Tomanovic v One Australia Pty Limited

BATHURST CJ: The first appellant (Mr Tomanovic) and the second respondent (Mr Sayer), through their respective entities, Australian Financial Services Corporation Pty Limited (AFS) and One Australia Pty Limited (One Australia) were engaged from 1999 up to 30 June 2010 in a financial services business carried on through a corporate entity, Global Mortgage Equity Corporation Pty Limited (GMEC). They were also involved in the ownership of two properties, the registered proprietor of which was a company, Argyle HQ Pty Limited (AHQ), as trustee for the 9 Argyle Street Unit Trust (9 AS Trust).

As at 30 June 2010, One Australia held 55% of the issued capital of GMEC, with AFS holding the other 45%. The shareholding in AHQ and the beneficial interest in 9 AS Trust were held equally by Mr Tomanovic and Mr Sayer.

A number of disputes arose between Mr Tomanovic and Mr Sayer. As a result, the Tomanovic interests brought statutory oppression proceedings under s 232 of the Corporations Act 2001 (Cth) against the Sayer interests, alleging oppression in the conduct of the affairs of GMEC and AHQ (the oppression proceedings).

On 30 August 2011 this Court made the following orders (the Court of Appeal’s Orders) in the oppression proceedings (Tomanovic v Global Mortgage Equity Corporation Pty Ltd (No 2) [2011] NSWCA 256; (2011) 86 ACSR 119):

Mr Tomanovic did not make the election referred to in par 4(a) of the Court of Appeal’s Orders.

The judge hearing the remitted proceedings (the primary judge) accepted the evidence of a valuer called by Mr Sayer and One Australia, a Mr McGuiness, that the equity value of GMEC ranged between $2.7 million and $3.1 million: Re Global Mortgage Equity Corporation Pty Ltd (ACN 105 108 469) [2013] NSWSC 1586; (2013) 97 ACSR 30 (the primary judgment). In reaching this conclusion the primary judge rejected the evidence of the valuer called by Mr Tomanovic and AFS, a Mr Meredith, who valued the whole share capital of the company at $12,515,000.

After making the adjustments which the primary judge considered were required by the Court of Appeal’s Orders, the primary judge calculated that the amount payable by One Australia to purchase the shares owned by AFS in GMEC was $1,870,043: primary judgment at par [104]. After the set-off required by Order 4(g) of the Court of Appeal’s Orders, the primary judge concluded that a net amount of $510,924 was payable by Mr Tomanovic and AFS to One Australia and Mr Sayer.

In the result, the primary judge ordered that AFS transfer its shares in GMEC to One Australia and that the judgment referred to in par 4(g) of the Court of Appeal’s Orders could be enforced in the amount of $510,924.

As I indicated, GMEC was a financial services company. In an affidavit filed in the remitted proceedings, Mr Sayer stated that GMEC was the holding company of a number of companies. The subsidiaries carried on two principal trading activities. The first was a retail mortgage broking business carried on primarily through Mortgage House of Australia Pty Limited (MHA) (the brokerage business).

The second activity was that of a mortgage lending and origination business (the lending and origination business) carried out through a trust, Paladin Mortgage Trust (No 1) (the Trust), of which Perpetual Trustee Company Limited was the trustee and MHA the principal beneficiary. Mr Sayer indicated that the Trust did not act as a mortgage broker or engage in mortgage broking activities. In these circumstances, commissions recoverable and commissions payable were attributable to third party funded loans rather than loans by the Trust.

Mr Sayer also gave evidence that he supplied to Mr McGuiness GMEC’s budgets for the financial years ended 30 June 2009 and 30 June 2010, together with extracts for the year ended 30 June 2011. His evidence, which was unchallenged, was that GMEC did not prepare a costs analysis to attribute operating costs or overheads to the brokerage business or to the lending and origination business. He stated that if it had, none of the costs would have been allocated to the lending and origination business as these costs were covered by the management fee payable to Perpetual Trustee Company Limited.

Mr Sayer also gave unchallenged evidence that GMEC did not expect any significant growth in settlements written through the Trust. He said the ability of the Trust to lend money depended on its ability to borrow money at competitive rates. He said that as at June 2010 its only source of funds was under a Senior Note Facility with the Commonwealth Bank of Australia. He said the Senior Note Facility was initially $750 million, which was reduced to $400 million in January 2009, and following a review in April 2010, was further reduced to $230 million.

Mr Sayer gave evidence that as at 30 June 2010 the Senior Note Facility was drawn down to $223 million. In addition, the Commonwealth Bank had increased its margin such that the Trust’s mortgage products had become uncompetitive. He said that by June 2010 the Trust was advising borrowers who wished to refinance, to refinance elsewhere. He stated his expectation was that there would be a decline in settlements made through the Trust after the valuation date.

Mr Sayer also indicated that the cash of $3,394,844 in the audited balance sheet of the Trust was mainly required to meet Trust obligations.

The balance sheet of GMEC for the financial years ended 30 June 2009 and 2010 treated trailing commissions received by the company differently. Trailing commissions may generally be described as commissions payable from lenders over the life of a settled loan based on the loan book balance outstanding.

In the 2009 year the net present value of such commissions was not recognised as fair value on loan settlement but rather accounted for as revenue in the financial year in respect of which they were received. The effect of such accounting treatment is to increase the profitability of the entity (assuming the trailing commissions received exceed the trailing commissions payable) but adversely affect the balance sheet position. Thus in 2009 the statement of financial position showed a deficiency in equity of $1,231,406 with a net loss after tax of $1,831,836 (after taking into account the writing-off of bad debts of $7,468,248). By contrast the restated 2009 accounts, which brought to account the net present value of the trailing commissions, showed a net equity of $12,384,140 but a loss for the year in question of $4,588,436.

The financial statements for the 2010 year were prepared on the basis that the net present value of the trailing commissions would be treated as an asset of the company in the balance sheet. In that year the accounts of GMEC showed total equity of $12,515,127 and a net profit of $130,987.

The accounts were prepared on a going concern basis. However, the notes to the accounts made the following comments:

The accounting policies and the effects they had on the accounts were explained in the notes to the special purpose accounts for the year ended 30 June 2010. Note 1(c) for the accounts dealt with revenue and expense recognition. It gave the following explanation:

The notes also explain that the basis upon which the commissions are brought to account is a matter for the judgment of the directors:

The financial effect of the change was also set out in the notes:

The accounts disclose a current liability with respect to borrowings of $7,050,000. The notes to the accounts contain the following comments in relation to that liability:

It should be noted that the accounts disclose an increase in cash held at the end of the financial year ending 30 June 2010 of $488,641. However, the cash flow from operating activities was a negative $133,860.

There are a number of matters arising from these accounts. First, the accounting policy adopted had a marked effect on the shareholders’ equity as disclosed in the balance sheet and on the profitability of the company. This tends to cast some doubt on the proposition advanced by Mr Meredith, the valuer engaged by the appellants, that it was appropriate to value the shares in the company by reference to the total equity in the balance sheet or for that matter by reference to any particular line item.

In this context, it should be noted that the auditor’s report stated that there was material uncertainty whether the Trust and MHA, which carried on the brokerage business, could continue as a going concern and, therefore, whether they would realise their assets at the amounts stated in the financial report. The report was in the following terms:

The other thing that should be noted is that, consistent with the opinion of Mr McGuiness, the valuer engaged by the respondents, it is clear from the notes to the accounts that the net present value of the trailing commissions does not take into account any operating expenses incurred in the carrying on of the business.

The judgment of the primary judge and the parties’ submissions on appeal focused primarily on the differing views of Mr McGuiness and Mr Meredith. It is necessary in those circumstances to set out their evidence in some detail.

Mr McGuiness stated that there were two fundamental premises of valuation – a going concern basis which holds that the business is a sustainable enterprise and the valuation could have regard to the future economic benefits associated with the business and a liquidation or orderly realisation of assets basis which holds that it is more economical to realise the assets and liabilities of the business than to continue to operate it.

Mr McGuiness explained that a discounted cash flow method is appropriate to use in certain circumstances including where the business has a limited life. He pointed out that such a valuation required determination of the nature and timing of future cash inflows and outflows at a discount rate or cost of capital to be applied to those cash flows.

Mr McGuiness explained that under a capitalisation of earnings method of valuation an expected level of earnings is estimated and capitalised by the application of a suitably chosen multiple. He explained that an orderly realisation of assets method valued the entity on the likely amount that will be distributed to shareholders if the assets were realised in an orderly manner. He said it was an appropriate method to use if the business was to cease operations or where the profitability of the company was not sufficient to sustain an earnings valuation.

Mr McGuiness stated that he valued the brokerage business of GMEC by a primary method of capitalisation of earnings and the lending and origination business by a discounted cash flow method. He said this involved two assumptions. First, that the mortgage interest revenues and borrowing costs on the Senior Note Facility are attributable to the lending and origination business, whilst the net present value of trailing commissions receivable and the net present value of trailing commissions payable are attributable to the brokerage activities.

Mr McGuiness said he reviewed the financial performance of GMEC with reference to the accounts of the company for the years ending 30 June 2007, 2008, 2009 and 2010. He noted the change in accounting policy to which I have referred above. He noted that the company had grown its revenues from 2007 to 2009 but they had fallen to approximately $27 million in 2010. The revenue had in fact declined by approximately $8.5 million in 2010 compared to the previous financial year.

Mr McGuiness pointed out, by reference to the statement of financial position for the year ended 30 June 2010, that GMEC had net assets of approximately $12.5 million but negative or marginal net assets on the application of the former accounting policy. He also noted the business had not generated significant cash flows in the 2009 and 2010 financial years.

