Blooms the Chemist Management Services Ltd v Pharmacy Council of NSW

1. [1]

   HIS HONOUR: The plaintiff, Blooms the Chemist Management Services Ltd, seeks a declaration, purportedly in the supervisory jurisdiction of the Supreme Court, as well as costs.

2. [2]

   The declaration that is sought relates to the registration of a pharmacy, Blooms the Chemist Cronulla South (hereinafter “the Pharmacy Business”). The terms of the declaration are as follows:

3. [3]

   The plaintiff asserts that the relief is sought under ss 69 and 75 of the Supreme Court Act 1970 (NSW), each of which, in the context of this application, relate to judicial review.

4. [4]

   On 24 February 2023, the first defendant, the Pharmacy Council of NSW (hereinafter “the Council”), refused the application by the second defendant, Tran Pharmacy (Cronulla South) Pty Ltd (hereinafter “Tran Pharmacy”), to register its interest in the Pharmacy Business thereby acquiring a financial interest in the Pharmacy Business. The Council issued reasons for the decision on 23 March 2023. [1]

5. [5]

   On 20 April 2023, the plaintiff sought an internal review pursuant to the provisions of s 53 of the Administrative Decisions Review Act 1997 (NSW) (“the ADR Act”) and, on 25 May 2023, the reviewer affirmed the decision of 24 February 2023 and provided reasons. [2]

6. [6]

   On 21 June 2023, Tran Pharmacy applied to the NSW Civil and Administrative Tribunal (“NCAT”) for review of the Council’s decision. The appeal is lodged pursuant to subclause 13(1)(b) of Schedule 5F to the Health Practitioner Regulation National Law (NSW) (hereinafter “National Law”). The proceedings before NCAT are adjourned by consent.

7. [7]

   The provisions under which the application is made are relevantly in the following terms:

8. [8]

   Because the decisions of the Council, both its initial decision and on the internal review, were decisions relating to an application for the approval of the registration of the holder of the financial interest, and because Tran Pharmacy, the notifier of the financial interest, was aggrieved by the refusal, it had a right, pursuant to the above provision, to apply to NCAT for an administrative review.

9. [9]

   NCAT has the jurisdiction to conduct an administrative review, pursuant to the terms of s 30 of the Civil and Administrative Tribunal Act 2013 (NSW) (hereinafter “CAT Act”). Pursuant to the terms of s 28 of the CAT Act, NCAT has such jurisdiction as may be conferred by the CAT Act. [4]

10. [10]

    Pursuant to the terms of s 63 of the ADR Act, NCAT is required to decide “the correct and preferable decision … having regard to the material then before it, including … any relevant factual material, [and] any applicable written or unwritten law”. [5] In undertaking that task, NCAT is entitled to exercise all of the functions and is provided with all of the jurisdiction conferred or imposed on the Council. [6]

11. [11]

    As can be seen from the declaration sought by the plaintiff in these proceedings and extracted above, a fundamental issue sought to be agitated by the plaintiff is the meaning of the term “financial interest” in the National Law. The term is defined in the following terms:

12. [12]

    Further, as a result of the provisions of s 64 of the ADR Act, NCAT, in an administrative review, is required to give effect to any relevant Government policy in force, except to the extent that the policy is unlawful or produces an “unjust decision”.

13. [13]

    The provisions of clause 3 of Sch 5F of the National Law prohibit the carrying on of a pharmacy business unless the premises have been approved by the Council and all holders of a financial interest in the pharmacy business are registered. Breach of the provision is a criminal offence, carrying a maximum penalty of 50 penalty units. [8]

14. [14]

    There are qualifications on the requirement to register, and the contravention of the provision is a criminal offence. First, by subclause 3(2) of the Schedule, the pharmacy may be carried on if there is a current approval for the premises, the holder of financial interest in the business is registered, but the application is awaiting the decision of the Council.

15. [15]

    Secondly, by subclause 3(3) of the Schedule, a failure to register a financial interest that is “a security interest with respect to a pharmacy business” does not affect the validity or enforceability of the security interest or the agreement relating thereto or otherwise limit the effect of the security interest. Clause 4 of the Schedule prescribes that which must be provided to the Council in writing in order for the financial interest to be registered and requires a person intending to acquire a financial interest in a pharmacy business to give such notice.

