Supreme Court New South Wales Medium Neutral Citation: Hashman v Australian Medico-Legal Group Pty Limited; Claireleigh Mosman Pty Limited v Australian Medico-Legal Group Pty Limited [2016] NSWSC 1773 Hearing dates: 30 November, 1 and 7 December 2016 Decision date: 07 December 2016 Jurisdiction: Equity Before: Brereton J Decision: Refer [41]-[43] and [51] Catchwords: LIMITATIONS – action to recover loans – where loans not for fixed terms and repayable on demand – cause of action for recovery arises from date loan was advanced – (NSW) Limitation Act 1969, s 54 – confirmation – financial statements – composite line item for shareholders' loans – whether acknowledgement of loans shown to be included in it – held, it is CORPORATIONS – members' rights and remedies – minority rights – valuation of shares – discounted cash flow valuation PROCEDURE – amendment – to join additional plaintiff – where issue as to proper plaintiff emerged late Legislation Cited: (CTH) Family Law Act 1975, s 90UD (NSW) Limitation Act 1969, s 54 Cases Cited: Compania de Electricidad de la Provincia de Buenos Aires Ltd, In re [1980] 1 (Ch) 146 Giacci v Giacci Holdings Pty Ltd [2010] WASCA 233 Jones v Bellgrove Properties [1949] 2 KB 700 Leyland Printing Company Ltd (in administration) v Leyprint Limited [2012] EWHC 2105 (Ch) Ottavio v Hayvio Pty Ltd [2011] NSWSC 1125 Stage Club Ltd v Millers Hotel Pty Ltd (1981) 150 CLR 535 Young v Queensland Trustees Ltd (1959) 99 CLR 560 Category: Principal judgment Parties: In proceedings 2014/170226: Edmund Ian John Hashman (plaintiff) Australian Medico-Legal Group Pty Ltd (first defendant) Mandy Dorothy Holland (second defendant) In proceedings 2015/187123: Claireleigh Mosman Pty Limited (first plaintiff) Edmund Ian John Hashman (second plaintiff) Australian Medico-Legal Group Pty Limited (defendant) Representation: Counsel: NJ Beaumont SC w A Avery-Williams (plaintiffs) TW Marskell (defendants) Solicitors: Mills Oakley Lawyers (plaintiff) Clyde & Co (defendants) File Number(s): 2014/1702262015/187123 Judgment (ex tempore) Wednesday, 30 November 2016 – Application to amend pleadings 1. HIS HONOUR: By a statement of liquidated claim in proceedings 2015/187123, initially filed in the District Court on 25 June 2015 and subsequently removed into this Court, Claireleigh Holdings Pty Ltd ("Claireleigh") – an entity controlled by Mr Hashman – sued Australian Medico-Legal Group Pty Ltd ("AMLG") to recover loans allegedly made by Claireleigh to AMLG between July 2006 and June 2009, amounting to some $300,000. 2. In its defence to the statement of claim, AMLG pleaded, in para 4, that it "does not admit the plaintiff made the payments as alleged". In an amended defence filed on 12 May 2016, in para 9, AMLG pleaded, inter alia, that, if there was any such agreement as alleged and if the payments were made – "which is not admitted" – then "these payments were provided to or made on behalf of AMLG pursuant to an agreement between the plaintiff and the defendant which did not include a term in respect of the time for repayment …". 3. In written submissions served a week or so ago, in preparation for the final hearing of the proceedings, AMLG contends that only an amount of $133,000 approximately was ever lent by the plaintiff Claireleigh, for the reason that "a close examination of primary records referred to in Mr Hashman's affidavit ... reveals that in many instances it was Mr Hashman who advanced the amounts now claimed", usually in his personal capacity and, in one instance, as a trustee, and that "simply put, Claireleigh was not a creditor of AMLG in respect of all of the amounts which it now claims". Claireleigh says that this is the first time it has apprehended that the defendant AMLG has raised an issue as to whether it was the proper plaintiff. Initially, in correspondence, it was foreshadowed on behalf of Claireleigh that objection would be taken to AMLG mounting this defence at all, but now Claireleigh says that, so long as it is permitted to join Mr Hashman as a plaintiff, the defence can be met, without requiring any further evidence beyond that already served. Accordingly, leave is now sought to amend the proceedings to join Mr Hashman as a plaintiff and to propound in the alternative a claim on his behalf in respect of the same loans, to the extent that they might be found to have been made by him and not by Claireleigh. 4. AMLG says that, if a forensic decision was made that only Claireleigh would sue, then no departure from that position should be countenanced; and that if the situation is the result of an oversight, then leave to amend should not be granted without an appropriate explanation being offered. However, I do not discern any calculated forensic decision of this kind. Nor is it apparent how any prejudice would arise from allowing a departure from it, if it has been made. If anything, by adding Mr Hashman as a plaintiff, it provides the defendant with an alternative personal plaintiff against whom a costs order might be enforceable if there were any difficulty in enforcing it against the company Claireleigh. 