In dealing with the lending and origination business, Mr McGuiness pointed to the significant decline in new mortgages through the Trust, which was consistent with an expectation that the Trust did not expect to write significant levels of business after June 2010. He also noted the value of all mortgages originated by the brokerage business had reduced from $3.5 billion to $2 billion over four years.

Mr McGuiness conducted an analysis of the brokerage business. He estimated earnings before interest, tax and depreciation (EBITDA) was negative $103,237 for the year ended 30 June 2010. This comprised $12,249,688 revenue less $12,352,925 operating costs. However, he noted that EBITDA averaged $2,011,355 over the 2008, 2009 and 2010 financial years. He accepted there were limitations in this presentation as there was no allocation of costs to the lending and origination business.

Mr McGuiness undertook an analysis of GMEC’s loan book valuation model. He noted that the loan book valuation model’s estimate of net trailing monthly income, for what was described as the branded portfolio, was $595,422 from gross commissions payable of $170,831, whilst in respect of the third party portfolio the estimated net trailing monthly income was $86,674 from gross commissions payable of $45,527. He noted that the loan book valuation model gave a net present value of the net trailing commissions, receivable for the year ended 30 June 2010, of $20,848,504.

In his evidence at the trial Mr McGuiness pointed out that although the figure of $20,848,504 was described in the loan book valuation model as the estimate of the net present value of trailing commissions receivable and took into account gross commissions receivable and gross commissions payable, it made no allowances for other operating expenses, which amounted to $6 million to $8 million. He pointed out that if these figures were accounted for in the loan book valuation model it would not mean that there was required a deduction of $8 million but rather that the net present value of that amount would need to be reflected. Mr Meredith agreed with the latter comment. Mr Meredith also agreed that there should be accounting for future liabilities.

Mr McGuiness also took into account the budgets of GMEC for the years ended 30 June 2009 to 30 June 2011. These budgets showed net commission income and expenses separately for the years in question. The expenses ranged from $6.7 million in the year ended 30 June 2009, $6.4 million in the year ended 30 June 2010 to $8.146 million in the year ended 30 June 2011. It was these figures of $6 million to $8 million which Mr McGuiness stated were not taken into account in the loan book valuation model.

Mr McGuiness also explained how those costs could be derived from the June 2010 accounts. He took the total expenses of $26,904,276, disclosed in the accounts, deducted operating expenses for the lending and origination business of $12,688,361 (borrowing costs-notes) and made the adjustments referred to in par 4.3.2 of his report of $1,882,990. After the deduction of these expenses, which, on Mr McGuiness’ calculation totalled $14,551,621 (the correct figure is in fact, $14,571,351 but the difference is immaterial), he attributed the balance of the operating expenses of $12,352,925 to the brokerage business. He concluded, as did Mr Meredith, that to the extent these expenses included trailing commissions payable, they were included in the net present value of the commissions. This left a balance of $7,832,329. Mr Meredith did not contest any part of this analysis save to assert costs of the nature suggested would not be incurred in collecting the trailing commissions.

These costs were used by Mr McGuiness in his calculation of EBITDA. Similar calculations were done for the previous two years providing an average EBITDA of $2,011,355. The EBITDA for the year 2010, however, was negative $103,237.

From this information Mr McGuiness valued the brokerage business using a capitalisation of earnings model, concluding that the value was within the range of $3.7 million to $4 million. Mr McGuiness also conducted a discounted cash flow analysis which also indicated a range of value of $3.7 million to $4 million. In doing this, he calculated the average EBITDA at 10.5% of revenue, which he noted when giving evidence, was more generous than the ratio for the year ended 30 June 2010.

Mr McGuiness conducted a valuation of the lending and origination business using a discounted cash flow model. He estimated cash flows for the business taking no account of the expenses allowed for in the budget to which I have referred. Whilst Mr McGuiness said in his evidence that he did not have information to express a view as to what part of the costs of the brokerage business were attributed to the lending and origination business, he stated he did not consider it would be material. He pointed out that if there was an allocation of 10% of those costs to the lending and origination business, it would exhaust the whole of the cash flows of that business. At the time of this report Mr McGuiness did not have the affidavit of Mr Sayer.

Mr McGuiness concluded that the value of the lending and origination business based on a discounted cash flow valuation ranged between $0.72 million to $0.73 million.

Mr McGuiness then considered the value of the loans made by GMEC to AHQ and 9 AS Trust. He concluded that, based on his valuation of AHQ and 9 AS Trust, the receivables should be valued at $2,256,193, as distinct from the book value of $6,718,464. This was to reflect the inability of AHQ and 9 AS Trust to repay the advances.

After making adjustments for surplus assets, Mr McGuiness concluded that the market value of the shares in GMEC ranged between $2.7 million and $3.1 million. This figure took into account adjustments, which he believed were necessary as a result of the Court of Appeal’s Orders.

Mr Meredith valued the share capital of GMEC at $12,515,000, an amount equivalent to the net asset value of GMEC disclosed in the audited financial accounts for the year ended 30 June 2010. He then adjusted this amount, by an amount referable to liabilities of GMEC to Mr Sayer, One Australia, Mr Tomanovic and AFS and certain legal expenses, to reach a net value for GMEC of $17,306,530.

Mr Meredith then calculated 45% of this amount and deducted from it monies due by Mr Tomanovic and AFS to Mr Sayer under the judgment referred to in Order 4(g) of the Court of Appeal’s Orders. He then added certain costs said to be payable by the appellants to the respondents to arrive at a total purchase price payable by One Australia of $6,686,869.

Mr Meredith opined that a capitalisation of earnings methodology was not appropriate for valuing GMEC as it was best suited to a company with relatively stable historical earnings, which he said was essential for a reliable estimate of future maintainable earnings. He also concluded that a discounted cash flow method of valuation was appropriate for a company expected to have a finite life, currently in a start-up phase, having the prospect of significant growth and able to provide reliable long term cash flows. He said that GMEC did not fall into any of those categories.

Mr Meredith stated that an assets valuation method was appropriate where, relevantly, an indication is required of the minimum value a vendor might be prepared to accept for its shares or for companies operating at a low return inconsistent with the level of net assets employed.

Mr Meredith stated that an assets based methodology was usually completed on either a going concern basis or on the basis of an orderly realisation of assets or on a distressed sale basis. He stated that on a going concern basis, carrying or book value is usually taken to be representative of market value. He provided no supporting material for this statement. Mr Meredith concluded that, as the other suggested means of valuing GMEC were inappropriate, it was appropriate to value the company on this basis.

In relation to AHQ, Mr Meredith stated that the management of GMEC had advised him that of the $4,799,626 shown as due to that company by various related entities, only $1,327,522 was recoverable. He said that as a consequence, the audited balance sheet of AHQ was materially misstated. He ultimately concluded that the shares and the units in 9 AS Trust had no value.

Mr Meredith’s reason for adopting book value in his valuation of GMEC was summarised by him in the following terms:

Mr Meredith sought to do a cross-check on value by reference to what he described as a price/book ratio method of valuing shares in a listed financial services company. The method involves dividing the price of a share by the net asset value of the company per share. After adding a premium for control of 25%, he concluded that the application of that methodology to GMEC produced a comparable result to that which was arrived at by applying a similar methodology to a listed company, HomeLoans Limited. This was a company which he stated, without elaboration, was comparable to GMEC. No reliance was placed on this approach by the appellants on the appeal.

In a report filed in response to that of Mr Meredith, Mr McGuiness pointed out that Mr Meredith accepted the book value of GMEC as its market value, making no separate analysis of the expected revenues, costs, profits and cash flows attributable to the brokerage business and the lending and origination business respectively. He stated that an approach which simply accepts the book value of the entity was not appropriate given there were two different businesses, the brokerage business was to continue over the long term and the lending and origination business was in a state of decline.

Mr McGuiness stated that an asset based method is not generally accepted as the primary valuation methodology. In an appendix to his report he provided a number of text references which supported that conclusion.

Mr McGuiness further stated that, in his opinion, Mr Meredith’s use of book value was in error and not consistent with the standard of fair market value, as Mr Meredith made no attempt to restate the assets and liabilities to their fair market value. In his evidence he stated that his consideration of the value of each of the businesses conducted by GMEC effectively restated the value of those assets to fair market value.

Mr McGuiness stated that if, contrary to his opinion, book value was to be used, it needed to be reduced from $12.52 million to $9.62 million, to take account of the non-recoverable nature of the loans to AHQ and 9 AS Trust and legal fees.

Mr McGuiness said his use of the GMEC budget was appropriate because it provided information indicative of the expected performance of the businesses post-valuation date. He said that Mr Meredith ignored this material. He stated that the approach adopted by Mr Meredith was flawed. He indicated that if it was credible, there would never be a need for an independent valuation and it would produce significantly different results depending upon the accounting policy adopted.

Mr McGuiness criticised Mr Meredith for making no adjustment for the non-recoverable loans, which he said led to a $4.46 million overstatement of the recoverability of loans from AHQ and 9 AS Trust. He also identified what he said were the errors made by Mr Meredith in his valuation of AHQ, arising from the use of book value. These were, the inclusion of a success fee of $1.03 million given an instruction it was irrecoverable, the use of the book value of a loan to Mortgage House and Land Pty Ltd of $1.25 million given an instruction that the recoverable value was $0.55 million and the use of book value in respect of a loan to Sayer Family Trust of $1.27 million given an instruction the recoverable value was $0.68 million.