16. [16]

    It also creates a criminal offence for a failure to give notice within 28 days of acquiring such a financial interest. Similarly, there is a criminal offence for a failure, within 14 days of the event, to notify of the cessation of a financial interest in the pharmacy.

17. [17]

    Clause 5 of Schedule 5F to the National Law restricts persons who may have a financial interest in a pharmacy business. It is unnecessary to summarise all those people who may have such a financial interest. It is sufficient, for present purposes, to acknowledge that Blooms, the plaintiff, is not a person who is entitled to have a financial interest in a pharmacy business pursuant to clause 5 of the Schedule. Otherwise, relevantly one may be a registered pharmacist or a corporation of which the pharmacist is the principal.

18. [18]

    It is an offence for a corporation to advertise or indicate that it is a pharmacy business except in circumstances where it is a body corporate that is capable of obtaining a financial interest and is registered. Clause 9 restricts the number of pharmacy businesses in which a pharmacist may have a financial interest and clause 11 requires a pharmacist to be in charge of every pharmacy business.

19. [19]

    The provisions of clause 12 of Schedule 5F deal with the contents of an application for approval of the registration of financial interest, amongst other things. The application is made to the Executive Officer of the Council on the form approved by the Council and the application is to be made by the owner of the pharmacy business.

20. [20]

    The application must be accompanied by a fee, and the Council may require the application to be verified by statutory declaration. By subclause 12(7) of Schedule 5F, the Council, having received an application, may refuse the application or “approve the premises or register the holder of the financial interest”.

21. [21]

    By subclause 12(8) of the Schedule, the Council must refuse the application to approve premises if the premises fail to comply with the standard prescribed or are connected to a supermarket, and the public can directly access the pharmacy from within the premises of the supermarket. Clause 13, as earlier indicated, provides for a right of appeal to NCAT by a person aggrieved, amongst other things, by a decision relating to an application for the approval of the registration of the holder of the financial interest.

22. [22]

    Clause 15 requires every person who holds a financial interest in a pharmacy business to provide to the Council a declaration specifying the nature of the interest held, the basis upon which the person is entitled to hold the interest under the Schedule and the National Law, the number of pharmacy businesses in which the person has a financial interest, and any other information prescribed by the regulations. Failure to do so on a yearly basis, prior to the declaration date, is a criminal offence punishable by a maximum penalty of 20 penalty units.

23. [23]

    Clause 16 permits the Council to give notice to a person requiring the person to provide specified information or a specified document relating to any financial interest the person may have and, on pain of a criminal offence carrying a maximum of 50 penalty units, the person is required to comply with such notice.

Facts and evidence

1. [24]

   Much of the background material is uncontentious. Tran Pharmacy is a pharmacist’s body corporate.

2. [25]

   It is unnecessary to recite, extract or analyse the provisions that allow Tran Pharmacy, as a body corporate, to own a pharmacy. It is sufficient, for present purposes, to note that it is entitled to own a pharmacy as a consequence of the ownership of the body corporate.

3. [26]

   Tran Pharmacy, together with David Tran and Renai Ross, are parties to an agreement with Blooms. The agreement is the Optimised Service and Licence Agreement (hereinafter the “OSL Agreement” or the “OSLA”). It was executed on 24 August 2022. David Tran is the guarantor to a loan agreement between Tran Pharmacy and Blooms. The loan is for the purpose of acquiring and operating the Pharmacy Business.

4. [27]

   Because it was acquiring an interest in the Pharmacy Business, in accordance with the National Law, Tran Pharmacy applied for approval from the Council on 29 August 2022. The Pharmacy Business is owned by other corporate entities, each of which is entitled to own a pharmacy.

5. [28]

   One of the interests in the Pharmacy Business is an interest held by EV Pharmacy (Cronulla South) Pty Ltd. It is the intention of Tran Pharmacy to purchase the interest held by EV Pharmacy. As earlier stated, the application for registration of that interest was refused by the Council on 23 March 2023.

6. [29]

   In short, the Council found that as a result of the relationship between Tran Pharmacy and Blooms, Blooms would obtain a financial interest in the Pharmacy Business, and the Council refused the registration of the interest of Tran Pharmacy. The plaintiff summarised the reasons of the Council in refusing the registration of the financial interest in the following way:

7. [30]

   The submissions of the parties travelled beyond the circumstances relating exclusively to the Pharmacy Business and dealt with the general arrangement between Blooms and the pharmacies that enter into arrangements with it. Leaving aside some identified exceptions to the arrangement, the arrangements between Blooms and the pharmacies which trade under the name “Blooms the Chemist”, in any particular suburb, are relevantly identical. There are some differences and, to the extent that such differences are relevant, the Court may refer to them.

