more caution. 40 It also emerged that when he prepared his reports Mr. Pittorino was not aware that Mr. Banks had had a role in the matter. 41 Cripps AJ expressed unfavourable views concerning the credibility of Mr. Ryder and the reliance to be placed on his evidence. I have had the benefit or receiving oral evidence from each of Mr. Ryder and Mr. Frohlich. Where there is a conflict between the evidence of those two gentlemen I prefer the evidence of Mr. Frohlich. 42 I am in agreement with the submissions of the Defendants that Mr. Ryder provided incorrect and misleading instructions to Mr. Pittorino, made inappropriate submissions to Mr. Pittorino as to the content of Mr. Pittorino's reports, and did not give to Mr. Pittorino important financial information about the business and about the Diversified Fund, with the consequence that there was presented to the Court on behalf of the Plaintiffs expert evidence of a much higher valuation of the business than Mr. Ryder would otherwise have been able to obtain. 43 My foregoing views concerning the defects of Mr. Pittorino's reports, and the conduct of Mr. Ryder in that regard affect the reliance to be placed by the Court on Mr. Pittorino's reports and the valuations set forth therein. 44 Further, under cross-examination very considerable inroads were made into the methodology upon which Mr. Pitterino based his report. He agreed that the report was grounded upon an implicit assumption that the business would continue in its current form; that is, consisting of a partnership between Mr. Ryder and Mr. Frohlich. He also agreed that a potential purchaser of a hedge fund business would probably have greater knowledge of the hedge fund industry than Mr. Pitterino himself had. 45 Further, it was only on the basis that the business will become profitable that Mr. Pitterino ascribed to it the valuation which he did. 46 Somewhat curiously, it would appear that Mr. Pitterino in valuing the business of the partnership had not taken into account the costs of the Diversified Fund. Further, although Mr. Ryder and Mr. Frohlich were not receiving any salaries at the relevant time, Mr. Pitterino agreed that the salaries of those two gentlemen should be taken into account in calculating the value of the business. He agreed that the presence of those two gentlemen was a very substantial component of the business as it existed on 1 March 2001. Ultimately Mr. Pitterino agreed that, even adopting his other assumptions, the figure of $320,000 was too high in the context that neither Mr. Ryder nor Mr. Frohlich remained in the business. Mr. Pitterino agreed that that figure would be reduced if those two gentlemen were not in the business. 47 I have already observed that neither Mr. Ryder nor Mr. Frohlich during the time when they devoted their professional expertise and energies to the conduct of the business received any salary. When Mr. Ryder abandoned the partnership and his involvement in the business on 2 March 2001, he took a position with Salomon Smith Barney ("Salomon") at a salary of about $500,000 a year. His hours at Salomon "were about 50 to 60 hours per week" and in a difficult week he might "put in very long hours, more than 50 to 60". However, as a result of Mr. Ryder's departure for Salomon, Mr. Frohlich then had to work 80 hours per week (judgment of Cripp AJ paragraph 41). It follows, therefore, that, in considering an appropriate salary that might have been offered to Mr. Frohlich in order to persuade him to stay in the business, an annual salary of $500,000 would not have been inappropriate. That figure would then be relevant to a consideration of the valuation to be ascribed to the business after the departure of Mr. Ryder. 48 The principal complaints of the Defendants concerning Mr. Pittorino's reports and his opinions include the following matters. 49 That Mr Pittorino relied on Mr. Ryder's instructions and submissions. In this regard I observe that Mr. Pittorino agreed that, consistently with his duty to the Court, he should have pointed out that the cash flow projections in the business plan had no proper basis, and that he should not have simply said that he left it up to Mr. Ryder to assess the accuracy or otherwise of the figures with which he was provided. 50 Further, that in respect to a possible investment by Amcor, Mr. Pittorino misunderstood his instructions from Mr. Ryder as being that Amcor was going to invest $25m in the Diversified Fund; whereas, Mr. Ryder had referred to Amcor investing up to $25m. In any event, it would appear from the evidence of Mr. Frohlich, which I accept, that the amount discussed was up to $20m. 51 That Mr. Pittorino provided to Mr. Ryder an oral indicative evaluation, at a fee of $10,000. It was only after he had received this oral indicative evaluation that Mr. Ryder committed himself to the cost of engaging Mr. Pittorino to prepare a full report. 