In relation to 9 AS Trust, he indicated Mr Meredith erred in adopting the book value of a loan receivable from related entities, known as Multiown Entities, of $0.22 million, from Trinity Legal of $0.1 million and from MH Property Connect Pty Ltd of $212 given instructions that they were irrecoverable.

Mr McGuiness also stated that in respect of a loan made by 9 AS Trust to AHQ, Mr Meredith erred in adopting a book value of $1.14 million given that on Mr Meredith’s own analysis AHQ had a deficiency of assets over liabilities of $1.08 million. Thus, he said, even on Mr Meredith’s approach, the amount of the loan which was recoverable was $0.06 million. Mr McGuiness pointed out that an adjustment arising out of loan receivables being wholly or only partly recoverable is a generally accepted valuation practice and was adopted by Mr Meredith in his analysis of AHQ and 9 AS Trust but not in relation to GMEC.

Mr McGuiness further pointed out that Mr Meredith provided no assessment of a cost of capital, an earnings multiple or expected earnings for GMEC. However, he stated that Mr Meredith’s valuation of $17.14 million implied an earnings multiple in the range of 11.8 times, which he said was inconsistent with valuation fundamentals. In fact Mr Meredith’s valuation was $17,306,530. However, it should be noted Mr Meredith reached that figure by making adjustments to the book value of $12.515 million which he believed was required by the Court of Appeal.

Mr McGuiness also referred to the different approach that he and Mr Meredith took to the value of the properties owned by AHQ. Mr Meredith valued these properties in an amount which was $0.89 million greater than the value attributed to them by Mr McGuiness. In valuing these properties, Mr McGuiness adopted a valuation of them by MJ Davis Valuations Pty Ltd, dated 10 May 2012, which valued the properties as at 30 June 2010 in an amount of $5,250,000. Mr Meredith relied on a valuation of 9 December 2010 prepared by the same valuer, valuing the property at $6,010,000. Mr McGuiness stated that in relying on the value of the properties as at 9 December 2010 Mr Meredith incorrectly relied on material not available at the valuation date. Mr McGuiness also pointed out that Mr Meredith made no allowance for the realisation costs of the property, even though he was conducting a valuation on an orderly realisation basis.

Mr McGuiness finally stated that it was inappropriate to take account of a deferred tax asset on an orderly realisation of assets method of valuation as a hypothetical purchaser would have no use for it.

In a joint report dated 21 August 2013 Mr McGuiness and Mr Meredith largely adhered to the positions they had adopted in their respective reports. However, in relation to GMEC, they agreed that, in principle, the book value of an entity’s assets and liabilities are not representative of market value and that an orderly realisation of assets method of valuation begins with an assessment of the book value for the assets and liabilities, which are adjusted to “a relevant standard of value”.

The valuers also agreed that, in principle, the application of a discounted cash flow methodology provides the net present value of the expected cash flows of an enterprise and a discounted cash flow based on cash flows to the entity provides a value of the operating business or enterprise value.

The valuers also agreed that, in principle, a capitalisation of estimated future earnings valuation is a proxy or short form analysis for a discounted cash flow analysis and is useful in providing a valuation of expected cash flows. They also agreed, in principle, that where an orderly realisation of assets method is used, it is “applicable” to restate the assets and liabilities to a relevant standard of value such as fair market value. However, they disagreed that for GMEC such a restatement from book value was required.

The valuers also agreed that, in principle, it was “applicable” for a valuer to review the financial position, financial performance, budgets, forecasts and other information for the purpose of a discounted cash flow or capitalisation of earnings analysis. However, the valuers disagreed that the material in the present case was adequate for such a review. Finally, they agreed that a going concern premise of valuation was appropriate for GMEC.

The valuers disagreed on the values of the integers to be used in a capitalisation of earnings or discounted cash flow analysis. However, Mr Meredith provided no alternative to those values suggested by Mr McGuiness. Subsequently, in the joint report Mr Meredith stated that the integers used were within the range which might be expected. The valuers also disagreed that, in relation to GMEC, it was appropriate to restate loan receivables and surplus assets to estimates of their recoverable value. However, in contrast, they agreed it was appropriate to do so in arriving at the equity value of AHQ and 9 AS Trust on an orderly realisation of assets basis, which they agreed was the appropriate method of valuing those entities.

The valuers adhered to their different positions in the method of assessing the value, to GMEC, of the loans made by that company to AHQ and 9 AS Trust.

In the joint report, Mr Meredith expressed the opinion that the most applicable method of valuing GMEC was a discounted cash flow valuation. However, he said that the foundation for such a valuation is “a long term cash flow forecast, preferably covering a period of 10 years, prepared by those persons tasked with stewardship of an enterprise”. He said such information was not available so it was not possible for a valuer to prepare such a valuation. He also said it was not possible to apply a future maintainable earnings methodology as it can only be applied where there has been stability of earnings over a three to five year period.

Mr McGuiness disagreed that there were such limitations and stated that the GMEC budget models provided information as to the nature, timing and extent of the integers that are relevant to the expected revenues, costs, profitability and cash flows.

In support of his contention that an asset based method of valuation was appropriate, Mr Meredith placed some reliance on comments made in a KPMG valuation of certain regulated assets prepared for Queensland Treasury. However, as Mr McGuiness pointed out, the valuation in fact was done on a discounted cash flow basis.

Mr Meredith stated that the budget models could not be used for valuation purposes because they were not supported by a strategic plan or a comprehensive set of clearly elucidated assumptions or “framed within a clarifying narrative”. Mr McGuiness by contrast stated that the budget models provided sufficient information for a valuer to understand the integers used. He said that the budget models were more detailed than those which are regularly found in businesses of a comparable scale.

So far as recoverability of the AHQ and 9 AS Trust loans were concerned, Mr Meredith stated that, given the valuation had to be completed in the context of it being retrospective, no regard should be paid to the write-off of $4,893,420 in the 2011 year when the loans were included in full value in the 2010 financial accounts. Mr McGuiness stated that the fact that the loans were written off was “inapplicable”, he instead adjusted their value having regard to the deficiency of the net assets of the debtors.

Mr Meredith did not deny the deficiency per se, but stated that he would determine the issue of recoverability using a cash flow test as it is not uncommon for enterprises with apparent deficiencies in assets to have access to cash resources, not shown in the accounts, to pay the debts.

There are other minor matters dealt with in the joint report. To the extent that they are relevant I have dealt with them subsequently in this judgment.

Mr Meredith repeated his view that in the absence of a long term cash flow forecast for the company and in the absence of a business plan it was not possible to value the shares in the company using a discounted cash flow method.

Mr Meredith stated that his understanding was that the operating costs of $6 million to $8 million, referred to by Mr McGuiness, would have been taken into account in forming a view whether the net assets reflected a true and fair view of the net assets of the company. He also pointed to the fact that the accounts were audited.

Mr Meredith stated he did not recall if the operating costs were included in the loan book. He said he had lost faith in the loan book when it produced a different net present value of the trailing commissions to that shown in the accounts. He said net present value in his belief was gross commissions received less the expenses of earning those commissions.

Mr Meredith also suggested that a hypothetical purchaser might not take the additional expenses into account because the purchaser might have the capacity to avoid any such expenses in getting in the commission.

In relation to the loans from GMEC to AHQ and 9 AS Trust, Mr Meredith acknowledged that the unaudited balance sheets for the latter two entities showed a deficiency of assets over liabilities but said funds could be obtained from other sources to pay the debts. Mr Meredith identified a possible source as cash from shareholders. He did not indicate why shareholders would make that cash available to an incoming purchaser. He said that he felt sure that the director responsible for preparing the GMEC accounts, who did not write down the loans, would have considered this issue.

In cross-examination, Mr Meredith acknowledged that he had had communication with the Chief Financial Officer of GMEC in the course of preparing his valuation. However, he said he did not make inquiries as to whether there was any business plan or strategic plan for the company. He said that such documents would have been given to him if they had been available. He acknowledged that the Chief Financial Officer asked him whether he needed any further information to prepare his valuation and that he did not request any further material.

Mr Meredith said he prepared a discounted cash flow valuation for the business. He described it as “internal rough workings” to see if he had all the information available to properly apply that methodology. He ultimately said to prepare a cash flow forecast he would have to rely on information provided by Mr Sayer and that would be difficult as he was the buyer of the shares. He said he was concerned that such material would not be impartial. It should be noted that no criticism was made of the material supplied by Mr Sayer.

Mr Meredith said that until he completed his report he did not look at valuations prepared by Mr McGuiness stating he felt “that that was not the thing to do”. He said that he had not read Mr McGuiness’ report in response although he had scanned it. He said he didn’t see any point in reading Mr McGuiness’ report.

Mr Meredith was referred to his evidence that he had lost faith in the loan book because it was inconsistent with a stated value of the commissions in the accounts. It was pointed out to him that the only difference was that a discount rate of 10.9% was used in the loan book compared to a rate of 12% in the accounts. He said he did not contact the Chief Financial Officer to ask him to explain the difference between the two amounts.

In his evidence Mr McGuiness explained his reports in detail. I have summarised these reports above.

Mr McGuiness agreed with Mr Meredith that the allocation of fixed costs was a matter of subjective assessment. He pointed out that if there was an allocation of costs in the lending and origination business, the business would produce a negative cash flow. He said his understanding was that the company did not have the information to attribute that part of the costs which may be attributable to the lending and origination business. In that context the evidence of Mr Sayer to which I have referred in par [11] above is of importance.