8. [31]

   While some of these arrangements will be the subject of more detailed analysis later in these reasons, it is important to understand the fundamental structure that applies to the business.

9. [32]

   First, there is a Working Partner, who, without being precise, runs the business. The Working Partner is required to operate the pharmacy. The Working Partner will own 50% of the equity in the business. Secondly, there is a Consulting Partner who owns the other 50% and is not required, under the agreements giving rise to the structure, to work in the pharmacy. Apart from the share of profits to which, necessarily, there is an entitlement, the Consulting Partner is generally to be paid additionally for work performed, if any.

10. [33]

    In the Pharmacy Business, the Working Partner is Renai Ross who is the principal of one or more corporations owning the 50% share in the Pharmacy Business. Directly or indirectly, there are loans obtained from Blooms at various interest rates, ranging from 6.5% (in 2024) to 8.07% (in 2019).

11. [34]

    Currently, the Consulting Partner is EV Pharmacy (Cronulla South) Pty Ltd, which owns the other 50% interest in the Pharmacy Business. It is the interest of EV Pharmacy that is sought to be purchased by Tran Pharmacy, and it is that financial interest which was sought to be registered by the application refused by the Council.

12. [35]

    The arrangement between Tran Pharmacy and Blooms is that Tran Pharmacy obtains the monies necessary to purchase the 50% interest in the Pharmacy Business from Blooms by way of a loan. The interest rate on the loan is at 20% (the 2019 rate) and was renewed at the same rate (in 2024).

13. [36]

    A significant aspect of the evidence relates to whether the interest rate at 20% is a market rate or includes a factor which, at least inferentially, gives Blooms a financial or monetary interest in the Pharmacy Business. It is necessary to provide more detail of the foregoing summary.

14. [37]

    A pro forma of the OSLA is in evidence.

15. [38]

    Under the OSLA, each of the partners contracts with Blooms the Chemist Management Services Ltd (the plaintiff in these proceedings) to operate a retail pharmacy business at the location specified in the OSLA. The preamble to the agreement specifies that “Blooms, through its Blooms Support Office division (BSO), packages and arranges the supply of Blooms Own Brand Products” to the pharmacy as part of a network of pharmacies from time to time and provides services as an assisted optimised channel to Blooms Network Pharmacies and to other pharmacy businesses.

16. [39]

    The agreement pre-emptively acknowledges and consents to Blooms acting as a buying agent for all Blooms Network Pharmacies (of which the pharmacy entering into the agreement becomes a member). According to an express provision of the OSLA, it is not a franchise agreement.

17. [40]

    Further, the agreement acknowledges that Blooms is granting the licence on the basis that the Pharmacy Business is a retailer of Blooms Own Brand Products at the Pharmacy Business, has appointed Blooms as its buying agent for goods and services for the Pharmacy Business and has engaged Blooms “to provide the Services”. [10]

18. [41]

    By subclause 4.3 of the OSLA, the partnership acknowledges that Blooms does not have any “proprietary, financial, pecuniary or controlling interest” in the Pharmacy Business “in breach of Pharmacy Laws” and the partnership must place at the business location any notice that Blooms may reasonably require stating that the Pharmacy Business is independently owned and operated by the partnership.

19. [42]

    The primary obligations of Blooms are set out in clause 5 of the OSLA. By subclause 5.1, Blooms is required, at the request of the partnership, to provide services to the Pharmacy Business, being:

20. [43]

    Further, Blooms is required, “at the request of the Partnership from time to time”, to provide products supplied and negotiation services in relation to Core Merchandise and other merchandise for the Pharmacy Business (referred to as “Merchandise Support Services”) which includes:

21. [44]

    By subclause 5.2.3 of the OSLA, the agreement requires Blooms to pass on to the Pharmacy Business any rebates, incentives or other payments from suppliers and wholesalers of products that relate to volume, orders and sales or the performance of the Pharmacy Business and which are received by Blooms as buying agent. The Pharmacy Business may request the provision of other additional goods and services which are listed in a Schedule.

