Reported Decision : 67 ACSR 627 New South Wales Supreme Court CITATION : Short v Crawley (No. 38) [2008] NSWSC 917 HEARING DATE(S) : 28-31 July 2008; 1 August 2008 JUDGMENT DATE : 5 September 2008 JURISDICTION : Equity JUDGMENT OF : White J DECISION : Counsel for the plaintiff to bring in short minutes of order in accordance with reasons. CATCHWORDS : CORPORATIONS – remedies – compulsory buy-out order – valuation of shares – factual matters concerning share valuation - CORPORATIONS – remedies – compulsory buy-out order – valuation of shares – relevance of offer – offer exceeded market value – offer relevant even though not capable of acceptance giving rise to a binding contract – full circumstances regarding offer unclear due to defendant's conduct – valuation made on the basis of value contained in offer - CORPORATIONS – remedies – compulsory buy-out order – valuation of shares – relevance of capital gains tax liability – underlying asset would incur substantial CGT upon sale – valuation to be made on the basis of a notional realisation of the company's assets – future CGT liability to be taken into account Evidence Act 1995 (NSW) LEGISLATION CITED : Gaming Machine Tax Act 2001 (NSW) Civil Procedure Act 2005 (NSW) CATEGORY : Consequential orders Short v Crawley (No. 30) [2007] NSWSC 1322 Re Bodaibo Pty Ltd (1992) 6 ACSR 509 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 Goold v Commonwealth of Australia (1993) 42 FCR 51 CASES CITED : MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167 Armory v Delamirie (1795) 1 Str 505; 93 ER 664 LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No. 2) (1990) 24 NSWLR 499 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 Tyco Aust Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2004) 47 ACSR 514 Roslyn Short as executrix of the estate of the Late Warwick Gordon Short & Anor PARTIES : v Christopher Crawley & 9 Ors (No. 38) FILE NUMBER(S) : SC 2824/98 COUNSEL : Plaintiffs: I M Jackman SC & T M Thawley Defendants: A J L Bannon SC & D B Studdy SOLICITORS : Plaintiffs: Kemp Strang Defendants: HWL Ebsworth Lawyers IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Friday, 5 September 2008 2824/98 Roslyn Short as executrix of the estate of the Late Warwick Gordon Short & Anor v Christopher Crawley & 9 Ors (No. 38) JUDGMENT 1 HIS HONOUR: On 19 December 2007, I made orders and declarations in accordance with my reasons for judgment in Short v Crawley (No. 30) [2007] NSWSC 1322. The orders included: " 1. [1303] Mr Crawley purchase Nabatu's share in J & J O'Brien and Marsico at a valuation of one third of the net assets of each company without discount for its being a minority parcel with each company's assets to be valued not on the basis of a forced sale, but on the basis of current market values assuming willing, but not anxious vendors and purchaser, or purchasers. 2. [1304, 1305] The valuation of each of J & J O'Brien and Marsico (and its subsidiary Trudale) as contemplated in order 1 above, shall: (a) reflect the judgments to be entered as set out below; (b) take account of the tax consequences to the companies of the judgments to be entered as set out below. 3. [1326] Order that: (a) if, on a valuation of Nabatu's share in J & J O' Brien, either party contends that the company has a liability or a contingent liability to pay penalties or interest, and if that question has not been finally determined as between the Commissioner of Taxation and J & J O'Brien, then in valuing J & J O'Brien's liabilities, it will be necessary to assess the value of its liability to pay additional tax, penalties and interest; (b) in the event that a valuation of J & J O'Brien's liabilities includes a component for penalties and interest payable to the Commissioner of Taxation, then its assets should be valued on the basis that it is entitled to be indemnified by Mr Crawley in respect of that part of any such liability for penalties and interest as arises from the non-inclusion of J & J O'Brien's share of the profit from the Yurong Street development in its income tax return lodged on 14 September 2004. " (The numbers in square brackets in those orders are references to the paragraphs in Short v Crawley (No. 30) .) 2 This hearing concerns the valuation of Nabatu Pty Ltd's shares in J & J O'Brien Pty Ltd and Marsico Holdings Pty Ltd on the basis set out above. Neither party contended that J & J O'Brien had a liability or contingent liability to pay penalties or interest. 3 The principal questions are the values of the Jackson's on George hotel owned by Marsico and the Marlborough Hotel owned by J & J O'Brien. Another issue is whether, in valuing Nabatu's share in Marsico and J & J O'Brien, allowance should be made for capital gains tax and sales commission were those hotels to be sold. In the valuation of Nabatu's share in Marsico, there is also an issue as to whether credit should be given for tax losses which, at least theoretically, should be available to Marsico. This would arise from corrections to be made to Marsico's 1997 income tax return which brought to account a capital gain on the sale of the Racecourse Hotel. As a result of the orders of 19 December 2007, that capital gain in Marsico is to be reversed. Subject to one relatively minor issue, there was otherwise no disagreement as to the adjustments to be made to the audited balance sheets of Marsico and J & J O'Brien as at 30 June 2007 to determine the net assets of those companies. 4 There is substantial disagreement as to the value of the hotels. The plaintiffs contend that Jackson's on George should be valued at $36.5 million. The defendants contend that it should be valued at $18,230,000. The plaintiffs say that the Marlborough Hotel should be valued at $20.5 million. The defendants say it should be valued at $11,658,811. The plaintiffs contend that the price to be paid for Nabatu's share in Marsico as at 31 July 2008 should be $6,511,537. The defendants' primary case is that it has a nil value. The plaintiffs say that Nabatu's share in J & J O'Brien should be valued at $7,319,641 as at 31 July 2008. The defendants say that its value is approximately $4 million. 5 In the case of Jackson's on George there is not only a question as to what would be the value of the hotel on a sale to a purchaser interested in acquiring the freehold and hotel business. There is a separate question as to whether the site has a special value to the adjoining owner and, if so, how that value should be assessed. Jackson's on George is located at 176 George Street and is in a prime location on Circular Quay. It adjoins Gold Fields House at 1 Alfred Street, Sydney. Gold Fields House was acquired in June 2006 by Valad Commercial Management Ltd, a company in a group of companies known as the Valad Property Group. On 28 May 2008, another company in that group, Valad Funds Management Ltd, made what it called an offer to purchase the site at 176 George Street for $30 million. Mr Crawley responded that the property was not for sale. On the face of the proposal, the "offer" did not extend to the acquisition of Marsico's hotel licence, poker machine permits or poker machine entitlements, all of which are transferable and were valued at between $6.5 million and $7.5 million. Before considering the effect of this proposal, I will determine the value of Jackson's on George on the basis of its current market value as an hotel without regard to any special value it may have to the adjoining owner. The Valuers' General Approach 6 The plaintiffs led evidence from Mr Tony Owen of Owen Property Valuations and the defendants led evidence from Mr Stuart Robertson of Robertson & Robertson. They are both experienced hotel valuers. They adopted the same general approach to the valuations. This involved assessing a figure for annual maintainable earnings before interest, tax, depreciation and amortisation ("EBITDA") and dividing that figure by a percentage yield or capitalisation rate. The higher the capitalisation rate, the lower the calculated valuation. Mr Robertson also said that he applied a direct comparison method of valuation, but the relevant comparison was of yields, not aggregate values. The valuers were not valuing the real estate independently of the businesses. Their valuations for each hotel covered the freehold land, the business carried on on that land, the licence, poker machine permits, and poker machine entitlements used in the business. 7 In assessing maintainable EBITDA, both valuers, to a certain degree, used "normalised" earnings. In his first valuation, Mr Owen, with one qualification, used annualised actual revenues. His report was made on 12 May 2008 and he used revenue and expense figures for six months to 31 December 2007 which were multiplied by two (or "annualised") to derive annual earnings. The only qualification to Mr Owen's adoption of the actual revenues for the six months to 31 December 2007 was that he used figures for gaming revenue for 12 months from 1 January 2007 to 31 December 2007. 8 On the other hand, Mr Robertson used what he said were actual figures for the period of nine months to 31 March 2008, except for gaming revenue for the Marlborough Hotel where he based his assessment of maintainable gaming revenue figure on four quarter gaming results rather than 39 weeks. 9 Both valuers relied on gaming revenue figures produced by a division of Tattersalls Ltd called Data Monitoring Services which operates a centralised monitoring system. Mr Robertson made a significant upwards adjustment to the recorded nine months' gaming revenue for Jackson's on George calculated on a per week basis purportedly by reference to the CMS invoices. It ultimately emerged in re-examination that in so doing, he had made a transposition error which had resulted in a mistaken calculation. 10 Mr Robertson also made upwards adjustments to the revenue of both Jackson's on George and the Marlborough Hotel to reflect findings which he said had been made by Pitcher Partners, a firm of chartered accountants engaged by the plaintiffs to conduct an audit of both hotels. The audit covered the period for the six months to 31 December 2007. The audit report of Pitcher Partners was not tendered. It appears from Mr Robertson's valuations, supplemented by his oral evidence, that Pitcher Partners reported that meals and alcohol had been "sold" to managers and staff but these sales had not been recorded as revenue in the general ledger of Marsico and J & J O'Brien. Mr Robertson made an upwards adjustment to the revenue of both hotels in respect of these so-called "sales". Mr Owen did not. 11 The next stage in the valuation exercise was the determination of the gross profit to be derived from the sales. In respect of gaming and "sundry" revenue, both valuers applied a 100 percent margin. In the case of bar sales, bottle sales and the sales of food through the hotels, Mr Robertson adopted the actual margins of the hotels. Mr Owen adopted a slightly higher margin as part of his assessment of "normalised" earnings. Neither valuer stated explicitly which costs were to be deducted in calculating the margins in order to determine gross profit, but it was common ground that the relevant costs were the costs of purchasing the liquor and food. 12 Both valuers made substantial downward adjustments to the other expenses of the hotels to derive a figure for maintainable earnings. Numerous adjustments were made to the statement of actual expenses. These included the exclusion of professional fees paid to Gladewood Pty Ltd and Springsley Holdings Pty Ltd and other consultants' fees. In the case of expenses, both valuers adopted the same approach, described by Mr Robertson as being the adjustment of excessive expenditure items and non-hotel items, and either increasing or decreasing expense items that appeared outside industry acceptable ranges. 13 Maintainable EBITDA was described by Mr Robertson as earnings that could be reasonably maintained in the longer term, adjusted for irregularities in income or expenditure that would be made by a prospective purchaser. Mr Owen said his assessment of operating costs to be brought to account in determining maintainable earnings assumed competent average management and ownership of a hotel on a single holding basis. He adjusted items of expenditure which appeared to be out of line with industry averages. Hence certain expenses for Jackson's on George were adjusted by him where he considered the expenses to relate to group expenses and not to Jackson's on George itself. 14 Mr Owen said that maintainable earnings would normally be expressed in terms of current dollars and future growth would be reflected in the capitalisation rate. He said that any variability in the expected future maintainable earnings should be built into the capitalisation rate. Summary of Valuations 15 Mr Owen valued Jackson's on George on 12 May 2008 at $36.5 million (exclusive of GST). This figure was based on estimated maintainable EBITDA of $2,560,000, applying a capitalisation rate of seven percent. On 4 June 2008, he valued the Marlborough Hotel at $20.5 million (exclusive of GST). This valuation was based on estimated maintainable EBITDA of $1,740,000 and applied a capitalisation rate of 8.5 percent. 16 On 17 June 2008, Mr Robertson valued Jackson's on George at $27,365,000. He said he did this partly using a direct comparison approach, although the direct comparison was as to yield ranges, and partly by capitalising maintainable EBITDA. Mr Robertson considered that maintainable EBITDA to be $2,257,684 to which he applied a capitalisation rate of 8.25 percent. On the same day, he valued the Marlborough Hotel at $16.5 million based on maintainable EBITDA of $1,439,308, applying a capitalisation rate of 8.75 percent. 17 On 15 July 2008, Mr Owen provided a further report in which he said that because of changed market conditions, it was necessary to adjust the capitalisation rates he used in valuing both hotels. He revised his valuation of Jackson's on George to $30 million applying a capitalisation rate of 8.5 percent. He adjusted his valuation of the Marlborough Hotel to $19.3 million applying a capitalisation rate of 9 percent. 18 On 25 July 2008, Mr Owen provided a further valuation in response to instructions from the plaintiffs' solicitors that he make new assumptions or hypotheses as to revenue of the hotels up to May 2008. As noted above, his other valuations had been based on annualising six months' figures to 31 December 2007, except for gaming revenue. On the basis of the 11 months' revenue figures with which he was provided to the end of May 2008, he revised his assessment of maintainable EBITDA to $2,320,000 which, when capitalised at 8.25 percent, yielded a valuation of $28,100,000 for Jackson's on George. In this calculation he made no adjustment of gaming revenue but used what he was given as actual revenues. In the case of the Marlborough Hotel, he revised his estimate of maintainable EBITDA to $1,640,000 which, capitalised at 8.75 percent, would yield a value of $18,742,857 which he rounded down to $18.7 million. Mr Owen provided a breakdown of his calculation of maintainable EBITDA of $2,320,000 for Jackson's on George and $1,640,000 for the Marlborough Hotel. 19 Although Mr Robertson had previously used "normalised" figures for both revenue and expenses, in oral evidence in chief he proffered a further valuation opinion using Mr Owen's revised figures which included unadjusted figures for revenue. On that basis, he expressed the opinion that Jackson's on George should be valued at $26,022,775 (using a revised EBITDA of $2,146,879). A similar exercise for the Marlborough Hotel resulted in a valuation of $17,340,422 in place of his earlier valuation of $16,449,234. This was based on a varied EBITDA of $1,517,287 in place of $1,439,308. 20 The figure for gaming revenue for Jackson's on George was further amended by Mr Robertson following the tender of CMS invoices which both valuers accepted provided the most reliable guide to gaming revenue. Mr Robertson calculated that gaming revenue for 11 months to 31 May 2008 was $2,159,529. This is to be compared with the figure of $2,387,569 which Mr Owen used. The defendants did not submit Mr Robertson's valuation should be adjusted downward from $26,022,775 to reflect the amendment to gaming revenue. They did submit that no upward adjustment such as he had made in his first report was warranted. Valuation Based on Actual Expenses 21 The defendants submitted as follows: " The Defendants' primary position is that the valuation of the share should be on the basis of the value of the hotels as assets of the particular companies the subject of the current management. All conduct which has been claimed to be a breach of duty or oppressive conduct has been the subject of court orders. There are no continuing claims. As there is no current plan to sell the hotels, a purchaser of the shares would inherit the current management of the hotels. Thus there is no occasion to value the hotels by reference to normalised expenses. The actual expenses with certain limited exclusions should be adopted. " 22 The defendants referred to what I said in Short v Crawley (No. 30) at [1295]: " The valuation should be made on the basis of what would be realised on an orderly sale of the assets of the companies in the current market. As the principal assets are the hotels, I think it unlikely that there would be any difference between a valuation on the basis of an orderly realisation of assets and a valuation of the companies as going concerns. The evidence is that hotels are valued by capitalising their future maintainable earnings. " 23 In the paragraph quoted, I was not expressing any view as to how future maintainable earnings should be assessed if the companies were valued as going concerns. 24 Mr Robertson was instructed to prepare an alternative valuation figure using actual expenses as shown in the management accounts ending the March quarter of 2008 and not using adjusted expenses, except for interest and overseas travel expenses. On that basis, Mr Robertson calculated EBITDA for Jackson's on George of $1,504,039. He then applied the same capitalisation rates to those earnings as he had used (i.e. 8.25 percent), and which Mr Owen had used in his report of 15 July 2008 (8.5 to 9 percent), to produce a range of values from $16,700,000 to $18,230,000. The defendants submitted that the value of Jackson's on George was $18,230,000 using the valuation approach set out by Mr Robertson, that is, using his capitalisation rate of 8.25 percent. 25 Mr Robertson calculated a value of $18,230,775 "assuming the capitalisation rate" adopted earlier in his report. Nothing in his instructions justified that assumption unless he was satisfied that it was appropriate to do so. Given the difference between Mr Robertson's assessment of normalised EBITDA and the actual EBITDA, a difference at the time of his report of 17 June 2008 of $753,645, one would have to think that Mr Robertson did not incorporate in his capitalisation rate a factor for the potential of the hotel to increase earnings under more efficient management. 