In cross-examination Mr McGuiness stated that the valuation task was to value 100% of the entity. He pointed out that in acquiring 100% of the entity the various financial benefits would consist broadly of the levels of revenue, costs, profitability, cash flow and at some time in the future perhaps dividends.

In relation to the accounts Mr McGuiness pointed out that the financial statements put readers on notice that there were going concern considerations.

The primary judge stated that the first matter which he was required to determine was the market value of the shares in GMEC. He referred to the fact that each of Mr McGuiness and Mr Meredith agreed that market value was to be assessed by reference to the value a hypothetical prudent purchaser who is a willing but not anxious buyer would be prepared to pay to a willing but not anxious vendor. He rejected the contention of the appellants that regard should be had to wider concepts of value, stating that the Court of Appeal’s Orders defined the task as to assess not “the ‘value’ of the relevant shares in a broader sense but their ‘market value’”. He said that that necessarily depended upon the saleable value of the shares on the relevant market.

The primary judge referred to the evidence of Mr Sayer (which I have summarised in pars [10]-[14] above) and to his evidence that GMEC prepared rolling two year budgets for management purposes.

The primary judge summarised the evidence of Mr McGuiness and Mr Meredith. He pointed out that although Mr Meredith stated that the financial information supplied was insufficient for a discounted cash flow or capitalisation of earnings analysis to be conducted, in cross-examination he indicated there was nothing he could recall about the information which caused him to question its reliability.

The primary judge referred to the fact that Mr Meredith had commenced a discounted cash flow valuation and there was nothing to suggest that the GMEC’s Chief Financial Officer was unwilling to provide such information as was required to assist in that task. He noted that Mr Meredith did not seek any such information (see pars [83]-[84] above). The primary judge stated that it did not seem to him that the information provided to the valuers by GMEC in itself raised any question as to its veracity. He referred to the evidence of Mr Meredith that it was important to remain impartial but said he found it impossible to see how an expert could prejudice his independence and impartiality by seeking necessary information.

The primary judge referred to the evidence of Mr Meredith that because of the difference in the net present value of the trailing commissions contained in the loan book as compared to the accounts, he lost faith in the loan book (see pars [80] and [86] above). The primary judge pointed out that had he asked the Chief Financial Officer the discrepancy would have been resolved as a difference due to a change in the discount rate. He repeated his view that asking for such an explanation could not be seen to compromise the independence of the expert.

In these circumstances the primary judge did not accept the criticisms made by Mr Meredith of the use made by Mr McGuiness of a discounted cash flow methodology in valuing the lending and origination business. He pointed out that Mr Meredith did not point to any academic or professional commentary supporting his view that to undertake such a valuation it was necessary to have 10 to 20 year forecasts prepared by management. The primary judge accepted that an earnings based valuation not based on such forecasts may have a greater level of uncertainty but said it did not seem to be worthless or impossible to undertake.

The primary judge also referred to the evidence of Mr Meredith that the unstable patterns of earnings experienced by GMEC made it impossible to use a capitalisation of earnings methodology to value the shares in the company. He again expressed the view that that assertion was not supported by any academic or professional literature and stated that he was not persuaded by Mr Meredith’s contention.

The primary judge rejected the appellants’ submission that the forecasts used by Mr McGuiness in his valuation amounted to sheer speculation. He said the fact that a valuation is not a matter of exact science is not a reason to not adopt an accepted valuation process. The primary judge accepted that any forward looking exercise, such as an estimate of future cash flows, is potentially less certain than an exercise based on historical facts. He pointed out that a fundamental difficulty with the appellants’ approach is that it would exclude the use of a discounted cash flow or capitalisation of earnings methodology in many or all circumstances. A similar comment had been made by Mr McGuiness (see par [58] above).

The primary judge also noted the appellants’ submissions that different growth rates could provide different results. He said that merely demonstrated that any expert assessment would depend on the inputs, which will often be a matter of expertise. He said it was open to the appellants to apply a sensitivity analysis to demonstrate the effect of different rates of growth and ask the Court to adjust the valuation on that basis. He noted that the appellants chose not to do so.

The primary judge rejected the criticism of Mr McGuiness’ valuation on account of the fact it was based on material supplied by Mr Sayer. He pointed out that a willing but not anxious purchaser would seek information in relation to the business to be acquired from a vendor. He also pointed out that the information was provided by the Chief Financial Officer rather than by Mr Sayer and there was no particular aspect of it which was said to be inaccurate or distorted. He also pointed out that Mr Meredith himself relied on the balance sheet.

The primary judge referred to the appellants’ contention that the result of Mr McGuiness’ valuation was that One Australia would acquire assets of $12.5 million net (including future trailing commissions having a value of nearly $20 million and access to a source of remuneration in excess of $900,000 per year) at a valuation of $2.7 million to $3.1 million. The primary judge pointed out that that assumes the value of future trailing commissions are at the figure stated notwithstanding the evidence that such a figure did not take into account the cost of earning such commissions, the qualification to the financial reports and the question whether GMEC could continue as a going concern.

The primary judge pointed out that in supporting his assets based valuation, Mr Meredith observed that book value was a true and fair value. He stated that that observation required at least three qualifications. First, neither the director nor the auditor stated that the balance sheet was presented either at market value or fair market value. Second, the reports themselves stated the accounts did not comply with Australian accounting standards. Third, the proposition had to take account of the nature of the audit set out in the auditor’s report to members. The primary judge accepted the respondents’ submission; namely, that the appellants’ assumption that auditors, when conducting a special purpose audit, in some ways satisfy themselves as to the market value of the assets of the company, overstated the position. His Honour accepted the evidence of the auditor, Mr Stevenson, that he was not qualified to perform and did not perform a valuation of GMEC’s assets.

The primary judge referred to the evidence of Mr Meredith that the proposition that book value is representative of market value is “entrenched in valuation practice and there is myriad empirical evidence and literature to support this view”. He pointed out that Mr Meredith produced no material to support that proposition. The primary judge referred to the commentary supplied by Mr McGuiness to the effect that the use of book value in that fashion is not generally a proper basis for valuation and that the literature did not support the view that the value of a business enterprise will necessarily be equal to book value.

The primary judge accepted the appellants’ submission that financial statements based on historical costs may have more utility where the relevant assets in question are future commissions based on net present value. However he stated this was not a complete answer, referring to the impairment to the loans owed by related parties and the failure to take into account the costs involved in delivering the earnings.

The primary judge pointed out that even if it was accepted that a discounted cash flow or capitalisation of earnings method of valuation was inappropriate, it did not follow that the balance sheet value should be accepted. He referred to the agreement between the valuers that an assets based method of valuation begins with an adjustment of book value to the relevant standard of value.

The primary judge referred to the evidence given by Mr McGuiness that Mr Meredith’s approach to book value did not take into account assets and liabilities not disclosed on the balance sheet. The judge stated that this was of particular importance where ongoing costs may be reflected as an expense in a company’s income statement rather than in its balance sheet.

The primary judge criticised Mr Meredith for failing to read the response report of Mr McGuiness. He stated that that fell well short of what would be expected of an expert.

The primary judge accepted the evidence of Mr Sayer as to the allocation of costs to which I have referred in par [11] above. He referred to the evidence of Mr McGuiness that the valuation attributed to trailing commissions in the loan book only took into account commissions payable and no allowance was made for other costs. He accepted the view, expressed by Mr McGuiness that it was necessary to take into account $6 million to $8 million of operating costs (see pars [37] and [38] above). In particular he accepted the evidence of Mr McGuiness that he had reviewed the loan book valuation model and that that model did not account for the operating expenses.

The primary judge rejected the submission that it was inconceivable that the auditor would fail to provide for these expenses in fixing the net present value of future trailing commissions. First, he stated that the evidence was that the value was fixed by reference to the loan book model and that the operating costs would be reflected in the statement of financial performance (profit and loss) contained in the accounts. He pointed out that the expenses would not be missing when brought to account in the profit and loss statement. He stated that no reason was given to suggest that the auditor would have any difficulty with the inclusion of operating expenses in the profit and loss account.

The primary judge also pointed to the evidence of Mr McGuiness as to the effect the change in accounting policy had on the net asset position (see par [33] above). The primary judge concluded that the substantial change caused by the adoption of that methodology indicated a fundamental deficiency in Mr Meredith’s approach, namely, a failure to adjust values to take account of expenses.

The primary judge rejected the submission that as the receivables from AHQ and 9 AS Trust were disclosed at full value in the balance sheet, they should be treated as fully recoverable. He referred to the notes to the GMEC accounts, which indicated that no adjustment had been made to the recoverability of assets in the event GMEC was unable to continue as a going concern and that the relevant impairment standard had not been applied. He described the evidence of Mr Meredith on this issue as purely speculative. He preferred the analysis of Mr McGuiness as demonstrating a deficiency in the assets of AHQ and 9 AS Trust, which would lead to an inability by GMEC to recover the whole of the loan. He stated that no rational purchaser would proceed without making such an adjustment.

The primary judge referred to the different approach taken by the valuers to the deferred tax liability of $5.78 million in the GMEC financial statements. He noted that Mr McGuiness stated he did not attribute a separate value to this because he allowed for estimates of the expected income tax attributable to the brokerage business in his capitalisation of earnings model or his alternative discounted cash flow analysis and to take account of it again would involve double counting. He accepted the evidence of Mr McGuiness that, as Mr Meredith did not assess the market value of the brokerage business, it was not practical to provide any assessment of the deferred tax liability.