22. [45]

    The provisions of subclause 5.4 of the OSLA require Blooms to make “available to the Partnership the Blooms system, valuable retailing know how and proprietary systems and methodologies for management of floor space, stock and staff…”. By subclause 5.5, Blooms are required to design, source and market Blooms Own Brand Products and, at the request of the Partnership, to arrange for them to be supplied to the Pharmacy Business.

23. [46]

    At its election, Blooms will, at no charge, provide the Pharmacy Business with materials, information and services that Blooms considers appropriate to support the Pharmacy Business as a Blooms Network Pharmacy and Quality Care Pharmacy program materials, which is a quality assurance program for community pharmacies operated by the Pharmacy Guild. [13]

24. [47]

    The Pharmacy Business undertakes that it shall upgrade its information technology hardware as recommended by Blooms from time to time, including personal computers, laptops, servers, switches, wireless access points, scanners, receipt printers and label printers, the cost of which are determined by the individual needs of the Pharmacy Business and the external information technology supplier’s costs, over and above the charges otherwise payable under the OSLA. [14]

25. [48]

    The primary obligations of the Pharmacy Business include the payment of “the Fees” and the payment of additional fees for any additional goods and services requested by the Pharmacy Business of Blooms. The additional goods and services are not the services outlined in subclauses 5.1 or 5.2.

26. [49]

    It seems, therefore, that the fees that are ordinarily payable will cover the provision of services described in subclause 5.1 and the merchandising support services described in subclause 5.2. The fees that are payable may be increased by Blooms on each anniversary “by reference to annual changes in the most recent CPI index”, which it may accumulate in any year where no increase occurs.

27. [50]

    Further, the Pharmacy Business agrees that Blooms shall pay, on behalf of the Pharmacy Business, suppliers and wholesalers who require direct bulk payment for the purchase of goods by the Pharmacy Business, third party service providers for the provision of services to the Pharmacy Business, as agreed, and the Pharmacy Business is required to pay Blooms the amounts equal to those charges contained in the Monthly Invoice. All fees must be paid without set off, deduction or counter claim when due. [15]

28. [51]

    The Pharmacy Business is responsible for compliance with the quality assurance program for community pharmacies operated by the Pharmacy Guild. The Pharmacy Business is required to notify Blooms of any proposed amendment of any lease of the premises on which the pharmacy is conducted.

29. [52]

    The Pharmacy Business must ensure that it is conducted solely on those premises, conducting the business in a professional, lawful and diligent manner, maintaining all licences and qualifications, ordering and maintaining stock and dispensing prescription medicines, and paying all taxes, duties and other amounts payable promptly to any government or regulatory authority. [16]

30. [53]

    By subclause 6.6, the Pharmacy Business is required to “provide Blooms with access to the [Pharmacy Business’] business records, accounts and systems” and the Pharmacy Business authorises “Blooms to use them for the purposes of providing the Services”. [17] Further, the Pharmacy Business authorises Blooms to use any information provided for the purpose of promotions, marketing, benchmarking and sales.

31. [54]

    The Pharmacy Business is also required to “acquire and use equipment from suppliers or wholesalers recommended by Blooms only in circumstances where Blooms reasonably considers that use of equipment from other suppliers and wholesalers would damage the Trade Mark, the Brand or the image of the Blooms Network Pharmacies as a whole”. [18]

32. [55]

    The Pharmacy Business is entitled to acquire and use equipment from other suppliers and wholesalers but only to the extent that such equipment meets “Blooms’ criteria based on reasonable grounds and best practices”. [19]

33. [56]

    The Pharmacy Business is responsible for performing a physical stocktake at its cost during each Financial Year in the manner and time agreed between the Pharmacy Business and Blooms, for which purpose Blooms will provide an experienced member of staff to assist, [20] and is required to “use reasonable endeavours to support Blooms in the provision of Services by Blooms”. [21] Further, the members of the partnership are responsible for attending training sessions, conferences, workshops, seminars and meetings arranged by Blooms and for preparing budgets for the Pharmacy Business.

34. [57]

    By subclause 6.7 of the OSLA, the Pharmacy Business undertakes not to sell goods and services that are the same or similar to Core Merchandise provided by Blooms, without Blooms’ prior consent. The consent can only be withheld if Blooms reasonably considers that the sale of such merchandise may detrimentally affect the Trade Mark, the Brand or its goodwill. To the extent that Blooms Own Brand Products are requested, they must be purchased, stocked and sold in accordance with the agreement and from approved suppliers.