5. As to oversight, while there is force in the submission advanced by AMLG that, having regard to the pleadings in the related oppression suit that is also before the Court, the potential for there to be an issue as to the correct identity of the lender was apparent, I do not consider that the pleadings in the loan case distinctly raised the issue, and it is understandable enough – particularly having regard to the paragraphs of the amended defence to which I have referred – that it would not have been appreciated that the identity of the lender was a live issue. 6. Counsel for AMLG properly did not contend that the defendant would be unable to meet the amendment if permitted, nor that any other relevant prejudice would be occasioned by it. The Court should allow all appropriate amendments to be made to enable the real issues between the parties to be dealt with; and the command that the Court facilitate the just, quick and cheap resolution of proceedings, with emphasis on the just, makes it highly desirable that that issue be addressed – both so that the case is not decided on a false or artificial basis, and also so that the issue, which can be addressed now without prejudice to either party, is not left unresolved so as to leave open the possibility of still further litigation between them – brought by Mr Hashman personally if Claireleigh were to fail in respect of some of the loans it claims in these proceedings because the true lender was Mr Hashman. 7. All those considerations firmly favour allowing the amendments sought. 8. It has been suggested on behalf of AMLG that if the amendments were permitted, the plaintiffs ought to be required to particularise which of the loans are said to have been made by which of Claireleigh and Mr Hashman. As I understand the case, the plaintiff's primary position is that all of the loans were made by Claireleigh, but it wishes to adopt the position that in the event that it be found that any were not made by Claireleigh but by Mr Hashman, then Mr Hashman will be there as a plaintiff to enforce them. In those circumstances, it does not seem to me necessary to require particularisation of which loan was allegedly made by which of them. 9. The Court therefore orders that: 1. Edmund Ian John Hashman be joined as second plaintiff. 2. The plaintiffs have leave to amend the statement of claim by filing the further amended statement of claim, a copy of which is exhibit VD1 herein. Wednesday, 7 December 2016 – Principal judgment 1. HIS HONOUR: Before the Court are two proceedings concerning the company Australian Medico-Legal Group Pty Limited ("AMLG"), in which the shareholders are Edmund Ian John Hashman and Mandy Dorothy Holland, who were formerly de facto partners. 2. In proceedings 2014/170226 ("the oppression case"), the plaintiff Mr Hashman brings a claim for oppression in respect of the conduct of the affairs of the first defendant AMLG. The parties have agreed, without admission, that a compulsory purchase order should be made in respect of his shares, and the only matter in dispute is the price to be paid; accordingly, the only substantive issue is the valuation of Mr Hashman's shareholding. 3. In proceedings 2015/187123 ("the loan case"), the first plaintiff Claireleigh Mosman Pty Limited as trustee for the Claireleigh Trust ("Claireleigh") – an entity controlled by Mr Hashman – sued AMLG in the District Court to recover loans allegedly made by it to AMLG. Those proceedings were removed into this Court, to be heard with the oppression case. On the eve of the hearing, it became apparent that the defences included that it was Mr Hashman, and not Claireleigh, who was the lender in respect of at least some of the advances which comprised the total amount claimed, and Mr Hashman was then added as second plaintiff. The loans are prima facie statute barred, and their recoverability depends upon whether there has been a confirmation on which the plaintiffs can rely. Accordingly, the issues are: first, whether Claireleigh or Mr Hashman was the lender; secondly, insofar as Claireleigh was the lender, whether there was any confirmation to it, it being conceded that there was a sufficient confirmation to Mr Hashman; and thirdly, whether the loans have been waived or released pursuant to a binding financial agreement entered into between Mr Hashman and Ms Holland dealing with financial matters between them consequent upon the breakdown of their de facto relationship. 4. The Court was greatly assisted by the economical and efficient conduct of the case by counsel on both sides, and their concise and focussed submissions. The loan case 1. It is not in dispute that the various advances which together comprise the total claim ultimately pressed of $269,726.49 were made to AMLG. Evidence has been adduced through Mr Hashman that establishes that they were, and there is none to the contrary. Who is the lender? 1. However, there is an issue as to who was the lender. As originally pleaded, Claireleigh claimed to be the sole lender. The documentary evidence supports the view that at least $179,276 was paid from Claireleigh's accounts, and that amount was also at one stage recorded in Claireleigh's financial statements as an asset – although it was later amended, as a result of an investigation and tracing of the source of funds, to a larger sum. In effect, AMLG contends that of the total advances claimed, $179,276 was advanced by Claireleigh and the balance by Mr Hashman personally. 