The primary judge concluded that therefore a hypothetical purchaser would not accept the valuation of GMEC by reference to its balance sheet without further adjustment. He referred to Mr McGuiness’ assets based valuation which, after adjustment to the assets, valued GMEC in the range of $2.69 million to $3.11 million. It should be noted this valuation effectively adopted the value that Mr McGuiness had placed on each of the businesses operated by GMEC in his capitalisation of earnings and discounted cash flow valuations.

The primary judge accepted that he was not bound to choose between the values arrived at by the two experts. However, he stated that any adjustments must be supported by evidence. With respect to adopting an earnings based methodology, the primary judge said there was no evidence, other than that supplied by Mr McGuiness, as Mr Meredith had not provided alternative calculations. In these circumstances the primary judge found that the shares in GMEC should be valued at $2.9 million, the midpoint of the valuation of Mr McGuiness.

The primary judge then dealt with the adjustments required by par 4(c)(ii) of the Court of Appeal’s Orders. He noted the valuers agreed on the amount to be adjusted but each valuer approached the task differently.

Mr Meredith, based on his understanding of the Court of Appeal’s Orders, added the amounts required to be adjusted. The primary judge stated in his view the adjustment was a matter for the application of accounting expertise. Mr McGuiness, by contrast, pointed to the fact that he had adjusted for this amount in his estimate of net liabilities and that it was not appropriate to make an adjustment by adding the amount of liabilities to the book value as shown in the balance sheet as this would amount to double counting. The primary judge seemed to accept the approach of Mr McGuiness as correct (despite what is said in the last two sentences in par [97] of the primary judgment).

The appellants filed lengthy and detailed grounds of appeal. However, the issues ultimately argued were reduced to four key matters. First, was the primary judge justified in accepting the valuation approach of Mr McGuiness in preference to that of Mr Meredith? Second, in valuing the brokerage business, did Mr McGuiness wrongly take into account costs of between $6 million to $8 million? Third, having regard to the equity in the balance sheet, was the valuation plainly erroneous? Fourth, did the primary judge err in accepting the valuation of the AHQ and 9 AS Trust loans propounded by Mr McGuiness in his valuation?

The appellants filed two sets of submissions. A number of matters raised in the first submissions were abandoned. However, that set of submissions pointed to what were described as a number of signposts, which were relied upon in support of the proposition either that the primary judge erred in declining to adopt the approach to valuation propounded by Mr Meredith or that he erred in failing to carry out his own assessment of value which would have led to a significantly greater valuation.

The first signpost that was relied upon was that the accounts showed that, whilst in 2007 GMEC had incurred a loss of $6,267,265, it earned a profit of $3,770,022 in 2008. It was also submitted that in 2009 GMEC suffered a loss of $1,831,836, which included the writing-off of bad debts of $7,468,248. It was said that but for the bad debts, GMEC would have earned a profit of $5,636,412 or $11,926,684.

It was submitted that these and other features, coupled with the fact that the company was able to pay Mr Sayer a salary of approximately $900,000 per annum, demonstrated it was very profitable.

The difficulty with this submission is that the figures relied on do not reflect what is shown in the accounts. As originally prepared, the accounts for the year ended 30 June 2009 showed a loss of $1,831,836, which as stated in the submission, was a loss which was arrived at after taking into account bad debts. However the restated accounts for 2009 showed a loss, not a profit, of $4,588,436. Further, this was arrived at after giving credit for a future income tax benefit of $1,983,028 arising out of the loss for that year. If an adjustment is made discounting the bad debts and the future income tax benefit, the operating profit before tax was $815,759, which declined to $187,124 for the 2010 year.

The appellants also criticised the primary judge for comparing the unrestated 2009 accounts to the 2010 accounts, stating that the equity position in the restated 2009 accounts was similar to those in 2010. It may be accepted that this is the appropriate comparison, but the significance is that the change in the equity position only resulted from a change in the accounting policies.

The appellants also submitted that, despite the fact that the net asset position disclosed in the balance sheet was four times the valuation arrived at by Mr McGuiness, Mr Sayer had said there was no way he would wind-up the company. It was submitted that this demonstrated Mr Sayer saw the business as worth more than $12,515,000. To the extent that the opinion of Mr Sayer was relevant, this proposition was not put to him.

It was also submitted that a staff increase in 2010 indicated that GMEC management foresaw GMEC enjoying a profitable future. It was said this was not considered by Mr McGuiness. In fact, staff expenses, along with other expenses, were taken into account in the earnings estimate carried out by Mr McGuiness.

The appellants also pointed to the fact that in 2008 Macquarie Bank sold its 10% share of GMEC to Mr Sayer for $750,000, which the appellants said would attribute a value of $7,500,000 to the company. It was submitted that the position of GMEC had improved considerably since that time.

It was also submitted that although there was evidence that a number of financial service businesses had failed post the Global Financial Crisis, the Commonwealth Bank had continued to renew its facility and the balance sheet of GMEC showed that it had weathered the Global Financial Crisis. They also referred to the fact that the Commonwealth Bank had provided a working capital facility, which in 2010 was 255% more than the valuation of the company arrived at by Mr McGuiness.

So far as the discounted cash flow valuation was concerned, the appellants submitted that the question was whether in the circumstances of the present case such a valuation could be carried out with a sufficient degree of reliability so the Court can, with confidence, obtain a definitive valuation. It was submitted that the primary judge’s reliance on the fact that such a valuation method was used in other cases did not take into account that in those cases the appropriateness of the use of that methodology was not in issue.

The appellants submitted that because of the volatility of earnings and the absence of forecasts necessary for a discounted cash flow valuation or a capitalisation of earnings valuation, those methodologies were inappropriate. They submitted this could be contrasted with the trailing commissions where the amounts payable are known and contingencies such as mortgage default can be forecast by reference to historical facts.

The appellants also submitted that the primary judge erred by failing to take into account the submission that, where an earnings based methodology entails a high degree of speculation, the result must be assessed against valuations based on more objective facts.

The appellants pointed to the fact that the selection of different growth rates for the business could lead to different results, which they submitted indicated the subjectivity of the valuation.

In submissions described as submissions in reply, but which in reality presented a somewhat different case, the appellants submitted that an entitlement to a trailing commission arose as a debt on the making of the loan and was contingent only on the loan being in place in subsequent years. Whilst this may reflect the common understanding of a trailing commission, it must be emphasised that there was no evidence of the particular contractual arrangements in place in the present case, in particular the terms on which such commissions were payable.

As a corollary to this submission, it was said that securing and generating the right to such a commission will be reflected in the expenses of conducting a business in which the loan giving rise to the commission was made. It was said that the initial commissions and the expense of generating them was reflected in the profit and loss statement in the years in which the loans were written whilst the right to future commissions was reflected in the balance sheet.

It was submitted that for a balance sheet to give a true and fair view of the assets and liabilities of a company it was a fundamental requirement that any material liabilities associated with an item, such as trailing commissions, would be identified either in the balance sheet or in the notes accompanying it. Reference was made to AASB 101 and AASB Framework pars [22] and [37] in support of this proposition. No reliance was placed on these standards in the Court below and no accounting evidence was led to support the proposition that such costs were required to be brought to account in the balance sheet as distinct from the profit and loss account or whether if included in the latter, they would be accounted for in the balance sheet as part of retained earnings or accumulated losses.

The appellants asserted that the $6 million to $8 million expenses referred to by Mr McGuiness were attributable to the current operation of the brokerage business which generated new transactions. They submitted that the right to receive net trailing commissions was no different to the right to receive a future stream of cash and a hypothetical purchaser would view these commissions separately from the brokerage business.

The appellants pointed to the fact that the balance sheet for the year ended 30 June 2010 disclosed trailing commissions, net of commissions payable, of $19.27 million. They pointed to a deferred tax liability in the accounts of $5.781 million, which they pointed out was 30% of $19.27 million. They submitted this indicated the value of the company was to be found in the net present value of the trailing commissions and the valuation of Mr McGuiness was in error. Once again no reliance was placed on these calculations in the Court below.

The appellants referred to the expenses listed in the consolidated revenue statements and submitted that prima facie none of these related to receiving trailing commissions. They submitted that neither the primary judge nor Mr McGuiness identified the costs that would be incurred in receiving future trailing commissions. However, it is important in evaluating that submission to have regard to the fact that Mr McGuiness was valuing the brokerage business, not simply the trailing commissions.

The appellants submitted that this analysis demonstrated that there was no material cost in the trailing commissions, particularly having regard to the deferred tax liability. It was submitted that what in reality was happening to the business of GMEC was that each year it was building up trailing commissions receivable in the future. They submitted that those commissions were assets which had a market value and could be sold if the owner chose to do so.

The appellants submitted that Mr Sayer gave no evidence to support the proposition that GMEC incurred any operating expenses in collecting future net trailing commissions. The appellants submitted that such a lack of evidence strengthened the submission that, in truth, no such expenses were incurred and therefore Mr McGuiness’ assertion of $6 million to $8 million costs had no basis and should be rejected.

The appellants submitted that there was no suggestion that book value was not a valid proxy for market value in the case of trailing commissions.

The appellants also submitted that Mr McGuiness’ capitalisation of earnings method of valuation was flawed as it compares “the value of the future earnings (not cash flow) of the business with net assets of the business (effectively represented by the net trail commissions receivable) which attributes no value to the future earnings of the business”. They submitted that as the basis for accounting of net trailing commissions results in the net present value of all net trailing commissions being recognised in the year which the loan was written, future earnings before interest and tax do not include the cash to be received from the entitlement to net trailing commissions.

