Supreme Court New South Wales

• Medium Neutral Citation: In the matter of Global Mortgage Equity Corporation Pty Limited [2013] NSWSC 1586
• Hearing dates: 10 - 13 September 2013
• Decision date: 01 November 2013
• Jurisdiction: Equity Division - Corporations List
• Before: Black J

Decision

Judgment delivered as to quantification of value of shares for the purpose of buy-out orders. Orders made for parties to bring in agreed short minutes of order to give effect to judgment.

• Catchwords: CORPORATIONS - share capital - shares - valuations -where orders made by Court of Appeal provide for a valuation to be undertaken by reference to the market value of the whole share capital of the company - where conflicting expert valuation evidence - where expert evidence differed on the application of differing methodologies - whether earnings-based valuation or valuation based on unadjusted balance sheet should be applied.
• Legislation Cited: Corporations Act 2001 (Cth) ss 95A, 296, 307
• Cases Cited: - Albany v Commonwealth (1976) 12 ALR 201; - Argus Shop Fitters Pty Ltd v Western Australian Planning Commission [2002] WASC 174; (2002) 125 LGERA 180; - Brisbane Water County Council v CSD [1979] 1 NSWLR 320; - Commercial Union v Ferrcom (1991) 22 NSWLR 389; - Davie v Lord Provost, Magistrates & Councillors of the City of Edinburgh (1953) SC 34; - Drinkwater v Caddyrack Pty Ltd [1999] NSWSC 851; - Federal Commissioner of Taxation v St Helens Farm (1981) 146 CLR 336; - Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 3) [2011] FCA 1370; (2011) 285 ALR 297; - Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705; - McKay v Commissioner of Main Roads [2011] WASC 223; - MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167; - Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247; - Re DG Brims & Sons Pty Ltd (1995) 16 ACSR 559; - Re Quest Exploration Pty Ltd (1992) 6 ACSR 659; - Russell v Minister of Lands (1899) 17 NZLR 241; - Smith v Gould [2012] VSC 461; - Smith Martis Cook & Ragan Pty Ltd v Benjamin Cook Pty Ltd [2004] FCAFC 153; - Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418; - United Rural Enterprises v Lopmand [2003] NSWSC 910; (2003) 47 ACSR 514; - Tyler v Thomas [2006] FCAFC 6
• Texts Cited: W Lonergan, The Valuation of Businesses, Shares and Other Equity, 4th ed
• Category: Principal judgment
• Parties: Zoltan Tomanovic (First Plaintiff); Australian Financial Services Corporation Pty Limited (Second Plaintiff); Global Mortgage Equity Corporation Pty Limited (First Defendant); One Australia Pty Limited (Second Defendant)
• Representation: Counsel: V.R. Gray (Plaintiffs); M.B.J. Lee SC/E. Cowpe (Defendants); Solicitors: Corporate & Civil Legal (Plaintiffs); Harris Friedman (Defendants)
• File Number(s): 2008/282203

Judgment

1 These proceedings involve an application to determine the value of shares in Global Mortgage Equity Corporation Pty Limited ("GMEC"), which are to be acquired by One Australia Pty Limited ("One Australia"), an entity associated with Mr Sayer, from Australian Financial Services Corporation Pty Limited ("AFSC"), an entity associated with Mr Tomanovic. I should first set out the background to that determination.

2 On 18 December 2008, the Plaintiffs brought oppression proceedings in respect of, inter alia, GMEC. The Court of Appeal noted, in its judgment in those proceedings, that Messrs Sayer and Tomanovic were in a business relationship from about 1999 to December 2004 through their respective entities, One Australia and AFSC. That business comprised a finance group and a non-finance group until about June 2003. The finance group's principal activities included mortgage broking, origination and funding and operated through companies that were owned in equal shares by AFSC and One Australia. The non-finance group's principal activities included provision of mortgage management systems to customers and the ownership of two properties situated in Parramatta. Those properties were owned by Argyle HQ Pty Limited ("AHQ") as trustee for the 9 Argyle Street Unit Trust ("9AS Trust") of which AFSC and One Australia were equal beneficiaries. Mr Tomanovic and Mr Sayer each held 50% of the shares in AHQ. GMEC was incorporated in June 2003 and became the holding company of existing entities in the finance group when a third party acquired a 10% interest in GMEC.

3 On 4 May 2011, the Court of Appeal ordered that, if Mr Tomanovic so elected, Mr Sayer must purchase free from encumbrances the shares owned by Mr Tomanovic in AHQ at a price of 50% of the net value of AHQ as at 30 June 2010. Mr Tomanovic has not made that election and no question as to the net value of AHQ needs to be determined in these proceedings, except so far as it may be relevant to the recovery of loans made by GMEC to that entity. The Court of Appeal also ordered that One Australia purchase free from encumbrances the shares owned by AFSC in GMEC at a price equal to 45% of the net value as at 30 June 2010 of GMEC, subject to specified adjustments. Paragraph 4(c)(i) of the orders made by the Court of Appeal provided for the valuation to be undertaken by reference to the market value of the whole share capital of GMEC. Paragraph 4(c)(ii) of those orders requires that that market value not be subject to any adjustment with respect to oppressive conduct. Paragraph 4(c)(iii) of those orders requires that the market value of GMEC be determined subject to adjustment for the net liabilities referred to in that paragraph. Paragraph 4(c)(iv) of those orders provides for the market value of GMEC to be determined after making an adjustment for legal costs expended by GMEC, AHQ or any subsidiary prior to 30 June 2010 in the conduct of the three proceedings referred to in that order.

4 The price to be paid is also subject to an adjustment with respect to any net liabilities of GMEC or their subsidiaries to any of Mr Sayer, One Australia, Mr Tomanovic or AFSC. The Court of Appeal also ordered that there be set-off between the amount owing by Mr Tomanovic and ASFC to Mr Sayer, Ken Sayer Investments Pty Limited and Mortgage House Australia Pty Limited pursuant to a judgment delivered in proceedings in 2009 and the amount owing to One Australia under the buy-out order, such that only the net amount after that set-off is liable to be paid. The Court of Appeal remitted the matter to the Equity Division for determination of these values.

What is the "market value" of the whole share capital of GMEC?

5 The first question to be determined in accordance with the Court of Appeal's orders, and in dispute between the parties, is the "market value" of the whole share capital of GMEC. In Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 at 432, Griffith CJ considered that concept in respect of the valuation of land, observing that:

"In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring 'what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural."

His Honour also observed (at 432) that:

"It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together."

6 The nature of a "market value" test was described in MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167 at [55], in the context of the purchase of shares on exercise of a call option, by Spigelman CJ (with whom Mason P and Hodgson JA agreed) as follows:

"A test of a "market value", whether in a statutory or contractual context, usually invokes the test long established and frequently applied in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 esp at 432 and 440-441 of a willing but not anxious purchaser and vendor, bargaining with each other. This approach was most recently expressed in a joint judgment of three judges of the High Court in Marks v GIO Australia Holdings Ltd [1988] HCA 69; (1998) 196 CLR 494 at 514:

"... The value ... is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it."

7 The range of accepted valuation methodologies was noted by Dixon J in Smith v Gould [2012] VSC 461 at [125], where his Honour observed that:

"In theory, all valuation methodology for a business is based on its cashflow. Discounted cashflow is the most commonly accepted valuation methodology. Other common valuation methodologies include capitalisation of future maintainable profits, capitalisation of future maintainable dividends, value of net tangible assets on a going concern basis, or notional realisation of assets (hypothetical liquidation)."

8 The Plaintiffs rely on an expert accounting report of Mr Meredith dated 5 September 2012. The Defendants rely on an affidavit of Mr Sayer sworn 1 July 2013 and on an expert accounting report of Mr McGuiness dated 28 May 2012 and a reply report dated 31 July 2013. The Court made orders for conferral of the accounting experts and Mr Meredith and Mr McGuiness issued a joint report dated 21 August 2013 setting out matters on which they agreed and disagreed.

9 Both accounting experts recognised that GMEC comprised two distinct businesses, one of which involved mortgage brokerage and the other of which involved origination and lending (McGuiness First Report [3.2.1], Meredith Report [3.1.1.1]-[3.1.1.2]; Joint Report Ex J1 [2.1.1]). Both accounting experts proceeded on the basis that their task is to determine the market value of the relevant shares, although there are significant differences between them as to the methodology to be adopted in that determination (Meredith Report [1.5.2], McGuiness First Report [3.1.1], Joint Report Ex J1 [4.1.2]). Both experts agree that "market value" is to be assessed in accordance with Spencer v Commonwealth of Australia above, as the value that a hypothetical prudent purchaser, who is a willing but not anxious buyer, would be prepared to pay to a vendor, who is willing but not anxious to sell, in the circumstances where both buyer and seller are reasonably informed of relevant information.

10 Mr McGuiness adopted the test of "fair market value" for his valuation of the shares in GMEC (McGuiness First Report [3.1.1]), which he defined in substantially the terms identified in Spencer v Commonwealth of Australia, as follows:

"The fair market value of an asset, business or equity interest is the value that a hypothetical prudent purchaser, who is a willing but not anxious buyer, would be prepared to pay to a vendor, who is willing but not anxious to sell, in circumstances where both buyer and seller are reasonably informed of operational and financial details."

Mr McGuiness also noted that a buyer would consider the financial benefits he or she would obtain by being the owner of the particular asset after considering any inherent risks attached with it in determining that price (McGuiness First Report [3.1.2]). He distinguished "market value" from "special value", being the value that a "special purchaser" with particular connections or relationships with the business would be willing to pay and notes that a "special purchaser" may be willing to pay more than fair market value in recognition of extra benefits available to them (McGuiness First Report [3.1.3]). Mr Meredith adopted the same standard of value and also referred to the test in Spencer v Commonwealth of Australia (Meredith Report [1.5.2.3], [3.4.1]). Both experts agreed that a valuation should have regard to information that was reasonably available at or about the date of valuation, 30 June 2010, and should not have regard to information after that date which would involve use of hindsight (McGuiness First Report [3.1.20], Meredith Report [3.3.2], Joint Report Ex J1 [4.1.20]).

11 The Plaintiffs contend that the Court should have regard, in determining the market value of the shares in GMEC, to wider concepts of "value" such as those articulated in Brisbane Water County Council v CSD [1979] 1 NSWLR 320 at 326, where Waddell J distinguished between the "value" of an item and the "price at which it might change hands in particular circumstances" and in Russell v Minister of Lands (1899)17 NZLR 241 at 235, as cited in Spencer v Commonwealth of Australia above at 435, where the Court distinguished the "value" of land compulsorily acquired from its "mere saleable value". I cannot accept this submission, since the orders made by the Court of Appeal define the task which was to be performed by this Court, which is to assess not the "value" of the relevant shares in a broader sense but their "market value". The term "market value" necessarily depends upon the saleable value of the shares on the relevant market.

12 The Plaintiffs also submit that:

"Where the purpose of the valuation exercise is to fix a price for a compulsory acquisition, the Court must be at pains to ensure that the party whose property is being taken from him is not under-compensated."