2. However, in the books of AMLG, all these advances are accounted for as shareholder loans, and the ledger for shareholder loans refers only to the individual shareholders, Ms Holland and Mr Hashman. In AMLG's financial statements, the whole of the advances are included as a liability under "Loans to shareholders". [1] AMLG adduced no evidence of the circumstances of, or otherwise bearing on the terms of, the advances. While Mr Hashman's evidence was to the effect that he regards all the advances as having been sourced in Claireleigh's funds, that is not decisive; the ultimate source of loan funds is not determinative of the identity of the lender as a gainst the borrower. 3. The most important objective evidence bearing on the question of who was, as against AMLG, the lender, is provided by AMLG's financial statements and ledger, which are probative that so far as AMLG was concerned, the sole lender was Mr Hashman personally, regardless of where he may have sourced the funds. Mr Hashman's evidence that he regarded the funds as Claireleigh's is not inconsistent with that position – he may have personal obligations to Claireleigh as a result, but as against AMLG he was the lender. Accordingly, as against AMLG, Mr Hashman personally, and not Claireleigh, was the lender in respect of the whole of the advances. The limitation issue 1. The limitation issue arises because the loans were not for fixed terms, and thus were repayable on demand, with the consequence that a cause of action for their recovery arises from the date the loan was advanced. [2] As all the loans, but for one of $40,000 made on 26 June 2009, were made more than six months before the loan case was commenced, and as even the $40,000 loan was made more than six years before Mr Hashman was joined as a plaintiff, a claim for their recovery is prima facie statute barred. 2. The plaintiffs invoked (NSW) Limitation Act 1969, s 54, which relevantly provides as follows: (1) Where, after a limitation period fixed by or under this Act for a cause of action commences to run but before the expiration of the limitation period, a person against whom (either solely or with other persons) the cause of action lies confirms the cause of action, the time during which the limitation period runs before the date of the confirmation does not count in the reckoning of the limitation period for an action on the cause of action by a person having the benefit of the confirmation against a person bound by the confirmation. (2) For the purposes of this section: (a) a person confirms a cause of action if, but only if, the person: (i) acknowledges, to a person having (either solely or with other persons) the cause of action, the right or title of the person to whom the acknowledgment is made, or (ii) makes, to a person having (either solely or with other persons) the cause of action, a payment in respect of the right or title of the person to whom the payment is made, (b) a confirmation of a cause of action to recover interest on principal money operates also as a confirmation of a cause of action to recover the principal money, and (c) a confirmation of a cause of action to recover income falling due at any time operates also as a confirmation of a cause of action to recover income falling due at a later time on the same account. … (4) An acknowledgment for the purposes of this section must be in writing and signed by the maker. (5) For the purposes of this section a person has the benefit of a confirmation if, but only if, the confirmation is made to the person or to a person through whom the person claims. (6) For the purposes of this section a person is bound by a confirmation if, but only if: (a) the person is a maker of the confirmation; ... 1. The "confirmations" relied upon were AMLG's Financial Report for the year ending 30 June 2009, which contained a liability line item, "Loans to [sic] Shareholders" in the amount of $374,151.35; and an email dated 2 December 2010 from Ms Holland to Mr Hashman, which attached the shareholder loan account ledger of AMLG, and over Ms Holland's typewritten signature stated: This is a copy of the shareholders loan account. All the credit that do not have your name have been paid by me. 1. A balance sheet signed by a company director can be an acknowledgment for the purposes of s 54, [3] and a composite item in a balance sheet may be a sufficient acknowledgment of components of it if extrinsic evidence establishes that the claimant's debt was amongst those included in the composite item. [4] The extrinsic evidence – in particular the loan account ledger, and Mr Hashman's evidence pertaining to each of the advances – so establishes in this case. 2. Counsel for AMLG accepted that there was a sufficient acknowledgment for the purposes of s 54 to Mr Hashman, but disputes that there was a sufficient confirmation to Claireleigh. As I have found that Mr Hashman, and not Claireleigh, was the relevant lender in respect of all the advances, it is in a sense unnecessary to take the matter any further. However, lest I be wrong about the identity of the lender, I will address the position vis-à-vis Claireleigh. 