Senior counsel for the appellants submitted that it was important to remember that the balance sheet is prima facie evidence of all matters contained in it. He referred in this context to s 1305 of the Corporations Act. He submitted in the present case the balance sheet reflected what he described as a “commercial reality”.

Senior counsel for the appellants also referred to the fact that Mr Sayer had provided a management representation letter (the Representation Letter), which stated that the figures in the balance sheet were correct.

Senior counsel for the appellants also submitted that Mr McGuiness erred in not using an orderly realisation of assets model of valuation at least as a cross-check on his primary method of valuation. He submitted that nowhere in his valuation did Mr McGuiness identify the figures of $6 million to $8 million costs. He submitted that the commissions would come in automatically or that the costs of collection would be small.

Senior counsel for the appellants referred to the secondary method adopted by Mr McGuiness in valuing the brokerage business, namely, the discounted cash flow analysis. He submitted that it showed an increase in working capital up to an amount of $26,878,328 and that what that demonstrated was that the business could derive cash flows of $569,303 together with a working capital asset increasing each year until it is approximately $26 million. Implicit in this submission was that this was inconsistent with a valuation of $3.7 million to $4 million.

Senior counsel for the appellants submitted that the approach adopted by Mr McGuiness and by the primary judge failed to come to grips with the real question, namely, what represented the true value of the trailing commissions, which did not include deducting $6 million to $8 million costs.

Senior counsel for the appellants also submitted that what he said was supported by the statement of the auditors that the net present value of the commissions gave a true and fair view of the state of the company’s assets and their value. He pointed to the definition of fair value in AASB 136 as the value represented by the sale of an asset in an arm’s length transaction between knowledgeable and willing parties.

Senior counsel for the appellants submitted that it was not necessary to find that an earnings method of valuation was inappropriate for the appellants to succeed. He said that surplus assets could not be ignored and suggested that trailing commissions could be taken into account in a similar fashion.

In their additional submissions the appellants pointed to the fact that Mr Sayer gave no evidence that the loans to AHQ and 9 AS Trust were not recoverable in full. They submitted there was no evidence to suggest that any inquiry was made to Mr Sayer as to the recoverability of the loans and that in these circumstances market value should be determined on the basis that the loans were fully recoverable. However as the respondents pointed out, material was available from the Chief Financial Officer to demonstrate that irrecoverability.

The appellants submitted that as at 30 June 2010 a hypothetical purchaser would know the accounts had been certified as presenting a true and fair view of the financial position of the company, that Mr Sayer had turned his mind to whether the debts were fully recoverable and formed the opinion they were and that in those circumstances the hypothetical purchaser would be entitled to assume that they were fully recoverable. In those circumstances the appellants submitted that the primary judge erred in accepting the adjustments for the recoverable value of the loans made by Mr McGuiness.

Senior counsel for the appellants criticised the primary judge for relying on the statement in the accounts that the accounting standards relating to impairment of assets had not been complied with. He contended that the standards which had not been complied with were the disclosure requirements in AASB 101. He pointed in particular to the notes of the accounts under the heading “Provisions and Impairment of assets”, which stated that loan advances are reviewed each balance sheet date to determine whether there is objective evidence of impairment and to the statement in the Representation Letter that all amounts recorded in the financial statements were recoverable. He pointed out that the primary judge did not refer to the notes.

Senior counsel for the appellants submitted that the matters taken into account by Mr McGuiness in adjusting the debt were not evidence but simply unverified instructions. He accepted that no objection was taken to the report and that it was not submitted that what Mr McGuiness relied on had not been proved.

The respondents have described the adjustment to the figures in the accounts to which I have referred in par [119] above as convenient manipulation, providing no basis for assessing the value of GMEC as a whole as at 30 June 2010. They described the submission that because Mr Sayer had no intention of winding-up the company and had increased staff in 2010 he perceived the company worth more than $12,515,000, as entirely speculative.

The respondents stated that a sale of a 10% shareholding by Macquarie Bank in 2008 could not be taken as a significant signpost stating that was consistent with what this Court said on an appeal in the oppression proceedings: Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 84 ACSR 121 at [195]. Similarly the respondents submitted that the size of the Commonwealth Bank of Australia’s funding and the remuneration paid to Mr Sayer constituted no evidence of value.

The respondents submitted that if the appellants’ contention, that a discounted cash flow methodology was inappropriate because of the impossibility to meaningfully predict future earnings, was correct, then it would mean this methodology would not have become an established method for valuing shares. They pointed out that Mr Meredith had stated that generally speaking it was an appropriate valuation method.

The respondents submitted that the primary judge was correct in noting that the observation of Mr Meredith, that the use of book value was appropriate as the accounts had been audited to Australian auditing standards, was subject to three qualifications. First, neither the management nor the auditors said the balance sheet was presented at market value. Second, the report itself made it clear that the accounts did not comply with several standards and, third, the proposition had to be read subject to the explanation of the nature of an audit and the tasks the auditors undertook. They submitted that the assumption contended for misunderstood the role of an auditor.

The respondents pointed out that although Mr Meredith stated that the proposition that book value is equivalent to market value was entrenched in valuation theory and practice, he did not identify any literature to support that proposition.

The respondents also submitted that even if an asset based valuation was the correct methodology, Mr Meredith made no attempt to restate the assets to their market value.

The respondents submitted that the second set of submissions filed by the appellants advanced a substantially new case. They submitted that what was put in relation to the trailing commissions and the loan assets could only be relevant if the Court found the primary judge’s conclusion as to the appropriate valuation methodology was incorrect.

The respondents pointed out that what had to be deduced was the value of the whole share capital, not what would be realised on the potential sale of a single asset.

The respondents submitted that in any event, the appellants’ submissions on the two specific assets must fail because there was no evidence to support the appellants’ further submissions and no attempt was made to contradict the evidence of Mr Sayer.

The respondents submitted that the evidence did not show that the payment of future trailing commissions was contingent only on a loan still being in place in subsequent years, that there were no material operating costs associated with the right to receive them, that any material liabilities would be identified in the balance sheet and the right to receive such commissions could be sold if the business so chose.

The respondents submitted that the evidence of Mr Sayer as to cost allocation was not challenged, nor was the conclusion reached by Mr McGuiness that the balance sheet value of the commissions did not reflect its value because it did not account for the $6 million to $8 million costs. It seems to me, having regard to the evidence of Mr Meredith, the latter matter was put in issue.

The respondents also noted that Mr Meredith said he did not have sufficient experience to assist the Court as to the costs of collecting the trailing commissions.

The respondents further noted that there was no evidence before the Court as to the appropriate accounting treatment for material liabilities associated with the balance sheet value of trailing commissions. They noted that Mr Meredith accepted that the expenses of deriving income would be accounted for in the profit and loss statement and not the balance sheet.

The respondents submitted that the appellants did not attempt to establish at trial that there was a market available for the right to receive trailing commissions.

The respondents submitted that there was evidence of the particular operating expenses associated with the trailing commissions. They pointed to the evidence of Mr Sayer to which I have referred above. They also referred to the evidence of Mr McGuiness that the loan book valuation model did not account for all operating costs to derive commissions and that Mr McGuiness identified the operating expenses in the 30 June 2010 financial statements and in the budget for the year ended 30 June 2011. They pointed out there was no challenge to these operating costs.

So far as the recoverability of the AHQ and 9 AS Trust debts were concerned, the respondents submitted the experts had agreed that there was a significant deficiency of assets in those companies, although they disagreed as to the extent. They pointed to the fact that Mr Meredith’s only justification for including the loans at full value was that the company may have access to other resources. The respondents submitted that the primary judge was correct in describing that evidence as speculative. They submitted there was no real reason to place any weight on the Representation Letter of Mr Sayer, which was for the purpose of complying with financial reporting standards. It should be noted, however, that the Representation Letter stated that adequate provision had been made for adjustments and losses in respect of the collection of receivables.

At the hearing, senior counsel for the respondents pointed out that because of the nature of the valuation conducted by Mr McGuiness, the $6 million to $8 million figure for costs was embedded in his earnings analysis.

Senior counsel for the respondents also submitted that Mr McGuiness had reached the same conclusion by the use of an assets based methodology. However, as I pointed out, that conclusion was reached on a fairly limited basis (see pars [56] and [113] above).

Senior counsel for the respondents said it was not suggested to Mr McGuiness that his approach of valuing the company as a going concern in effect led to the result that a fair proportion of the earnings from the trailing commissions were consumed in the expenses that were generating less and less revenue. He submitted, referring to the June 2011 budget, that the brokerage business was expected to continue.

Senior counsel for the respondents emphasised that there was no challenge to the specific figures in the budget or other material that Mr McGuiness took into account.

Senior counsel for the respondents pointed out that the loan book model only accounted for commissions payable, not operating expenses. In essence, he submitted that having regard to the fact that any difference between the figures derived from that model and the net present value of the commission disclosed in the accounts was a difference in discount rates, Mr Meredith was not justified in disregarding the model.

Senior counsel for the respondents submitted that the impairment standards in AASB 136 had no application as they only applied to tangible assets. He submitted the notes to the accounts and the Representation Letter to which I have referred (see par [150] above) had no relevance to the valuation process.

The respondents submitted that it was incorrect to state that there was no evidence to justify the conclusion reached by Mr McGuiness on the recoverability of the loans to AHQ and 9 AS Trust. Senior counsel for the respondents pointed to information supplied by the Chief Financial Officer of GMEC, which referred to the write-down of loans to associated companies and the non-recoverability of the success fee, consistent with what was stated by Mr McGuiness. The material contained a review of the financial position of AHQ and 9 AS Trust consistent with the evidence of Mr McGuiness. The material was admitted without objection and no challenge to its veracity was made.