26 I do not consider it appropriate to approach the valuation exercise on the basis of actual EBITDA without adjustments to bring expenses into line with what would be expected for the hotel in question under competent average management and where expenses were confined to the hotel in question. Thus, Mr Owen reported that professional fees paid by Marsico, which were included in actual expenses for Marsico under the heading "Professional Fees", included payments related directly to the building and renovations that had been carried out at the Marlborough Hotel and which were capital expenses. Neither Mr Robertson nor Mr Owen in their assessment of normalised earnings for Jackson's on George allowed professional fees of in excess of $200,000 on an annualised basis, nor an amount of some $43,628 for what were called storage fees. They both made substantial downward adjustments to the actual expenses to bring them into line with what would be expected in accordance with industry practices under a hotel with competent management. 27 Neither valuer suggested that the use of actual expenses was in accordance with proper valuation practice, although Mr Robertson observed that where a partial interest in a business is acquired, actual expenditure items which might normally be adjusted would not in fact be adjusted if the existing management arrangements and infrastructure continued. However, that simply reflects the consequence of acquiring a minority interest. The plaintiffs are not able to influence management so as to bring the actual expenses into line with the order of expenses both valuers considered to be appropriate. But the value of the plaintiff's share is not to be discounted for the fact that it is a minority holding. The defendants' preferred position is not consistent with the basis on which I have said Nabatu's shares should be valued. Moreover, I directed that the companies' assets be valued on the basis of current market values assuming willing, but not anxious, vendors and purchasers. The defendants' preferred position instead assumes that the valuation should be approached as if it was only the plaintiffs' minority share which was to be valued rather than the companies' assets on the basis of an hypothetical sale. 28 Further, the price which is to be fixed for the share must be one which is fair. It would not be fair to deprive the plaintiffs of the value which they could obtain for their share if the companies' assets were realised. Had I considered that the plaintiffs' share ought to be valued on the basis for which the defendants now contend, I would not have made the order for compulsory purchase, but rather would have made the orders for winding up which the plaintiffs sought. 29 I therefore reject the defendants' "primary position". Although put as the defendants' primary position, it was but faintly argued. General Considerations Affecting Value – Smoking Ban 30 The trade for both hotels was adversely affected by a smoking ban introduced on 1 July 2007. The smoking ban particularly affected gaming revenue. The plaintiffs contended that management of Jackson's on George and of the Marlborough Hotel failed to introduce a "smoking solution" and that on the introduction of a "smoking solution" it could be expected that revenue would return to pre-ban levels. Trade at the Marlborough Hotel was also affected by renovations carried out to the hotel between May and August 2007. The plaintiffs submitted that in determining the appropriate EBITDA, the Court should adopt gaming profits which were being achieved as at 30 June 2007 immediately before the introduction of the smoking ban. 31 In Queensland a similar ban was introduced in July 2006. Gaming revenue for Queensland hotels declined sharply for the first 12 months but over the succeeding nine months, revenues recovered to levels above those obtaining before the smoking ban was introduced. Smoking bans were introduced in Victorian gaming venues in 2002. There was an initial downturn in gaming revenue, but after four years gaming revenue returned to approximately the levels it was at before the bans were introduced. Mr Owen said that the reason for the slower recovery in Victoria was due to there having been only about nine months' notice of the smoking bans being introduced. In both Queensland and New South Wales, longer periods of notice were given. Mr Owen gave evidence, which I accept, that : " From my experience those hoteliers who have prepared their hotels with outdoor gaming areas where patrons can smoke at the poker machine have maintained their pre-smoking ban revenue and in some cases increased revenue. Jackson's and the Marlborough do not have any smoking solutions. Had they implemented an outdoor gaming solution it is likely that they would have maintained revenue at pre-smoking ban levels. If this were the case this would have increased their maintainable earnings and increased the value of the hotels. " 32 The smoking ban does not appear to have affected bar sales but it has affected gaming revenue. Gaming revenue is by far the most profitable business of the hotels. It accounts for 28 percent of total turnover of Jackson's on George, but gaming profits contribute to approximately 70 percent of EBITDA. In the Marlborough Hotel, gaming revenue constitutes about 20 percent of total turnover but gaming profits contribute about 60 percent of EBITDA. 33 In an affidavit sworn on 20 February 2008 in support of an application for the stay of orders requiring Marsico to pay moneys to the Racecourse Hotel partnership and the Australian Youth Hotel partnership, Mr Crawley deposed that "The original 2007/2008 budget for Marsico had included provision for approximately $1 million in building costs to create a Level 1 veranda across the front of the hotel and a break out area on Level 3 to provide smoking areas for patrons." Mr Crawley decided not to proceed with those renovations at the time. He said that "In December 2007 I decided that Marsico would not be in a position to proceed with the funding of these alterations for the time being and accordingly deferred this expenditure. These building costs will however need to be incurred to maintain turnover in the existing market." An internal report of the ANZ Bank for the Kavia Holdings Group records that "Management are investigating capital improvements to alleviate the downturn in sales as the [Jackson's on George] site does not provide outdoor smoking facilities on the premises. Future improvements are currently on hold however pending the outcome of the court litigation." I infer that the last statement is based on information provided to that bank by Mr Crawley. 34 The "smoking solution" which both valuers had in mind as being likely to reinvigorate gaming profits is one where customers could continue to play the poker machines whilst smoking. Smoking is not now permitted internally and smoking areas require 25 percent of surfaces to be open to the elements. At present the gaming room at Jackson's on George is located downstairs from street level. The proposed structural changes to levels one and three would not provide such a solution unless the gaming room were relocated. Council approval would presumably be needed to such changes. No confident conclusion can be drawn that particular structural changes to Jackson's on George could or should be made to achieve the suggested smoking solution which would allow patrons to smoke whilst playing the poker machines. A decision to restructure the hotel would require consideration of the impact that would have on other patrons. 35 The capitalisation rates adopted by both valuers should have taken account of their assessment of the potential to increase revenue by implementing such a smoking solution. In initially adopting a yield of seven percent, Mr Owen expressly took into account the scope for Jackson's on George to improve trade through a contemporary refurbishment or redevelopment without outdoor gaming facilities. Mr Robertson identified an opportunity for Jackson's on George to create an external smoking area off the pool bar on the top floor. This was one of the matters he took into account in selecting his capitalisation rate. 36 Similar considerations apply to the Marlborough Hotel. Both valuers thought it peculiar that no "smoking solution" was implemented for the Marlborough Hotel when renovations were carried out in 2007 which would permit gamblers to smoke while playing poker machines. Mr Owen said: " As part of the refurbishment of the ground floor during 2007 the gaming room was relocated from the basement to the King Street level. The new gaming room does not have frontage on any side to an external space where a smoking area could be provided. It seems peculiar that the owners, who would have been mindful of the forthcoming smoking bans, would reposition the gaming room to an area of the hotel that does not have access to an outdoor space. ... Given the significant profit generated from gaming the relocation of the room to an area adjoining the rear laneway or courtyard fronting the Prego's restaurant or possibly into the existing TAB area, giving it direct street access, are recommended alternatives, although this would involve redesigning the ground floor layout and would incur considerable cost. Nevertheless, from our experience hotels that have moved their gaming machines into areas that are exempt from the total smoking ban has seen an improvement in gaming revenue. " 37 Mr Robertson said that he would expect gaming profitability to improve from current levels once the full effect of the renovations was experienced but would not expect gaming profitability to return to pre-smoking ban levels without access to an outdoor smoking area or direct access from King Street. Mr Robertson said that, given the limited site area, it was difficult to see that a smoking area off the gaming room could be provided without significant structural alterations. It might be necessary to relocate the gaming room to the position of the building occupied by Prego's restaurant which would have direct access to the rear laneway or courtyard. 38 The evidence does not permit a conclusion as to precisely what changes to the Marlborough Hotel could be made to optimise revenue from gaming. Such changes would require council approval and would be likely to affect the overall amenity of the hotel and accordingly its attraction to customers who do not want to play the poker machines. 39 Both Mr Owen and Mr Robertson took into account in their capitalisation rates what they considered to be the prospect of the Marlborough Hotel increasing revenue and profit from gaming by adopting a "smoking solution". The plaintiffs denied that Mr Robertson did so but he gave evidence in cross-examination that he did take into account the potential for the Marlborough Hotel to provide direct access to a smoking area for gamblers. He considered that substantial costs would be involved and there was a risk in any event that smoking might be banned altogether within two years and a judgment would have to be made as to whether costs of providing such an area would be prohibitive. His cross-examination on this subject was based on a statement in his report that the matters he had taken into account in determining an appropriate capitalisation rate were his SWOT analysis and market evidence. He did not refer to the potential for increasing gaming profit by providing direct access to a smoking area for gamblers as an opportunity in his SWOT analysis. However, I accept his evidence that he did take that matter into account. 40 The plaintiffs have not established that there was some specific step which Mr Crawley should have taken in the renovation of the Marlborough Hotel or Jackson's on George to maximise gaming revenue for which council approval would have been obtained and which would have been cost-effective. Whilst I accept that Mr Crawley deferred renovations to Jackson's on George until after the present hearing, I do not infer that this was done in order to depress the trading results and thereby lower the price which would be payable for Nabatu's share in Marsico. The renovations he had in mind would carry a substantial cost and it is not unreasonable that Mr Crawley should decide to embark on such a course only after the purchase of Nabatu's share has been resolved. Both valuers thought there was an opportunity for the hotels to increase such revenue, although the ways in which that will be done and the costs of doing so have not been clearly defined. To the extent the valuers have been able to form a judgment on those matters, they have taken account of them in the capitalisation rates applied. I do not consider it appropriate to make any increase to either valuer's assessment by reason of the fact that no smoking solution has been implemented. General Considerations Affecting Value – The Depressed Market 41 In his report of 15 July 2008, Mr Owen said that the reason he adjusted his original capitalisation rate for Jackson's on George from seven percent to between eight and nine percent and the reason he adjusted his capitalisation rate for the Marlborough Hotel from 8.5 percent to 9.5 percent was the sharp deterioration in the hotel market in the second quarter of 2008. He said: " Market sentiment has taken a battering in recent months and buyers appear reluctant to commit at this time, uncertain whether prices may fall further on the back of the sub prime collapse and the international credit crunch and the increasing cost of borrowing. " 42 After listing four further factors affecting market sentiment he said: " The extent of the downturn is hard to measure because there has been an absence of sales transactions from which to take guidance and until hotels start selling and some benchmark sales occur there is no clear indication as to what will happen with yields. Nevertheless, against this backdrop and in spite of an absence of sale evidence, circumstances point to a further softening of yields, since my last valuation reports. " He said that from discussions with hotel brokers, " A reoccurring theme was that hotels are attracting genuine interest from buyers at yields of 9.5% to 10.5%, but that at this level offers were well below vendor expectations and hence sales were not proceeding at this point in the market cycle. " He also said: " From my experience the current hotel market is the worst I have experienced in terms of market sentiment and transaction activity since before the introduction of poker machines into hotels in 1997. Hotels in Sydney have been hit on numerous fronts and the result has been a decline in hotel profits and a softening of investment yields that have lead to a significant decline in capital values and this has become particularly evident to me over the last two months as the credit crisis deepens. It is my opinion that if an hotel owner were seeking to achieve an optimum price/valuation for their hotel then it is difficult to imagine a worst [sic] time to be selling or having it valued. I emphasise that a valuation is a snapshot of a moment in time and is based on market conditions as they exist on the day. It is not a final opinion of what the hotel will ultimately be worth when the downturn finishes. Should there be an easing of interest rates and credit availability I would expect the Sydney hotel market to rebound quite quickly. I also expect NSW to eventually return to pre-smoking ban profits as they have in both Queensland and Victoria although the recovery may take longer than the Queensland example in this current depressed market. However, I would expect NSW to be more closely aligned to the Queensland cycle because of the right to have outdoor gaming and the longer lead in period NSW hotels have had to prepare their venues. " 43 Counsel for the plaintiffs submitted that where shares are to be valued pursuant to an order for compulsory purchase in a temporarily depressed market, the Court should employ a capitalisation rate favourable to the oppressed minority and cited Re Bodaibo Pty Ltd (1992) 6 ACSR 509 at 515-516. It was submitted for the plaintiffs that the order requiring the hotel assets to be valued at their current values permits some flexibility to achieve fairness. 44 If it were clear that the present market conditions were temporary, then there would be force in this submission. When I directed that the shares be valued on the basis of current market values assuming willing but not anxious vendors and purchasers, I was concerned to clarify that the valuation was not to be made at 1997 or 1998 values, as the defendants had submitted, but at current values. Whilst the current values are those obtaining at the time of making the order for purchase rather than at the time I made the orders of 19 December 2007, I accept that if it were shown that the depression in values is temporary, fairness to the plaintiffs would require that an adjustment be made to reflect that fact, if it were not already accommodated in the capitalisation rates adopted by the valuers. 45 The plaintiffs also submitted that it appeared from Mr Owen's evidence, on which he was not cross-examined, that only an anxious vendor would sell in the current depressed market. My order required the valuation to be made on the assumption of there being willing but not anxious vendors and purchasers. Therefore, the plaintiffs submitted, the appropriate capitalisation rates to adopt were those which obtained in or before December 2007 and not those in July 2008. Mr Owen's valuation of Jackson's on George of 12 May 2008 adopted a capitalisation rate of seven percent. In January 2008 Mr Robertson adopted a capitalisation rate of 7.85 percent for Jackson's on George. He said in cross-examination that if he were valuing Jackson's on George in December 2007 he would have chosen a lower capitalisation rate than that adopted either in his report as at June 2008 or his report of January 2008. 46 In relation to the Marlborough Hotel, Mr Owen adopted a capitalisation rate of 8.5 percent in his report of 6 June 2008. However, the plaintiffs submitted that that report took into account the then deteriorating market conditions. Mr Robertson adopted a capitalisation rate of 8.75 percent in his report of 17 June 2008 compared to 7.93 percent in a report he had made on 23 January 2008. It was submitted for the plaintiffs that it should be inferred that had Mr Robertson prepared a report in December 2007 for the Marlborough Hotel, he would have used a capitalisation rate lower than 7.93 percent. 47 The difficulty with the plaintiffs' submission is how to assess whether the market has further to fall, and for how long the market will remain depressed. Neither valuer was able to venture an opinion on those questions. Mr Robertson said that: " There is still demand for landmark hotels, however, in my opinion, it is doubtful they will be purchased with a yield below 8%. The large institutional buyers and consortiums that were prevalent in the market up to December 2007 are not as active and it is expected as borrowing costs increase they will be less active in the short term unless access to cheaper funds becomes more available than the current cost of funds. " 48 In cross-examination Mr Robertson confirmed that he was unable to express that opinion beyond the short term. It does not follow that any confident opinion could be expressed as to market conditions beyond the short term. There are a number of factors which are affecting market sentiment for hotels including the Small Bars Bill which is expected to increase competition from new premises in the Sydney city and inner suburbs, and possible legislative responses to social evils from gambling in hotels. Mr Robertson expressed the opinion that hotels reliant on gaming revenue were heading into a far tougher legislative environment. How that eventuates is yet to be seen, but the market's perception of that prospect is itself something which affects hotel values and is independent of current economic conditions. Nor is it possible to prognosticate when credit for investment in hotels is likely to become more readily available to institutional buyers and consortia that had been in the market up to December 2007. 