3. The requirement of s 54(5) is that the confirmation is made to the person or to a person through whom the person claims. The plaintiffs referred to the dictum of Wilson J in Stage Club v Millers Hotels: [5] Mr Handley argues that the balance sheets were given to Mr Walker in his capacity as a member of the Club and not as agent for Millers. In my opinion it clearly emerges from the cases which I have reviewed that the absence of an intention on the part of the debtor to communicate to the creditor or his agent is immaterial so long as the document is actually delivered to him. 1. The defendant referred to the following passage in the judgment of Slade J (as he then was) in In re Compania de Electricidad de la Provincia de Buenos Aires Ltd: [6] In my judgment, though no authority has been cited to me which either confirms or rejects such proposition, a written acknowledgment cannot be said to be 'made to' a creditor or his agent within the meaning of s24(2) unless either (a) it is delivered to the creditor or his agent by or with the authority of the debtor or his agent, or (b), it is expressly or implicitly addressed to and is actually received by the creditor or his agent. In my judgment in case (a) it would not matter that the acknowledgment was not according to its terms expressly or implicitly addressed to the recipient. In case (b) it would not matter that the acknowledgment reached the hands of the creditor otherwise than by or with the authority of the debtor. In either case, however, it would be necessary that the creditor should actually receive the acknowledgment before he could rely on it. 1. However, the next paragraph in Slade J's judgment is also important: A company's balance sheet must in my judgment be regarded as implicitly addressed to (among other persons) those creditors whose debts are referred to in it. It follows that in my judgment, as Miss Arden submitted, and, as I understood him, Mr Sykes did not contend to the contrary, an effective "acknowledgment" of a debt must be said to have been "made" by the company to any creditor who can establish by appropriate evidence that (i) he has actual received, from whatever source, a copy of the balance sheet of the company, signed by directors of the company and referring to "sundry creditors"; (ii) he is one of the sundry creditors so referred to. In such circumstances the balance sheet of the company would constitute an effective acknowledgment of the relevant debt, not as at the date on which it was actually signed by the directors or received by the creditor, but as at the date of the balance sheet, being the date to which the signature of the directors related; and the cause of action would be deemed to have accrued at that date: see In re Gee & Co. (Woolwich) Ltd [1975] Ch 52 at 71, per Brightman J. 1. On those authorities, the financial statements of AMLG are to be taken to be implicitly addressed to all creditors whose debts are referred to in them; and constitute an effective acknowledgment of the debt of any creditor who can establish by appropriate (extrinsic) evidence that it has received from whatever source a copy of the balance sheet, and that in the case of a composite item such as "sundry creditors", that it is one of those referred to. Claireleigh unquestionably received the financial statements, through its alter-ego Mr Hashman. Even though Claireleigh is not specifically referred to in the balance sheet, to the extent that it is established that the "shareholder loans" refer to advances made by and repayable to Claireleigh, it constitutes an effective acknowledgment – even though Claireleigh is not, strictly speaking a shareholder. 2. Accordingly, the limitation defence fails, whether the true lender be Mr Hashman or Claireleigh. Have the loans been released by the binding financial agreement ("BFA")? 1. The third issue is whether the loans have been released by the binding financial agreement between Mr Hashman and Ms Holland, made under (CTH) Family Law Act 1975, s 90UD, on 14 June 2011. Relevantly, the BFA recited: C The purpose of the agreement is to deal with the following: (a) the manner in which the property or financial resources Mandy and Ian had at the commencement of the de facto relationship and thereafter acquired during the formed de facto relationship, are to be distributed; and so the maintenance of Mandy and Ian. ... K During the relationship the parties founded a company, the Australian Medico-Legal Group Pty Ltd ACN 199 356 24 ("the Company"), of which they are both shareholders and directors. ... Property and financial resources as at date of agreement: T Ian and Mandy acknowledge and agree that their respective assertions as to their property and financial resources are approximately as set out in schedules 2 and 3 of this financial agreement, and they have each had and taken the opportunity of inspection all relevant financial records relating thereto ... 