35. [58]

    There are recommendations relating to retail price, which are not binding, and the suppliers of pharmaceutical goods, which are also not binding.

36. [59]

    It is not absolutely clear what interest, if any, Blooms has in the arrangement if there is no financial or proprietary right in the pharmacy, but insurance must be taken out with an insurance company recommended by Blooms. Further, each of the members of the partnership must take out public liability and professional indemnity insurance as reasonably required by Blooms. [22]

37. [60]

    There are some other unusual conditions. For example, subclause 6.11 requires the partnership to undertake a number of steps and/or remain licensed and such as to operate lawfully, which is a requirement of the law but is made, otherwise, a condition of the OSLA. Further, as well as requiring the Pharmacy Business to “comply with all occupational, health and safety laws”, the OSLA also requires the Pharmacy Business to conduct itself “in a manner that maintains the health and safety of the Pharmacists and all employees, agents, contractors and members of the public” and prevents any of the members of the partnership from holding a proprietary, financial or pecuniary interest in any pharmacy that is not a Blooms Pharmacy. [23]

38. [61]

    The Pharmacy Business is required to observe all reasonable directions notified by Blooms regarding the nature, characteristics and quality of any trademark materials, the representation of any trademarks and the manner in which the Pharmacy Business uses the trademarks and tradenames on any materials. The Pharmacy Business is required to display “Blooms the Chemist” on signage at the front of the shop and use their best endeavours to preserve the value and goodwill of Blooms’ trademarks, tradenames and not use them in any way that is likely to harm or prejudice Blooms’ rights. [24]

39. [62]

    The Pharmacy Business partnership is required to use its best endeavours to use and display the marketing material provided by Blooms, which is required to provide the marketing material for point-of-sale promotions, and to do so in the manner recommended by Blooms. Further to the immediately preceding requirement, the Pharmacy Business is required to remove obsolete marketing material.

40. [63]

    To the extent that Blooms reviews or refreshes its brand, the Pharmacy Business is required, within a reasonable time, to use its best endeavours to change all representations associated with it. Further, as at the commencement date, “all representations of any pharmacy brands or banner groups other than Blooms the Chemist will be removed” from the premises. [25]

41. [64]

    By subclauses 8.1 and 8.2 of the OSLA, the Pharmacy Business is required to be conducted under the name “Blooms the Chemist” with the addition of the location, and to display the business name and Blooms’ colours and logos in accordance with the requirements of Blooms. It is also required to display a notice that represents that the Pharmacy Business “is independently owned and operated by the proprietor”.

42. [65]

    It is unnecessary to summarise each of the terms of the OSLA but the whole of the agreement needs to be read and understood in order for the proper construction of each of the terms otherwise summarised to be reached. While it is, to some extent, an implied obligation, the OSLA expresses a requirement that each party must “refrain from doing all acts and things that could hinder performance by any party of the provisions” of the OSLA. [26]

43. [66]

    The Chief Financial Officer of Blooms, Andrew Crawford, affirmed four affidavits, dated 21 July 2023, 27 October 2023, 7 June 2024 and 28 November 2024. The affidavit of 21 July 2023 attests to a number of matters that are already obvious from these reasons for judgment.

44. [67]

    Mr Crawford attests to the fact that Blooms provides administrative and consulting services to the “Banner Group”, being those pharmacies operating under the title “Blooms the Chemist”. He also attests to the fact that the Banner Group was established in 1995 and consists of a network of pharmacies, each of which are separately owned and operated.

45. [68]

    To the extent that Mr Crawford’s testimony goes beyond that which is contained in the OSLA or seeks to qualify it, the Court relies on the OSLA to establish the relationship between Blooms, on the one hand, and the pharmacies in its network on the other. Mr Crawford testifies to the purpose of Blooms in preparing the OSLA and loan agreements being that it desired “to ensure that by entering into them Blooms did not acquire a financial interest in a pharmacy business”.

46. [69]

    Mr Crawford also testifies that the pro forma agreements provide the template for the agreements that relate to the Pharmacy Business at Cronulla South. The OSLA and loan agreement relating to the Cronulla South Pharmacy Business are attached and are dated August 2022. In his first affidavit, Mr Crawford testifies that there are other applications for registration of a financial interests which are awaiting the determination of this application.