49 To the extent that an assessment can be made of those future matters, it should be reflected in the capitalisation rates adopted by the valuers. 50 It was submitted for the plaintiffs that the capitalisation rate should be adjusted upwards to reflect the fact that it is only anxious vendors or vendors who are forced to sell who would sell in current market conditions. Mr Owen commented on the lack of current sales because buyers were only genuinely interested at yields which would result in offers well below vendor expectations. Mr Robertson said that buyers who have sufficient cash resources would be in a position to take advantage of hotels which were forced sales, or sold by owners who had financing difficulties, and that the number of hotels sold under receivership was expected to rise. Receivership sales, being forced sales, do not meet the test of market value. He said that the market continues to operate on fear and rumour and until some fear subsides it is expected that there will be a significant range in yields until the gap between buyers and sellers closes and the market returns to some "normality". 51 Nonetheless, both valuers were able to express an opinion as to "market value". Mr Robertson defined market value as the estimated amount for which the asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgably, prudently and without compulsion. Mr Owen defined current market value as the price which the property might reasonably be expected to be sold at the date of the valuation assuming a willing, but not anxious buyer and seller; a reasonable period within which to negotiate the sale having regard to the nature and situation of the property and the state of the market for property of the same kind; that the property was reasonably exposed to the market; and that no account was taken of the value or other advantage or benefit, additional to market value, to the buyer incidental to ownership of the property being valued. Mr Owen's revised valuation of 15 July 2008 which he described as a "snapshot of a moment of time ... based on market conditions as they exist on the day" was a valuation of current market value as he defined it. He said that it was not a "final opinion of what the hotel will ultimately be worth when the downturn finishes", but that does not mean he was unable to reach an opinion as to current market value because of an absence of willing vendors. 52 As Mr Bannon SC for the defendants submitted, whatever money a vendor gets is money which is available in the same market. In some cases it might not be fair to a vendor of shares to require it to sell shares at current market values where the market is depressed, but given that those standing behind Nabatu are themselves active participants in the market, and given also that it is impossible to predict whether the current depression of market conditions is only temporary, I do not accept that I should adjust the capitalisation rates to be adopted to December 2007 or pre-December 2007 levels. Value of Jackson's on George as an Hotel Revenue 53 The figures for annual revenue (expressed in dollars per week) for Jackson's on George used by the valuers in determining EBITDA was as follows: Owen 12/5/08 (based on actuals for 6 months to 31/12/07 annualised except for gaming) Robertson 17/6/08 (based on actuals for 9 months to 31/3/08 annualised with adjustments to gaming based on statutory returns and to bar and food for unbooked sales to managers and staff) Owen 25/7/08 (based on actuals to 31/5/08 annualised), Exhibit G Robertson 30/7/08 (Exhibit 7, based on gaming tax invoices and performance statements) Bars 97,163 96,132 95,918 Food 23,128 23,677 23,191 Gaming 50,617 48,393 45,929 45,273 Other 5,435 4,197 3,800 Total p/week 176,342 172,399 168,838 Annual Total 9,169,804 $8,964,748 8,776,971 54 The plaintiffs submitted that to determine the appropriate EBITDA I should adopt the figures for revenue apart from gaming for the 11-month period ended 31 May 2008, and that the gaming profits should be those achieved as at 30 June 2007 immediately before the introduction of the smoking bans. For the reasons I have given, I do not consider that I should adjust the statement of gaming revenue for the alleged failure of Marsico to take effective steps to implement the smoking ban. The question remains whether gaming revenue should be assessed on the basis in Mr Owen's report of 12 May 2008 where he adopted the gaming profits for the 12 months ended 31 December 2007, rather than annualising the six-month figures; whether it should be based on the actual figures for 11 months to 31 May 2007, and if so, which figures should be adopted; or whether any other adjustment should be made. The logic of adopting the gaming results for 12 months to 31 December 2007 is that based on interstate industry figures, gaming revenue can be expected to return to its levels before the introduction of the smoking ban in time. Therefore in determining maintainable revenue from gaming, it may not be appropriate to use the first 11 months' figures after the introduction of the ban when the effect of the ban is likely to be most pronounced. 55 In contrast to the figures in the above table, the weekly gaming profit, (which term is used interchangeably with gaming revenue as a 100% margin is applied in determining gross profit from gaming), was as follows: Year Weekly Profit 2001/02 $46,302 2002/03 $45,772 2003/04 $41,196 2004/05 $45,953 2005/06 $54,019 2006/07 $53,954 56 Given that the gaming profits for the 2005/06 and 2006/07 years were substantially higher than the preceding four years, I do not consider that I should assume that gaming profits will, within a reasonable time, return to their 2005/06 and 2006/07 levels. As the valuers say that they have incorporated into their capitalisation rates their assessment of the potential for gaming profits to be improved by the introduction of a smoking solution, I think the preferable approach is that adopted by Mr Robertson of using up-to-date revenue figures to calculate maintainable EBITDA. 57 There was no dispute about the calculation of the actual revenues for the 11-month period to 31 May 2008, except in relation to the discrepancy between the gaming figures said to be contained in management reports, or recorded in the general ledger, and what appears from tax invoices and performance standards provided by Data Monitoring Services. Mr Owen's calculation of gaming revenue for the 11-month period to 31 May 2008 was $2,190,791. The figure appearing in the general ledger as "poker machines/profit" to 31 May 2008 was $2,183,965. The figure calculated by Mr Robertson from the DMS invoices was $2,159,529. Both valuers regarded the invoices from Data Monitoring Services as being the most reliable record and one they would use if available. In his report of 12 June 2008, Mr Robertson made substantial upwards adjustments from what he said was the actual nine-month gaming profits as shown in the profit and loss management accounts and was based on the statutory returns provided by the Department of Gaming and Racing. However, as noted earlier in these reasons, he later said that his figures contained a transcription error. In all of these circumstances I consider that the figure of $2,159,529 should be used and should be annualised. 58 As noted in para [10] above, in his report Mr Robertson made upwards adjustments to revenue to reflect findings he said had been made by Pitcher Partners in relation to meals and alcohol which had been supplied to managers and staff and not taken up as revenue in the general ledger of Marsico and J & J O'Brien. In his report of 17 June 2008 for Jackson's on George, Mr Robertson made an upward adjustment of $251 per week in respect of bar sales. He added $459 per week in respect of restaurant sales. 59 As noted earlier in these reasons, the report of Pitcher Partners to which Mr Owen referred was not tendered by the plaintiffs. On the other hand, the whole of Mr Robertson's report was tendered by the defendants. Mr Robertson did not himself investigate the accuracy of Pitcher Partner's calculations. He did turn his mind to whether maintainable revenue should be adjusted for such sales and considered that it should. 60 The defendants submitted that because Mr Robertson's opinion on this matter was based on facts which had not been independently proved, there was no proper foundation for his opinion and, notwithstanding that they tendered the whole of his report, it was not open to the plaintiffs to rely upon this part of the report. Alternatively, they submitted that in the absence of admissible evidence to prove the underlying facts which Mr Robertson had assumed and acted on, his opinion on those matters should be given no weight. In this respect they referred to Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at 743-744 [85]. 61 This submission failed to take account of s 60 of the Evidence Act 1995 (NSW) and the fact that the relevant parts of Mr Robertson's report had not only been tendered without objection, but tendered by the defendants themselves. The defendants' counsel expressed outrage that the plaintiffs should seek to rely upon this part of Mr Robertson's report, but it is likely that a reason the plaintiffs did not seek to tender the evidence from Pitcher Partners was that parts of the Pitcher Partners report (including this part) had been adopted by either or both of the valuers. The defendants had indicated their intention to read the whole of Mr Robertson's report, and they did not seek to adduce any evidence to contradict the assumption which Mr Robertson made based on the Pitcher Partners report. It must be remembered that in the absence of a direction under s 136, s 60 of the Evidence Act makes admissible first-hand hearsay used by the expert as a basis for his opinion. No argument was advanced addressing s 60, or whether the material in question was first-hand or more remote hearsay. No application was made under s 136 of the Evidence Act until closing submissions. In any event, no limitation under s 136 on the use of the statement made by Pitcher Partners would be appropriate given that the defendants did not seek to challenge the correctness of the matters asserted by Mr Robertson, namely that there had been bar sales and restaurant sales to managers and staff not recorded as revenue in the amounts stated. That evidence was led from documents tendered by the defendants. 62 The question remains whether the adjustments made by Mr Robertson, but not by Mr Owen, are appropriate. I do not consider that they are. As Mr Bannon SC submitted such "sales" can be regarded as part of the employees' reward for working at the hotel. If they were not given free food and drink, they could reasonably expect to be paid more. If a prospective purchaser were to increase revenue on the basis that he could charge the staff for the food and drink they were accustomed to consume, then he would have to expect to increase the wages bill. What that effect would have on overall profitability, assuming fringe benefits tax is paid on the food and drink so supplied, would be uncertain. The evidence did not disclose how fringe benefits tax is taken into account in the calculation of EBITDA, in other words, whether it is a tax which is also excluded from the calculation. Given these imponderables, I prefer the position taken by Mr Owen not to adjust revenue for these items. Neither expert gave any reasons for the approach he took. 63 For these reasons, I conclude that the annualised revenue for Jackson's on George should be taken to be the sum of the following: Bars: $4,986,258 (as per Exhibit G) Food: $1,205,579 (as per Exhibit G) Gaming: $2,354,203 ($2,159, 529 ÷ 47.7 x 52) Other: $197,564 (as per Exhibit G) Total: $8,743,604 (I have taken the year to comprise 52 weeks and not 52.3 weeks as Mr Owen's annualised figures are not based on there being 52.3 weeks in the year and both valuers' expense figures are based on a 52-week year.) Gross Profit 64 As noted in para [11], both valuers applied a 100 percent margin to gaming and sundry revenue. In relation to bar sales, Mr Robertson applied a margin of 71.6 percent which he said was a gross profit margin extracted and summarised from profit and loss accounts for the 39 weeks to 31 March 2008. In relation to restaurant sales, he adopted a margin of 58.2 percent. He said that the actual margin for the 39 weeks to 31 March 2008 extracted from the profit and loss accounts was 57.3 percent and that the difference was due to "the slight adjustment in the increasing sales according to the Pitcher Report where food and drink sales were supplied to staff or managers." Accordingly, if I were to apply the approach of Mr Robertson using the unadjusted revenue figures, the appropriate margin would be 57.3 percent. 65 Mr Owen adopted a margin of 72 percent for bar sales and 60 percent for food sales based on the figures provided to him as to the operation of the hotel and taking into account industry benchmarks. 66 Unless there were no scope to adjust margins, it would be appropriate in assessing a margin as part of the valuation exercise not only to consider the actual margins applicable to the hotel's operation, but also industry benchmarks. Whilst the costs of purchases may be independent of the owner, the volume of sales and pricing is very much a function of individual management. In my view, Mr Owen's approach of having regard to industry benchmarks is to be preferred to the approach of Mr Robertson. In relation to food sales, Mr Robertson observed that the margins were at the lower end of the industry expected range and was attributable to the current pricing structure under which on various nights, meals were offered at below cost. That is a matter which a prospective purchaser could expect to address. The differences are not substantial. In my view, the margins adopted by Mr Owen are to be preferred. Accordingly, the gross profit in the EBITDA calculation can be assessed as follows: Bars: $3,590,106 Food: $723,347 Gaming: $2,354,203 Other: $197,564 Total: $6,865,220 Normalised Operating Expenses 67 In their reports of 12 May 2008 and 17 June 2008 Mr Owen and Mr Robertson primarily assessed normalised operating expenses by doubling what they reported as the actual operating expenses for the six months to 31 December 2007 after excluding or adjusting expenses they considered to be out of line with industry averages for the costs of operating the hotel on a single holding basis. In his report of 25 July 2008 Mr Owen made new calculations based on information provided to him of updated revenue figures to 31 May 2008 but did not make any adjustment to normalised expenses except for an adjustment of gaming duty. Mr Robertson took the same approach in relation to expenses when he provided revised calculations using the figures for turnover taken from Mr Owen's report. Set out below is a schedule which lists in respect of those expense items allowed by Mr Owen or Mr Robertson what they reported to be the actual expenses incurred to 31 December 2007 and their allowance for the relevant expense stated as an annual figure. The schedule omits expense items which both valuers excluded: Expenses Item Actual per Owen 31/7/07-31/12/07 Actual per Robertson 31/7-31/12/07 Annual per Owen Annual per Robertson Accountancy - - 15,000 15,000 Advertising 76,402 76,402 153,000 151,176 Bank Charges 15,887 15,887 15,000 31,435 Cleaning/laundry 81,359 81,359 161,000 160,984 Electricity, Gas and Heating 89,336 89,250 125,000 176,598 Entertainment 123,447 120,902 242,000 239,228 Flowers and Decorations 11,104 5,638 16,000 11,156 Gaming Device Duty 439,528 439,528 886,000 843,315 Gaming repairs and maintenance - 41,400 General 619 - 1,225 Hire of Plant 19,471 19,471 - 38,527 Insurance General 14,130 14,130 28,000 27,959 Insurance Workers' Comp 29,364 29,364 58,000 80,868 68 Mr Robertson adopted a normalised wage expense of $42,974 per week including superannuation and payroll tax, a total of $2,234,648 (based on a 52-week rather than a 52.3-week year). Mr Owen's allowance for wages, superannuation and payroll tax as shown on the above table was $2,286,000. 69 Mr Owen's initial figure for operating expenses for the purpose of calculating EBITDA was $4,718,400. Mr Robertson's figure was $4,773,766, a difference of $55,366. Mr Owen's revised expense figure was $4,577,399. Mr Robertson's revised figure was $4,710,063, a difference of $132,644. 70 The operation of the hotel is labour-intensive as it has a number of service points on multiple levels. It also trades from 8.30am to 3.00am three nights per week, from 8.30am to 4.00am one night per week, and from 8.30am to 5.00am on two nights per week. 71 Mr Robertson said that his maintainable expenses including wages equated to 53.3 percent of the total turnover which was towards the higher end of the industry expected range. He said that he had chosen to reflect any further potential savings in expenditure or wages in the selection of an appropriate capitalisation rate. However, I am not satisfied that Mr Robertson did so. In his report he said that he selected an appropriate capitalisation rate based on the results of his SWOT analysis and market evidence. The potential for further savings in expenditure on wages was not identified as an opportunity in his SWOT analysis. Also, as noted previously in these reasons, Mr Robertson applied the same capitalisation rate when valuing the hotel with its actual level of expenses as he did when valuing it using his assessment of maintainable expenses. If there were any allowance for potential savings in expenditure or wages built into the capitalisation rate, there would be much greater scope for such savings in an alternative valuation figure using actual expenses, which should result in a downwards adjustment to the capitalisation rate. On the other hand, if Mr Robertson's alternative valuation based on actual expenses assumed that there was no scope for adjusting expenses because only a partial interest in the business was being acquired (see para [27] above), then, if there were an allowance for further potential savings built into the rate used to capitalise earnings based on normalised expenses, one would expect him to adopt a higher rate when capitalising EBITDA where there was no such scope. 72 Mr Owen said that: " The Net Operating Profit of a freehold hotel (EBITDA) will generally range between 25%-45% of gross sales, depending on the sales mix and efficiencies of the Hotel. A dominance of high profit trade, i.e. gaming, should see net profit at the higher end of the range, whereas a hotel with a high proportion of bottle or food sales, which are low margin, high cost areas, would be at the lower end of the range. The adjusted net operating profit (EBITDA) of the Jacksons on George Hotel equates to $2,560,000 (rounded) or 28% of turnover." 