The Plaintiffs distinguished that position from that of a freely transacting party who has the liberty to decide whether to accept or reject a valuer's estimate of value. I understand the Court of Appeal's directions as to the manner in which the valuation is to be undertaken to reflect a determination that "market value" in its usual sense would represent a fair value for AFSC's shares in GMEC in all the circumstances and a proper price to be paid by One Australia to acquire AFSC's interest in GMEC, consistent with the applicable principles: see, for example, Smith Martis Cook & Ragan Pty Ltd v Benjamin Cook Pty Ltd [2004] FCAFC 153 at [71]-[75]. The task I am required to undertake is to determine the value of the GMEC shares in accordance with the orders made by the Court of Appeal and the evidence before me; that should ensure that the Plaintiffs are not "under-compensated"; but it is not open to me to adopt a different approach from that which the Court of Appeal has directed to ensure that the Plaintiffs are more generously compensated.

Earning-based valuations

13 I directed each party to provide a statement of the valuation methodology that they would propound prior to the hearing. The Defendants indicated that they relied on a capitalisation of earnings method of valuation in respect of GMEC's mortgage brokerage business and a discounted cashflow method of valuation in respect of GMEC's origination and lending business as outlined in Mr McGuiness' First Report and his Response Report. It is convenient to address this valuation first, since Mr Meredith accepted that an earnings-based valuation would be the usual form of market valuation, although he adopted a different approach in this case on the basis that that usual form of valuation was not possible or appropriate in this case.

14 Mr McGuiness determined the market value of GMEC as a whole by taking the value of the operating businesses, comprised of the mortgage brokerage business and originating and lending business, and then making an adjustment for the market value of surplus assets and non-operating liabilities to determine the market value of GMEC as a whole (McGuiness First Report [7.1.27-29]). In undertaking that analysis, Mr McGuiness had regard to the financial results of GMEC recorded for the financial years ending 30 June 2007, 30 June 2008, 30 June 2009 and 30 June 2010 and also to cashflow statements, budgets and other financial information and documents referred to in section 4 of his First Report. Mr McGuiness recognised that there were difficulties in establishing the reasonableness of the figures in GMEC's budget models by reference to the actual results of past periods; and that those models were complex and detailed and provide for the build-up of revenues, costs and cashflows on the basis of integers applicable to cashflows rather than accounting profits (McGuiness Report [3.2.4]). Mr McGuiness in turn undertook a replication of GMEC budget models, in a simplified model using inputs and balances set out in the worksheets in the budget models in section 4.9 of his First Report. He also noted that the budget adopted an aggressive assumption as to the increase in the value of the loan book, by comparison with GMEC's recent experience of limited settlements of mortgages.

15 Mr Sayer gave evidence as to the structure of GMEC's business at the valuation date of 30 June 2010. His evidence was that, as at that date, GMEC did not trade but paid some expenses of the GMEC Group including consulting fees. The Paladin Process Pty Limited operated as an administration company, held an Australian financial services licence and employed most employees in the GMEC Group and otherwise did not trade. There were approximately 38 "Mortgage House" branches throughout New South Wales, Victoria, Queensland and Western Australia, less than the number of branches that had existed in 2008-2009 (Sayer [6]). Another entity, Mortgage House Broker Services Pty Limited provided mortgage broking services on a "broker to broker" basis. A third entity, Mortgage House of Australia Pty Limited ("MHA") was the principal trading entity in the GMEC Group and provided retail mortgage broking services to the public. Mr Sayer's evidence was that MHA sold home loan products of third party lenders to home owners; sold "Mortgage House" branded mortgage home loan products to home owners which were funded through the Adelaide Bank and the Paladin Mortgage Trust; acted as a representative of a number of lenders for the sale of home loan products; and obtained income from upfront fees and commissions received from third party lenders. Another entity, Paladin Wholesale Funding Pty Limited provided sub-broking mortgage services to major mortgage brokers (Sayer [6]).

16 Mr Sayer also gave evidence as to other financial information prepared by GMEC, which was of considerable significance to the valuation undertaken by Mr McGuiness, but (with the exception of GMEC's balance sheet as at 30 June 2010) were of little significance for Mr Meredith's valuation approach. Mr Sayer's evidence was that, at relevant times, GMEC prepared rolling two year budgets for internal management services which were revised as necessary (Sayer [9]). Mr McGuiness was provided with GMEC's budgets for the financial years ended 30 June 2009 and 2010 and with an extract from GMEC's budget for the financial year ended 30 June 2011, which were tendered (Ex D4) (Sayer [9]), and Mr Meredith was provided the same information.

The valuation of the origination and lending business

17 Mr Sayer gave detailed evidence as to the position of the origination and lending business as at the valuation date, 30 June 2010. Mr Sayer's evidence was that, relevantly, the principal trading activity of the Paladin Mortgage Trust (No. 1) ("Trust") had been as a home loan lender on security of mortgages over residential land (Sayer [7]). Perpetual Trustee Company Limited was the trustee of the Trust as at the valuation date and MHA was the principal beneficiary of that Trust (Sayer [7]). Mr Sayer noted that the Trust's ability to lend money on security of mortgages over residential land depended on its ability to borrow money itself on competitive terms for on-lending purposes. Mr Sayer's evidence was that GMEC did not expect any significant growth in the origination and lending business of the Trust at the valuation date, for reasons that I will note below.

18 Mr Sayer's evidence was that, as at the valuation date, the Trust's only source of finance to onlend was provided under a Senior Note Facility with the Commonwealth Bank of Australia ("CBA") dated 1 February 2007 ("Warehouse Facility"), which had initially had a limit of $750 million. His evidence was that it had previously been intended that the Trust would repay the Warehouse Facility by securitising mortgages to third parties and that the global financial crisis adversely affected the mortgage securitisation market and the Trust was unable to repay the Warehouse Facility; the limit to the Warehouse Facility was reduced on 15 January 2009 to $400 million; CBA undertook a review of the Warehouse Facility in April 2010 and further reduced its limit to $230 million; and by that time, the Warehouse Facility was almost fully drawn and there was very little capacity for the Trust to make new loans available.

19 Mr Sayer's evidence was that CBA had also increased its margin under the Warehouse Facility from 0.20% as at 1 February 2007 to 1.75% as at the valuation date which made the Trust's mortgage products uncompetitive and that, by the valuation date, the Trust was advising existing borrowers who wanted to refinance or take out fresh mortgages to refinance elsewhere. As a result of the impact of the global financial crisis, Mr Sayer did not believe the Trust could source finance elsewhere at the valuation date and did not believe the Trust could expect any significant growth after the valuation date (Sayer [11]). At the valuation date, he believed the business of the Trust was in decline and he did not believe the Trust had the capacity to make new loans. Mr Sayer's evidence was that, as a result of its agreements with borrowers, the Trust also did not expect to receive the repayment of any deferred establishment fee on any loan exceeding 5 years' duration and, since the Trust was not lending at the valuation date, GMEC did not expect to receive the payment of any deferred establishment fees after 2015 (Sayer [22]).

20 Important aspects of Mr Sayer's evidence as to the position of the Trust are supported by GMEC's Special Purpose Annual Financial Report for the financial year ended 30 June 2010. That Report discloses that the Trust had drawn down $223 million of its limit of $230 million at 8 January 2010. The audit report for the Special Purpose Annual Financial Report also referred to the dates to which the warehouse facility and working capital facility had been extended and noted that:

"As a result of these matters there is significant uncertainty whether the Trust and MHA will continue as a going concern beyond this date, and therefore whether they will realise their assets and extinguish their liabilities in the normal course of business and that the amount stated in the financial report. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Trust or MHA not continue as a going concern."

21 Mr McGuiness also noted evidence of a substantial reduction from GMEC's levels of activity before the global financial crisis in the middle of 2008, with a substantive reduction in the levels of origination as broker and the levels of origination for the Trust with little new business in the year ended 30 June 2010 (McGuiness First Report [4.2.2]). Mr Sayer's evidence in cross-examination also recognised the impact of the global financial crisis, and he observed that:

"it was nasty, confidence disappeared, banks would not lend to each other, investors pulled out, liquidity virtually evaporated overnight. We could not obtain funding and if we did it was very expensive. As a result of that Macquarie Bank who was our main tenant [sic] pulled out on or about 2008" (T36).

The audit report for the Special Purpose Annual Financial Report dated 30 June 2010 also referred to significant uncertainty regarding the going concern status of the entity. Mr Sayer's evidence, which is supported by the matters to which I have referred and which I accept, indicates that the origination and lending business was, at the valuation date, at least unlikely to grow and more likely in decline.

22 Mr McGuiness adopted a discounted cashflow valuation (as described in paragraphs [3.1.9] ff of his First Report) as his primary method of valuation for GMEC's origination and lending business (McGuiness First Report [3.2.5]). Mr McGuiness expressed the view that the discounted cashflow method was appropriate for GMEC's origination and lending business where GMEC was expecting that activity to run down, and noted that the use of a capitalisation of earnings method would generally be applicable where there was an expectation of sustainable growth, which was not the case with the origination and lending business (McGuiness First Report [3.2.6]).

23 Mr McGuiness determined the expected profitability and expected cashflows to equity of the origination and lending business in section 6.2 of his First Report. Mr McGuiness in his Response Report refers to a different basis for the calculation of the trustee fees to the loan book, disclosed in Mr Sayer's affidavit, than had been assumed in his First Report. He notes that the relevant adjustment would change the range of business values from his earlier report of $4.43m-$4.85m (McGuiness First Report [7.1.6]) to $4.51m-$4.85m (McGuiness Response Report [2.3.6]) and would change equity values from $2.69m-$3.11m (McGuiness First Report [7.1.27]) to $2.77m-$3.11m (McGuiness Response Report [2.3.6]). Mr McGuiness expresses the view that this difference is not material and Mr Meredith does not express a contrary view. I have made no adjustment in this judgment for this matter.

24 Mr McGuiness applied a discount factor in the range of 16.75% to 17.25% to value the origination and lending business at between a low of $0.72 million and a high of $0.73 million (McGuiness First Report [6.2.3], [6.2.7]). While the expert accounting witness retained by the Plaintiffs, Mr Meredith, did not accept the appropriateness of this methodology, for reasons that I will note below, he did not seek to comment on the detail of its application. Mr McGuiness also undertook a "cross check" of the valuation on a discounted cashflow basis, by undertaking a capitalisation of earnings analysis, which derived a somewhat higher valuation of $0.81 to $0.86 million (McGuiness First Report [6.3.14]).

25 Mr Meredith accepted that a discounted cashflow methodology (as adopted by Mr McGuiness in respect of GMEC's origination and lending business) would generally be an appropriate valuation methodology and observed in his oral evidence that:

"I subscribe to the view that the DCF methodology generally speaking is the most appropriate methodology to apply ..." (T87).

26 However, Mr Meredith rejected the use of a discounted cashflow methodology to GMEC or any part of its business in the particular circumstances. In the Joint Report, Mr Meredith observed that:

"The foundation for the application of the DCF method is a long-term cashflow forecast, preferably covering a period of 10 years, prepared by those persons tasked with the stewardship of an enterprise, such as shareholders, directors and management, and based on their vision, strategic plans, business plans and business model for the enterprise. A long-term cashflow forecast for GMEC meeting the foregoing criteria prepared prior to or around 30 June 2010, is not available. Therefore, in my opinion, it is not possible to apply the DCF valuation methodology to GMEC to determine a fair market value of GMEC as at 30 June 2010" (Ex J1 [8.1.4]).