52 That Mr. Norris and Mr. Lloyd, another Deloitte employee, were the true authors of Mr. Pittorino's report. However, I can see little problem in an expert such as Mr. Pittorino relying upon colleagues in his accounting practice for the provision of facts and information, so long as it is Mr. Pittorino himself who puts his oath and his professional reputation to the report and who gives his own independent consideration to the content and conclusions expressed in that report. I would, however, in this regard observe that Mr. Pittorino did not know whether Mr. Norris or Mr. Lloyd had made any inquiries as to the historical financial performance of the United States and other overseas funds managers which were selected as comparable entities. This was obviously an important issue, since the business of managing the Diversified Fund was making losses at the relevant time, and a comparison to substantial businesses, which had been in existence for some years and were making significant profits, would be wholly inappropriate. It should also be here recorded that neither Mr. Norris nor Mr. Lloyd was called as a witness, so the Defendants were not aware of what inquiries, if any, had been made by those gentlemen concerning the historical financial performance of the comparable overseas funds managers. 53 That Mr Pittorino made a number of wrong and inappropriate assumptions in considering if, and to what extent, the presentation by Mr. Frohlich to Amcor after 2 March 2001 might increase the value of the business of managing the Diversified Fund. I am also in agreement with the submission on behalf of the Defendants that Mr. Pittorino inappropriately assumed in valuing the business that there would be a buyer for it. There was no evidence of any such buyer. 54 That Mr Pittorino did not take into account important factors in valuing the business. I am in general agreement with the complaints of the Defendants in this regard, which are set forth in paragraph 54 of the Defendants' Submissions of 27 April 2006. 55 I would, however, make particular reference to the fact that Mr. Pittorino appears to have omitted from any consideration the money which would have been necessary to pay salaries to Mr. Ryder or to Mr. Frohlich in order to persuade the two of them to remain in the business, and what effect those salaries would have had on the purchase price being offered by any potential purchaser. Mr. Frohlich made it clear in his evidence that he would have been prepared to work for someone else only if he was very well remunerated. 56 I am in agreement with the submission of the Defendants that the weight to be given to Mr. Pittorino's evidence and to his conclusions by way of expert opinion concerning the valuation of the business have been seriously affected by the foregoing matters. 57 It will be appreciated that it is for the Plaintiff to establish the value of the partnership business. In the light of my foregoing views and comments concerning Mr. Pittorino's evidence and in the light of my conclusions regarding the bases upon which his opinion evidence was founded, I am not persuaded to accept the opinion of Mr. Pittorino concerning the value of the partnership business. 58 However, for completeness, it is appropriate that I should refer to the evidence offered by Mr. Hall in opposition to that of Mr. Pittorino. 59 Mr. Hall (who prepared his reports himself, without assistance) valued the business of managing the Diversified Fund in the range of nil to $17,700, with the most likely value being nil (report, 30 January 2004, paragraph 8). 60 Mr. Hall, like Mr. Pittorino, adopted the funds under management method. He said (in his report of 30 January 2004, paragraph 7), The low end of this range reflects the likelihood that the business was unsaleable as at 2 March 2001 due to its startup nature, the likelihood of operating losses continuing in the short to medium term, the small scale of the Diversified Fund in terms of FUM, the relative lack of saleability of hedge funds as compared to equity funds and the reliance on the fund on the personal goodwill of the founder of the business. The high end of the valuation range assumes that a potential buyer could be found for the business and represents a value equal to 1 % of FUM from unrelated parties as at 2 March 2001. This percentage range of FUM has been assessed as appropriate after taking into consideration the range of valuation multiples derived from an analysis of the purchase and sale of other funds management businesses over the past few years. 61 I regarded Mr. Hall as an impressive witness who answered questions put to him thoughtfully and carefully. Mr. Hall readily accepted that the percentage of FUM valuation method was a crude one. However, that was the same method which had been used by Mr. Pittorino and by Mr. Banks. Mr. Hall freely acknowledged his inexperience in conducting the valuation of a hedge fund (a kind of entity which appears to be a relative newcomer to the Australian financial scene). 62 Since the question which each expert had to address was to determine the fair market value of the business on the basis of what a hypothetical prudent purchaser, who was a willing but not anxious buyer, would be prepared to pay to a vendor, who is a willing but not anxious seller, in circumstances where both buyer and seller are fully informed of all operational and financial details, it was conceded by the experts that the percentage of FUM valuation method or, indeed, any other valuation methodology, does not give a complete answer to this question, which always remains a question of judgment for the valuer. 63 It follows therefore that it is important for a valuer to consider whether or not there is a market for the product or interest. Mr. Hall did that in his reports; Mr. Pittorino did not. However, under cross-examination Mr. Pittorino agreed that in order to determine whether the business of managing the diversified fund would be saleable, he would have to take into account whether or not the would be likely to be any buyers for the business at that stage in its development. Mr. Pittorino conceded under cross-examination that his report was, in effect, prepared upon the assumption that there would be such a buyer. 