47. [70]

    Mr Crawford’s second affidavit, of 27 October 2023, deals with further applications submitted to the Pharmacy Council and the fees payable under the OSLA, to which earlier reference has been made. The fees are determined by the band in which a particular Pharmacy Business is placed.

48. [71]

    There are seven bands and the fee ranges from $70,000 for Band 1 to $160,000 for Band 7. The Pharmacy Business is placed into the relevant band which is determined by a function of the floor space (measured in square metres) and the number of full time equivalent employed staff.

49. [72]

    The fourth affidavit dated 28 November 2024 seeks to explain and/or qualify certain aspects of the other affidavits. Referring to an earlier statement, Mr Crawford explains that Blooms does not always lend money to the Senior Partner to finance the acquisition of its interests in the pharmacy, and it is not a condition of joining Blooms’ Network that a loan be taken out. It was not a condition when the loan referrable to the Tran acquisition was agreed on 23 August 2022. There are three pharmacies in the Network that do not have a loan from Blooms.

50. [73]

    In many respects, the fourth affidavit explains some aspects of the third affidavit of Mr Crawford dated 7 June 2024. The third affidavit deals with the general structure of the pharmacies in the Blooms’ Network and as recited above, describes it as being one in which there is one partner who works full time in the pharmacy, the Working Partner, and another who does not, the Consulting Partner. Mr Crawford refers to the Consulting Partner as the “Senior Partner” and describes that person as “usually more experienced”, often having interests in more than one pharmacy.

51. [74]

    Mr Crawford describes the usual practice, as he understands it, that the Working Partner, to the extent required, borrows money from the bank to secure the interest held, and that loan is “typically secured over all the assets of the pharmacy business” and usually the performance of the obligations of the managing pharmacist is guaranteed by both the Working and Consulting Partners.

52. [75]

    Primarily, Blooms lends money to the Consulting Partner to acquire that pharmacist’s 50% interest in the pharmacy. To the extent that the assets of the business are secured against the Working Partner’s loan, the loans to the Consulting Partner are unsecured or secured only as a second mortgage and usually as a limited recourse loan.

53. [76]

    Mr Crawford, as the CFO, recommends to the CEO the interest rate to be charged to Consulting Partners. Mr Crawford gives a number of factors that are taken into account, which it is unnecessary to recite.

54. [77]

    Mr Crawford then provides the Weighted Average Cost of Capital (“WACC”), which, according to Mr Crawford, represents Blooms’ average after-tax cost of capital from all sources. It is a generally applicable calculation and is in the following terms:

55. [78]

    According to Mr Crawford in his third affidavit, the WACC provides a benchmark rate of return that “must be exceeded to generate profit for a company” and increase the value for its shareholders. Except as to the term “profit”, there is little controversy with this general proposition. Nor should there be.

56. [79]

    Mr Crawford testifies that the WACC for Blooms is approximately 14%. Three quarters of its capital is provided by equity with an expected yield of 17% and the remaining 25% is provided by debt with an approximate cost of 7%. At the time Blooms made the loan to fund 50% of the acquisition of the Pharmacy Business, the cost of debt was approximately 5%.

57. [80]

    Initially, Blooms was involved in discussions about the purchase of the Pharmacy Business in 2018. The structure of the Pharmacy Business was that, through corporate entities, Ms Ross would be the managing pharmacist and each of Mr Sidgreaves and Mr Vavoulas would contribute capital. The business name was established in mid to late 2018 and Ms Ross’ corporation owned 25%, Mr Sidgreaves, with some alteration in ownership at various points, owned 25% and Mr Vavoulas’ corporation owned 50%.

58. [81]

    The acquisition of the Pharmacy interests was facilitated by Blooms lending to Ms Ross’ corporation the sum of $152,500 which was used for the acquisition of the 25% interest. Blooms also lent to the Sidgreaves’ corporation (albeit at that stage also owned by Ms Ross) a further $152,500 to fund the acquisition of another 25% interest.

59. [82]

    Further, on the same date, Blooms lent to Mr Vavoulas’ corporate entity to enable him to fund the acquisition of the 50% interest. The interest charged to Mr Vavoulas was 20% per annum. The term of the loan was five years. The loans to Ms Ross and Sidgreaves’ interests were for two-year terms. Initially, Blooms did not take security.