27 Mr Meredith similarly emphasised in the oral concurrent evidence of the experts that he considered that the foundation for the application of a discounted cashflow methodology was a long term cashflow forecast, in the order of 10 years, prepared by persons tasked with the stewardship of the relevant enterprise (T87). He maintained his rejection of the use of an earning-based methodology in this case in cross-examination, on the basis that GMEC management did not prepare strategic business plans or 10 year forecasts and he considered that he was therefore unable to undertake a valuation on that basis (T88). Mr Meredith accepted in cross-examination that he had not asked GMEC whether or not there was a business plan or strategic plan of the kind he required (T135); however, Mr Sayer did not say that such long term strategic plans or forecasts were prepared by management not did Mr McGuiness rely on them in his valuation.

28 Mr Meredith's second requirement for such a valuation was that the relevant long term forecasts had been prepared by management personally, rather than, for example, developed by the valuer from forecasts prepared by management covering a shorter period. That requirement was not directed to a question whether the valuer had adequate information to prepare such a forecast, since Mr Meredith rejected the possibility that a valuer could prepare such a forecast in principle, and irrespective of whether he or she had adequate information to do so. Mr Meredith again did not identify any reference in the valuation literature to his requirement that only management can prepare the necessary plans or forecasts.

29 After Mr Meredith had made an opening statement in concurrent expert evidence, he and Mr McGuiness had discussed their respective views and he had been cross-examined, I asked him about how a valuer could go about a valuation if management had not prepared the strategic and business plans and cashflow forecasts that he considered necessary, and Mr Meredith indicated that a willing purchaser could ask management to prepare the plans and forecasts with the valuer's assistance or otherwise form a view as to the maximum price it would be prepared to pay on the basis of publicly available information (T170). Mr Meredith did not consider that such a valuation could be prepared if management had not prepared long-term plans and forecasts or they were not available to the valuer, for example during a global financial crisis scenario where management considered long term forecasts were not reliable or in a hostile takeover where they were not made available.

30 On the other hand, Mr McGuiness expressed the view that:

"That a company does not present long term budget models in one form or another does not prevent a valuer from making reasonable estimates of the expected integers relevant to forecast revenues, costs, earnings and cashflows. A valuer is expected to challenge inputs in a company's forecasts and make his or her own assessment." (Joint Report Ex J1, [8.1.20]).

Mr McGuiness also indicated that he did not agree with Mr Meredith's observations as to the nature of information required for a discounted cashflow forecast, and he expressed the view that GMEC's budget models provided information as to the nature, timing and extent of integers relevant to its expected revenues, costs, profitability, cashflow and other factors (Joint Report Ex J1 [8.1.22], [8.1.24]). Mr McGuiness also took issue with Mr Meredith's suggestion that a valuer must arrive at a "definitive view", noting that that would not be achievable given the uncertainties in the financial performance of any business, and expressing the view that a valuer's task was "to provide reasonable estimates of the expected integers in the analysis so that the indicated values are unbiased", in the sense that actual values are equally likely to be higher or lower than expected values (Joint Report Ex J1 [8.1.25]-[8.1.26]).

31 Mr Meredith also expressed the view that GMEC's budget for the 2011 year was of "inferior quality so far as providing confidence that it might be used to support a valuation process" (Joint Report Ex J1, [8.5.2]). Mr Meredith further observed, with perhaps an excess of rhetoric, that:

"To attempt to synthesise what an estimate of earnings for GMEC would have been prior to or around the 30 June 2010 based solely on a valuer's retrospective invention and assumption of facts at that date and to then value an enterprise on that estimate of earnings is self-fulfilling and unequivocally fundamentally flawed." (Joint Report Ex J1 [8.5.3])

32 Mr McGuiness expressed the contrary view in the Joint Report, observing that GMEC's budget models provided sufficient information for a valuer to understand the integers inherent in those models, and that he had made assessments of those integers having regard to the past performance of the GMEC businesses, industry sectors and other factors, and that the absence of long-term budget models did not prevent a valuer from making reasonable estimates of expected integers relevant to forecast revenues, costs, earnings and cashflows (Joint Report Ex J1 [8.5.9]-[8.5.14]). He expressed the view that GMEC's budget models are more detailed than is regularly found in businesses of a comparable scale, and provide an indication of the integers that determine revenues, costs, profitability and other factors in a discounted cashflow, and provide a basis from which reasonable assessments of the nature, timing and extent of integers inherent in a discounted cashflow or capitalisation of earnings can be made (Joint Report Ex J1 [8.5.17]-[8.5.18]).

33 Mr Meredith also initially raised a wider concern as to the reliability of the information available to him, although he qualified that concern in his cross-examination. In the Joint Report, Mr Meredith observed that:

"the information [he was provided by GMEC] was not sufficiently detailed or reliable and in some cases independent or appropriate to use in assessing a market value of GMEC" (Joint Report Ex J1 [2.2.4]).

However, in cross-examination, Mr Meredith indicated that that there was nothing he could recall about the information that he was provided which made him question its reliability or whether it was appropriate for use (T164) and he accepted that the part of the Joint Report referring to an issue as to the reliability of the information:

"was prepared very rushedly [sic] but I could have chosen better words" (T165).

34 Mr Meredith or, at least his staff, in fact commenced a discounted cashflow analysis in the course of preparing his report but did not compete that analysis because, in his view, the information available to him was incomplete (T138-139, 145, 147-148, 158). This does not appear to arise from any lack of cooperation by the Defendants, since email communications between the chief financial officer of GMEC, Mr Jones, and Mr Meredith between June 2012 and September 2012 offered Mr Meredith assistance as to any further information which he needed to complete the valuation, and Mr Meredith did not request the further information that he considered he needed. It appears that Mr Meredith did not make further inquiries to obtain that information given the view he took as to its reliability because of Mr Sayer's interest in the acquisition of shares in GMEC. It does not seem to me that the Plaintiffs have established, as a matter of fact, that the fact that information was provided to the valuers by GMEC raises, in itself, as any question as to its veracity. Mr Meredith also explained his not seeking this further information on the basis that it was important that he remain impartial (T159-160, 162). I find it impossible to see that an expert seeking necessary information from an entity that is the subject of his analysis could prejudice his independence or impartiality.

35 It also appears that Mr Meredith's analysis of some of the information provided to him, and particularly information as to revenue and costs in respect of commission income in the loan book model, was incomplete. Mr Meredith's evidence in cross-examination was that:

"I don't recall whether those costs, to be frank, were included in the loan book. I did - the loan book model that I was given, I do recall that there was a difference in the value generated by the model referred to as a loan book but calculating the net present value of the trailing commissions of approximately 1.5 million. I think that the model that I was given by GMEC derived a value of $20.6 million and ultimately the value reported in the financial statements of 2010 was of the order of $19.27 million.

So there was some difference between that model and the figure recorded in the financial statements. That point I guess to be very frank, your Honour, I lost a bit of faith in that model as I couldn't reconcile the two amounts so I wasn't sure what the correct number was or in fact whether the auditors had questioned the calculation and perhaps called for a reduction in recording of the value" (T109-10)

This evidence had the difficulty that the difference in the loan book model to which Mr Meredith referred resulted from a difference in the applicable discount rate, a variable in GMEC's loan book model, as between that model and GMEC's accounts for the year ended 30 June 2010. Mr Meredith had made no inquiry of GMEC to identify the reason for the difference nor recognised it himself before he "lost confidence" in the model (T160-161). It was put to Mr Meredith in cross-examination that the loan book model applied a discount rate of 10.9%; GMEC's accounts for the year ended 30 June 2010 applied a discount rate of 12%; and that the change to that single variable for the discount rate in the model from 10.9% to 12% reconciled the figures in the loan book to the statutory accounts. Mr Meredith was unable to recall any of those aspects of the model, and his evidence was that he did not contact GMEC's chief financial officer, who had been providing him with relevant information, to seek to inquire as to the apparent inconsistency, because of his concerns as to maintaining the independence of his report (T161). As I also noted above, I do not accept that that independence would have been compromised by inquiring whether there might be an explanation for an apparent discrepancy, since it would have been open to Mr Meredith to test the answer he was given had he asked the question. Had he done so, that apparent discrepancy would have been resolved.

36 In my view, Mr McGuiness' explanation of the application of the discounted cashflow methodology to the origination and lending business was convincing, and I am not persuaded by Mr Meredith's criticisms of the application of this methodology, having regard to the matters to which I have referred above. In particular, Mr Meredith did not identify any academic or professional commentary which supports the view that he expressed concerning the necessity of 10-20 year forecasts proposed by management personally and it might be thought that, in periods of change in the business environment or the economic environment generally, there may be difficulty in producing reliable long-term estimates of future cashflows for a period of 10-20 years. It seems to me that I can properly also have regard to the fact that Courts have frequently accepted expert evidence adopting earnings-based methodologies by reference to shorter time periods: for example, Drinkwater v Caddyrack Pty Ltd [1999] NSWSC 851; Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 3) [2011] FCA 1370; (2011) 285 ALR 297. An earning-based valuation based on information for a shorter period that Mr Meredith required, or prepared by party other than management such as an investment analyst based on publicly available information, may need to allow for a higher level of uncertainty than a valuation based on the information which Mr Meredith required, but it does not seem to me to be either worthless or impossible to undertake. I am therefore not persuaded that Mr Meredith's views in respect of this methodology or its application to GMEC's origination and lending business should be accepted.

The valuation of the mortgage broking business

37 Mr McGuiness adopted a capitalisation of earnings method (as described at paragraphs [3.1.16]-[3.1.17] of his First Report) as his primary method of valuation for GMEC's mortgage broking business (McGuiness First Report [3.2.5]). Mr McGuiness initially determined the relevant inputs into his valuation, which included the weighted average cost of capital, a rate of growth at 3%, revenues, depreciation and capital expenditure and working capital as a percentage of revenue (McGuiness First Report [5.1.6]) and then determined earnings multiples to be applied to earnings and cashflows (McGuiness First Report [5.2.2]-[5.2.3]). He determined an adjusted enterprise value and market value of the brokerage business, on that basis, as in the range of $3.7 million to $4 million (McGuiness First Report [5.2.6], [5.2.11]). He also undertook a sensitivity analysis as to that valuation in respect of the rate of growth, which demonstrated that the value of the business decreased as its rate of growth increased. He noted that this somewhat unusual outcome reflected the additional working capital investment that would be required to sustain the growth of the business (McGuiness First Report [5.2.10]). Mr McGuiness also undertook a discounted cashflow analysis to cross-check his capitalisation of earnings valuation of the mortgage brokerage business, which he concluded indicated values in the range of $3.7 million to $4 million (McGuiness First Report [5.3.7]). Again, it seemed to me that Mr McGuiness' explanation of the application of this methodology, which was vigorously tested in cross-examination, was convincing. Mr Meredith did not comment on the detail of this valuation, having commenced but not completed preparation of his own model adopting a discounted cashflow methodology in the circumstances to which I referred above.