By notice of motion filed on 22 August 2014 the appellants sought to add the following additional ground of appeal:

The ground of appeal relates to Order 4(b) of the Court of Appeal’s Orders to which I have referred above (see par [4] above). The appellants sought to argue that prejudgment interest in respect of judgment referred to in the additional ground and interest on the judgment from 5 March 2010 to 30 June 2010 should be added to the purchase price for the shares in GMEC, in addition to interest accruing after the latter date.

Senior counsel for the appellants accepted that the issue was not raised at the hearing stating that it was simply overlooked. He noted it was not included in the balance sheet and so it was overlooked.

The notice of motion was opposed by the respondents. They submitted there was ample opportunity to raise the matter but the appellants had failed to do so until shortly prior to the appeal. They submitted had the matter been raised earlier they would have sought to investigate the recoverability of the loan made to Mr Tomanovic. Senior counsel for the respondents referred to the judgment of Tobias JA on the application for a stay of the judgment in the oppression proceedings (Zoltan Tomanovic v Global Mortgage Equity Corporation Pty Ltd (NSWSC, unreported, 17 May 2010)) pointing to the fact there was a real issue as to recoverability of the loan.

Both valuers accepted that an earnings based method of valuing a company as a going concern is the methodology most commonly adopted.

This opinion is consistent with what has been stated in a number of cases in which the valuation of shares in a proprietary company has been considered.

In Perpetual Trustee Company (Limited) v The Federal Commissioner of Taxation [1942] HCA 4; (1942) 65 CLR 572, Williams J pointed out at 580 that the main items to be taken into account in valuing shares are the earning power of the company and the safety of capital assets in which the shareholders’ money is invested. A similar approach was taken by his Honour in McCathie v The Federal Commissioner of Taxation [1944] HCA 9; (1944) 69 CLR 1 (McCathie). In that case Williams J made the following comments at 11:

What was said by Williams J in McCathie may require some qualification where it was within the power of the purchaser to wind-up the company. However, in the present case there was no issue in the Court below that GMEC should be valued as a going concern.

In Commissioner of Succession Duties (South Australia) v Executor Trustee and Agency Company of South Australia Limited [1947] HCA 10; (1947) 74 CLR 358 (Commissioner of Succession Duties), Latham CJ, Rich and Williams JJ made the following comments at 362:

This passage was approved by Gibbs J sitting as a single judge of the High Court in Gregory v Commissioner of Taxation of the Commonwealth of Australia [1971] HCA 2; (1971) 123 CLR 547 at 565.

A somewhat similar problem to that which has arisen in the present case arose in Mallet v Mallet [1984] HCA 21; (1984) 156 CLR 605. In that case the primary judge valued the shares in a proprietary company at $334,600 in circumstances where the value of the assets of the company was close to $700,000. The High Court, by majority, upheld the decision of the trial judge. Gibbs CJ made the following remarks at 616-617:

Gibbs CJ at 617 also referred to the difficulty of adopting an alternative methodology in the absence of evidence of whether the assets were capable of ready realisation, whether it would be prudent to realise them and the likely proceeds of realisation.

Mason J dissented. He made the following remarks:

In considering whether the primary judge erred in adopting the valuation method propounded by Mr McGuiness there is one further matter which should be borne in mind. The process of valuation may produce a range of results from different judges valuing in accordance with accepted principle and making no error of law. An appellate court is not justified in substituting its own opinion unless it is satisfied the court below acted on the wrong principle of law or its valuation was entirely erroneous: Commissioner of Succession Duties at 367, The Commonwealth v Milledge [1953] HCA 6; (1953) 90 CLR 157 at 159, Emerald Quarry Industries Proprietary Limited v Commissioner of Highways (South Australia) [1979] HCA 17; (1979) 142 CLR 351 at 356 and 374 and The Commissioner of Taxation of the Commonwealth of Australia v St Helens Farm (ACT) Proprietary Limited [1981] HCA 4; (1981) 146 CLR 336 at 363-364 and 381.

I do not consider that the primary judge erred in accepting that the approach adopted by Mr McGuiness was the appropriate methodology to determine the value of GMEC. The method of valuation adopted by Mr McGuiness is a well-accepted method of valuing a company as a going concern. Importantly, no suggestion was made that the company should not be valued on a going concern. Rather, the methodology that Mr McGuiness used was in dispute.

Ultimately, no submission was put that the primary judge misconstrued his task or misunderstood the Court of Appeal’s Orders which directed the basis on which the valuation was to be undertaken. Further, the primary judge was correct in stating that Mr Meredith did not provide any academic or professional support for the proposition that a precondition to an earnings based valuation was stability of earnings or for the proposition that a precondition to a discounted cash flow analysis was ten year cash flow forecasts provided by persons having “stewardship” of the company.

Undoubtedly it is correct that stability of earnings and the availability of long term cash flow forecasts diminish the uncertainty inherent in the valuation based on an estimate of earnings or cash flows. So much was acknowledged by the primary judge. However, this does not mean the absence of such factors precludes the use of such methods of valuation if the valuer believes that he or she has sufficiently reliable material to undertake the task.

In the present case the evidence of Mr McGuiness, an experienced valuer, was that he had sufficient information to undertake the valuation using earnings and cash flow based methodologies. Mr Meredith, apart from the general assertion that the preconditions he said were necessary for the use of methodologies were absent, did not point to any material relied on by Mr McGuiness as being inaccurate or unreliable. Nor did he criticise any of the integers used by Mr McGuiness in carrying out his valuation.

In these circumstances it does not seem to me that the primary judge erred in principle in accepting that the methodology used by Mr McGuiness was appropriate. However, the question remains whether the result arrived at was self-evidently erroneous such that the valuation could not be accepted. This involves two questions. First, could the valuation be supported having regard to the differences between the result arrived at and the book value of the company as disclosed in the statement of financial performance for the year ended 30 June 2010? Second and aligned to this issue, did Mr McGuiness err in taking into account costs of between $6 million to $8 million in his estimate of earnings for the brokerage business? It is convenient to deal with the second issue first.

I have set out the method by which Mr McGuiness derived the operating costs in pars [38]-[39] above. Mr McGuiness relied in part on a loan book valuation model in that analysis. He was justified in doing so. Although Mr Meredith said he had lost faith in that model because of the different net present value of the trailing commissions derived from it, compared to the figures stated in the accounts, he failed to observe that this was due to a different discount rate. The primary judge was correct in rejecting Mr Meredith’s criticism of the model in these circumstances.

The appellants’ submissions focused on the proposition that there was nothing to suggest costs of the nature of $6 million to $8 million would be incurred in collecting the trailing commissions. The appellant submitted these costs related to the generation of new business and criticised the primary judge and Mr McGuiness for not identifying the costs said to be involved in their collection. They submitted that Mr Sayer did not identify such costs and an inference could be drawn that there were none.

The difficulty with that submission is that Mr McGuiness was not attempting to calculate the value of the trailing commissions in isolation. Rather, he was valuing the brokerage business as a going concern. Once that is understood, it is apparent that Mr McGuiness did identify the costs in question. The costs in question were the operating costs, after removal of the borrowing costs, which Mr McGuiness attributed to the lending and origination business. This was consistent with the evidence of Mr Sayer that other costs of the lending and origination business were covered in the management fee paid to Perpetual Trustee Company Limited (see par [11] above). It was also consistent with the budget for the 2009, 2010 and 2011 years, which identified such costs.

It follows that in valuing the brokerage business as a going concern it was necessary to take these costs into account. Indeed, had they not been attributed to the brokerage business but to the lending and origination business, as Mr McGuiness pointed out, the cash flow of that business would have been exhausted by 10% of those costs.

It was not suggested that the costs were unreasonable, rather they should have been ignored in the valuation as there was insufficient evidence that they would in fact be incurred. In my opinion they could not be ignored in the application of the methodology used by Mr McGuiness. Whether that methodology produced a result which could be said to be reflective of the value of the company is considered below.

The primary submission made by the appellants was that having particular regard to the total equity of the company of $12,515,127, disclosed in the statement of financial position for the year ended 30 June 2010, a value of GMEC between $2.7 million and $3.1 million was plainly erroneous. As I indicated, senior counsel for the appellants referred to s 1305 of the Corporations Act, pointing out that the effect of that section was that the value of assets set out in the statement of financial performance was prima facie evidence of their value. He also pointed to the fact that the Director’s statement accompanying the accounts said that they presented a true and fair view of the company.

However, in considering the accounts it must be borne in mind that they had been prepared on a going concern basis in circumstances where there was material uncertainty as to the ability of the company to continue as such. Both the notes to the accounts and the auditor’s report expressed a concern as to whether in those circumstances assets would be realised in the amount stated in the accounts.

It is important to remember that Mr Meredith in his orderly realisation of assets model simply assumed that assets could be realised in their orderly fashion at book value and gave no consideration to the overall financial position of the company as at the balance date. The submissions of the appellants adopted the same approach.

There was no evidence to suggest that there was a market for the trailing commission, whether their disposal would result in a default either under the loan facility or the Senior Note Facility or for that matter how any orderly realisation could take place. As Mr McGuiness agreed in the joint report, if a company is to be valued on an orderly realisation of assets basis, the book value would need to be adjusted to reflect market value. In this context a prudent purchaser of the company as a going concern would consider whether in fact any of its assets could be realised without significant financial consequences to the company.