73 Given that gaming contributes a high proportion of the profits of Jackson's on George, one would expect that EBITDA would be a higher percentage of turnover than 28 percent. Mr Owen did not say that he had reflected the potential for further savings in expenditure or wages in his capitalisation rate and I infer that he did not. 74 I do not consider a further downwards adjustment should be made to wage expense in the determination of EBITDA than was adopted by Mr Robertson given that Mr Owen's figure, when payroll tax and superannuation were added, was higher than Mr Robertson's. However, as the plaintiffs submitted, the wage cost is high even having regard to the extended trading hours and the wages cost attributable to having a multi-point and multi-level bar and food operation. In this respect, Mr Robertson acknowledged that the Orient Hotel in the The Rocks offered a good comparison with Jackson's on George in terms of the percentage of expenses including wages to turnover. Mr Robertson valued the Orient Hotel in 2005. His report stated that it had a substantial bar and bistro trade with a multi-level bar and food operation and 24 hour trading on weekends. His assessment of maintainable wages in his EBITDA calculation for that hotel was that they were 18.8 percent of turnover. Mr Robertson acknowledged that gaming at the Orient Hotel made a smaller contribution to turnover than did gaming at Jackson's on George, and that one would expect the ratio of expenses, including wages, to turnover at Jackson's on George to be lower than at the Orient Hotel. In fact the ratio of wages and other expenses to turnover for the Orient Hotel was 45.9 percent compared with the 52-53 percent shown in the assessment of normalised expenses to turnover in each valuer's calculation of EBITDA for Jackson's on George. Mr Robertson pointed out that the higher contribution of gaming at Jackson's on George increased the expense of gaming tax, but nonetheless agreed that if Jackson's on George were run as efficiently as the Orient from the point of view of wages and expenses, he would not expect Jackson's on George's wages and expenses to be more than 45 percent of turnover. 75 The Orient Hotel was not one of the hotels which Mr Robertson included in his valuation for the purposes of making a direct comparison with yields. Of the hotels he did list, only for the Clovelly Hotel was there an analysis of expenses including wages to turnover. The proportion was 41.7 percent. 76 Because of the high level of wages costs even as allowed by Mr Robertson, I prefer to adopt Mr Robertson's assessment of wages costs, including payroll tax and superannuation, rather than costs for those matters adopted by Mr Owen. In Mr Robertson's analysis of comparable hotels, the percentage of wages costs to turnover ranged between 19 and 26.8 percent. Mr Owen did not provide the same level of detail. Based on the turnover in para [63] above, the "normalised" wages expense (including superannuation and payroll tax) of Mr Robertson and Mr Owen was between 25.6 percent and 26.1 percent. I think it is appropriate to adopt Mr Robertson's lower figure for wages expense. 77 For many of the expense items there was no material difference in the sums adopted by both valuers. I have chosen to select Mr Robertson's figures for expenses subject to adjustment in some cases for expense items which have been marked with an asterisk in the table below. I comment on the asterisked items as follows: Wages, including superannuation and payroll tax: as per Mr Robertson $2,234,648 Accountancy 15,000 Advertising 151,176 Bank charges* 15,000 Cleaning and laundry 160,984 Electricity, gas and heating* 176,598 Entertainment 239,228 Flowers and decorations 11,156 Gaming Device Duty* 731,471 Gaming repairs and maintenance* 41,400 General 1,225 Hire of Plant* 38,527 Insurance General 27,959 Insurance Workers' Comp* 58,000 Printing, stationery and postage* 29,878 Promotional expenses 31,117 Rates and taxes* 150,000 Repairs and maintenance* 50,000 Replacements 50,000 Security 345,050 Subscriptions and sponsorship 6,987 Telephone 22,084 Travel and couriers 16,068 Total 4,603,556 78 As shown in the table in para [67] above, Mr Owen allowed $15,000 for bank charges whereas Mr Robertson adopted $31,435 for bank charges. Actual bank charges to 31 December 2007 according to Marsico's general ledger was $7,410. The expense for bank charges as at 31 May 2008 was $13,977.50. Both valuers misstated the actual bank charge expense as at 31 December 2007. I have adopted Mr Owen's estimate of $15,000 for the 12-month period which is in line with the general ledger to 31 May 2008. 79 The general ledger showed that the expense for electricity, gas and heating to 31 December 2007 was $89,336. Mr Owen observed that these costs were almost 50 percent above the previous years' costs and seemed excessive. That was the reason for his adoption of $125,000 as an annual expense in his EBITDA calculation. Mr Robertson approximately extrapolated the figures for the first six months for the full twelve-month period. 80 The general ledger as at 31 May 2008, was either not available to, or was not used by, either valuer. It records the electricity and gas expense to 31 May 2008 as being $163,817.59. I have adopted Mr Robertson's figure of $176,598 as the estimated actual electricity, gas and heating costs for the 12 months to 30 June 2008. This is a substantial increase in the reported actual expenses for previous years which Mr Owen recorded as $118,103 in 2005/2006, and $119,477 in 2006/2007. This is one of the items where there appears to be scope for potential savings. Mr Owen brought the potential savings into account in his EBITDA calculation. I have followed Mr Robertson's approach of using actual figures. It is necessary to take account of potential savings in this area in the selection of the capitalisation rate. As I have said, Mr Robertson said that he had taken such potential savings into account in his selection of the capitalisation rate but I am not satisfied that he did so. 81 Gaming device duty varies according to the gaming device profits brought into account as part of the revenue. For the 2007/2008 financial year, the tax on gaming machine profits of between $1,000,000 to $5,000,000 was 33.2 percent. The plaintiffs tendered a schedule (Exhibit J) showing the rates for 2004 to 2009 and for 2010 and subsequent years. This table is in accordance with s 13A of the Gaming Machine Tax Act 2001 (NSW). In their revised calculations both valuers adopted $2,387,569 as the figure for gaming revenue, but Mr Owen calculated the gaming device duty as $744,999 and Mr Robertson calculated it at $779,643. The difference was unexplained. Based on the table of hotel gaming machine taxes admitted as Exhibit J, neither calculation was correct, although Mr Owen's calculation was close if duty were assessed at the rates for 2010 and subsequent years. As the assessment is of future maintainable earnings it is appropriate to use those rates rather than the rates for the current year. Using that table I have calculated gaming device duty on gaming revenue of $2,354,203 to be $731,471 as shown in the calculation below: > $25,000 at 5% = $1,250 $25,000 > $200,000 at 15% = $26,250 $200,000 > $400,000 at 25% = $50,000 $400,000 > $1,000,000 at 30% = $180,000 $1,000,000 > $2,354,204 at 35% = $473,971 $731,471 82 I have used Mr Robertson's figures for the expense of repairs and maintenance to gaming machines. Mr Owen had no figure for this particular item but his figure for general repairs and maintenance was $38,400 higher than Mr Robertson's expense. In substance, Mr Robertson adjusted his expense for repairs and maintenance between gaming machines and other areas. Whilst overall Mr Robertson's figures were slightly higher, the difference is not material. I will also use Mr Robertson's lower figure for other repairs and maintenance. 83 Mr Owen did not allow any figure for the hire of equipment because he considered that even though such equipment was on lease, it should not be considered as an operating expense but as an item of capital expenditure. He said that on the sale of an hotel a purchaser would expect the equipment, comprising sound systems and the like, to be included in the sale. Both valuers accepted that finance lease charges should be excluded. However, there was no evidence that the expense arose under a finance lease. Mr Robertson said that it was common for hotels to incur fully deductible expenses for the hire of equipment and that where venues had extended trading hours and significant entertainment, equipment was often hired rather than purchased so that it could be updated regularly. As there is no evidence that the equipment was subject to a finance lease and as any new purchaser would have to incur the expense of either buying or hiring the same equipment, I consider that the expense for hire of equipment should be allowed. 84 Mr Robertson said that his figure for workers' compensation premiums was based on his figure for maintainable wages. He provided no other details of the calculation. As Mr Robertson's figure for maintainable wages were less than actual wages and less than Mr Owen's figure for maintainable wages, one would expect his expense to be lower than Mr Owen's figure. The workers' compensation premium to 31 May 2008 was $49,918.71 according to the general ledger. There was no cross-examination of either valuer on their figures. I will adopt Mr Owen's figure in the absence of any explanation as to how the figure should be calculated using Mr Robertson's wage expense. If anything, comparison with the general ledger at 31 May 2008 suggests Mr Owen's figure is a little high. 85 Mr Robertson's figure for printing, stationery and postage was an extrapolation of what he said was the actual weekly expense to 31 December 2007 for that item. Marsico's general ledger as at 31 May 2008 shows that the expense for the 11-month period was $23,161.45, which is in line with Mr Robertson's projected annual expense. Accordingly, I have adopted Mr Robertson's figure in preference to that of Mr Owen. 86 Mr Robertson's figure for rates and taxes was $169,062, whereas Mr Owen's figure was $134,000. Mr Owen's figure was based on the expense for rates and taxes recorded in the general ledger ($69,935) as a percentage of revenue. Mr Robertson's figure used the land tax and council rates in the notices issued for the full financial year. Whilst it is appropriate to use the full-year figures, Mr Robertson's annualised figure for the 12 months of $169,062 for land tax, rates and water (or $14,088 per month) is excessive. The expense for rates and taxes recorded in the general ledger as at 31 May 2008 totals $136,216.70. Land tax is amortised monthly in the sum of $5,436.89. It appears also that rates and water bills are paid monthly. The total of the expenses for rates and taxes in May 2008 was $13,316.53. In my view, the appropriate estimate of the expense for rates and taxes is $150,000. 87 There was no significant difference between the valuers' assessment of the ongoing costs for repairs and maintenance once regard is had to the fact that Mr Robertson made a separate allowance for repairs and maintenance for gaming machines. 88 Accordingly, my assessment of maintainable expenses is $4,603,556 as shown in the table at para [77]. The reductions in Mr Robertson's estimates are largely due to the use of up-to-date information and adjustment to the calculation of gaming device duty. This gives an EBITDA figure of $2,261,664. The percentage of EBITDA to turnover is 25.9 percent, which is at the bottom of the expected range of profitability, notwithstanding the high contribution of gaming profit (see para [72] above). Wages and expenses are 52.7 percent of turnover, whereas Mr Robertson accepted that they should be no more than 45 percent of turnover if the hotel were run as efficiently as the Orient Hotel. That suggests that there are further potential annual savings of about $665,000 which could be achieved. If these were assumed and capitalised at 8.25 percent the valuation would be increased by about $8 million. 89 If EBITDA of $2,261,664 is capitalised at 8.25 percent, the resulting value is $27,414,109. This would not take account of the potential for savings from a more efficient operation of the hotel referred to in the above paragraph. For the reasons I have given, I do not consider that such potential has been taken into account by either valuer in the capitalisation rate. I do not consider that there should be an adjustment to the capitalisation rate to bring the potential savings of about $665,000 per annum immediately to account as if the potential for making such savings had already been realised. To make such an allowance in the capitalisation rate would require reducing the yield from 8.25 percent to about 6.4 percent. Nonetheless, I consider that the potential for making such savings warrants a substantial adjustment to the capitalisation rate. Conversion of Poker Machine Permits to Poker Machine Entitlements 90 Mr Robertson said: " Poker Machine Permits (PMP) 15 PMP are included within the poker machine holding of the hotel. I am aware from my frequent assessment of Hotels with PMPs that there is an ability to transfer the PMP and convert them to PME. Such a conversion and transfer would result in a surplus value. In the past few years, the added value of the PMP have been added to the capitalised value of the hotel. I have observed since about December 2007 that the practice of converting PMP to PME is no longer undertaken by hoteliers, or to any great extent as there has been limited sales in one line above 10 PMP. ... Based on my recent investigations with hotel brokers, they have confirmed that there is limited demand for PMP at prices above $250,000/PMP. In my opinion, the 15 PMP, based on recent transactions and asking prices, have a value of $3,600,000, before commission or $240,000/PMP. This is a significant reduction in prices achieved prior to December 2007 above $300,000/PMP. The surplus value created after the sale of 15 PMP and allowing for the purchase of 15 PME would be approximately $750,000 before agent's commission (15 PMP x $240,000/pmp Less 15 PME x $190,000). Rather than adding this surplus value to the capitalised value, I have chosen to reflect the surplus PME value in the selection of an appropriate capitalisation rate. " 91 Mr Owen did not say that he had taken the opportunity to realise the surplus value of poker machine permits in his selection of a yield. He said that the 15 poker machine permits could be sold and replaced with 15 poker machine entitlements realising a potential capital gain of $1,500,000. He said that: " While we are not aware of any hotel sales where the ability to replace Permits with Entitlements has attracted a premium price their inherent value provides an additional level of security to a prospective purchaser/mortgagee of the hotel and is another reason why Jackson's is regarded as an exception to the market average. Reference to this issue should be added to the bullet points listed in item 6.1 Capitalisation Approach page 22 of my report. " 92 That statement was made in Mr Owen's report of 6 June 2008 and he was there referring to the matters which he considered amounted to special circumstances which justified a yield of seven percent. In his further report of 15 July 2008, Mr Owen increased the yield to between eight and nine percent in acknowledgment of the further deterioration of the market and in his report of 25 July 2008 adopted a yield of 8.25 percent taking into account improved gaming performance. I conclude that Mr Owen did not take account of the potential for realising this surplus value in his initial selection of the capitalisation rate, but subsequently decided that it was a factor which provided further support for the rate he initially adopted. It does not appear to have influenced his subsequent adjustments to the yield. 93 Whilst Mr Robertson said that he had considered the surplus value of the poker machine permits in his selection of the overall rate, he also said that he did not reduce his rate because of the opportunity to realise that surplus value. It was not an opportunity included in his SWOT analysis which he said elsewhere in his report he had taken into account, along with market evidence, in selecting a capitalisation rate. 94 Neither Mr Owen nor Mr Robertson was cross-examined on his assessment of the quantum of the surplus value. Their estimates ranged from $730,000 to $1,500,000. Given the depressed market, I will accept Mr Robertson's assessment of current surplus value of $750,000 before agent's commission, or $735,000 after agent's commission. 95 It is more logical to add that surplus value to the valuation rather than to take it into account as an adjustment to the capitalisation rate. The value of such poker machine permits and the cost of replacement poker machine entitlements depends on the current prices at which permits and entitlements are traded, not on the performance of Jackson's on George. Conclusion on Market Value 96 In my view, the appropriate capitalisation rate to adopt is not 8.25 percent but 7.5 percent to reflect the potential for additional savings through more efficient operation of the hotel. To this should be added the figure of $735,000 representing the surplus value of the poker machine permits. This gives a figure of $30,890,520 which can be rounded to $30.9 million. In my view, that represents the current market value of the hotel, excluding any special value it may have to the adjoining landowner. I am not dissuaded from that view from the fact that the last opinions of each valuer fell in the range of between $26,023,000 and $28,100,000. I differ from both valuers for the reasons I have given as to the level of maintainable expenses, and I consider neither valuer took a proper account of the potential for increasing profitability by reducing expenses reflected in the hotel being at the bottom of Mr Owen's expected range of adjusted net operating profit to turnover, notwithstanding the high contribution of gaming, and as reflected in wages and expenses being 7.5 percent above the proportion of wages and expenses to turnover which Mr Robertson said would be expected if the hotel were to run as efficiently as its nearby competitor. 97 For these reasons, I consider that Jackson's on George should be valued at $30,900,000 for the purposes of calculating Marsico's net assets, unless a higher value should be adopted to reflect what may be its special value to a company in the Valad Property Group. Proposal from the Valad Property Group 98 As noted in para [5], in June 2006 Valad Commercial Management Ltd, a company in the Valad Property Group, acquired Gold Fields House at 1 Alfred Street, Sydney. The property was acquired for $274 million. On 13 March 2008, the Council of the City of Sydney gave a deferred commencement approval under s 81(1)(a) to a mixed-use retail commercial and residential development of that property. On 28 May 2008, Valad Funds Management Ltd, another company in the Valad Property Group, made what it described as an offer to purchase 176 George St, Sydney, which is the address of Jackson's on George. The letter was addressed to Mr Crawley and was signed by persons who described themselves as Head of Capital Transactions, Real Estate Investments, and COO, Real Estate Development. 