38 Mr Meredith expressed the view that a capitalisation of earnings methodology cannot be applied in this case because GMEC had a relatively unstable pattern of historical earnings and it was not possible reliably to estimate future maintainable earnings for GMEC (Meredith Report [3.4.3.5]); Mr Meredith's view is that a reliable estimate of future maintainable earnings is a critical element of the methodology and, implicitly, that it is not possible to take into account variability of earnings in such a valuation. Mr Meredith maintained that view in the Joint Report, noting that it was not possible to apply a multiple of future maintainable earnings methodology to value GMEC as that methodology could only be applied in circumstances where the enterprise being valued had, historically, demonstrated a stable earnings record over 3-5 years, and GMEC did not demonstrate stable earnings in that period (Joint Report Ex J1 [8.1.7]). The correctness of this proposition stands or falls with Mr Meredith's assertion of it, since Mr Meredith did not identify any academic or professional literature which expressed the view that he expressed. The Defendants point out, and I accept, that this methodology has also been accepted by the Courts in an appropriate case: Re Quest Exploration Pty Ltd (1992) 6 ACSR 659; Re DG Brims & Sons Pty Ltd (1995) 16 ACSR 559 at 589; Drinkwater v Caddyrack Pty Ltd above; Smith Martis Cook above. I have addressed other issues raised by Mr Meredith as to the reliability and independence of the information provided by GMEC above. I am not persuaded by Mr Meredith's criticisms of the application of this methodology in this case.

Further adjustments made by Mr McGuiness

39 Mr McGuiness then adjusted total value for GMEC's mortgage brokerage and origination and lending businesses by deducting interest bearing current liabilities of $7.05 million and adding cash of approximately $3.8 million to determine an equity value before surplus assets and non-operating liabilities, and then further adjusted his valuation for such assets and liabilities as set out in paragraph 7.1.21 of his First Report. Mr McGuiness included a net liability of $3,040,000 of GMEC to Mr Sayer for employment services and a liability for legal costs of $1,568,431 at this point, before determining the value of GMEC. The Defendants contend that that approach was consistent with orders 4(c)(ii) and (iv) made by the Court of Appeal (McGuiness First Report [7.1.21]-[7.1.26]). I will address that question in paragraph 95 below. On that basis, Mr McGuiness assessed GMEC's market value as in the range of $2.7 million to $3.1 million (McGuiness First Report [7.1.27]-[7.1.29]).

The Plaintiffs' wider criticisms of an earnings-based valuation

40 In submissions, the Plaintiffs advanced several criticisms of the earnings- based valuation that overlap with, but are wider than, the views expressed by Mr Meredith.

41 The Plaintiffs contend that an earnings-based valuation is not suitable because:

"There are too many facts which are essential constituents of any valuation based upon projections of future earnings and projections of future cashflows which facts are unknown and unknowable, so that the result of using these methods of valuation necessarily produces as the valuation of GMEC a figure which is nothing more than the product of elaborate arithmetic which is, in truth, based upon sheer speculation."

42 The Plaintiffs refer to the observations of Sir Kenneth Jacobs in Albany v Commonwealth (1976) 12 ALR 201 at 210ff concerning a discounted cashflow valuation undertaken by the plaintiffs in that case, which related to the value of land that had been compulsorily acquired by the Commonwealth. I do not understand those observations to be directed to the utility of discounted cashflow valuations generally, as distinct from a consideration of the issues arising in respect of the valuation of the land at issue in those proceedings. The Plaintiffs also draw attention to the observation of Sir Anthony Mason in Federal Commissioner of Taxation v St Helens Farm (1981) 146 CLR 336 at 381 that "[v]aluation is not a matter of precise mathematical calculation". However, the fact that valuation is not a matter of exact science, or that different persons might assess the value of an item differently, is not itself a reason not to adopt an accepted valuation process, but is instead a matter that is well recognised in the authorities: Drinkwater v Caddyrack above at [26]-[27].

43 The Plaintiffs also characterise the discounted cashflow and capitalisation of earnings methodologies adopted by Mr McGuiness in respect of GMEC's mortgage origination and lending business and brokerage business respectively as involving "speculation". It is obvious that any forward-looking exercise, such as an estimate of future cashflow, is potentially less certain than an exercise that has regard to historical facts. The Plaintiffs contend that a discounted cashflow valuation made in 2000 could not, for example, have anticipated the global finance crisis commencing in August 2008. That is no doubt correct, but the Courts have been prepared in various areas, such as the calculation of damages for loss of opportunity, to accept something less than absolute certainty as to future events.

44 The Plaintiffs also seek to distinguish between forward-looking exercises which have a degree of certainty, of which they give the example of actuarial tables of life expectancy based upon verifiable data, and evidence of the earnings of a company in the future. It seems to me, however, that this question is one of degree and I do not consider that it is not open to an expert, having made an appropriate assessment of present earnings, budgets and other relevant variables, to project them forward to give rise to an estimate of future earnings or cashflows for the purposes of a discounted cashflow or capitalisation of earnings valuation. A fundamental difficulty with the Plaintiffs' approach is that, if it were correct, it would exclude the use of discounted cashflow or capitalisation of earnings methodologies in many or all circumstances. In doing so, it would prevent the Court undertaking a "market valuation" in those circumstances unless that is understood as an assets-based valuation in every case. The Courts have in fact adopted valuations on a discounted cashflow or capitalisation of earnings basis in many cases, including those to which I have referred above.

45 The Plaintiffs point out that Mr McGuiness referred in cross-examination to the steps taken in economic modelling to develop a "measure of central tendency" (T197). These seem to me to be properly the application of accounting expertise rather than an exercise in "speculation" as the Plaintiffs contend. The Plaintiffs also point out that Mr McGuiness' valuation would have differed had he adopted a projected growth rate or 2011-2015 of 5.1% per annum, referred to in an Ibis industry report on which he relied, as distinct from a CPI growth rate of 3% per annum adopted by BIS Shrapnel. It seems to me that this proposition establishes no more than the fact, which seems to be hardly controversial, that any expert assessment of future earnings will depend upon the inputs into it, which will often be a matter for the application of the expert's expertise. I do not accept that this invalidates the application of a valuer's or accountant's expertise in this situation. It was open to the Plaintiffs to undertake, for example, a sensitivity analysis that would have demonstrated the different values which would arise from adopting different rates of growth, and place the Court in a position to adjust for the sensitivity of the valuation to that variable. They have chosen not to adopt that course, or indeed to lead expert evidence establishing the result of a capitalised earning or discounted cashflow analysis adopting any particular alternative rate of growth.

46 The Plaintiffs also contend that the valuation undertaken by the Defendants is dependent on information provided by GMEC management which they contend is, in truth, Mr Sayer, who is said to be, in substance, the purchaser of AFSC's shares. The Plaintiffs contend that:

"Any information derived from that source cannot be accepted as objective and proper for the Court to accept as the basis for determining a valuation on which Mr Sayer's interests are to acquire the AFSC shareholding in GMEC."

47 It seems to me that there are several difficulties with this proposition. First, the Court of Appeal directed that a "market value" of the relevant shares be determined and it was common ground between the parties that such a value would be determined by reference to the price paid by a willing but not anxious purchaser from a willing but not anxious seller in an arm's length transaction. One might expect that, in such a transaction, a willing but not anxious purchaser would in fact seek information from the vendor as to the business to be acquired, rather than eschewing such information on the basis that the vendor had a self-evident interest in the sale of the business, notwithstanding that the purchaser might well then undertake analysis of that information to test its veracity.

48 The Plaintiffs advance an analogy which is perhaps helpful in testing that proposition, observing that:

"In substance, the position is the same as that of a farmer who has to buy particular farmland at a price based upon its estimated future productivity and the value is dependent upon the farmer as the source of information as to the future productivity of the land. Even if the valuer were objective, the source of the data on which the valuation is based is contaminated. The farmer is a judge is his own cause. The same is true of Mr Sayer in this case."

One might ask, rhetorically, why would the vendor of the farmland not seek information from the farmer who is the potential purchaser of farmland as to its anticipated productivity, and then take such steps as he or she considered appropriate to verify the accuracy of that information? The Plaintiffs seek to distinguish the position where information could be sought from the vendor, and verified against other information, by contending that there is no external benchmark against which a valuer could have assessed the credibility of long term cashflow predictions for GMEC. However, that proposition is not self-evident where there were, of course, other mortgage broking businesses against which the income, costs and other financial variables within GMEC's business could have been assessed, but were not, to advance any challenge which the Plaintiffs sought to raise in respect of the information provided by GMEC to the accounting experts.

49 Second, so far as the evidence goes, the information provided to valuers for the respective parties was provided by GMEC management, and primarily its Chief Financial Officer, rather than Mr Sayer and there was no evidence of any particular aspect in which that information was not accurate or was distorted by reason of the fact that it was provided by GMEC management. It was open to each of the valuers to test the integrity of the information provided, and it is apparent that at least Mr McGuiness took steps to do so. Third, while the Plaintiffs reject reliance on information provided by GMEC to undertake an earnings-based valuation, the statement of financial position (or balance sheet) of GMEC as at 30 June 2010 on which Mr Meredith places exclusive reliance (as I will note below) in undertaking an "assets-based" valuation included a substantial item reflecting the present value of future cashflow in respect of commissions, which was determined by reference to the loans model prepared by GMEC. It seems to me that neither source of information was any less "contaminated", to use the Plaintiffs' language, by GMEC's involvement.

50 The Plaintiffs also contend that Mr McGuiness' valuation did not have proper regard to collateral advantages such as the possibility of a future stock exchange flotation (T36), the ability to use the economic group to raise money (T44) and the remuneration that a controller of GMEC could draw from the business (T225). I have noted above that Mr McGuiness drew attention to the difference between "market value" on the one hand and "special value" on the other. Mr McGuiness also noted in cross-examination that whether a buyer sought to personally assume executive control of GMEC and take the remuneration previously paid to Mr Sayer was not relevant to the valuation, which depended on the resources required by GMEC to continue to operate and the arm's length costs of retaining those resources, which would include retention of a chief executive or other senior management (T180).

51 In any event, it seems to me that the possibilities on which the Plaintiffs rely to advance these submissions also depend on speculative, and unproved, assumptions. The possibility of a listing of GMEC was wholly speculative. Mr Sayer denied that he was concerned in 2010 with the possibility that at some future time GMEC might become listed on the stock exchange, and his evidence as that his only concern was "with survival" at that time (T36). I accept that evidence which seems to me to be plainly consistent with the objective probabilities. There is no reason to suggest that the ability to use the economic group to raise money, which is available to any economic entity, is not taken into account in orthodox valuation methodologies. The value that the remuneration that a controller of GMEC could draw from it would have to that controller would depend on whether that remuneration was higher or lower than the remuneration which he or she could earn in another occupation, without controlling GMEC, which is a matter which would depend upon the particular identity of a particular purchaser.

52 The Plaintiffs also contend that the result of Mr McGuiness' valuation, as between $2.7 million and $3.1 million as at 30 June 2010, is "unrealistic", and that this is demonstrated by the fact that another financial institution paid $2 million for a 10% interest in GMEC in 2003, which was, as the Plaintiffs acknowledge, 7 years before the valuation date. The Plaintiffs acknowledge that that institution sold its 10% shareholding in GMEC to One Australia in November 2008, which they recognise was during the global financial crisis, and they contend that that sale attributed a value of $7.5 million to GMEC as a whole. It seems to me that the price for which that institution acquired an interest in GMEC 7 years earlier is of no assistance in testing the valuation, given the evidence, which I accept, that GMEC's business was at its strongest in the mid 2000's and thereafter in decline. It also seems to me that the sale price for a 10% interest in the business in November 2008, some 18 months prior to the valuation date, is also of limited assistance where the global financial crisis continued for a considerable time after that date and where, as Mr Sayer's evidence demonstrated, mortgage broking businesses were facing substantial business challenges and competition from the retail banks in that period.