1. In Schedule 2, entitled "Edmund Ian John Hashman – statement of financial position as at 9 June 2011", appears an entry "Australian Medico-Legal Group – $375,000." In Schedule 3, entitled "Mandy's assets liabilities and resources as at the date of agreement", appears an entry "Mandy's shares in Australian Medico-Legal Group Pty Ltd – negligible". 2. The agreement further recited: X Ian and Mandy desire and intend by this financial agreement to finalise their financial relationship with respect to property and spouse maintenance following the breakdown of their de facto relationship (which de facto relationship has now ended). 1. The operative part of the BFA relevantly provided: (3) By way of final property settlement: (a) simultaneously with the signing of this agreement the parties shall enter into a "shareholders agreement" which will regulate their future conduct in respect of the company. A copy of this agreement is annexed hereto and marked with the letter 'B'. (b) Ian shall pay to Mandy the sum of dollars $100,000 as follows: (i) upon signing this agreement the sum of $50,000; (ii) a further $50,000 out of the first dividends received Ian from the company. 1. Clause 5 provided that subject to Mandy complying with the terms of the agreement, as against Ian she was and would remain the sole legal owner of, and Ian should have no interest in, various specific items listed in that paragraph, including: "her shares in the company, subject to the shareholders agreement"; and "all real and/or personal property (including choses in action) of whatsoever nature and kind in her possession and/or name at the date of the making of this agreement"; and also "all real and personal property of whatsoever nature and kind may come into her possession or name after the date of this agreement". Clause 6 provided that subject to Ian complying with the terms of the BFA, as against Mandy he was and would be the sole legal owner of, and Mandy should have no interest in, various specific assets listed, including: "his shares in the company subject to the shareholders agreement"; and "all other real and/or personal property (including choses in action) of whatsoever nature and kind in his possession or name at the date of the making of this agreement ...". 2. The reference in Schedule 2 – Mr Hashman's statement of financial position – as at 9 June 2011, to an interest in Australian Medico-Legal Group said to be worth $375,000, is notable. Mr Hashman plausibly explained in cross-examination that it was an overestimate of the amount due to him or his controlled entities – in particular Claireleigh – because he wanted to leave no room for any suggestion that he had under-disclosed his financial position and thereby provide a ground on which application might be made to set aside the BFA and, for the purposes of disclosure, he was treating interests of Claireleigh as interests of his own. Such an approach is conventional in family law practice. Counsel for the defendants accepted that the entry referred to the loans to AMLG, though not that it correctly characterised the lender. Clause 6 of the BFA, to which I have referred, had the effect that property and assets of Mr Hashman which were in his possession or name at the date of the BFA, and were not otherwise dealt with by the agreement, were to remain his own. In other words, the express effect of the BFA is that Mr Hashman, whether directly or indirectly through Claireleigh, retained the benefit of his loan account in AMLG. This is not inconsistent with the general tenor of the BFA, which, while it is expressed to be intended to finalise the financial relationship of the parties with respect to property and spousal maintenance, clearly envisaged that there would be an ongoing relationship between them in respect of AMLG – providing, as it did, for the execution of the shareholders agreement, and for each of them to retain their separate interests in AMLG. 3. It follows that the unambiguous effect of the BFA is that Mr Hashman's (or Claireleigh's) loans to AMLG are not released or assigned, but preserved as an asset in Mr Hashman's hands. Loan case – conclusion 1. Accordingly, all the defences on the loan case fail. Mr Hashman is entitled to judgment on those loans which he pressed, amounting to $269,726.49, and interest from 17 July 2013, when demand was made for repayment. [7] Such interest as at the date of hearing, only a couple of days ago, amounted to $57,253.17. 2. Thus, in the loan case, Mr Hashman is entitled to judgment for $329,094.66. The oppression case 1. After the evidence and the submissions were concluded on 1 December 2016, I gave reasons which indicated my views in respect of the disputed valuation issues, so as to enable the parties – and more particularly their accountants, neither of whose approach I adopted in full – to prepare further calculations based on the parameters indicated. Although I did not wholly accept either of the accountants, the Court was much assisted by their professional and detailed application to the problem and the issues, and their articulation of them in their joint report. What follows replicates the substance of the reasons I then gave. 2. It is common ground that the appropriate valuation approach is a discounted cash flow (DCF) valuation. That