99 The letter included the following: " We understand that the property is not for sale and we are making an undertaking on our behalf via Mr Ben Parkinson of CB Richard Ellis [sic] Property: 100% of the vendor's interest in the subject property, including all fixtures, fittings, software and associated warranties, plans and any other items considered necessary to maintain the effective ownership of the property. Purchaser: Valad Funds Management Limited (VFML) ... Price: Thirty Million Dollars ($30,000,000) plus stock at valuation This offer is NOT conditional upon a capital raising. Valad will be utilising its existing debt and equity capacity to complete the transaction. Due Diligence: Due Diligence period 8 weeks from the receipt of the due diligence information. Exchange to be at the expiry of the due diligence period. Settlement Settlement to be 60 days from exchange of Structure: contracts ... Exclusive Due Diligence Period: The Vendor must allow the Purchaser full access to the property, together with all records, files and agreements relating to the property. ... Conditions: The transaction is subject to:– § Valad Property Group's board approval § Due diligence to the satisfaction of the purchaser § Satisfactory sale documentation § The other terms set out in this letter ... Valad is well known in the market place for its ability to transact expediently and complete on transactions once in due diligence. We have a proven track record, which has been demonstrated by recent acquisitions and we are happy to provide references if required. We are prepared to mobilise resources immediately in order to execute on this transaction. " 100 Mr Crawley replied to this letter on 26 June 2008 as follows: " RE: OFFER TO PURCHASE – JACKSON ON GEORGE PROPERTY: 174-176A GEORGE STREET SYDNEY We are in receipt of your letter dated 28 may 2008. We refer to the first paragraph of your letter under reply and confirm that your understanding as expressed therein is correct and the situation has not changed. " 101 The property which Valad Funds Management Ltd stated it wished to purchase did not include the hotel licence and the poker machine permits and poker machine entitlements held in relation to the licence. These are transferable. They were separately valued by Mr Robertson at $6,500,000 and by Mr Owen at between $7,000,000 and $7,500,000. 102 Therefore, prima facie, if Valad Property Group were willing and able to purchase the land and other property described in its letter of 28 May 2007 for $30,000,000, the land together with the hotelier's licence, poker machine entitlements and permits would be worth at least $36,500,000. As the offer in the letter of 28 May 2007 was a first offer, there may have been scope for it to have been increased. 103 Mr Crawley was obliged to act in the interests of all shareholders in responding to the offer from Valad Property Group. On its face, the offer was for substantially more than what Mr Crawley contends to be the value of Jackson's on George, particularly if the offer is for the hotel without the hotelier's licence, poker machine permits and poker machine entitlements. On the face of the letter, there would be an opportunity for Mr Crawley to realise the assets for at least $36,500,000. There was no evidence from Mr Crawley as to his reasons for responding in the way he did. His response appears to have foreclosed discussion, at least for the time being. 104 It may be that Mr Crawley did not regard the offer as genuine, or that he had discussions with the Valad Property Group which indicated to him that it would be unlikely to proceed, or would be subject to unsatisfactory conditions, or he considered that the medium to long-term prospects of the hotel were such that the offer undervalued the hotel. Mr Crawley did not vouch an explanation. It is also possible that Mr Crawley intends to leave the offer in abeyance until after the present hearing has been concluded in the expectation that he could then deal with Valad Property Group in the knowledge that the plaintiffs would not share in whatever price above the market value of the land could then be negotiated. It was Mr Crawley's duty to ascertain whether terms could be negotiated to sell the hotel for substantially more than would otherwise be its market value by reason of any special value it may have to Valad Property Group. By refusing to negotiate, and by the late discovery of Valad's offer, the defendants have made it impossible to determine issues such as whether a higher price could be negotiated, whether due diligence would be likely to have proved satisfactory, whether board approval would probably be forthcoming, whether the Valad Property Group would have insisted on the hotel licence, poker machine permits and poker machine entitlements being included in the sale notwithstanding the terms of their letter, and whether they were still willing to proceed. 105 The defendants did not give discovery of Valad's letter of 28 May 2008 and Mr Crawley's reply until about 5pm on Friday, 25 July 2008, being the Friday before the valuation hearing started. On 19 December 2007, I made orders for discovery by the defendants including an order that by 15 February 2008 the defendants give discovery of any documents brought into existence from 1 July 2006 constituting any offer to purchase any assets of Marsico. It was common ground that the defendants were under a continuing obligation to give discovery (Uniform Civil Procedure Rules, r 21.6(a)). The explanation for the delay in giving discovery was not satisfactory, although I accept, contrary to the plaintiffs' submissions, that the delay was not attributable to any instruction from Mr Crawley to withhold discovery for as long as possible. 106 On 23 April 2008, the plaintiffs issued a subpoena to the Proper Officer of Valad Commercial Management Ltd for the production of all documents relating to the development of Gold Fields House including any purchase, offer to purchase or contemplation of possible purchase of Jackson's on George. I infer from the fact that that subpoena was issued that the plaintiff was suspicious that an offer might be made. 107 On 27 May 2008, there was a conversation between Mr Calabria of Kemp Strang, the plaintiffs' solicitors, and Mr Parkinson of C B Richard Ellis Pty Ltd in relation to Valad. The details of that conversation are not in evidence. The plaintiffs claimed privilege in respect of Mr Calabria's file note of the conversation on the ground that it was a communication between the solicitor and Mr Parkinson predominantly for the purpose of legal proceedings. Counsel for the defendants submitted that it should be inferred that Valad's letter of 28 May 2008 was written in response to a proposal from the plaintiffs that such a letter be written and that this casts doubt on the genuineness of the offer. Counsel submitted that it was suspicious that when the value of the hotel licence, poker machine entitlements and poker machine permits were added to the price offered in the letter, the hotel would be valued at about $36.5 million; that it was no coincidence that this was the value the plaintiffs contended should be put on Jackson's on George; and that the figures were "all too good to be true". I do not accept that any such inference can be drawn from the fact that a conversation took place the day before the sending of the letter between Mr Calabria and Mr Parkinson in respect of which the plaintiff claims privilege. Not only is there no basis for inferring that such an approach was made by the plaintiff, but there is no reason to think that Valad would respond to any such approach unless it were genuinely interested in acquiring the property described in its letter of 28 May 2008 at the price indicated. Such a genuine interest can be inferred from the terms of its letter and that is a sufficient explanation, in the absence of other evidence from Mr Parkinson or Valad, as to why the letter was sent. If it were seriously to be suggested that the letter was a put-up job, or too good to be true, the defendants could be expected to have called Mr Parkinson or Valad. I should add that no challenge was made to the claim for client legal privilege. 108 On 27 June 2008, Mr Tsathas of Aubrey F Crawley & Co sent an email to the defendants' solicitors, HWL Ebsworth Lawyers, attaching a copy of Valad's letter dated 28 May 2008 and Mr Crawley's response of 26 June 2008. The email was headed "Valuations and Discovery – Valad". Valad's letter of 28 May 2008 should have been discovered shortly after that date. Unquestionably, both letters should have been discovered shortly after 27 June 2008. 109 The defendants' solicitor, Mr Griffiths, said that the reason they were not was because at that time, the defendants were struggling to prepare their evidence for the hearing and this was given priority. He also said that giving discovery would not have been as simple as forwarding the documents to the plaintiffs, but he would also have needed express instructions as to whether there were any other documents which were required to be discovered and would probably need to have prepared a supplementary list of documents. Priority was given to the preparation and evidence. 110 On 21 July 2008, Kemp Strang wrote to HWL Ebsworth Lawyers reminding them of their obligation of continued discovery and of the order of 19 December 2007 that they give discovery of any offer for the purchase of any assets of J &J O'Brien or Marsico. The following morning Mr Griffiths sent Kemp Strang's letter to Mr Crawley and counsel noting that the letter from Kemp Strang indicated "they have an ongoing interest in the prospects of Valad or other entity purchasing one of the properties. It may be they have obtained information or a document other than what was produced on subpoena by Valad." He asked Mr Crawley and Mr Tsathas to give close consideration to whether there were any other documents that should be discovered and said that he would make available the two documents concerning Valad that they had "recently provided". He did not make the two documents available at that time. Instead, on 24 July 2008 Mr Griffiths asked Kemp Strang whether the plaintiffs had any additional documents to produce. 111 On 24 July 2008, Mr Griffiths wrote to Mr Crawley asking whether there were any other documents that should be made available to the plaintiffs other than the two items of correspondence already provided. 112 At 1.03pm on 25 July 2008, Kemp Strang served a notice to produce returnable on the commencement of the hearing on Monday 28 July 2008. This called for the production of any offer by or on behalf of Valad Property Group Ltd for the purchase of the property at 176 George Street or the business of Jackson's on George, and any correspondence or notes of conversations on behalf of Marsico on the one hand, or by or on behalf of Valad Property Group Ltd on the other in relation to any offer by or on behalf of Valad Property Group Ltd to purchase the property or the business. The correspondence of 28 May and 26 June 2008 was sent to Kemp Strang at 5.02pm on Friday 25 July 2008. When the notice to produce was called upon on the first morning of the hearing, Mr Bannon SC responded by saying that there were presently no additional documents to produce, that the defendants had a motion to set aside the notice to produce, but if there were no other documents, the motion to set aside the notice to produce might go away. No further documents were produced. Nor was any application made to set aside the notice. 113 It was submitted for the plaintiffs that the defendants were seeking to hold back the documents for as long as they could get away with it, and it should be inferred that the solicitors were under pressure from Mr Crawley not to give discovery of the documents, or to delay their production, for as long as possible. 114 Mr Griffiths denied that he had received instructions not to give discovery and denied that he himself intended not to give discovery of the documents if that were possible. I accept those denials. Nonetheless, the fact remains that the documents were not discovered until the very eve of the hearing. Even if the delay were wholly attributable to the defendants' solicitors, the fact remains that one of the reasons the plaintiffs were not able effectively to investigate the circumstances of the offer was due to the delay of the defendants, or those for whose conduct they are responsible, in giving discovery. 115 The plaintiffs were able to procure the issue of a subpoena on 25 July 2008 to the Proper Officer of Valad Property Group Ltd which was made returnable on 28 July 2008. It called for three classes of documents including any notes of conversations between anyone by or on behalf of Valad Property Group Ltd on the one hand, and on behalf of Marsico, J & J O'Brien or Mr Crawley on the other hand in relation to any offer by or on behalf of Valad Property Group Ltd to purchase the property or the business. The subpoena also called for any offer by or on behalf of Valad Property Group Ltd to Marsico, J & J O'Brien or Mr Crawley in relation to the purchase of the property at 176 George Street or the business conducted at that address being the Jackson's on George hotel from 1 January 2008. Two documents were produced in response to the subpoena but were not tendered. The subpoena was not aptly drawn to catch documents relating to offers made by any member of the Valad Property Group other than Valad Property Group Ltd. Of course, when the plaintiffs applied for the issue of the subpoena, they did not have the correspondence of 28 May 2008 and 26 June 2008. Whilst the plaintiffs had a suspicion that some offer had been made, they were not given the opportunity they should have been given to investigate the circumstances. 116 It was submitted for the defendants that the plaintiffs could have sought an adjournment. Given the fluid state of the market, it is entirely understandable that the plaintiffs did not seek an adjournment. If the application had been acceded to, they would have faced the risk that the market might deteriorate further and that by the time a new hearing date could be arranged they might be prejudiced by changes in the market. 117 The reasons that there was no investigation of the questions of whether Valad was still prepared to offer $30 million for the site, what conditions it might seek to impose on a purchase, what matters would be of concern to it in a due diligence investigation, and what was the likelihood of board approval, are threefold. The first is that the defendants who had known of the offer from 28 May 2008 did not seek to call evidence from Valad. Secondly, by their late discovery of the correspondence, they put it out of the plaintiffs' power to do so in any meaningful way. The third and most significant reason is that Mr Crawley failed to respond to the offer, notwithstanding that on his case, the offer, if genuine, would have been a substantially valuable opportunity which he would have been bound to investigate if acting in the interests of all shareholders. It was submitted for the defendants that there was no allegation against Mr Crawley that he had breached his duty to the company by not pursuing negotiations with Valad. That submission is hollow given the lateness with which the defendants gave discovery of the documents in question. 118 It was submitted for the defendants that the letter of 28 May 2008 could provide no evidence of value because it was not an offer to purchase the property. In Goold v Commonwealth of Australia (1993) 42 FCR 51, Wilcox J considered the authorities on the question of whether offers are admissible as evidence of value. His Honour said (at 60): " ... before placing reliance upon a mere offer, a court must consider carefully the question of its genuineness. The offer might be a sham, designed to prop up an inflated compensation claim or to reduce rates and taxes; in either case without any cost to the offerer. It might be an attempt to manipulate the market for some other ulterior purpose, perhaps a purpose extraneous to the litigation. If the offer was genuine when made, it might not have led to a concluded contract, even if resumption had not intervened. The offer might have been withdrawn. The purchaser might have failed to complete the transaction. Because of matters such as these, even a genuine offer cannot be regarded as direct evidence of value. But it seems to me that, once the court is satisfied about genuineness, an offer by an arm's length party to purchase the land under valuation is something that the judicial valuer ought to take into account in considering the possibility of a sale at a price different from that indicated by conventional evidence, such as an analysis of comparable sales, or of a hypothetical development, or a calculation of the capitalised value of the rental return. How much weight should be given to such an offer is a question to be determined by reference to the facts of the particular case. In some cases, the appropriate weight may be minimal; in others considerable. " 119 In MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167, Spigelman CJ, with whom Mason P and Hodgson JA agreed, approved of the judgment of Wilcox J in Goold v Commonwealth of Australia and held that an offer with respect to the very land or property in issue would usually be admissible as evidence relevant to value whose weight would depend on all the circumstances (at [84]-[93]). His Honour said (at [96] and [97]): " [96] In the analysis by Wilcox J in Goold , particularly his Honour's reference to the judgment of Barber J in Phillipou , it is established that where a valuation must refer to the special potentiality of particular property for a specific purchaser, an offer by that purchaser to purchase that property is relevant. Both Barber J and Wilcox J refer to the cases of Inland Revenue Commissioners v Clay and Raja Vyricherla Narayana Gajapatiraju . As Wilcox J concluded in Goold at (59–60), in a context in which a particular purchaser was willing to pay more than market value: '… It would be anomalous and unjust for the courts to adopt a blanket rule excluding offer evidence. Such a rule might exclude cogent evidence of the interest of a particular purchaser in the land being valued, a person who was willing to pay more than ordinary market price.' [97] In my opinion, an offer by such a purchaser is not only relevant it is highly probative. Indeed, whilst allowing for the possibility of further bargaining, it is difficult to conceive what better evidence there could be. Expert evidence may establish that such an offer is inadequate but, unless there are special considerations, the offer clearly establishes a floor." 