53 The Plaintiffs also contend that Mr McGuiness' valuation has the result that One Australia would acquire assets worth $12.5 million net (including, they contend, future trail commissions with a net present value of nearly $20 million, access to a source of remuneration in excess of $900,000 per annum and a financial services industry business having particular characteristics) at a valuation of $2.7 million-$3.1 million. It seems to me that that submission has the difficulty that it assumes that the value of future trail commissions are that figure, notwithstanding the evidence that it did not take into account the costs of earning such commissions and the qualifications to the financial reports (to which I will refer below); assumes that access to such remuneration had a value notwithstanding the matters to which I have referred in paragraph 51 above; and does not have regard to the evidence as to the challenges facing GMEC's business, including the question as to whether it could continue as a going concern, noted in its Special Purpose Annual Financial Report for the year ended 30 June 2010.

"Asset-based" valuation

54 The Plaintiffs' statement of valuation methodology propounded an assets-based valuation, as follows:

"The valuation methodology to be relied upon as the appropriate method of valuation of [GMEC] is the going concern asset based methodology as articulated and adopted in the report of Douglas Meredith dated September 2012.

Absent asset-specific valuations (of which there is none), the fair market value of GMEC as at 30 June 2010 is the net book value of its net assets as at 30 June 2010.

Reliance will also be placed on an asset-based methodology which is, in part, described as a hypothetical orderly realisation of assets (as distinct from as a going concern) on the basis that a hypothetical buyer of the business of GMEC as at 30 June 2010 would be able to maximise the return on the purchase investment by realising the future trail commissions as a partial realisation of the GMEC asset pool rather than retaining them as assets of an ongoing business. (This is really an alternative justification for utilising the balance sheet value of the future trail commissions)

The result of adoption of this partial orderly realisation of assets methodology is the same value as is derived by the going concern asset based methodology adopted by Douglas Meredith."

55 In their outline of opening submissions the Plaintiffs contended that:

"... the basis on which the value of GMEC is to be determined is, in the circumstances of this case, the audited financial statements of the GMEC business entity (GMEC and its controlled entities) as at 30 June 2010 and is no less than the net equity in the GMEC and its controlled entities group as at 30 June 2010, namely $12,515,000."

The Plaintiffs submit that this approach should be adopted because a hypothetical seller and purchaser would negotiate on the basis of the audited accounts as at that date and no reasonable seller would negotiate at a lesser figure.

56 Mr Meredith's evidence was that where a valuer had "no appropriate or sufficiently reliable information" available to conduct a valuation except "what he is told and provided by a purchaser in the compulsory sale and acquisition of shares in GMEC", and in the "absence of suitable independent information on which to base a valuation of market value", the most appropriate "advice" he can give the court is to rely on the independently audited financial position or "book value" of GMEC according to its statement of financial position as at 30 June 2010, which the auditors and director of GMEC had declared to provide a "true and fair view" (Joint Report Ex J1 [2.2.5], [8.1.5], [8.1.10]).

57 Mr Meredith observes that the use of the "book value" of GMEC as at 30 June 2010 as a basis for the compulsory share and acquisition of shares in GMEC is supported by the fact that that net asset value has been tested to Australian auditing standards; the auditors of GMEC opined that the "book value" was a true and fair value; and the director of GMEC, in essence the compulsory purchaser of the GMEC shares, declared that the "book value" was a true and fair value (Joint Report Ex J1 [2.2.2]). This observation requires at least three qualifications. First, as Mr McGuiness points out in the Joint Report, the management, director and auditors do not in fact say in the Special Purpose Financial Report that the balance sheet is presented at either "market value" or "fair market value" (Joint Report Ex J1 [2.3.7]). As I will note below, that would not ordinarily be the case. Second, the special purpose financial reports themselves made clear that, irrespective of whether the audit complied with auditing standards, the accounts themselves did not comply with several Australian accounting standards. Third, the proposition that auditors opined that "book value" was a "true and fair value" has to be read subject to the explanation of the nature of an audit set out in the auditor's report to the members of GMEC and subject to the evidence of the nature of the task that GMEC's auditors in fact undertook.

58 The Plaintiffs further submit that:

"In the circumstances of this case, having regard to the nature of the GMEC assets and the basis on which the GMEC audited accounts were prepared (at a time when Mr Sayer had no motivation to produce anything other than true and accurate accounts as to the worth of the GMEC business enterprise) and the fact that the figures in the accounts were the subject of audit scrutiny by a reputable firm of auditors, the audited accounts as at 30 June 2010 provide the best guide to the true value of the GMEC business on that date."

This submission again needs to be tested against somewhat more detailed scrutiny of the content of the audited accounts, the qualifications to them so far as the several applicable accounting standards had not been applied, the process adopted by the auditors in respect of the audit of those accounts, and the relevance of the information included in GMEC's balance date to a determination of the value of its shares. As the Defendants point out, GMEC's financial statements as at 30 June 2010 did not represent that the balance sheet was presented at "market value", and directors instead stated that the financial report and notes gave a true and fair view of the financial position of GMEC "in accordance with the basis of accounting described in Note 1". Note 1 in turn referred to the financial statements as being a special purpose financial report to satisfy the requirements of the Corporations Act 2001 (Cth) and then stated that the report had been prepared in accordance with the recognition and measurement requirements of Australian equivalents to International Financial Reporting Standards (CB 610, 622, 624). I will refer to the qualifications arising from the fact that certain accounting standards were not applied below.

59 The Defendants point out, and I accept, that the assumption in the Plaintiffs' approach that auditors who conducted an audit of special purposes accounts had in some way satisfied themselves as to the market value of the entity's assets overstates the role of an auditor. The auditor was required to form an opinion about, inter alia, whether the financial report was in accordance with the Corporations Act, including the requirement for compliance with accounting standards and the true and fair view requirement under s 296 of the Corporations Act and the audit was required to be conducted in accordance with auditing standards under s 308 of the Corporations Act. GMEC's auditor, Mr Stevenson, who was called by the Plaintiffs on subpoena, properly made clear that he was not qualified to perform and did not purport to perform, in undertaking an audit, a valuation of GMEC's assets. Mr Stevenson presented as a knowledgeable and helpful witness and I accept his evidence.

60 Mr Stevenson explained the audit process in cross-examination, observing that:

"As the auditor it is to undertake an audit under the Australian Auditing Standards, so perform a series of test on a sample basis over the balances in the financial report and to confirm that they comply with the relevant Australian accounting standards and take into account materiality as the concept over the opinion we give." (T64)

Mr Stevenson's evidence was that these relevant accounting standards give guidance as to how a company should recognise and measure assets and liabilities, but the standards do not determine the relevant figures (T67).

61 Mr Stevenson also agreed in cross-examination (T71-72) with several propositions which Counsel put to him, drawn from a well-known Australian text on valuation (W Lonergan, The Valuation of Businesses, Shares and Other Equity, 4th ed at 604-606), namely that:

• The statutory accounts of the company are prepared to present a picture of that company's profit and loss for a set period and its financial position at a particular date.

• The preparation is regulated by mandatory compliance with applicable approved accounting standards.

• Statutory accounts are prepared on the basis of a number of fundamental accounting principles specific for this reporting purpose, such as accrual accounting, historical cost and at least historically the matching of income and expenses.

• Statutory accounts, by their very nature, are reports on a company's past performance only.

• While these may provide some guide to the company's performance over the next year, they are generally not intended to provide accurate information about current values or future events.

• Some of the accounting principles used for the preparation of statutory accounts may give rise to figures which lack meaning for valuation purposes.

• If this was not the case, all valuations would be equivalent to either the net asset position, as represented in the company's statutory accounts, or the operating profit figure in the profit and loss statement, multiplied by a price earnings ratio.

• Clearly, these would be inappropriate for prospective purchasers wanting a valuation based on the returns that a business would generate in the future or for a shareholder needing to assess the reasonableness of an offer for his or her shares.

• It is for these reasons that valuers employ valuation methodologies rather than merely relying on the figures in the company's statutory accounts.

Mr Stevenson's evidence was also that, if he had been asked to prepare a valuation as at 30 June 2010 of the shares in GMEC, he would not have undertaken that valuation as he did not consider himself qualified to perform that task (T72-73).

62 The Plaintiffs rely on Mr Meredith's expert report in support of their "assets-based" valuation by reference to the balance sheet contained in GMEC's Special Purpose Annual Financial Accounts for the year ended 30 June 2010. Having rejected the use of an earnings-based methodology as noted above, Mr Meredith adopts the figure of $12.515m in his report (drawn from the figure of $12,515,127, being the value of GMEC's net assets in its statement of financial position as at 30 June 2010 without adjustment) as "representative of market value" (Meredith report [2.2.1], [2.3.2.1], [5.4.1], [5.4.3.2]). In the Joint Report, Mr Meredith observes that:

"'Book value' is usually taken to be representative of market value in circumstances where an asset-based going concern valuation is the valuation method adopted" (Joint Report Ex J1 [2.2.1])

63 Mr Meredith also expresses the view that book value is taken to be representative of market value is "entrenched in valuation practice and there is myriad empirical evidence and literature to support this view", but does not further identify that evidence and literature (Joint Report Ex J1 [8.1.13]). Mr Meredith also did not identify the empirical evidence or valuation literature supporting that view in cross-examination (T167-168). I cannot accept that evidence as a statement of general valuation practice, since the financial reports of a company will typically record its assets at historical cost rather than market value, as Mr Stevenson's evidence and a substantial volume of professional writings exhibited to Mr McGuiness' Report made clear. In particular, Mr McGuiness' Response Report drew attention to extensive commentary in the valuation literature that indicates that the use of "book value" in that manner would at least not generally be a proper basis for valuation (McGuiness Response Report [2.1.13]). In closing submissions, Mr Lee and Mr Cowpe, who appeared for the Defendants, drew attention to important aspects of that literature, which, inter alia, points to the economic justification for earnings-based valuations as a means to assess the future benefit to an owner of a business (McGuiness Response Report, [B.1.24]-[B.1.25]); notes that an asset valuation by reference to book value attributes no value to the incremental economic benefits that the assets of a business deliver as a going concern (McGuiness Response Report, [B.1.6]); and notes that financial statements are generally prepared on the basis of the cost principle of accounting and assets are usually recorded at their historical purchase or acquisition cost, even if the economic value of the assets has changed considerably in comparison with an historical cost (McGuiness Response Report, [B.1.30]). That literature also does not support any view that the value of a business enterprise (under any standard of value) will necessarily equal the company's accounting book value (McGuiness Response Report, [B.1.34]). Mr Meredith himself agreed with Mr McGuiness, in the Joint Report, that, in principle, "the 'book value' of an entity's assets and liabilities are not representative of 'market value' or 'fair market value'".

64 The Plaintiffs contend, and I accept, that the fact that financial statements are based on historical costs will have less weight as a qualification to their utility as a source of valuation where the relevant assets are, for example, future commissions at net present value, as (in part) in the present case. However, that is by no means a complete answer to the difficulties with the use of the balance sheet of GMEC to determine its value, which include at least the absence of allowance for impairment in the loans owed by related parties in that balance sheet, expressly recognised in the qualifications to the accounts, and the fact that the net present value of the earnings from the commission stream does not have regard to the costs incurred by the business generally in securing those earnings, as I will note below. These issues are not answered by the Plaintiffs' suggestion that weight should be placed on the auditor's work in fixing the "net present value" of future cash assets and liabilities in the balance sheet, and asking the Court to accept that the figure as to the value was consistent with the Australian accounting standards. That submission has the difficulties, first, that it is the role of directors and not the role of the auditor to determine the values included in the balance sheet and, second, that the qualifications to the relevant financial reports made clear that they did not in fact comply with significant Australian accounting standards including the accounting standard dealing with impairment.