involves, broadly speaking, two steps: the first being the prediction of the future dividend stream, and the second being the discounting of that dividend stream at a rate reflective of the risk associated with its receipt. However, it is wrong to see those two steps as entirely independent: the confidence with which the valuer can predict the future dividend stream bears on the discount rate to be applied, in the sense that the less confident one is of achieving the predicted stream, the higher the appropriate discount rate. Future maintainable dividend 1. So far as the future dividend stream is concerned, in this case it is governed by the Shareholders Deed of Agreement, under which Mr Hashman is entitled to a dividend each year of 50% of the audited net profit of the company after tax for that year until such time as he is paid a total sum of $2 million dollars, and at the expiration of that period to have his shares bought back at $0.001 per share. The starting point for the calculation is thus the audited net profit of the company after tax for each year, which in turn depends on the maintainable net earnings, derived from income, less expenses. In this respect, the valuers adopted slightly different approaches. Ms Cusack used historical dividends to predict future dividends, while Mr Katehos deduced future maintainable net profits from a prediction of future gross profits less expenses. I do not consider that either approach is incorrect; both are open. However, in this case, at least one matter suggests a degree of unreliability in Ms Cusack's approach. This is manifested in Ms Cusack's "Report No 2 Calculation Adjusted for Carried-Forward Tax Losses" (PX11) by the leap in implied net profit before tax for the years ended 30 June 2018 and 30 June 2019. The implied net profit before tax is derived by doubling her predicted 50% dividend, and then grossing-up by 30% for tax in those years where tax would be payable (that is to say, after tax losses are exhausted). Thus the predicted dividends for 2016 and 2017 of $21,000 and $22,000 respectively imply a net profit before tax of $42,000 and $44,000 dollars respectively, because tax is not payable in those years on account of accumulated tax losses. If those tax losses were not available, then the dividend would be less – the net profit before tax would not be greater. As it seems to me, there is no good explanation for the relatively substantial leap in net profit before tax implied by Ms Cusack's approach in 2018 and 2019, which is the result of grossing-up for tax in those years. The net profit before tax should be relatively consistent, while the effect of exhausting tax losses should be to reduce net profit after tax, and thus dividend. Moreover, in principle, I think a more reliable prediction of net profit after tax is likely to be obtained by projecting maintainable gross profit, expenses and tax, than by predicting future dividends from past dividends, especially when past dividends are influenced by, and future dividends may not be influenced by, available tax losses. Accordingly, in this respect, I prefer Mr Katehos' approach, which ultimately generates a future maintainable dividend of $24,684 – subject to the next matter, which is the growth rate. 2. Ms Cusack proposed an ongoing growth rate in the order of 3.3%, which she applied to the maintainable dividend calculated by her; Mr Katehos proposed a growth rate of 3% in 2017, 2.5% in 2018, 2019 and 2020, and nil thereafter. 3. As it seems to me, there is no good reason to think that this business will boom above market average in the future; nor is there any good reason to suppose it will expand more slowly than the economy average. The safest assumption is that its future performance will reflect the midpoint of the predicted inflation range of 2 to 3%, and accordingly the 2.5% factor which Mr Katehos has applied for 2018, 2019 and 2020 should be applied also in each successive year. As I understand Mr Katehos' calculations, that carries through to gross profit, and it seems to me that it should also be applied to total operating expenses for each year from 2022 onwards. Discount rate 1. Ms Cusack was of the opinion that 14.01% was appropriate, and Mr Katehos 35%. In my view, Ms Cusack's rate is too low, due to a failure to take into account the financial risk associated with the current financial situation of the company, whose liabilities exceed its assets and which is dependent upon Ms Holland's financial support. Although it was suggested that another financier might be found, it was acknowledged that such a financier would presumably require a guarantee from the director – being Ms Holland – and if she is no longer prepared to provide financial support, then there is no reason why she would provide a guarantee in lieu of cash. Accordingly, it seems to me that there needs to be a substantial increment to Ms Cusack's discount rate, on account of the financial risk factor. 