64 Since the business had been in operation for only eight months, and since it had generated no profits, and had required a considerable startup expenditure, there appears to me to have been no basis for Mr. Pitterino to assume there would have been a buyer. Indeed, under cross-examination he conceded that he could never guarantee that there could be a buyer for any business, particularly if there was not a deep market. He also agreed that to his knowledge there was no active market in startup funds that only had $4m in funds under management. 65 The suggestion that either Magnum Fund Management Limited ("Magnum") (which had a consulting agreement with Coastal in respect to the Diversified Fund), or an entity like Magnum, might have been interested in buying a business such as managing the Diversified Fund appeared to have no evidentiary basis. Although that suggestion was put to Mr. Hall under cross-examination, it was not put to Mr. Frohlich, and Mr. Ryder himself gave no evidence about whether Magnum might or might not have been interested in buying the business. Mr. Hall considered it unlikely that Magnum would have had such an interest. 66 It was also suggested to Mr. Hall under cross-examination that, because a Mr. Halliday and Ascolon (which appears to have been a subsidiary of the St. George Bank) might have been interested in purchasing part of the business, this potentiality could have affected his conclusions. This matter of Mr. Halliday and Ascolon was put to Mr. Frohlich in cross-examination. However, Mr. Frohlich responded that the interest of Mr. Halliday was in Coastal's responsible entity licence, which was not an asset of the partnership business. He also said that the discussion which he had had with Mr. Halliday really led nowhere. In the absence of any offer made by Mr. Halliday to purchase any part of the business of managing the Diversified Fund, I am in agreement with the submission of the Defendants that there is no basis upon which to find that Mr. Halliday was a potential buyer. 67 I have already observed that each of Mr. Pittorino and Mr. Hall adopted the methodology referred to as the percentage of funds under management of the Diversified Fund. In applying such a percentage, however, each of those experts did not merely accept the actual amount of the FUM, but used an adjusted amount. Mr. Pittorino almost doubled the actual FUM, in order to take account of the possibility, as at 2 March 2001, that the Diversified Fund might later attract an investment from Amcor. 68 The fact that Mr. Frolich had been invited to make a presentation to Amcor on 23 March 2001, some three weeks after Mr. Ryder had abandoned the partnership, does not appear to me to be a proper or sound basis for adding, in order to apply the foregoing methodology, an additional amount of $3.125m to the funds under management held in the Diversified Fund. 69 The disparity between, on the one hand, the assumption that the possible investment by Amcor was to be $25m or the assumption that it was to be up to $25m (or, according to Mr. Frolich, up to $20m) and, on the other hand, the facts as known on 2 March 2001 is of considerable significance. Mr. Pittorino agreed that if the amount which Amcor was proposing to invest was unknown (as indeed was the case), then it would be impossible to include any amount on account of that possible investment. Further, both Mr. Ryder and Mr. Pittorino agreed that it would be difficult, or very unusual, for a potential purchaser to be able to form a view about the possibility that the business might win the Amcor investment. Mr. Ryder agreed that Coastal might have got nothing from Amcor. Mr. Pittorino proceeded upon the assumption that a hypothetical purchaser would discount by 50 percent his assumed 25 percent chance that the Diversified Fund would win the Amcor mandate (thus reaching a conclusion of $3.125m). However, that 50 percent was a totally arbitrary figure, and there was no proper basis suggested by Mr. Pittorino as to why the possibility that the Diversified Fund would win the mandate should be discounted by a potential purchaser by 50 percent or by any other figure. 70 Mr. Pitterino's conclusion in this regard also assumed that Mr. Frohlich would stay with the business after it was sold. There was no basis whatsoever for that assumption. 71 Neither Mr. Hall (nor indeed Mr. Banks, in his draft report) considered it appropriate to make any adjustment to the Diversified Fund's FUM on account of the prospective Amcor investment. 72 Mr. Hall, and also the Banks report, adjusted the FUM of the Diversified Fund downwards, in order to take account of Coastal's arrangement with Magnum. The adjustment was in proportion to the fee revenue from the Diversified Fund that was attributable to Magnum. Mr. Hall also adjusted the FUM downwards by excluding related party funds (that is, funds that had been invested in the Diversified Fund by Mr. Frohlich, by Mr. Ryder, and by their family members or associates). The reason for that adjustment was that investments are usually made by such persons (related parties) because of the involvement of a particular person, in this case, Mr. Ryder and Mr. Frohlich, and when that involvement ceases, at least part of the reason for investing the funds no longer exists. 