65 Even if one were to accept Mr Meredith's view that a discounted cashflow and capitalisation of earnings methodology were not applicable in the particular case, and that only an "assets based" valuation were possible, it does not follow that the values attributed to the relevant assets in GMEC's balance sheet should be adopted. Mr McGuiness described a method of valuation directed to the orderly realisation of assets, although he distinguished that form of valuation from the approach in fact adopted by Mr Meredith, as follows:

"This method values an entity on the basis of the likely amount which would be distributed to the shareholders in the event the assets of the entity were realised in an orderly manner. This method may be appropriate where the business is to cease operations or where the profitability of the company being valued is not sufficient to sustain an earnings valuation. It may be used as a check on the reasonableness of valuations derived from other methodologies since it gives an indication of the minimum value that a vendor might be willing to accept on the sale of the business."

66 In the Joint Report, both Mr Meredith and Mr McGuiness agreed that that an asset method would begin with an assessment of the book values of the assets and liabilities which are adjusted to a relevant standard of value (Ex J1 [4.1.7]). There are occasions on which the courts have accepted valuations based on an asset-based methodology in respect of shares. For example, in Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247, in valuing a company with two assets of substance, the court accepted that the company's balance sheet was an "appropriate guide" by which to undertake the valuation, but on the basis that "the most recent valuations are inserted in lieu of the value of the fixed assets that appear in that balance sheet". In United Rural Enterprises v Lopmand [2003] NSWSC 910; (2003) 47 ACSR 514, both parties adopted a net asset basis of valuing the share in a company, and made adjustments from figures shown at cost in the balance sheet to "actual current value" to determine net assets. These decisions do not support the use of balance sheet valuations, unadjusted by reference to current market value.

67 Mr Meredith made no inquiry to determine the correctness of the values attributed to GMEC's financial assets, other than to assert their correctness by reason of their source in the balance sheet in GMEC's Special Purpose Annual Financial Report for the year ended 30 June 2010. Mr McGuiness' evidence was that Mr Meredith's approach to "book value" did not account for other assets or liabilities that are not disclosed on GMEC's balance sheet (Joint Report Ex J1 [8.13.10]). That observation seems to me of particular importance where costs that are incurred on an ongoing basis may properly be reflected as an expense of the business in its income statement rather than on its balance sheet. Mr McGuiness also points out that Mr Meredith did not undertake any analysis as to what would be required to adjust the balance sheet, if GMEC had complied with those accounting standards which the notes to its financial statements indicated that it did not comply with (Joint Report Ex J1, [8.16.14]-[8.16.15]). Mr McGuiness also observed in his Response Report and his oral evidence in chief that, in order to undertake an assets-based valuation, a valuer should start with the book basis balance sheet closest to the valuation date (here 30 June 2010) and restate assets and liabilities, including those that are unrecorded, to fair value or fair market value (McGuiness Response Report [B.1.7], T103, 108).

68 The Defendants also contend that Mr Meredith's indicated value is shown to be unreasonable because it would imply an earnings multiple in the range of 11.8 times (McGuiness Response Report [3.3.42]). I give little weight to this criticism since, if an assets-based methodology were otherwise properly performed in respect of a business which had substantial assets but limited earnings, then a similarly high earnings multiple might be derived. In that situation, as Mr Meredith noted in cross-examination, the assets-based methodology may more properly reflect the value of the business than an earnings-based methodology.

69 I should also record one further difficulty with Mr Meredith's approach to his valuation. Mr Meredith's evidence, given in cross-examination and confirmed in an answer to a question which I asked him, was that he "may have scanned" Mr McGuiness' Response Report but he "didn't read it in detail" (T168). Mr Lee then asked Mr Meredith whether he thought it might have assisted the court if he had read that report and he responded that:

"I expressed an opinion about the value of GMEC and I stand by that opinion and I don't see the criticism of my report, critique of my report, response, would change my opinion." (T168)

The Defendants, not surprisingly, criticise the approach of an expert who fails to read, or read in detail, the other expert's Reply Report prior to attending a joint conference and preparing a joint report both ordered by the Court.

70 The Plaintiffs respond that there "nothing in" the Defendants' criticism of Mr Meredith for failing to "examine minutely" Mr McGuiness' comments upon his report, and that the Defendants are "clutching at the last straw" in this regard. I do not accept that submission. Mr Meredith did not merely fail to "examine minutely" Mr McGuiness' Reply Report, but failed to read it or at last carefully to read it, as he acknowledged in cross-examination. I consider that approach fell well short of the standard that the Court would expect of an expert giving evidence before it. In failing properly to review Mr McGuiness' response report before the meeting of experts and preparation of the Joint Report, Mr Meredith deprived the parties and the Court of the opportunity for narrowing the issues in dispute between the accounting experts that would have been available from (1) a proper review of Mr McGuiness' report, (2) a fully informed meeting of the experts and (3) the preparation of a Joint Report in which Mr Meredith had fully engaged with Mr McGuiness' Reply Report. To the extent that Mr Meredith failed to read that Report because of any entrenched view that he and Mr McGuiness were taking different approaches and would not agree, then that failure to engage with the substance of Mr McGuiness' Reply Report is more rather than less inappropriate.

Accounting for costs of deriving trail commissions

71 Mr Meredith and Mr McGuiness differ as to the manner in which operating costs arguably incurred by GMEC in generating the receivable for trail commissions should be accounted for in an assets-based valuation of GMEC. The Special Purpose Annual Financial Report of GMEC for the year ended 30 June 2010 noted that key assumptions underlying the fair value calculations of trailing commissions receivable and payable included the average loan life and discount rate, which were determined by management based on internal data and comparisons with similar companies (Special Purpose Annual Financial Report for the year ended 30 June 2010, p 14; Plaintiff's CB, p 539). The statement of comprehensive income contained in the Special Purpose Annual Financial Report of GMEC for the year ended 30 June 2010 recorded not only commission expenses of $4,528,986, but also other expenses including advertising and marketing, substantial borrowing costs, employee benefits expenses, occupancy and other expenses.

72 Mr Sayer's evidence is that those other operating costs were incurred in respect of the mortgage broking business. His evidence was that, as at the valuation date, GMEC did not prepare a costs analysis to attribute its operating costs or overheads between its mortgage broking business and its origination and lending business. His evidence was that, had such an allocation been prepared, the GMEC Group would not have allocated its budgeted operating costs or overheads to the origination and lending business carried out by the Trust because those operating costs were covered by management fee paid to Perpetual Trustee Company (Sayer [10]). Mr McGuiness was therefore instructed to assume that commissions receivable and commissions payable figures in GMEC's balance sheet were primarily attributable to third party funded loans rather than loans by the Trust (Sayer [12]) Mr Sayer's evidence was also that the Trust did not act as a mortgage broker or engage in mortgage broking activities and did not receive or pay commissions, other than for a trailing commission payable by the Trust as originator fees to PWF (a company within the GMEC Group) of $1,314,044 and that all other trailing commissions payable were attributable to mortgage brokerage activities (Sayer [25]). I accept this evidence, which seems to me to reflect a logical approach to cost allocation. Importantly, it follows that those costs should be allocated to the mortgage broking business from which GMEC derived trailing commissions.

73 Mr McGuiness pointed out in his oral evidence that the valuation attributed to trailing commissions in GMEC's balance sheet was derived by applying a present value factor to the net monthly trailing income and the only costs deducted were commissions payable (T93-T94) and no allowance was made for other operating costs. He observed that:

"I believe that these other operating costs there should be some allowance for that if one is to use this loan book valuation model to put it on comparable terms with the overall profitability of the entity.

That is not done in the construct of the loan book valuation model. It only puts a value on the net commissions receivable. It doesn't put a value on the future liability that the entity would have to incur to achieve those net commissions receivable. So it is not a complete analysis." (T94)

74 Mr McGuiness' evidence was also that the net present value of the trailing commissions receivable (both current and non-current) was approximately $20.8 million (T93); total operating costs incurred by GMEC were about $12.3 million, of which commissions payable (current and non-current) accounted for $4.5 million (T94). Mr McGuiness expressed the view that a rational hypothetical purchaser of the asset constituted by the receivable being GMEC's trailing commissions would not be prepared to pay $20.8 million for that asset - being the value at which it was recorded in GMEC's balance sheet for the year ended 30 June 2010 - because approximately $6m-$8m of operating costs (in additional to commissions payable) would need to be incurred by the purchaser in order to generate that receivable. Mr McGuiness, in valuing GMEC, accounted for those operating costs (T103).

75 Mr McGuiness also emphasised in his oral evidence that GMEC's loan book valuation model did not account for other operating costs that it must incur to derive the net commissions receivable (T106), and he expressed the view that the balance sheet value of trailing commissions was therefore not reflective of their market value (T107). Mr McGuiness also emphasised, in oral evidence, that in his view:

"The hypothetical purchaser is going to be an informed rational purchaser. ... An informed rational purchaser will not pay $20 million, the net present value of net commissions receivable, which is incomplete in respect of the costs it has to incur." (T108)

I accept Mr McGuiness' evidence in that regard. It does not seem to me that a rational arm's length purchaser would be led to ignore such costs in valuing GMEC or its shares by the fact that such operating costs were included as expenses in GMEC's profit and loss rather than in its balance sheet, as at 30 June 2010.

76 By contrast, Mr Meredith, in accepting the book value of the trailing commissions receivable shown in the Balance Sheet as at 30 June 2010 as their market value, did not allow for operating costs (other than commissions payable) incurred, or to be incurred in the future, in respect of GMEC's business. Mr Meredith's evidence was that he did not recall whether the relevant costs were included in the loan book model, and at this point he noted the difference in value (resulting from the application of a different discount rate in the loan book model and in the balance sheet) which had led him to lose confidence in the loan book model (T110), to which I have referred in paragraph 35 above. As I noted above, that loss of confidence was not, in my view, justified by that matter.

77 Mr Meredith accepted, in answer to a question from the Court, that the expenses of GMEC's operations would have been recorded in GMEC's statement of financial performance or profit and loss account, rather than in GMEC's balance sheet. However, notwithstanding his recognition of that matter, Mr Meredith expressed the view that the net present value of commission income could mean "gross commissions received, less expenses of earning that commission"; and that if the expenses of operating the business of $8 million had been omitted from the forecast of trailing commissions, then that was a material difference (T110). That difference would plainly be material, but it does not seem to me to be correct to characterise accounting for operating expenses in GMEC's statement of financial performance (profit and loss), rather than capitalising them in the balance sheet, as in the nature of an omission where GMEC's financial report would be read as a whole. Mr McGuiness' evidence, which I accept, was that he had reviewed the loan book model and other operating expenses of $6-$8 million were not in fact accounted for in that model (T111). Both Mr McGuiness and Mr Meredith agreed that any adjustment would be for the net present value of the relevant expenses (T111). Mr Meredith made no such adjustment in his asset-based valuation of GMEC.