60. [83]

    On 30 June 2021, Mr Vavoulas was appointed Chief Executive Officer of Blooms and considered disposing of his interests in Blooms pharmacies. On 28 July 2021, Mr Vavoulas’ interest in the Pharmacy Business was sold to Tran Pharmacy. On 31 August 2022, Tran Pharmacy submitted a change of ownership application to the Pharmacy Council.

61. [84]

    On 5 June 2024, Blooms and Ms Ross entered into an amended and restated loan agreement to finance her corporate interest in the Pharmacy Business through each of the corporate entities. Further detail is given in the affidavit as to the fees and the services provided in relation to those fees. It is unnecessary to summarise them for the purposes of these reasons.

62. [85]

    In cross-examination, Mr Crawford accepted that Blooms issued a prospectus in 2021 which raised capital from shareholders. He could not recall how many shares were added to the register but there were approximately 350 shareholders as at December 2024 and, probably, about 100 prior to the capital raising exercise. As a consequence of the raising of the capital, Blooms became a reporting entity and is required to produce general purpose financial reports.

63. [86]

    Blooms is the owner of a loan book comprising approximately 100 limited recourse loans according to records, which now approximates 120 limited recourse loans. Such loans are to Consulting Partners.

64. [87]

    It is the intention that the loan financing the Tran interests in the Pharmacy Business will be a limited recourse loan. Mr Tran has not drawn down on any money.

65. [88]

    The annual report states that the loans are limited recourse in that liabilities under each loan are only required to be discharged from the obligor Consulting Partner’s interest in Blooms pharmacies. The liabilities are limited to so much as is recoverable from the Consulting Partner’s interest in the underlying pharmacy.

66. [89]

    All of the loans were at 20% interest. The loans were originally issued to other partners in Blooms Pharmacies through a unit trust which Blooms subsumed in September 2017. Some of the loans are up to 40 years old. About five to eight new loans are issued each year. All of the loans are at the 20% rate.

67. [90]

    Blooms promised its bank, NAB, that it would not charge less than 20% on a Consulting Partner’s loan. The Tran Pharmacy loan was for 20%.

68. [91]

    At the time that Mr Tran sought to buy 50% interest in the Pharmacy Business, he also made applications in respect of two other Blooms pharmacies to become a Consulting Partner. Those pharmacies were at Windsor and Riverview.

69. [92]

    Mr Crawford agreed that the interest rate charged by Blooms did not vary based upon the underlying business. The factors that were outlined in his affidavit were relevant to whether Blooms wanted to provide a loan to the borrower but did not affect the interest rate. The recommendation regarding interest rates to be charged was based on the performance of Blooms’ business, not the pharmacy.

70. [93]

    The loan book, being the asset associated with the loan debts owed to Blooms, is the largest asset on Blooms’ balance sheet and each year an expert valuation is obtained of the loan book. The valuation adopted by the board of Blooms was in every instance within the range proffered in the valuation obtained.

71. [94]

    Mr Crawford agreed that the financial reports held out to the market that the basis upon which Blooms was valuing the largest asset on its balance sheet was that the valuation was supported by an independent analysis. It also represented to the market that there had been a cross-check and that the Board’s valuation was consistent with the independent analysis.

72. [95]

    The valuation of the loans to Consulting Partners is based upon fair value through profit and loss. This is different from loans to Working Partners which is done on an amortised basis (ECL method). Working Partner loans are recognised on the balance sheet.

73. [96]

    The marketability discount, which is at 4%, is a key valuation consideration when it comes to the value of the loan. The discount takes into account whether, for example, the underlying loan was in default, historical default and the marketability of the Pharmacy (or the interests in the Pharmacy).

74. [97]

    Mr Crawford accepted that he had indicated to the independent expert that there was “strong demand” for pharmacy businesses and that Blooms would be able to sell the Pharmacy Business at value within the relevant timeframe. The value of pharmacies increased at least in part because of the limitations on the number of pharmacies in Australia and the number of pharmacies in any particular area. Thus, even though there is a restricted pool of purchasers, there is an even more restricted pool of pharmacies for sale.

75. [98]

    Mr Crawford accepted that, on his experience from the time he was Chief Financial Officer and Chief Executive Officer at Blooms, he would expect that Blooms would get its money back on the loan. His view of marketability has not changed, except for a short time around the 60-day dispensing, which was two years ago, which ultimately has not affected the market and has had no impact on the interest rate charged by Blooms.