2. On the other hand, Mr Katehos' rate is too high, for two reasons. First, I do not accept that there is a key person factor in this business. As I understand the business from the evidence, it essentially involves receiving requests for reports from medical experts, selecting appropriate experts who act as contractors or consultants, obtaining the reports from them for the client, and sharing the income so generated with the consultant. While no doubt Ms Holland brings qualities and experience to the job, I do not think they are such as to render her irreplaceable, indispensable or otherwise so critical as to involve a "key person" risk factor. 3. The second matter by reason of which Mr Katehos' rate is too high, is his adoption of an excessively high starting point from the Shine Lawyers comparable. Though Shine is far from a perfect comparable, it is probably as good a comparable as is available. However, the analysis of its results which was undertaken in the course of cross‑examination and submissions demonstrates that Shine's price-earnings ratio ("PER") was higher – and thus the relevant discount rate to be derived from it lower – than the 14.3% which Mr Katehos derived as the starting point for his discount rate. As at 30 June 2014, the Shine PER was 17.10, implying a discount rate of 5.84%; and as at 30 June 2015, it was 14.32, implying 6.98%. The Shine share price subsequently plummeted, resulting in the much lower PERs and higher discount rates adopted by Mr Katehos. Because the Shine share price and thus PER was so volatile, precision is not possible. However, I think 9.5% is a safer starting point than Mr Katehos' 14.3%. 4. I do not wish to give the impression of undue precision in the rate I propose to adopt, because there is a great deal of guestimation involved in predicting how a company will perform over a period of effectively 20 years. If one adopts a starting point (derived from Shine) of 9.5%, and adds a liquidity risk factor of 30% (which appears to be common ground) and a financial risk factor of 50% (according to Mr Katehos), the result is 18.525%. If one takes Ms Cusack's 14.01% (which includes provision for liquidity risk), but adds a more moderate financial risk factor of 30%, the result is 18.21%. Acknowledging that the base level of maintainable earnings (before growth) predicted by Mr Katehos, which I adopt, is higher and therefore involves an elevated level of risk over that assumed by Ms Cusack, in my view the appropriate discount rate is 18.75%. Other matters 1. The parties now agree that, by reason of Corporations Act, s 254T, the plaintiff will not be entitled to any dividend while the company still has accumulated losses. 2. It is no longer controversial that $109,000 of tax losses is available, until eroded. That means that the approach to tax losses taken in PX11 can be adopted, and that Mr Katehos' Updated Schedule H will need to be modified to reduce the period during which the availability of tax losses means that no tax is payable. 3. In Mr Katehos' Updated Schedule H, for the year 2023, the "dividend permitted" is correctly shown as $40,229. That is because, before dividend can be paid, the remaining carried-forward losses of $27,340 must first be paid out of net profits. However, for that very reason, "dividend permitted" does not necessarily equal "audited net profit of the company after tax for that year". Clause 4.1 of the shareholder agreement provides that the plaintiff is entitled to dividend of 50% of the audited net profit after tax for each year, whereas cl 4.2 provides that the second defendant is entitled to dividend of "up to 50%" of the audited net profit. Consistently with this, cl 17 requires the second defendant, who is the sole remaining director, to declare a dividend each year consisting of 50% of the audited net profit of the company after tax in relation to (the plaintiff's) A class shares and, at her option, the remainder to (her) B class shares. As it seems to me, the effect of those provisions is to give the A class shares a priority right to the first 50% of audited net profit, and if (because a deficiency of net assets must first be extinguished) less than the whole of the net profit is available for dividend, then the A class shares are entitled to what is available up to 50% of audited net profit. Thus the plaintiff's dividend for 2023 should be 50% of the audited profit before tax, less tax; rather than 50% of the "dividend permitted"; prima facie, before adjustments for the tax loss issue, that should be in the order of $28,000, rather than the figure of $20,115 presently shown as "plaintiff's dividend" for the 2023 year. 4. Finally, there was an issue as to whether the effect of the binding financial agreement – and, in particular, cl 3(b)(ii), which requires the plaintiff to pay the second defendant $50,000 out of the first dividends received by him from the company – is that the first $50,000 of dividends receivable by him should be disregarded in the valuation. As it seems to me, the personal obligation of the plaintiff to pay $50,000 under that clause, albeit that the sum is payable "out of the dividends" when received by him, is quite distinct from the value of the shares. His personal liability to pay money to the second defendant upon receipt of dividends does not affect the value of the shares to him at all. The shares have value to him for the very reason that by receipt of