78 The Plaintiffs submit that there is no admissible evidence as to the alleged "future expenses" incurred in deriving trailing commissions, and, in particular, that there was no direct evidence from Mr Sayer that there are any such future expenses, and refer to the principle in Commercial Union v Ferrcom (1991) 22 NSWLR 389 at 418. I do not accept this submission. I have referred above to the evidence given by Mr Sayer as to the structural aspects of the business that support an attribution of those expenses to GMEC's mortgage broking business. It is also by no means clear that it was a matter for the Defendants, rather than the Plaintiffs, to lead evidence as to this matter where it was the Plaintiffs who sought to rely on an asset-based valuation which would require a separate assessment of the asset value of the trailing commissions, as distinct from accounting for them in an earnings-based valuation as Mr McGuiness had done.

79 The Plaintiffs also submit that it is inconceivable that GMEC's auditors would fail to provide for those future expenses in fixing the "net present value" of future trail commissions or refer to such expenses in a note to the accounts. I do not accept that submission. First, the evidence established that GMEC management fixed the "net present value" of future trail commissions by reference to the loan model prepared by GMEC and that operating costs of the business would be reflected (as Mr Meredith acknowledged) in the statement of financial performance (profit and loss) contained in GMEC's financial report. The Plaintiffs' approach to this issue tended to focus on a question whether it was likely that the relevant expenses were "missing" from the valuation of trailing commissions. That characterisation seems to me to be unsustainable, since those expenses would not be "missing" where taken to account in the profit and loss rather than in the valuation of the relevant commissions in the balance sheet.

80 Second, Mr Stevenson's evidence was that the audit process adopted in respect of the value attributed to trailing commissions, as recorded under the heading "current assets" was, on a sample basis, to look at management calculations in the form of a discounted cashflow analysis, test the variables in that model back to source documents on a sample basis and consider any other estimates or judgments applied in determining that net present value (T64). Mr Stevenson observed that the approach adopted to determine the amount of trailing commissions treated as a "non-current asset" was broadly similar to the approach undertaken for the current portion of the same asset, with an additional procedure to confirm that likely collection would be more than 12 months out (T65). No reason was shown why the auditors should have had any difficulty with the inclusion of operating expenses in the profit and loss rather than the balance sheet, for financial reporting rather than valuation purposes. By contrast, as Mr McGuiness' evidence makes clear, a purchaser who did not adopt an earnings based valuation would need to have regard to those expenses in determining the value of the asset that it would acquire, which is a matter of valuation not a matter of financial reporting.

81 Mr McGuiness also notes that there was a significant change in GMEC's accounting for trailing income in the year ended 30 June 2010, since income and expense in relation to commissions had been accounted for as received or paid up to 30 June 2009, whereas the net present value of trailing commissions receivable and payable were accounted for as assets and liabilities on the balance sheet in the year ended 30 June 2010 (McGuiness First Report [4.1.2]-[4.1.3]). Mr McGuiness, in his Response Report, points out that Mr Meredith's reliance on an unadjusted balance sheet valuation of GMEC would therefore treat GMEC's net asset position at 30 June 2010 as $12.52 million and would treat its net asset position as a negative value of $1.23 million only 12 months earlier on 30 June 2009. That difference is attributable simply to the change in accounting policy in respect of the treatment of commission income rather than any change in the fundamentals of the business (McGuiness Response Report [2.1.44]). The substantial change in the value of the business, by the adoption of that method, in circumstances that there is little change in its fundamentals, seems to me to indicate a fundamental deficiency in Mr Meredith's approach, namely its failure to adjust the value of assets contained in the balance sheet to take account of corresponding expenses contained in the profit and loss in the relevant accounts.

Treatment of debt owed by AHQ/9AS Trust to GMEC in an assets-based valuation

82 The accounting experts also differ as to the value to be attributed to a debt owed by AHQ and the 9AS Trust to GMEC, if an assets-based methodology is to be adopted as the Plaintiffs' contend. Loans receivable from these entities are shown at $6.718 million in GMEC's financial statements as at 30 June 2010 (McGuiness Response Report [3.3.18]) and Mr Meredith makes no adjustment to that figure in determining his value for GMEC. In the Joint Report, Mr McGuiness takes issue with Mr Meredith's approach to the receivable from AHQ and 9AS, observing that:

"Another significant issue is found in the handling of the non-recoverable part of loans receivable balances to AHQ and 9AS, it is generally accepted that if an asset is not recoverable, then it is not presented at "market value" or "fair market value".

There should be adjustments for the extent of the deficiency of net assets of the debtor entity to align the value of the loan receivable with a reasonable estimate that a hypothetical purchaser and hypothetical vendor would accept at arm's length. This is a $4.4 million over-statement in Mr Meredith's values." (Ex J1 [2.3.9] - [2.3.10])

83 The notes to GMEC's Special Purpose Annual Financial Report for the year ended 30 June 2010 recorded that:

"Management have reviewed amounts owed to the economic entity as at 30 June 2010 and believe that all amounts as recorded in the financial statements will be recovered. Provision has been made in the parent entity for amounts considered irrecoverable in the short term from subsidiaries."

However, the disclosure requirements of AASB 136 dealing with impairment of assets had not been complied with in those accounts, which also noted that:

"The financial statements have been prepared on a going concern basis and do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Trust or MHA not continue as a going concern."

84 The Plaintiffs' argue that GMEC's audited accounts indicate that they give a true and fair view of GMEC's financial position as at 30 June 2010 and, relying on the auditors' opinion, contend that GMEC management and the auditors regarded the AHQ debt owed to GMEC as fully recoverable, where the audited GMEC accounts recorded the debt at full face value. I do not accept that submission, where those accounts were specifically qualified for the fact that the relevant impairment standards had not been applied. The Plaintiffs also contend that:

"In these circumstances, the objective facts known to hypothetical contracting parties as at 30 June 2010 must be that as at that date the debt was (or was perceived to be) fully recoverable."

If this submission is intended to suggest that a willing but not anxious purchaser would have dealt with a willing but not anxious vendor on the basis that the accounts demonstrated that the debt owed by AHQ was fully recoverable, notwithstanding the qualification in the accounts that they did not comply with accounting standards as to impairment, and without regard to any substantive assessment of whether AHQ in fact had the capacity to repay it in full, then I also do not accept it.

85 Mr Meredith expresses the view that:

"The primary test of recoverability I have used in the past is the test specified in section 95A of the Corporations Act 2001 commonly referred to as the 'cashflow' test which involves a consideration of the ability of an enterprise to pay its debts out of its cash resources and/or future cashflows.

Based on my experience, it is not uncommon for an enterprise to appear to have an excess of assets over liabilities at a particular date but can rely on its access to cash resources to enable it to pay its debts at sometime in the future. The sources can include cash received by way of the subscription of capital, cash advances and shareholder loans." (Joint Report Ex J1 [8.17.2]-[8.17.3])

Mr Meredith's evidence on cross-examination was that he "felt sure" the directors of GMEC and auditor would have had lengthy discussions about recoverability of the relevant loan and "may have" made an assessment of AHQ's solvency for the purposes of s 95A of the Corporations Act (T122). That evidence is plainly speculative in character. Mr Meredith also treats AHQ's solvency for the purposes of s 95A of the Corporations Act as a matter that indicates that the loan is recoverable in full; however, it seems to me that the fact that a company is presently meeting its debts as and when they fall due, when it is not required to pay the amount of $6.178 million, cannot provide any rational basis for an assessment that it could pay that amount in full if required to do so.

86 On the other hand, Mr McGuiness notes that it is necessary to have regard to any deficiency of assets of a debtor entity to establish reasonable estimates of the recoverable value of a loan receivable and, if such analysis is not used, the "book value" of the loan receivable is overstated to the extent of the deficiency of net assets; and that, once regard is had to the deficiency of assets of AHQ and the 9AS Trust, there is a decrease in the carrying value of the loan receivable owed by it to GMEC by an amount of approximately $4.4 million (Joint Report Ex J1 [8.17.4]-[8.17.5], [8.17.8]). Mr McGuiness expresses the view that AHQ has a deficiency in net assets of $2.27 million and that the 9AS Trust has a deficiency in net assets of approximately $2.19 million (McGuiness Response Report [3.3.19]) and that the true recoverable value of the AHQ and 9AS Trust receivables is $2.256 million, not $6.178 million. Mr McGuiness expresses the view that the write down of $4.462 million in the amount of that receivable must be made in order to properly reflect these receivables at market value. Mr McGuiness expresses the view that a rational hypothetical purchaser would conclude that that the AHQ/9AS Trust receivables owed to GMEC are not fully recoverable (T118) and would not pay the value attributed to them in the balance sheet of $6.178 million. I prefer that analysis to Mr Meredith's approach to this issue. It seems to me that no rational purchaser would proceed other than by making such an adjustment.

Treatment of deferred tax liability in an assets-based valuation

87 Mr Meredith and Mr McGuiness also adopt a different approach in relation to the treatment of a deferred tax liability of $5.78 million in GMEC's financial statements, referable to 30% of the net balances attributable to the book value of commissions receivable of approximately $19.27 million (McGuiness Response Report [3.3.27]). Mr McGuiness' evidence is that he does not attribute a separate value to deferred tax liabilities in his earnings-based valuation, because he has allowed for estimates of the expected income tax attributable to the mortgage brokerage business in either his capitalisation of earnings or the alternative discounted cashflow valuation, and it would be double counting to also take into account a separate value for the deferred tax liability (McGuiness Response Report [3.3.29]). However, Mr McGuiness' evidence is that, if Mr Meredith had attributed a fair market value for the mortgage brokerage business and had not allowed for income tax payable on the net commissions receivable, then it would be appropriate to deduct a deferred tax liability balance from that valuation. Mr McGuiness expresses the view that, as Mr Meredith does not assess the market value or the fair market value of the mortgage brokerage business, it is not practical to provide any assessment of the deferred tax liability balance on his analysis (McGuiness Response Report [3.3.31]-[3.3.32]). I accept this analysis, which identifies a further reason why Mr Meredith's valuation of GMEC by reference solely to the unadjusted assets shown in its 30 June 2010 balance sheet should not be accepted.

Conclusion in respect of assets-based valuation

88 It seems to me that a willing vendor and willing purchaser would not have assessed the value of GMEC's shares by reference to its balance sheet without further adjustment, in circumstances that the qualifications to the financial report made clear that it did not include impairments as required by the relevant accounting standards, and the evidence also indicates that the expenses incurred by GMEC in generating the relevant commission income (which was reflected at its net present value in that balance sheet) would be reflected in the profit and loss of GMEC for that year, rather than adjusted in the valuation of that item in the balance sheet.

89 In paragraph 2.1.23 of his Response Report, Mr McGuiness undertakes an asset-based valuation of the operating businesses of GMEC, adjusting to fair market value, and attributing a range of values to the mortgage brokerage business, the originating and lending business, operating assets, net debt and surplus assets and non-trading liabilities. He derives an indicated value for the equity of GEMC in a range of $2.69m-$3.11m, which he noted in his oral evidence was consistent with the result arrived at under an earnings method. Mr McGuiness explained that result as reflecting, inter alia, the fact that the restatement of the book value of assets and liabilities to fair market value involved inclusion of costs of earning the trailing commissions of $6-8m that were not accounted for in Mr Meredith's calculation of asset value (T104), to which I have referred in paragraphs 56-58 above. If an assets-based valuation were to be adopted, contrary to the view that I have reached above, I would prefer Mr McGuiness' adjusted valuation to Mr Meredith's unadjusted valuation derived from GMEC's balance sheet as at 30 June 2010.