120 It was submitted for the defendants that this would only be relevant if the letter of 28 May 2008 was an "offer". They submitted that Valad never made an offer. Mr Bannon SC was reluctant to describe it even as an invitation to treat, although he acknowledged at one point that it was an expression of interest. It was, according to the defendants, a mere piece of paper which might have been sent only to explore a price which the vendor might be prepared to accept without being committed to an offer. This was so because the so-called offer was subject to board approval, due diligence and satisfactory sale documentation. The defendant submitted that if Valad saw a special value in the property because it adjoined Gold Fields House and might somehow be incorporated in a development, then it would be entirely possible that Valad might require as a condition of sale the removal of a restrictive covenant limiting the height of construction, which Marsico would be in no position to provide. 121 The defendants submitted that before an "offer" can be taken into account on the principles discussed in Goold v Commonwealth of Australia and MMAL Rentals Pty Ltd v Bruning, it must be an offer capable of acceptance so as to give rise to a binding contract. I do not agree. Doubtless greater weight will be given in the usual case if the offer were of that kind, as the offeror would be exposed to the risk of being bound to the price and terms offered. The willingness of the offeror to contract at that price would be clearly demonstrated. However, the offers in question in Goold v Commonwealth of Australia were not of that kind. They were offers "subject to a Contract on terms satisfactory to our client and the Contract being approved by this firm" (at 61). After investigating the evidence surrounding the offers, Wilcox J was not satisfied that they were genuine or intended to be translated into contracts free of unusual conditions (at 64). The emphasis was on assessing the genuineness of an offer, and whether it was at arm's length and would not have been subject to unusual conditions. If the offers were of that kind, even if not in a form capable upon acceptance of giving rise to an immediate contract, they could be used as evidence that the property might be sold at a price above market value reflecting its special value to the offeror (at 60, 64). 122 It can be inferred from the letter of 28 May 2008 itself that the site of Jackson's on George was of special interest to Valad who were prepared to make an offer for it, notwithstanding that they understood it was not on the market. 123 The difficulty is that it was not possible for the plaintiffs to lead evidence to seek to establish that the offer was genuine, that board approval was likely, that no unusual conditions of purchase would have been sought, and that Valad would have been prepared to purchase the property for at least the amount indicated in its letter after due diligence. 124 An analogy can be drawn with cases where a wrongdoer's wrongful conduct has made quantification of loss difficult (Armory v Delamirie (1795) 1 Str 505; 93 ER 664). As Hodgson J (as his Honour then was) said in LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No. 2) (1990) 24 NSWLR 499 at 508, the Court can resolve questions of value against the party whose actions have made an accurate determination problematic (see also Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 59; Tyco Aust Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [96]). 125 I also consider that Mr Crawley's failure to respond to Valad's proposal should be taken as an admission by him, by conduct, that the property, without the hotel licence, poker machine permits and poker machine entitlements, was worth more than $30 million. As I have said, if that were not so, at least prima facie, his duty to all of the shareholders was to have sought to pursue the opportunity. It was submitted for the defendants that if there were any such admission, which they denied, it could only be an admission of Mr Crawley's belief which would be irrelevant to an assessment of value which depends upon expert evidence. An admission is evidence of the fact admitted. The opinion rule does not apply to evidence of an admission (s 81 Evidence Act). Its weight will depend on the circumstances. Where the question is what price Mr Crawley should be required to pay for Nabatu's share in Marsico, an admission by conduct of the value of the hotel is probative. 126 It is not at all satisfactory to have to decide this question on the current evidence. Whilst I am aware of no precedent, I see nothing in principle to preclude the making of a compulsory purchase order for the shares assessed having regard to the market value of the hotel without recourse to any special value that it may have for Valad, but with a further condition that if within, say, the next three years, Marsico were to sell the property to Valad, or if Mr Crawley were to sell the shares in Marsico to Valad, for a price in excess of what is otherwise current market value as I have assessed it, then Mr Crawley should pay one-third of the excess to Nabatu. It is not at all satisfactory to increase the price payable for Nabatu's shares in Marsico by $1.87 million (less capital gains tax) on the basis of an offer which events might show would not have been proceeded with. Nor would it be satisfactory to fix a price for Nabatu's share without regard to Valad's offer if it were found that shortly after the orders were made, or the purchase was effected, Mr Crawley negotiated a sale of the property to Valad at a vastly superior price. The risks of injustice to either side could be alleviated by an order which provided for the purchase price to be increased if the property were later sold to Valad at a higher price. If that were to happen, it would be just that Nabatu share in the increase, because the opportunity for the sale has arisen when it is a shareholder. 127 However, neither party embraced this suggestion. Doubtless each party had its own good tactical or commercial reasons. 128 For the reasons I have given, I consider that I should determine the problematic questions of value arising from Valad's offer of 28 May 2008 against the defendants, and should value the site without the hotel licence, poker machine permits and poker machine entitlements at $30 million. In the current depressed market, I would adopt the valuation of Mr Robertson of the licence, the poker machine permits and poker machine entitlements of $6.5 million which should be added to the value of $30 million. 129 For these reasons, Jackson's on George should be valued at $36,500,000 for the purpose of fixing the price of Nabatu's share in Marsico. Liability for Capital Gains Tax 130 The plaintiffs did not dispute that if Jackson's on George were valued on the basis of the offer from the Valad Property Group, then in valuing Nabatu's share in Marsico, it is necessary to recognise Marsico's liability for capital gains tax on the sale of the asset. I agree with this concession for reasons developed below in connection with the valuation of Nabatu's share in J & J O'Brien. 131 In her report of 25 July 2008, Ms Deborah Cartwright of Pitcher Partners commented on calculations made by Mr Paul Carter of PriceWaterhouse Coopers of the cost base for Jackson's on George for the purposes of calculating capital gains tax. She was not cross-examined on that evidence and Mr Carter did not respond to it. I accept her analysis. She calculated that if the hotel were sold, then, to calculate capital gains tax, the cost base of the hotel would be $22,572,034. I adopt that figure. Capital gains tax would be payable at 30 percent of the difference between the proceeds of sale and the cost base. Mr Carter assumed that there would be selling costs of two percent. However, that was on the basis that Marsico would be employing a hotel broker to sell the hotel to any general prospective buyer. There is no evidence that if the hotel were sold to Valad Property Group that any real estate agent would be entitled to commission as being the effective cause of the sale. Selling costs of the hotel assets, that is, the licence, the poker machine permits and the poker machine entitlements would be two percent of $6,500,000, namely, $130,000. I will assume that the total costs of sale would be $180,000 so that the proceeds would be $36,320,000. The assessable capital gain is $13,747,966 and the capital gains tax $4,124,390. Adjustment to Marsico's Prior Income Tax Returns 132 In my principal judgment, I held that Mr Crawley and Nabatu and not Marsico were entitled to the capital gains on the sale of the Racecourse Hotel. Marsico is liable to Nabatu and Mr Crawley for the amount of the capital gain of $2,643,067 together with interest from 1997. Marsico included that capital gain in its income tax return for the 1997 financial year. The effect of my orders is that that capital gain should be excluded. Mr Carter and Ms Cartwright were both of the view that the 1997 income tax return could be amended to exclude the capital gain on the sale of the hotel with the result that additional tax losses of $2,643,067 could be carried forward. It appears that in the income tax return for Marsico as filed for the 1997 financial year, Marsico had only $32,925 of carried forward losses. In the 1998 financial year, it reported a profit for income tax purposes of $400,863 against which was offset the carried forward loss of $32,925 and losses transferred from Trudale Pty Ltd of $367,938. It reported a loss in its income tax return for 1999. In 2000, it carried forward that loss and transferred further losses of $478,590 from Trudale to be offset against a taxable profit of $772,915. From 2000 to 2006, it paid income tax. The effect of reversing the capital gain in 1997 is to increase the losses which Marsico is entitled to carry forward by that amount. 133 In the 1998 financial year, Marsico's taxable income will be increased by $1,234,386.14 being the difference between the judgments in favour of Marsico and Trudale plus interest, and the judgments against Marsico in favour of the Australian Youth Hotel partnership and the Racecourse Hotel partnership plus interest. 134 Marsico paid tax between 2000 and 2006 in amounts totalling $697,116. Ms Cartwright and Mr Carter agreed that the Commissioner of Taxation would not allow a refund of tax paid in the 2000, 2001, 2002 and 2003 financial years which totalled $225,369. Ms Cartwright opined that the Commissioner should allow a refund of tax totalling $471,748 paid in the 2004-2006 years. Mr Carter said that the practical likelihood of being able to amend the returns and receive the full refund of overpaid taxes of $471,748 was minimal. He said that such a process would be lengthy and costly and likely to involve significant audit activity which could present practical problems as it is likely that the records from the period are no longer held by Marsico, and the Australian Taxation Office would probably look to use the lack of documentation to deny otherwise allowable deductions. Ms Cartwright disagreed with the likelihood of the Australian Taxation Office creating such difficulties. I prefer Ms Cartwright's opinion, but in my view the question is irrelevant. The valuation of Nabatu's share in Marsico is to be made on the basis of what the value would have been but for the oppressive conduct. The failure to account for the capital gains on the Racecourse Hotel to the Racecourse Hotel partnership is part of the oppressive conduct which is the occasion for the orders for the compulsory purchase for Nabatu's share. Had the conduct not occurred, Marsico would not have paid the tax of $471,748 which it did pay between 2004 and 2006. 135 Likewise, it would not have paid the tax totalling $225,369 paid in the 2000-2003 financial years. Ms Cartwright agreed with criticisms made by Mr Carter of her initial report in which she reversed the tax payments made from 2000 to 2006. But in my view her initial report was correct in principle for the purposes of the present exercise, even though she accepts that the Australian Taxation Office would not now allow a refund of the tax paid in the 2000-2003 financial years. The question is not what the Australian Taxation Office would now allow, but what Marsico's position would have been had it not taken the capital gain on the sale of the Racecourse Hotel to itself. As Ms Cartwright's first report shows, the effect of such an adjustment would be to reduce its liabilities by $697,116. 136 There is also a question of what losses could be carried forward. In her first report, Ms Cartwright assumed that losses which had been transferred to Trudale in 1998 should still be carried forward. In her revised assessment, she initially did not include those as carried forward losses, just as Mr Carter had not. However, her evidence ultimately was that those losses could be carried forward and the defendants did not contend to the contrary. In my view, Ms Cartwright was correct in her initial treatment of the adjustments for amendments to prior income tax returns, and in her calculation of losses to be carried forward to 1998, and in her assessment of income tax payable in the 1998 financial year. 137 The calculation of income tax payable in the year ended 30 June 2008 is complex because of the various judgments for Marsico and Trudale and against Marsico. I adopt Ms Cartwright's assessment at notes 4 and 5 to her schedule A1.1 to Exhibit DC4. Estimate of Profits for the Year ended 30 June 2008 138 Both experts took as their starting point the audited balance sheet of Marsico as at 30 June 1997. One of the adjustments to be made to the balance sheet is the anticipated after-tax profit for the year to 30 June 1998. Ms Cartwright calculated net operating profit after tax for the 13 months from 1 July 2007 to 31 July 2008 by multiplying six months operating profit to 31 December 2007 by 13 and dividing by six. The profit for 6 months to 31 December 2007 before tax was $307,121 (Exhibit DC8 Sch F, A1.7). In the four months of January to April 2008 there was a loss of $110,709 (Exhibit DC10 Annexure D). Accordingly, the profit for ten months from 1 July 2007 to 30 April 2008 was $196,412. This adjusts to a 13-month figure of $255,336. To this is to be added adjustments totalling $58,470 in relation to reimbursement of line and margin fees to Aldonet and of excessive professional fees charged by Gladewood to Marsico from 1 November 2007 to 31 July 2008. Accordingly, the appropriate profit before tax for the 13-month period to 31 July 2008 is $313,806 before tax, or $219,664 after tax. 139 Accordingly, it is possible to state the adjusted balance sheet of Marsico as at 31 July 2008. The balance sheet includes receivables under the orders of 19 December 2007 and liabilities under the judgment of 19 December 2007. These figures include interest on the judgments entered on 19 December 2007 at the prescribed rates from that date to 1 August 2008. Ultimately, there was no dispute that interest under s 101 of the Civil Procedure Act 2005 (NSW), that is, interest after judgment, is payable on the amount for which judgment was entered even though that amount includes pre-judgment interest pursuant to s 100. 140 Set out below is the adjusted consolidated balance sheet of Marsico as at 1 August 2008. Adjusted Consolidated Balance Sheet of Marsico Pty Ltd as at 1 August 2008 CURRENT ASSETS Cash and cash equivalents 170,332 Trade and other receivables 170,090 Net operating profit after tax 219,664 Judgment receivables (Marsico) 5,702,674 Judgment receivables (Trudale) 275,787 Inventories Bar Stock 73,892 Inventories Elizabeth Centre 273,000 Prepayments 89,838 6,975,277 NON-CURRENT ASSETS Trade and other receivables 4,589,230 Property plant and equipment 36,320,000 40,909,230 TOTAL ASSETS 47,884,507 CURRENT LIABILITIES Sundry trade and other creditors 471,051 Judgment debts 8,629,904 Input tax credits (77,237) GST payable 209,927 Bank overdraft 521,977 Lease liabilities 24,885 Employee benefits 62,653 Provision for income tax (102,865) Provision for income tax – prior year amendments (697,116) Provision for income tax – 2008 year 239,753 Accrued charges 279,438 9,562,370 NON-CURRENT LIABILITIES Lease liabilities 42,239 Loans – secured – Aldonet Pty Ltd 15,489,577 Loan – Director 88,421 Sinodun Pty Ltd 3,372,425 Capital gains tax on realisation of Jackson's on George 4,124,390 23,117,052 TOTAL LIABILITIES 32,679,422 Net assets are $15,205,085. Accordingly, I value Nabatu's share in Marsico as at 1 August 2008 in the sum of $5,068,362. Valuation of the Marlborough Hotel 141 As noted in paras [15]–[19], Mr Owen valued the Marlborough Hotel at 4 June 2008 at $20.5 million based on maintainable EBITDA of $1,740,000 and a capitalisation rate of 8.5 percent. On 15 July 2008, he adjusted that valuation to $19.3 million by increasing the capitalisation rate to nine percent. On 25 July 2008, he revised his estimate of maintainable EBITDA to $1,640,000 on the basis of revenue figures to the end of May 2008 to which he applied a capitalisation rate of 8.75 percent. This gave a valuation of $18.7 million. 142 Mr Robertson valued the Marlborough Hotel on 17 June 2008 at $16.5 million based on EBITDA of $1,439,308 and applying a capitalisation rate of 8.75 percent. In oral evidence he increased that valuation to $17,340,422 using the increased revenue figures for the 11 months to the end of May 2008 which Mr Owen had used in his valuation of 25 July 2008. Revenue and Gross Profit 143 In his report of 4 June 2008, Mr Owen adopted the following figures for revenue and gross profit. Marlborough Hotel Owen 4/6/08 Revenue Margin Gross Profit Bars 3,895,230 69% 2,687,709 Bottles 1,219,504 30% 365,851 Food 600,036 64% 384,023 Gaming 1,609,555 100% 1,609,555 Other 166,616 100% 166,616 $7,490,941 $5,213,754 144 Mr Owen used actual revenue for the six-month period ending 31 December 2007 except for gaming. The figures were annualised. For gaming he used the revenue in the DMS statements for the four quarters to 31 December 2007. 145 Mr Robertson used actual revenue figures for the 39 weeks to 31 March 2008 which he annualised, except for gaming. For gaming revenue Mr Robertson used the four quarters of revenue from 1 April 2007 to 31 March 2008. Mr Robertson's figures for revenue and gross profit were as follows: Robertson 17/6/08 Revenue Margin Gross Profit Bars 3,863,808 68% 2,627,389 Bottles 1,244,880 30.8% 383,423 Food 564,616 62.5% 352,885 Gaming 1,452,256 100% 1,452,256 Other 126,256 100% 126,256 $7,251,816 $4,942,209 146 Unlike Jackson's on George, trading in the Marlborough Hotel was affected by renovations carried out between May and August 2007. 147 In his report of 25 July 2007, Mr Owen revised his EBITDA figure to incorporate revenue figures to 31 May 2008. He observed that the weekly turnover for bar sales had substantially increased in April and May 2008 compared with the preceding three months. There were also increases in bottle sales and food. However, gaming declined in the months of April and May 2008 compared with the preceding 39 weeks from 1 July 2007 to 31 March 2008. In his assessment of EBITDA, adjusted for revenue figures to 31 May 2008, Mr Owen used the following figures: Owen 25/7/08, Exhibit G (Annualised from turnover to 31/5/08). Revenue Margin Gross Profit Liquor 5,208,533 59.5% 3,099,077 Food 570,675 64% 365,232 Gaming 1,285,270 100% 1,285,270 Other 248,119 100% 248,119 $7,312,597 $4,997,698 148 In his oral evidence, Mr Robertson adopted Mr Owen's annualised figure for turnover of $7,312,597 set out above, and applied his margins of 58.9% for liquor and 62.5% for food. This gave gross profit of $4,957,887. 