dividends he would be enabled to discharge that personal obligation. Thus it would be wrong to deduct from the projected dividend stream the $50,000, as suggested in line J of Mr Katehos' Updated Schedule H. Revised calculations 1. With the benefit of the foregoing guidance, the valuers brought in revised calculations. There remained a couple of relatively minor issues between them. One was whether I had intended to adopt Mr Katehos' projection of operating expenses for the years up to 2021. Above (at [41]), I indicated that the growth rate of 2.5%, which Mr Katehos had applied for 2018, 2019 and 2020, should be applied also in each successive year; that as I understood his calculations, that carried through to gross profit; and I added: And it seems to me that it should also be applied to total operating expenses for each year from 2022 onwards. 1. Although I perhaps did not make it as clear as I might have, by referring to the years from 2022 onwards, I intended to adopt Mr Katehos' operating expenses for the years up to and including 2021, on the basis that so far as I could tell, both from his report and from the schedules, he had projected growth and changes in operating expenses in the exercise which he undertook in his valuation. Accordingly, that resolves one of the remaining disputes, by indicating that the operating expenses as projected by Mr Katehos up to 2021 should be adopted and, thereafter, grown at 2.5% per annum. 2. Once that matter was resolved, the difference in valuation reduced to some $3,000: Ms Cusack's approach produced a value of $31,333, and Mr Katehos' a value of $28,203. The only remaining unresolved difference was the treatment of what Ms Cusack called a "deferred tax asset" of $32,986. The effect of its inclusion, on Ms Cusack's approach, was that a dividend became payable to Mr Hashman one year earlier than would otherwise have been the case. 3. In some observations handed up to the Court today, Mr Katehos gave reasons, which seem logical and persuasive, as to why that approach was inappropriate. However Mr Paul, who appeared today for Mr Hashman, was not in a position to deal with that argument. 4. As it seems to me, where the difference between the valuers is $3,000, and the costs of adjourning the matter to enable counsel to return on another occasion and argue the issue must exceed $10,000, I ought to resolve this matter, one way or another, today. The parties commendably adopted the commercial and pragmatic view that in the circumstances it would be open to the Court to "split the difference". In any event, it must be borne in mind that ultimately the exercise being undertaken is given illusory precision by the DCF calculations, and involves many elements of prediction, projection and guestimation. 5. Both in order to indicate that what is being adopted involves an element of estimate and rounding, but also because I incline to the view at present – while bearing in mind that Mr Paul has not had an opportunity to answer it – that Mr Katehos' criticisms of Ms Cusack's approach in this respect are likely to be correct, I propose to adopt a figure slightly below the midpoint of the two, and that will be a figure of $29,500. Orders 1. Accordingly, in proceedings 2015/187123 (the loan case), the Court gives judgment that: 1. The defendant Australian Medico-Legal Group Pty Limited pay the second plaintiff Edmund Ian John Hashman the sum of $329,094.66. 1. In proceedings 2014/170226 (the oppression case), the Court orders that: (2) The second defendant Mandy Dorothy Holland purchase the shares of the plaintiff Edmund Ian John Hashman in the first defendant Australian Medico-Legal Group Pty Limited for a price of $29,500. (3) There be liberty to apply for further directions in the event of any difficulty arising in the implementation of this order. 1. The Court directs that: (4) Any party seeking a costs order lodge with my Associate and serve a written submission, setting out the order sought and the basis on which it is sought and attaching any additional evidence relevant to the question of costs, by 14 December 2016. (5) The respondent to any such application lodge with my Associate and serve its submissions in response by 21 December 2016. ********** Endnotes 1. There is no doubt that the reference "Loans to [sic] Shareholders", appearing as it does as a liability, means loans from shareholders. 2. Young v Queensland Trustees Ltd (1959) 99 CLR 560 at 566 3. Stage Club Ltd v Millers Hotel Pty Ltd (1981) 150 CLR 535 4. Jones v Bellgrove Properties [1949] 2 KB 700 at 704; Leyland Printing Company Ltd (in administration) v Leyprint Limited [2012] EWHC 2105 (Ch) at [15]; Giacci v Giacci Holdings Pty Ltd [2010] WASCA 233 at [36]; In re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] 1 Ch 146 at 193 to 194. 5. (1981) 150 CLR 535 at 566. 6. [1980] 1 Ch 146 at 193. 7. Ottavio v Hayvio Pty Ltd [2011] NSWSC 1125 at [15]-[16]. Amendments 14 December 2016 - Correct formatting error 15 December 2016 - Correct formatting error to dates on cover page 02 May 2017 - Further correction to formatting on cover page 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. Decision last updated: 02 May 2017