Whether the Court can determine an alternative valuation

90 I should also deal with one further matter to which the parties directed submissions, although it does not strictly arise where I have accepted Mr McGuiness' earnings-based valuation of GMEC on its merits and having regard to the evidence of Mr Sayer supporting it. The Plaintiffs contend that it is open to the Court to fix its own value for GMEC differing from the values propounded by the respective accounting evidence. On the other hand, the Defendants submit that the Court must not allow itself to be placed in the role of a third valuer, reaching a valuation unsupported by the valuation evidence led by the parties.

91 I accept, of course, that the Court is not bound to choose between the respective valuations prepared by the accounting experts, adopting one or the other without modification. I did not understand the Defendants to contend to the contrary. It is well established that the experts cannot usurp the Court's function in applying its own independent judgment to the facts, including the facts relevant to valuation, proved in evidence: Davie v Lord Provost, Magistrates & Councillors of the City of Edinburgh (1953) SC 34 at [39]-[40], [42], approved in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at [59]. I recognise that, as the Plaintiffs also point out, the possibility that the Court would not bound by the methodologies preferred by the valuers was left open in McKay v Commissioner of Main Roads [2011] WASC 223 at [170].

92 However, it seems to me that any adjustments to an expert valuation must be supported by the evidence and must not involve the Court casting itself in the role of an additional expert, because it does not have the expertise to perform that function: Arcus Shop Fitters Pty Ltd v Western Australian Planning Commission [2002] WASC 174; (2002) 125 LGERA 180 at [76]; Tyler v Thomas [2006] FCAFC 6 at [56]. A practical implication of that observation is that, in this case, if the Court considered that an earnings-based methodology was preferable (as I do), the only evidentiary basis on which it could presently be adopted is found in Mr McGuiness' expert evidence, since Mr Meredith did not develop an alternative calculation based on those methodologies which would allow any alternative calculation on that basis. Had it been necessary to do so, the Court could also have required the parties to prepare further valuations on, for example, a different basis supported by the evidence before it. I do not consider it necessary or appropriate to take that course, where I have accepted Mr McGuiness' evidence as to an appropriate earnings-based valuation for the reasons noted above.

93 If the Court had considered that an asset-based valuation is preferable, the Court might have regard either to the valuation undertaken by Mr Meredith on that basis, or to the alternative valuation prepared by Mr McGuiness in his Response Report, or might adopt its own valuation having regard to the evidence led by each of those experts. As I noted above, had I preferred that approach, I would have adopted Mr McGuiness' alternative assets-based valuation in his Response Report, which adjusts for costs incurred in respect of trailing commissions and writing down the recoverable from AHQ and the 9AS Trust.

94 It follows that I accept the Defendants' submissions that the net market value of GMEC as at 30 June 2005 should be found to be $2.9 million, being the midpoint of the range of $2.7m - $3.1m determined by Mr McGuiness (McGuiness First Report [7.1.29], Joint Report [Ex J1 2.1.1]) in preference to the amount of $12,515,000 which Mr Meredith adopted from the unadjusted balance sheet of GMEC as at 30 June 2010 (Meredith Report [2.2.3]).

Adjustment for net liabilities

95 Paragraph 4(c)(ii) of the orders made by the Court of Appeal requires that the net value of GMEC be determined subject to adjustment for the net liabilities of GMEC or their subsidiaries to any of Mr Sayer, One Australia, Mr Tomanovic or AFSC. It is common ground between the parties that the liabilities which need to be adjusted include a liability to Mr Sayer in respect of remuneration in the amount of $3,040,000 and a liability for interest on that amount of $183,098 (McGuiness First Report [1.4.3], [7.1.21]; Meredith Report [2.2.3]; Joint Report Ex J1 [2.1.1]-[2.1.2]).

96 Mr Meredith adds those amounts to his valuation after having first determined the market value of GMEC (Meredith Report [2.2.3]). Mr Meredith does not seek to support that approach by indicating any requirement for it under accounting or valuation principles, but instead on the basis that that approach is based on his understanding of the Court of Appeal's orders. Those orders required that the valuation be undertaken subject to an adjustment with respect to the liabilities, but did not specify that that adjustment was to be undertaken by simply adding those liabilities to the amount to be paid. That was, in my view, a matter for the application of accounting expertise, not a matter of construction of the Court of Appeal's orders. In my view, those orders neither require nor support the approach which Mr Meredith adopted.

97 The Defendants contend that Mr Meredith's approach has the result that those liabilities are double counted, first within the net assets for GMEC included in its balance sheet, and again by adding them to the market value of GMEC. So far as I can determine, the Plaintiffs did not respond to this submission. On the other hand, Mr McGuiness takes into account the net liabilities of GMEC to Mr Sayer in determining the market value of GMEC (McGuiness Response Report [3.5.53]ff). Mr McGuiness expresses the view that it is not appropriate to adjust the loans payable to Mr Sayer of $3.04 million by adding it to the amount payable as Mr Meredith had done for the reasons provided in his Response Report [3.3.58]-[3.3.60]. Mr Meredith's approach seems to me to adjust for these liabilities, as the Court of Appeal had required, and to be supported on a reasoned basis. I accept that approach.

98 I should also note that Mr Sayer's evidence acknowledged that, for the financial year ended 30 June 2009, GMEC had a bad debt of $7,387,223 which was incurred as a result of a non-recoverable mezzanine type loan relating to a residential apartment development in which Mr Tomanovic and Mr Sayer had an interest (Sayer [13]). The Plaintiffs sought to introduce reliance on this matter as a further adjustment to the valuation immediately prior to the hearing. I declined to adjourn the hearing or order determination of separate questions which would have been necessary to allow that matter to be raised at that late stage.

Adjustment for legal costs

99 Paragraph 4(c)(iv) of the orders made by the Court of Appeal requires that the net value of GMEC is to be "ascertained after making an adjustment, of such amount as is necessary for the net value of GMEC as at 30 June 2010 not to be decreased by reason of any sums that have been paid" by certain entities in respect of certain legal costs. The accounting experts proceed on the agreed basis that the amount of those legal expenses is $1,568,431 (Joint Report [2.1.1]-[2.1.2]).

100 Mr McGuiness adjusted for those legal expenses by treating them as a receivable to be taken into account in determining the value of GMEC (McGuiness Response Report [3.3.35-37]). By contrast, Mr Meredith added that amount to the net market value of GMEC that he had determined (Meredith Report [2.2.3]). The Defendants contend that Mr Meredith had not in fact determined the market value of the GMEC shares after making an adjustment for legal fees, as the decision of the Court of Appeal's orders require, but determined that value prior to such an adjustment and thereafter made the adjustment. The practical difference between the two approaches may not be significant, where Mr Meredith's approach is simply based on GMEC's balance sheet as at 30 June 2010. I accept Mr McGuiness' approach to this issue, which is consistent with the earnings-based approach to the assessment of the market value of the share capital of GMEC, which I have accepted for the reasons noted above.

101 Mr McGuiness notes that neither Mr Meredith nor he have allowed for any income tax effect in relation to the adjustment for legal fees. Where neither of the experts has made such an adjustment, and no party has contended for it, it is not necessary for me to consider further whether such an adjustment would have been appropriate (McGuiness Response Report [2.1.52]).

102 Having made these adjustments, the amount being 45% of the net value of those shares as contemplated by the Court of Appeal's orders is $1,305,000.

Adjustments for interest on judgment in 2009 proceedings and for net value of shares and units in Multiown companies

103 Paragraph 4(b) of the orders made by the Court of Appeal provides for a further adjustment to the purchase price payable by One Australia by adding the amount of interest that has accrued on the judgment in proceedings 297497 of 2009 ("2009 proceedings") from and including 1 July 2010, and deducting the net value as at 30 June 2010 of any shares and units in specified "Multiown" entities that have been transferred to AFSC by One Australia or Mr Sayer. Mr McGuiness adds an amount of $565,043 in respect of this interest, Mr Meredith states that this matter has a "neutral effect" and does not add any amount at this point, presumably by reason of the set-off to which I refer below. The difference in approach may have no impact in the final calculation, but that is a matter that should be addressed by the parties in submissions as to orders. The accounting experts agree the value of the shares and units in Multiown entries is nil and no adjustment is required and both parties proceeded on that basis.

Set-off under Court of Appeal orders

104 The buy-out price payable by One Australia to purchase the shares owned by ASFC in GMEC, by reference to the valuation undertaken by Mr McGuiness which I have accepted, and the adjustments made above is $1,870,043.

105 The amount owing by Mr Tomanovic and ASFC to Mr Sayer, Ken Sayer Investments Pty Limited and MHA, pursuant to the judgment (including interest and excluding costs) in the 2009 proceedings, must then be determined in order to implement the set-off required by Order 4(g) made by the Court of Appeal. Mr McGuiness proceeds on the basis that the judgment in the 2009 proceedings is $1,765,004.64 and interest on that judgment is $615,962.44. Mr Meredith adopts a figure of $1,341,750 (which appears to be to an amount including interest to 5 March 2009) together with interest of $450,460, for a total of $1,792,210. The parties should seek to resolve the relatively small difference between these calculations in preparing draft orders. The set-off required by order 4(g) of the Court of Appeal's order on Mr McGuiness' calculation, including interest on the judgment in the 2009 proceedings, is in the order of $2,380,867, and a net amount is therefore payable by the Plaintiffs to the Defendants in the order of $510,924.

106 The Plaintiffs contend that they should also have interest on the amount of the valuation of GMEC's shares since 30 June 2010. It is not clear to me that I can properly allow such interest where the Court of Appeal's comprehensive directions as to how the amount payable is to be calculated does not provide for it. However, I will give the parties the opportunity to make further written submissions as to that question at the same time as they submit draft orders to give effect to this judgment.

Costs of the proceedings at first instance and on appeal

107 Mr Meredith also includes an adjustment for 40% of the Plaintiffs' costs at first instance and legal costs in the Court of Appeal in his calculation of the purchase price to be paid by Mr Sayer and One Australia in respect of the GMEC shares. I do not understand that matter to be before me, because the Court of Appeal made a separate order that Mr Sayer and One Australia are to pay 40% of the costs of the proceedings at first instance, as agreed or as assessed, and that Mr Sayer and One Australia pay the costs of the appeals. No order as to set-off was made by the Court of Appeal in respect of those costs.

108 There is also no evidence of any agreement or assessment as to the amount of those costs and the figures adopted in Mr Meredith's report appear to be solicitor/client costs (rather than costs on a party/party basis) advised by Mr Tomanovic's former solicitors. Those costs will need to be assessed or agreed in the ordinary course and the Court of Appeal's order does not require or permit me to make any adjustment in respect of them in determining the purchase price for the shares in GMEC.

Orders and costs

109 I direct the parties to bring in agreed short minutes of order within 14 days to give effect to this judgment and, if no agreement is reached, their respective drafts and short submissions as to the differences between them. Those submissions should also address the question of the Plaintiffs' claim to interest on the amount of the valuation of GMEC's shares since 30 June 2010, to which I have referred in paragraph 106 above. The parties may make short written submissions as to costs, within 14 days, indicating whether they seek an opportunity for an oral hearing as to those matters.

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Decision last updated: 04 November 2013