73 As at 31 March 2001 the Diversified Fund had accumulated losses of $78,816. The business had been in operation for eight months at that time and had never made a profit. Further, any investors who subscribed to the Diversified Fund at its commencement had lost upon their investment. Furthermore, neither Mr. Ryder or Mr. Frohlich had paid themselves a salary. If they had done so, the losses of the business would have significantly increased. 74 One of the comparable entities relied upon by Mr. Pitterino was a transaction involving Hedge Funds Australia ("HFA"), of which an 83 percent interest had changed hands for $3.1m in September 2003. However, at that time HFA had FUM of $320m (exhibit 6). A percentage of FUM for HFA as at September 2003 was therefore 1.25 percent. That percentage supports the percentage range chosen by Mr. Hall in valuing the business of managing the Diversified Fund. 75 Mr Pittorino was cross-examined concerning the comparability between HFA on the one hand and the Diversified Fund on the other hand. HFA had been in operation for between three and five years, was being recommended by 7,000 financial advisors, and was 80 times the size of the Diversified Fund. It had a greater spread of clients, operated several funds, was paying salaries to its staff, and would be regarded as a much more robust business than the business of managing the Diversified Fund. Mr. Pittorino agreed that it would be necessary to discount the percentage applicable to the HFA transaction, before using that comparison in order to calculate the value of the business of managing the Diversified Fund. He also agreed that, although the HFA transaction was not a very good comparison to the Diversified Fund, it was still the closest comparison. 76 The differences between the HFA transaction and the Diversified Fund are so great, that I do not consider that they can be of any assistance in achieving a comparable transaction upon which to ground a valuation of the present partnership business. 77 Ultimately, I am in agreement with the submission on behalf of the Defendants that the best "real world" evidence of the value of the partnerships assets is what Mr. Ryder, one of the two partners, asked for it on 2 March 2001. When Mr. Ryder on that date repudiated the partnership, breaking his contractual promise to contribute equally in terms of time and effort, and went to a high paying position at Salomon, he did not ask for any money from Mr. Frohlich. It was not until a year later, after the business had started to turn around (entirely due to Mr. Frohlich's efforts) and become of some value, that Mr. Ryder first sought any money from the business. It is quite apparent from Mr. Ryder's conduct that at the time when he left the business he considered that it was worth nothing. 78 It was only after working 80 hours a week on his own that Mr. Frohlich made a success of the business. Any potential purchasers would probably have had to work just as hard and would also have needed Mr. Frohlich's skills and experience in the field of investment banking in order to make the business a success. 79 If it were necessary for me to do so, I would prefer the valuation of Mr. Hall to that of Mr. Pitterino, and would calculate the value of the partnership business, being the value of the right to manage the Diversified Fund, as having, at 2 March 2001, a value of no more than $17,700, that being 1 percent of the FUM of the partnership as calculated by Mr. Hall. 80 Upon that basis, no more than $8,850 (being one half of $17,700) could have been owing to Mr. Ryder, referrable to the value of the business as at 2 March 2001. That figure is considerably less than the amount of $29,650, being the agreed amount by which Mr. Ryder is indebted to Mr. Frohlich upon the cross-claim. 81 It should be empasised, however, that my primary conclusion is that at 2 March 2001 the business of the partnership had a nil value. 82 The Court of Appeal made no order regarding the costs of the remittal of the proceedings to me for determination of the various matters set forth in order 3 made on 21 December 2004. Accordingly, it will be necessary for the proceedings to return to the Court of Appeal for those costs to be dealt with, as well as for the making of final orders in consequence of my determinations. 83 For the benefit of the Court of Appeal, I would, however, express the view that the Plaintiffs have been unsuccessful in the proceedings before me whilst the Defendants have been successful, and that I consider it appropriate that the First Plaintiff should pay the costs of the First Defendant. 84 Accordingly, I make the following orders and determinations: (1). I determine that: (a) As at the date of termination of the partnership (being 2 March 2001) (i) The partnership had no assets, and the value of the partnerships assets was nil; (ii) No moneys were owing to Mr. Ryder referrable to the value of the business as at 2 March 2001, and Mr. Ryder owed moneys to Mr. Frohlich. (b) Mr. Ryder is indebted to Mr. Frohlich in the sum of $29,650. (2). I refer the matter to the Court of Appeal to deal with the costs of the proceedings before me, and to make final orders consequent upon my foregoing determinations. ********** 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.