Acceptance of the appellants’ proposition, that a willing but not anxious purchaser would pay an amount equivalent to the book value of the assets of the company for its shares, ignores the factors to which I have referred. It also ignores the fact that the company’s profit to the 30 June 2010 financial year was $187,124 before tax and $130,987 after tax and that it had a negative cash flow of $133,860. In these circumstances it does not seem to me that the primary judge erred in declining to adopt the approach suggested by Mr Meredith or in concluding that Mr McGuiness’ valuation was unreasonable.

As I indicated above at par [140], the appellants submitted that Mr McGuiness’ valuation was flawed because it did not take into account future earnings from net trailing commissions. This submission was not put in the Court below, was not the subject of evidence from Mr Meredith, who did not criticise any of the integers in the valuation and Mr McGuiness was not cross-examined on it. In these circumstances it cannot be relied on in this Court.

Similarly, the submission of senior counsel that the increase in working capital to $26,878,129 in the discounted cash flow analysis used by Mr McGuiness as a secondary method of valuing the brokerage business was inconsistent with a business worth $3.7 million to $4.1 million was not put in the Court below. The figure for working capital was calculated by Mr McGuiness on the basis that working capital was 160% of revenue. He explained that this was unusually high but was the effect on the changes in accounting policy in 2010. He stated it was “applicable” to have regard to the high levels of working capital relevant to revenues in 2010 for determining estimates of expected future profit and in turn expected cash flows. This methodology was not disputed and it was not suggested to Mr McGuiness or for that matter put to the primary judge that it followed that the valuation arrived at by Mr McGuiness was erroneous for that reason.

It does not seem to me that the fact that Mr Sayer said he would not wind-up the company had any bearing on its value. It was not suggested to Mr Sayer that he believed the value of the company was in excess of $12,515,000. Even if it had been put and could be said to be relevant, it would have very little weight.

Nor do I think that the fact that Macquarie Bank sold its 10% shareholding for $750,000 in 2008 demonstrated that the valuation arrived at by the primary judge was erroneous. The appellants submitted that the financial position of the company had improved since that date. There was no analysis to demonstrate that this was the case. In fact the position of the company showed a marked deterioration in 2009 due to the writing off of bad debts of $7,468,248. For this reason alone the submission cannot be accepted. Further, the pre-tax profits for the 2009 year, adjusted as I have indicated in par [121] above, were $815,759, compared with $187,124 for the 2010 year, showing a decline in the position of the company rather than an improvement.

In these circumstances it cannot be said that the valuation arrived at by the primary judge, although significantly lower than book value, was erroneous.

The appellants were correct in submitting that the primary judge erred to the extent he relied on the fact that the accounts stated that the impairment provisions in the auditing standards had not been complied with. As the appellants submitted, the notes to the account and the Representation Letter signed by Mr Sayer indicated the loans were fully recoverable.

However, the hypothetical prudent purchaser for the purpose of the valuation would be considered to be fully informed as to all matters known as at 30 June 2010 which would affect the value of the shares in question: Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 at 441. That would include, in my opinion, information relating to the recoverability of the loans, which were a significant asset of the company.

Each valuer agreed that the loan receivables should be valued in accordance with the orderly realisation of assets methodology. The loans were shown in the accounts of GMEC in an amount of $6,718,464. Mr Meredith assumed them to be fully recoverable. It should be noted however that in valuing AHQ and 9 AS Trust, Mr Meredith indicated that the management of GMEC had instructed him that of the related party debts due to AHQ, shown in the balance sheet at a value of $4,799,626, only $1,327,522 was recoverable. However, Mr Meredith did not take the diminution of the value of AHQ and 9 AS Trust into account in assessing the recoverability of the loans due by those entities to GMEC.

By contrast, Mr McGuiness took those matters into account and as a consequence wrote down the recoverability of the loans from $6,718,464 to $2,256,193.

The adjustments to the loans due by AHQ and 9 AS Trust were consistent with the information provided by the Chief Financial Officer, which was tendered in evidence and admitted without objection.

It seems to me that this information would be taken into account by a prudent purchaser in assessing the value of GMEC. As I indicated, Mr Meredith did not contend to the contrary but stated there may have been other sources from which the loan could be repaid. It is unlikely that a prudent purchaser would rely on such speculation. Further, if what was being referred to by Mr Meredith were sources available to the existing owners of the entity, a prudent purchaser would not take them into account in considering the value of the receivables.

The other differences between Mr McGuiness and Mr Meredith in their treatment of AHQ and 9 AS Trust were not the subject of submissions on the appeal.

It follows that the primary judge did not err in accepting as correct the valuation of shares in GMEC arrived at by Mr McGuiness.

Although it may be arguable that Order 4(b) of the Court of Appeal’s Orders in the oppression proceedings (see par [4] above) was wide enough to encompass prejudgment interest and interest from 5 March 2010 to 30 June 2010 the matter was not raised below.

A consideration of the issue would involve, first, the construction of the earlier order of the Court and second, whether the loan to Mr Tomanovic was recoverable and the effect this would have on the calculation of the amount due pursuant to that order or for that matter the valuation of the shares in GMEC. The matter was not dealt with in the written submissions. It was quite inappropriate to raise it shortly prior to the hearing of the appeal and as the respondents point out, there at least would have been the possibility that evidence concerning the recoverability of the judgment debt could have been led had the matter been raised at the hearing. For these reasons the application should be refused.

In these circumstances leave to amend the notice of appeal should be refused and the appeal should be dismissed. The appellants should be ordered to pay the respondents’ costs of the appeal.

BARRETT JA: In Gold Coast Selection Trust Ltd v Humphrey (Inspector of Taxes) [1948] AC 459 at 473, Viscount Simon LC said, "Valuation is an art, not an exact science"; and, "Mathematical certainty is not demanded, nor indeed is it possible". As the Chief Justice explains, the primary judge proceeded according to an objectively reasonable method of valuation and reached a conclusion that, having regard to the evidence before him and the submissions put to him, does not exhibit error. For the reasons stated by the Chief Justice, the appeal should be dismissed with costs.

EMMETT JA: This appeal is concerned with the valuation of shares in Global Mortgage Equity Corporation Pty Ltd (GMEC). The valuation was necessary for the purposes of determining the price to be paid by the first respondent, One Australia Pty Ltd (One Australia), to the second appellant, Australian Financial Services Corporation Pty Ltd (AFSC), in consequence of orders made in an oppression suit brought under s 232 of the Corporations Act 2001 (Cth). An order was made that One Australia purchase the shares owned by AFSC in GMEC at a price equal to 45 per cent of the net value as at 30 June 2010 of GMEC, plus an amount of interest minus the net value as at that date of other assets that had been transferred to AFSC by either One Australia or the second respondent, Mr Kenneth Sayer. A judge of the Equity Division concluded that the amount payable by One Australia for the purchase of the shares in GMEC owned by AFSC was $1,870,043.

AFSC and its principal, the first appellant, Mr Zoltan Tomanovic, appealed from the orders made by the primary judge. They contended that his Honour erred in arriving at a valuation of the shares in GMEC, and that his Honour should have determined a valuation in the order of $12,500,000, which would have resulted in a price payable by One Australia of 45 per cent of that sum.

I have had the advantage of reading in draft form the proposed reasons of the Chief Justice for concluding that the appeal should be dismissed with costs. The appellants sought leave to file an amended notice of appeal. I agree with the Chief Justice, for the reasons proposed by his Honour, that leave to amend should be refused. Accordingly, as the Chief Justice indicates, four questions raised in the appeal require resolution.

The first question was whether the primary judge was justified in accepting the valuation approach adopted by Mr McGuiness, the valuer called by One Australia, in preference to that of Mr Meredith, the valuer called by AFSC. I agree with the Chief Justice that the primary judge did not err in principle when accepting that the methodology used by Mr McGuiness was appropriate.

The second question was whether Mr McGuiness wrongly took into account costs between $6,000,000 and $8,000,000 in valuing the brokerage business of GMEC. I agree with the Chief Justice that in valuing the brokerage business as a going concern, it was necessary to take those costs into account.

The third question was whether, having regard to the shareholders’ equity disclosed in the balance sheet of GMEC, the valuation by Mr McGuiness was plainly erroneous. I agree with the Chief Justice that, although the valuation arrived at by the primary judge was significantly lower than book value, it could not, in the circumstances, be said to be erroneous.

The final question was whether the primary judge erred in accepting the valuation propounded by Mr McGuiness in his valuation of certain loans made by GMEC. I agree with the Chief Justice that, while the primary judge erred to the extent that he relied on the fact that the accounts stated that the impairment provisions in the auditing standards had not been complied with, the hypothetical prudent purchaser of the shares in GMEC must be assumed to be fully informed as to all matters known as at 30 June 2010 that would affect the value of the shares, including information relating to the recoverability of the loans, which were a significant asset of GMEC. The adjustments to the value of the loans made by Mr McGuiness were consistent with information provided by the chief financial officer of GMEC, which was admitted into evidence without objection. Such information would be taken into account by a prudent purchaser in assessing the value of the shares in GMEC. Any error by the primary judge was therefore immaterial.

I agree with the Chief Justice, for the reasons proposed by his Honour, that the primary judge did not err in accepting as correct the valuation of shares in GMEC arrived at by Mr McGuiness. It follows, as the Chief Justice proposes, that the appeal should be dismissed and that the appellants should pay the respondents’ costs of the appeal.