149 The last revenue figures adopted by both valuers make no allowance for the interruption of trading in the first two months of the financial year. In the case of Mr Owen, I infer that that arises because he was asked to express an alternative opinion based on the latest revenue figures and he did not turn his mind to whether they should be adjusted for that interruption. Mr Robertson then used Mr Owen's figure as the basis of his last opinion. 150 The adjustment to actual revenue and gross profit made by Mr Owen in his report of 4 June 2008 was $182,953. This was only partly attributable to the renovation. Mr Owen said it was made having regard to the "particular circumstances affecting this hotel", including the potential to relocate the gaming room to provide a smoking solution. The adjustment made by Mr Robertson in his report of 17 June 2008 was $155,324. He said that he adopted four quarters of revenue from gaming from 1 April 2007 to 31 March 2008, rather than annualising three quarters' gaming revenue because of the interruptions to trading from the renovations. Because the adjustment was to gaming revenue which has a 100% margin, the same adjustment was made to gross profit. 151 None of this is logical. To ignore the interruption to trading in the first two months of the year, as both valuers do in their latest calculations, is to understate maintainable revenue. On the other hand, to adjust only gaming revenue when the renovations affected all areas of trading with different margins, and to make the adjustment using figures for a period which was also affected by the interruptions to trading from the renovations, is not logical. The problem is compounded by the fact that pre-1 July 2007 trading figures are unaffected by the smoking ban which affects ongoing trading. The logical course would be to compare trading for the months of July and August 2007, (or possibly July to September 2007 as the renovations might have an ongoing effect on custom), with trade in the succeeding months; adjusted if necessary for seasonal differences. Neither valuer made this comparison and the evidence does not permit it to be made. 152 Accordingly, the choice is between ignoring the effect of interruptions to trading from the renovations, or using the only adjustment specifically addressed to that issue, namely the adjustment made by Mr Robertson in his report of 17 June 2008. An adjustment for temporarily interrupted trading is prima facie appropriate in an assessment of maintainable earnings. Neither valuer gave a reason not to make an adjustment. Accordingly, I will make the adjustment made by Mr Robertson in his report of 17 June 2008. That does not mean that I adopt his figure of gaming revenue of $27,928 per week. Rather, I take the quantum of his adjustment to actual gaming figures for the first nine months of the 2007-2008 financial year because of the interruptions to trading, namely, $2,987 per week or $155,324. That is to say, I accept Mr Robertson's view that the hotel lost $155,324 of revenue and gross profit because of the interruption to trading due to the renovations that were not completed until August 2007. It is otherwise appropriate to use annualised figures based on 11 months' trading to 31 May 2007. The sum of $155,324 is to be added to the figure for gaming revenue in the table at para [147] above. 153 Accordingly, for the purposes of calculating EBITDA, I take revenue to be as follows: Liquor $5,208,533 Food $570,675 Gaming $1,440,594 Other $248,119 Total $7,467,921 Margins 154 The different margins applied by Mr Owen and Mr Robertson to bar sales, bottle sales and food sales are slight. Mr Robertson observed that the margins on bar sales were towards the upper end of the industry-expected range. As with his valuation of Jackson's on George, he used the gross margins which had been achieved in the hotel without adjustment. He observed that the margins on bottle sales were also at the higher end of the industry-expected range and that margins on the restaurant were within the industry-expected range. 155 Given that the hotel faces intense competition in the Newtown area for its restaurant, and given that the margins are not at the lower end of the expected range as was the case with Jackson's on George, I think it more appropriate to adopt Mr Robertson's margin for food sales which is more likely to reflect circumstances peculiar to the Marlborough Hotel, than the adoption of an industry-expected range. I have no basis to prefer one valuer's opinion to the other in relation to the margin on liquor sales and I will choose a margin which is midway between the two figures. Accordingly, I will apply margins of 59.2 percent to liquor and 62.5 percent to food. The margins for gaming and for sundries are 100 percent. Accordingly, I assess gross profit for the purposes of the EBITDA calculation to be $5,128,836. This is higher than the gross profit of both valuers in their last calculations, but that is due to their failure to make any adjustment for interruption of trading in the first two months of the financial year, notwithstanding that they used annualised 11-month figures in their EBITDA calculations. Revenue Margin Gross Profit Liquor 5,208,533 59.2% 3,083,451 Food 570,675 62.5% 356,672 Gaming 1,440,594 100% 1,440,594 Other 248,119 100% 248,119 $7,467,921 $5,128,836 Normalised Operating Expenses 156 Set out in the table below is a summary of the normalised expenses adopted by Mr Owen and Mr Robertson in their reports of 4 June 2008 and 17 June 2008. 157 Both valuers used the same expense figures in calculating EBITDA based on 11 months' trading to 31 May 2008. That is to say, although they both used actual revenue figures for the 11-month period, they nonetheless used annualised six-monthly expenses figures based on the expenses to 31 December 2007. The exception to this was gaming device duty where the duty varies directly with the amount of gaming revenue. Marlborough Hotel Annual Normalised Expenses (Both Robertson and Owen used expenses to 31/12/07 which were annualised.) Owen Robertson Accountancy 15,000 15,000 Advertising 50,000 52,000 Bank charges 10,000 21,010 Cleaning/laundry 106,000 104,962 Credit Card charges 11,000 11,803 Electricity 130,000 128,607 Entertainment 290,000 287,822 Flowers 5,000 12,770 Gaming device duty 490,000 447,649 Gaming repairs and maintenance - 38,400 General - 15,000 Hire of plant - 15,000 Insurance General 23,000 23,097 Insurance Workers' Comp 47,000 57,440 Payroll tax 50,000 Printing, postage & stationery 23,000 27,498 Promotional expenses 39,000 30,108 Rates and taxes 98,000 94,745 Repairs and maintenance 65,000 40,000 Replacements (see also, supplies) 40,000 25,000 Security 323,000 319,501 Subscriptions 36,000 35,426 Superannuation 133,000 Supplies - 41,000 Telephone and postage 15,000 16,284 Travel 3,000 - Wages 1,474,000 Wages and on-costs per Robertson 1,643,304 3,476,000 3,503,426 158 Mr Robertson assessed maintainable wages, after adjustments, at $31,602 per week including on-costs. This is the equivalent of $1,643,304 per year. Accordingly, Mr Robertson's total figure for expenses in his 17 June 2008 report was $3,503,426. Mr Owen's calculation of maintainable expenses was $3,476,000. Of that, Mr Owen's assessment of maintainable wages, superannuation and payroll tax was $1,657,000. 159 The actual wages expense including superannuation and payroll tax for 11 months taken from the general ledger was $1,495,500 which comes to $1,631,454 on an annualised basis. The valuers' figures include a component for the wages of a bookkeeper. Those expenses are currently met as professional fees and neither valuer has allowed any component for professional fees in his assessment of normalised expenses. Mr Robertson provided a detailed explanation as to his adoption of a figure for maintainable weekly wages of $31,602 and I adopt his figure. As with Jackson's on George, I adopt Mr Robertson's assessment of expenses except where indicated otherwise. Where his and Mr Owen's figures for the same item of expense vary by more $5,000, I explain below the reasons for the figure I have adopted. 160 Mr Robertson's figure of $21,010 for bank charges is close to the general ledger which shows that bank charges incurred to 31 May 2008 totalled $18,763. For that reason, I prefer his figure to that of Mr Owen. Mr Owen's figure for flowers is also close to the expense shown in the ledger of $11,566 for 11 months. For that reason, I prefer his figure for this expense. 161 Neither valuer provided his calculation of gaming duty. I have calculated gaming device duty based on the table in Exhibit J and based on gaming revenue of $1,440,594. As with the calculation of duty for Jackson's on George, I have used the rates which will be applicable from 2010. The calculation is as follows: > $25,000 at 5% = $1,250 $25,000 > $200,000 at 15% = $26,250 $200,000 > $400,000 at 25% = $50,000 $400,000 > $1,000,000 at 30% = $180,000 $1,000,000 > $1,440,594 at 35% = $154,208 $411,708 162 Mr Robertson included $15,000 as a "general" expense. He observed that no allowance for waste had been made and assumed that this had been included with other expenses within the hotel. The general ledger as at 31 May 2008 (and as at 31 December 2007) includes an expense under the heading "general" of $375. I take Mr Robertson to have selected a figure he considers to be reasonable to allow for expenses not otherwise specifically identified. Rubbish removal is one such possible expense. However, the general ledger provides a detailed list of expenses and, on its face, is comprehensive. If waste removal is not included in the expense for cleaning, I would assume that it was covered by another item of expense, such as rates and taxes, rather than that it was omitted altogether. The accounts of J & J O'Brien up to 30 June 2007 have been audited and the accounts for the six months to 31 December 2007 have been audited. No audit evidence was adduced to suggest that there were expenses incurred in the business not accounted for in the general ledger. Mr Owen did not make any such allowance. In my view, his approach is to be preferred. I will allow the sum of $375 as appears in the general ledger. 163 For the same reasons as I gave in connection with Jackson's on George, the expense for hire of plant should be allowed. 164 The expense for workers' compensation premiums for the 11 months to 31 May 2008 was $41,516 which would equate to $45,290 for a 12-month period. The actual workers' compensation premium recorded in the ledger is 2.78 percent of wages plus other on-costs. Applied to Mr Robertson's expense for wages plus on-costs this would yield a premium of $45,684. This suggests that Mr Owen's figure is closer to the mark. In the absence of any calculation showing how the expense was arrived at by Mr Robertson, I prefer Mr Owen's figure of $47,000. 165 Mr Owen's figure for promotional expenses was $9,000 higher than Mr Robertson's figure. Whilst both figures reflect what the valuers consider ought reasonably be incurred having regard to acceptable industry ranges, Mr Robertson made no adjustment to what he assumed to be the actual weekly expense for promotions. The expense for the 11 months to 31 May 2008 was $35,889, which, on an annualised basis, is very close to Mr Owen's figure. In the circumstances, I prefer Mr Owen's figure. 166 The general ledger shows that the annual expense for rates and taxes will be $100,114.11. I adopt that figure which is higher than either of the valuers' estimates as it would not be susceptible to adjustment in any material way, dependent upon the operation of the hotel. 167 Mr Robertson's figure for repairs and maintenance and gaming repairs and maintenance totals $78,400 compared with Mr Owen's figure of $65,000. Both amounts are substantially below the costs for repairs and maintenance which are recorded in the general ledger for the 11-month period to 31 May 2008 of $132,207. However, that figure is probably substantially affected by the renovations to the hotel. Mr Robertson said that repairs and maintenance had been dissected to remove gaming repairs and maintenance and monitoring costs which had been allocated to gaming repairs and maintenance. Mr Owen said that costs for repairs and maintenance generally ranged between 0.5 percent and 1.5 percent of gross turnover, dependent on the size, age and level of patronage of the hotel. He considered that 0.9 percent of gross turnover, or $1,250 per week was adequate including poker machine repairs and maintenance. Mr Robertson's allowance for repairs and maintenance is 1.05 percent of gross turnover as I have calculated it. This is well within the range given by Mr Owen. I will adopt Mr Robertson's figure. 168 Mr Robertson's figure for replacements and supplies totals $66,000. Mr Owen allows $40,000. Mr Owen said that in 2007, the cost of replacements was $96,483 and for the six months to December 2007 was $37,762. He considered those amounts to be well outside industry norms for a single hotel and reduced the allowance to $40,000 per annum. Mr Robertson also considered that supplies were excessive. He increased the amount to $41,000 per annum which he considered was adequate, and also increased the amount for replacements to $25,000 per annum "having regard to the size of the operation". In the general ledger, both items are called "supplies". I have split the difference and included a figure of $53,000 under the heading "supplies". 169 As shown on the table below I have determined maintainable expenses to be $3,443,681. The most substantial reason for the variance from the valuers' figures is in the calculation of gaming device duty. Marlborough Hotel Determination of Maintainable Expenses Accountancy 15,000 Advertising 52,000 Bank charges 21,010 Cleaning/laundry 104,962 Credit card charges 11,803 Electricity and gas 128,607 Entertainment 287,822 Flowers 12,770 Gaming device duty 411,708 Gaming repairs and maintenance 38,400 General 375 Hire of plant 15,000 Insurance general 23,097 Insurance workers' compensation 47,000 Printing, postage and stationery 27,498 Promotional expenses 39,000 Rates and taxes 100,114 Repairs and maintenance 40,000 Replacements (see also supplies) - Security 319,501 Subscriptions 35,426 Supplies 53,000 Telephone and postage 16,284 Wages and on-costs 1,643,304 $3,443,681 170 This yields EBITDA of $1,685,155. Ultimately both valuers adopted a capitalisation rate of 8.75 percent. In the case of the Marlborough Hotel, there is no reason to adjust that rate as was the case with Jackson's on George. Applying that capitalisation rate to EBITDA of $1,685,155 yields a value of $19,258,914. I will round this down to $19,250,000. This is higher than the final figures of both valuers. That is principally attributable to the fact that their last calculations made no allowance for the interruption of trading in the first two months of the financial year. Provision for Capital Gains Tax 171 Mr Crawley, Athann Pty Ltd and Nabatu acquired the shares in J & J O'Brien prior to the introduction of capital gains tax. The company was already the owner of the Marlborough Hotel. Capital gains tax would not be payable by J & J O'Brien on the sale of the Marlborough Hotel, except insofar as the sale involved the sale of assets which, for capital gains tax purposes, are to be treated as separate assets acquired after 20 September 1985. Mr Carter identified two classes of assets of that kind. The first was 15 poker machine permits acquired by J & J O'Brien in about October 1998 at a cost of $750,000. Those permits are necessary for the operation of the hotel and would be transferred if the hotel were sold. However, there was no dispute that they would be treated as separate assets for capital gains tax purposes. They were valued by Mr Robertson at between $240,000 to $270,000 and by Mr Owen at $300,000 each. I adopt the value of $240,000 per permit, as did Mr Carter. That is the same value as Mr Robertson attributed to the poker machine permits when valuing the permits, entitlements and hotelier's licence associated with Jackson's on George which I have adopted in the earlier part of these reasons. Mr Carter calculated the capital gain on the poker machine permits, after indexation of the cost base, to be $2,768,775 giving rise to capital gains tax of $830,633. There was no dispute about these figures. 172 If the hotel were sold, the poker machine entitlements would also be transferred. Mr Carter said : " On balance, I do not consider that PMEs are post-1985 assets, and accordingly, while necessarily using Mr Robertson's value for PMEs in my calculations of CGT on other assets, I do not consider that any CGT should be allowed with respect to PME. " 173 He did not give his reasons for this conclusion, but the defendants did not contend that capital gains tax would be payable on the transfer of poker machine entitlements. Nor did Ms Cartwright suggest that capital gains tax would be payable. Nor was there any calculation of what the tax would be. As the parties adopted a common position on this question, I will proceed accordingly. 174 Between 1988 and 1991, J & J O'Brien acquired land and buildings adjacent to the hotel which have subsequently been incorporated into the hotel. Mr Carter said that this land comprises about 20 percent of the total hotel site and is a separate asset for capital gains tax purposes. He was not challenged on this opinion and I accept it. Mr Carter assessed the capital gains tax which would be payable on the disposal of this asset which is inseparable from the wider hotel operation using the following methodology. First, he took the assumed value of the Marlborough Hotel less selling costs. From this, he deducted the value of poker machine permits and poker machine entitlements (less selling costs) to derive a value of the hotel net of the value of poker machine entitlements and poker machine permits. On the basis that the additional land acquired was 20 percent of the total property, he valued that additional land at 20 percent of the net figure. From that value he deducted the cost of the additional land after indexation and the cost of improvements to the additional land. He assessed the total cost base of the additional land after indexation at $1,421,513. The difference between this sum and 20 percent of the net value of the hotel after deducting the value of the poker machine permits and entitlements was the capital gain for the additional land and buildings. 175 There was no challenge to this assessment, nor as to his methodology. I adopt his approach, but it is necessary to adjust his calculation to bring to account the value of the Marlborough Hotel which I have found, rather than the value he assumed. I also adopt his assessment of the value of poker machine permits and poker machine entitlements which are based upon Mr Robertson's report. The value of the poker machine permits and poker machine entitlements after assumed two percent selling costs, totals $6,321,000. Using my determination of the value of the hotel of $19,250,000, and deducting selling costs of two percent, and deducting $6,321,000 as the value of poker machine permits and entitlements, gives a value of the hotel net of PME and PMP of $12,544,000. The value of the "additional property", being 20 percent of that sum, is $2,508,800. Deducting from that sum the figure of $1,421,513 gives a capital gain for the "additional property" of $1,087,287, on which tax of $326,186 would be payable. 176 Mr Carter also noted that whilst extensive improvements had been made to the hotel between 2000 and 2004 and in 2007, it is reasonable to assume that no capital gains tax would have accrued on improvements in 2007 even if those improvements were to be treated as a separate capital gains tax asset. In relation to the improvements between 2000 and 2004, Mr Carter assumed that $500,000 should be included as relating to the additional land. There was no challenge to his methodology or assumptions and I adopt his approach. 177 Accordingly, using Mr Carter's figures and methodology, but making adjustments for the different value of the hotel which I have found, I conclude that if the hotel were sold, J & J O'Brien would face a liability for capital gains tax of $1,156,819, being the sum of $830,633 and $326,186. 178 The plaintiffs submitted that it was not appropriate to include as a notional liability of the company in adjusting the balance sheet, the fees and taxes that would be payable if the underlying real estate were sold. In this respect they relied upon the judgment of Campbell J (as his Honour then was) in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2004) 47 ACSR 514, especially at 524 [57] and 524-525 [60]. Campbell J said: " [57] The question, however, is whether the Lopmand Painten share ought be valued on the basis that Painten is being, at least notionally, liquidated. I see no reason why it should be valued on that basis. The effect of URE purchasing the Lopmand Painten share will be that URE holds all of the issued shares in Painten. There is no basis in the evidence for believing that Mr Lindsay-Owen has plans to cause Painten to sell the real estate in the foreseeable future. The investment is cash flow positive, and has been cash flow positive for many years. Even if the time were to come when Mr Lindsay-Owen decided to realise the investment, it would be commercially attractive for him to try to realise it by selling all the shares in Painten, rather than by having Painten sell the land. Upon any such sale of shares, expenses analogous to the selling expenses which Mr Potter recognised may well be payable, but they would not be payable by Painten. Further, Painten would not pay income tax by reason of that sale occurring. ... [60] ... However the general principle applied in [Fedorovitch v St Aubins Pty Ltd (No. 2) (1999) 17 ACLC 1558 ] , that it is only matters which affect the value of a share which should be taken into account in fixing a price for a compulsory buy-out order, can and should be applied here. In the present case, the prospect that, even if Mr Lindsay-Owen were to decide to quit the investment, the way in which he might choose to do so is by sale of the Painten shares has the effect that no allowance should be made for income tax on any net profit made by Painten, nor for marketing expenses which might become payable, at some stage in the future, in connection with a sale of shares in Painten which gave effective control of the Marayong unit. If the Marayong unit were owned as to two-thirds by Mr Lindsay-Owen personally, and as to one-third by Mr Lake personally, and Mr Lindsay-Owen were to purchase of Mr Lake's one-third interest, at a fair valuation, one can readily see that if Mr Lindsay-Owen were to sell the Marayong unit at some stage in the future, presumably he would have to pay marketing expenses in connection with that sale, and income tax on any profit he made on the sale. But the need to incur those marketing expenses in the future, or to pay that income tax in the future, is not something which would be taken into account in assessing the value of Mr Lake's one-third interest in the real estate. When the Marayong unit is held by a single-purpose corporate vehicle, and there is no proved intention to realise the investment in the foreseeable future, I likewise do not see any need to take into account the prospect that marketing expenses and income tax might be payable on any future sale. I therefore decline to make any adjustment to the value of the Painten assets, for the purpose of valuing the Lopmand Painten share, to take account of that possibility. " 179 The plaintiffs adduced evidence from Ms Cartwright that if the shareholders of J & J O'Brien wished to realise the capital value of the Marlborough Hotel, it was more likely that that would be achieved by a sale of the shares in J & J O'Brien than by a sale of the hotel. She said that the individual shareholder, Mr Crawley, and the individual beneficiaries of the family trust of which Springsley is trustee, would take advantage of the 50 percent CGT tax discount for individuals. Any reservation a purchaser might have about inheriting unforeseen liabilities would be assuaged by its being able to transfer the hotel into a special purpose vehicle without tax or stamp duty implications, so that J & J O'Brien could then be deregistered or liquidated to mitigate risks of potential liability. She said that she thought it improbable that J & J O'Brien would actually bear tax on a future sale of the Marlborough Hotel property and that it was more likely that any tax impost would be borne by the shareholders of J & J O'Brien in the form of capital gains tax on the sale of shares in the company. The plaintiffs submitted that the shares were not to be valued on the basis that the company was to be liquidated. 180 I do not accept the plaintiffs' submissions. In my view, the valuation of the shares in J & J O'Brien and Marsico is in the nature of a notional liquidation of the companies. It is by a notional realisation of the companies' assets that the capital value of those assets can be unlocked for the benefit of the minority shareholder. The fact that the majority shareholder does not intend to sell the asset at any definite time in the future is, in my view, irrelevant. It would be different if the minority share were to be valued by capitalising future dividends projected on the basis that the dividends were not depressed by any oppressive conduct. But that would lock the plaintiff into the consequences of being a minority shareholder. I have found that it would not be fair to discount the value of Nabatu's share on the basis that it is a minority shareholder. 181 Nabatu is entitled to one-third of the value of the net assets of the company. Those assets are not valued by capitalising the income to be derived from them under the current management. If the valuation were to be made on that basis, then I would accept that it would not be appropriate to make provision for a capital gains tax liability because such a valuation would involve no hypothetical sale of the asset. But for the reasons given in paras [21]-[29], that valuation approach is inappropriate as it would saddle Nabatu with the high level of expenses under the existing management, which would reflect its vulnerability as a minority shareholder. 182 On an actual liquidation, Nabatu would be entitled to one-third of the value of the surplus of assets over liabilities. The value of its interest would not be depressed by its being a minority holding. I have found that it is fair that its shares be valued without discount for its being a minority holding. Short of a liquidation, that is achieved only by a notional realisation of assets. Hence, I ordered that Nabatu's share be purchased at a valuation of one-third of the net assets of the company without discount for its being a minority parcel, with the companies' assets to be valued on the basis of current market values assuming willing but not anxious vendors and purchasers. Nabatu cannot take the benefit of that approach to valuation without accepting the consequences. The question is what would Nabatu receive on a realisation of the companies' assets? For that question to be properly answered, account must be taken of selling costs and liability for capital gains tax. 183 It is not to the point that the shareholders of J & J O'Brien might sell their shares rather than causing the company to sell the hotel. As a matter of principle, one would expect a prospective purchaser of shares to discount the price to be paid for the capital gains tax that would be payable when the property is sold. That was Mr Carter's opinion. He said that a purchaser would require the price of shares in the comapny to be significantly discounted to compensate for additional risks involved in a share purchase. He said that: " In my opinion the best measure of the discount that would be required is to make allowance for the CGT that could be payable when the property is sold, and the valuation of the shares ... would be reduced accordingly. " 184 Mr Robertson also gave evidence that if a prospective purchaser of the hotel were to acquire shares in the company rather than the hotel itself, the purchaser would require a discount of the price. He said: " In my opinion, the discount that a prospective purchaser of a hotel who is acquiring the shares in a company that owns the hotel, as opposed to simply acquiring the business of the hotel, represents the concern for risk attributed to issues such as capital gains tax liabilities and any unforeseen legal implications that may arise. [sic]" 185 All but two of the sales with which he has been concerned or has investigated, have been sales of the real estate, goodwill, and licences, as opposed to the purchase of the shares in the company that owns the hotel assets. I accept the evidence of Mr Carter and Mr Robertson in these respects. That evidence was not challenged. 186 I agree with the defendants' submission that if the shares were to be valued without taking account of the company's liability for capital gains tax on a sale, but otherwise its asset was valued at its market price, the plaintiffs would receive a windfall and Mr Crawley would be penalised in a way unconnected with redressing the effects of oppressive conduct. 187 The current accounting standards are instructive on this question. AASB116, which relates to accounting for property, plant and equipment, requires the reporting entities to which the standard applies to choose either the cost model in paragraph 30 of AASB116 or the revaluation model in paragraph 31 as its accounting policy. Paragraph 31 provides: " After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. ... " 188 "Fair value" means "the amount for which an asset could be exchanged between knowledgable, willing parties in an arm's length transaction." Paragraph 5 of Interpretation 121 of the Urgent Issues Group provides relevantly: " The deferred tax liability or asset that arises from the revaluation of a non-depreciable asset in accordance with AASB116.31 shall be measured on the basis of the tax consequences that would follow from recovery of the carrying amount of that asset through sale, regardless of the basis of measuring the carrying amount of that asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset. " 189 In other words, if the standard applies, and assets in the books of a reporting entity are revalued to their fair value, then the entity should include the likely capital gains tax as a deferred liability. 190 It was common ground that Marsico and J & J O'Brien were not reporting entities required to comply with AASB116 and URG121. However, the significance of those standards is the recognition by those responsible for establishing accounting standards, that consistency requires that if assets are revalued to fair value, based on their market value if the asset were sold, the company should recognise the taxation liability which would accrue were the asset to be realised. That is so irrespective of whether it is intended that the asset be sold. In my view, the same principle applies in the present case. 191 For these reasons, the balance sheet of J & J O'Brien should be further adjusted by recognition of a liability for capital gains tax of $1,156,819. For the same reason, the value of the Marlborough Hotel should be brought to account after allowing for two percent selling costs, namely, at a figure of $18,865,000. Net Profit from 1 July 2007 to 31 July 2008 192 It is appropriate to use the most up-to-date figures to assess the net operating profit of J & J O'Brien to 31 July 2008. In her first report, Ms Cartwright stated that net operating profit before tax for the six months to 31 December 2007, according to the general ledger, was $181,033. Mr Carter says that this omitted a loss from Prego's restaurant for that period of $25,929. No detailed analysis of the net profit to 31 December 2007 was provided by either Ms Cartwright or Mr Carter. Mr Carter was not cross-examined and Ms Cartwright did not take issue with this part of Mr Carter's report in her report in reply. I will therefore accept his contention to be correct. That would reduce Ms Cartwright's statement of profits to 31 December 2007 to $155,104. 193 Mr Carter said that he had been provided with up-to-date management information showing that J & J O'Brien had made a profit of $318,743 before tax and other adjustments to 30 April 2008. On this basis, he said that net profit for the 13-month period was $414,366. He also said that he had been provided with other profit and loss information that the profit for nine months was $255,252. This is a substantial discrepancy. He did not produce the information. From the further information provided by Ms Cartwright, the profit for the four months from January to April 2008 for the Marlborough Hotel was $99,597. I will use that figure. That results in a ten-month profit of $254,701, not $318,743. When $254,701 is extrapolated to a 13-month period, the net operating profit before tax and other adjustments is $331,111. This is substantially below the figure given by Mr Carter in his report, but he was not cross-examined on his figure with a view to the plaintiffs substantiating it, and I am unable to determine how he arrived at his figure. I will adopt the figure of $318,743 for which there is some supporting detail. 194 Ms Cartwright observed that professional fees had continued to be paid by J & J O'Brien to Gladewood after 31 October 2007. The orders of 19 December 2007 included orders for compensation in respect of excessive fees charged up to 31 October 2007. Ms Cartwright has made further adjustments in respect of excessive fees paid by J & J O'Brien to Gladewood and for interest on those amounts for the period from 1 November 2007 to 31 July 2008. There is no dispute about those adjustments which total $37,473. Hence, the net operating profit before tax to 31 July 2008 is $368,584. The tax expense on that profit is $110,575. Net operating profit after tax for the 13-month period is $258,009. 195 There was no dispute as to the other adjustments to be made to the audited balance sheet of J & J O'Brien as at 30 June 2007, save in respect of the calculation of interest on the judgment debts. However, for the same reasons as in para [139] above, I accept Ms Cartwright's calculation of interest. 196 The balance sheet may be restated as follows: J & J O'Brien Adjusted Balance Sheet at 1 August 2008 CURRENT ASSETS Cash and cash equivalents 179,306 Trade debtors 874 Other debtors 75,180 Net Operating Profit after tax from 1/7/07 258,009 Judgment receivables 7,482,041 Inventory 87,697 Prepayments 37,728 TOTAL CURRENT ASSETS 8,120,835 NON-CURRENT ASSETS Loan – other 8,160 Loan – unsecured Sinodun Pty Ltd 3,491,759 Shares in Subsidiary 2 Property, plant and equipment 18,865,000 TOTAL NON-CURRENT ASSETS 22,364,921 TOTAL ASSETS 30,485,756 CURRENT LIABILITIES Booking deposits 6,077 Trade creditors 304,338 Other creditors 142,334 Judgment creditors – 19.12.07 orders 167,845 Input tax creditors (131,262) GST payable 167,333 Bank overdraft 1,320,123 Lease liabilities 40,848 Employee benefits 14,144 Provision for income tax (92,602) Provision for income tax – 2008 or 2009 year 2,338,847 Accrued charges 186,188 TOTAL CURRENT LIABILITIES 4,464,213 NON-CURRENT LIABILITIES Lease liabilities 23,681 Loans – secured Aldonet Pty Ltd 1,554,887 Loan – Director CWC 16,880 Loan – Marsico Holdings Pty Ltd 4,144,961 Capital gains tax accrued on hotel value 1,156,819 TOTAL NON-CURRENT LIABILITIES 6,897,228 TOTAL LIABILITIES 11,361,441 NET ASSETS 19,124,315 Value for 1 share at 31 July 2008 $6,374,772 197 Accordingly, as at 1 August 2008, I value Nabatu's share in J & J O'Brien at $6,374,772. As set out at para [140], I value Nabatu's share in Marsico as at 1 August 2008 at $5,068,362. 198 It is necessary to make further adjustments to the net operating profit after tax of Marsico and J & J O'Brien, and for additional interest after tax on the judgments against and in favour of Marsico and J & J O'Brien up to the date of the orders. I will list the proceedings at a convenient time for the purposes of making final orders. 199 The adjustments from 1 August 2008 are as follows. For Marsico, net operating profit before tax and before other adjustments was $255,336 for 13 months or 397 days, or $178,735 after tax. This accrues at a daily rate of $450. If excessive professional fees have continued to be charged by Gladewood, the amount of such fees paid after 1 August 2008 and interest on the excess payments should be brought to account, less tax at 30 percent. Interest on the judgment sums in favour of Marsico and Trudale accrues at $1,637.94 per day. Interest on judgments against Marsico accrues at $2,364.36 per day. Marsico's net liability for interest on judgments after tax is $508.50 per day ($726.42 x 0.7), which should be deducted from the preceding adjustments. 200 For J & J O'Brien, net operating profit after tax and before other adjustments was $223,120 ($318,743 x 0.7) for 13 months or 397 days. This accrues at a daily rate of $562. If excessive professional fees have continued to be charged by Gladewood, the amount of such fees paid after 1 August 2008 and interest on the excess payments should be brought to account, less tax at 30 percent. Interest on the judgment sums in favour of J & J O'Brien accrues at $2,049.87, which after tax is $1,434.91 per day. 201 Once the determination of the net assets of Marsico and J & J O'Brien are adjusted accordingly up to the date of the orders, the purchase price for Nabatu's share in each company is to be calculated as one-third of those figures. 202 If I have made arithmetical errors material to the valuation of the shares, the parties should advise me of them. If either party considers that, consistently with my reasons, orders should be made for the purchase of Nabatu's shares for sums different from those calculated above, and if there is no agreement as to that matter, the parties should forward written submissions two days before the date for making final orders. Subject to the above, I direct counsel for the plaintiffs to bring in short minutes of order in accordance with these reasons on a date to be arranged. The orders should provide for the time at which the purchase is to be made, the mechanics of the purchase, and for interest on the purchase price until payment. As indicated in Short v Crawley (No. 30) at [1226], the orders should include a reservation of the proceedings for further consideration in case it appears that Mr Crawley is unable to effect the purchase. ****** 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.