76. [99]

    In calculating the WACC, the cost of equity was 17% or 18%, not because the company regularly declares dividends of that amount, but because of a historic understanding that shareholders would receive a rate of return of 17%. Blooms obtained this “understanding” from feedback from the shareholders. It is not recorded anywhere.

77. [100]

    When the expert valuer, PKF, calculated the WACC, it was not told that the cost of equity should be 17% and the traditional and orthodox method was the approach taken. That method involved benchmarking against comparable companies. The experts came up with the cost of equity of 11.42%.

78. [101]

    Mr Crawford accepted that if Blooms charged 14% or above as an interest rate, it could expect to achieve a yield for shareholders of approximately 17% per annum or greater. This assumes no other costs.

79. [102]

    He also accepted that the statement about profitability should have stated that the benchmark rate of return provided by the WACC calculation generates a “suitable” profit and the company is profitable at a rate lower than the benchmark rate. This was the earlier-mentioned controversy as to the use of the term “profit” in the affidavit, when referring to the WACC.

80. [103]

    Mr Crawford gave evidence that it was not difficult to sell a pharmacy but maintained that it was “difficult to realise the value of a pharmacy’s interest”, about which he was questioned by the Court. In terms of Blooms’ chemists, Blooms controls the market.

81. [104]

    In terms of pharmacies more generally, there is a restricted number of pharmacies available for sale at any one time because of the restrictions on opening a pharmacy as a result of statutory and prescriptive limitations. At the same time, the pool of pharmacists increases because more are produced than leave the profession as a result of illness, death and/or retirement. I do not accept Mr Crawford’s opinion that the sale of a pharmacy is “more difficult than other asset classes” as a general comment on the difficulty of selling the pharmacy or any one of the interests in Blooms the Chemist stores.

82. [105]

    No evidence was adduced by Blooms to the effect that it had ever lost money as a result of an inability by a borrower to repay the loan on the sale of its interests. Nor was any evidence adduced by Blooms that the sale price of a Consulting Partner’s interest had fallen at any time during the operation of Blooms’ system as earlier described. Further, no evidence was adduced as to the time period needed to sell an interest in a Blooms’ pharmacy. Moreover, there is no evidence that any borrower under the Blooms system had ever defaulted on a loan, by which I refer to a failure to pay that which is required at the termination of the loan.

83. [106]

    A discount rate for Consulting Partner loans in the loan book is at 11%. This information was forthcoming during cross examination and is a result of the recommendation by Mr Crawford to the Board of Blooms and the adoption by the Board of the recommendation. The expert valuers from whom Blooms receives reports each year expressed the view that the 20% interest rate charged by Blooms was above market value.

84. [107]

    Blooms also charges advertisers to market goods and services in their magazine, in which case Blooms then proposes those products to the underlying Banner Pharmacies. The product is, according to the arrangement, to be available in a certain part of the store usually with promotional signs.

85. [108]

    Mr Crawford could not provide details of how many marketing opportunities were sold to advertisers each month and could not deny that there were 500 marketing opportunities available every month. He was prepared to accept that there was a significant number of marketing opportunities.

86. [109]

    Mr Crawford accepted that the amount of interest charged is linked to the cost of capital and agreed that the cost of capital refers to his earlier comments about the cost of equity, being the rate of return needed to have persons invest in Blooms. This, Mr Crawford explained, was what he meant by the term “cost”. A different cost is the interest rate at which Blooms can borrow from a lender, being the cost of interest it pays on that debt.

87. [110]

    Between 2017 and 2022, there were significant variations in the cost of money borrowed by Blooms but there were no variations in the interest rate charged by Blooms to borrowers. Any interest rate fall was reflected by a higher profit margin.

88. [111]

    Before dealing with the expert reports, it is necessary to refer to other lay evidence. Michael Shane Foran executed an affidavit of 7 June 2024. Mr Foran is the Chief Operations Officer of Blooms. Banner Pharmacies have two categories of stock: front of shop (the non-dispensary items) and dispensary items. The front of shop items fall into two categories: core merchandise and local merchandise.

89. [112]

    Blooms negotiates the terms of trade with suppliers for core merchandise on behalf of its pharmacies and seeks to negotiate a discounted price, less than the supplier’s list price. Exhibited to the affidavit is a confidential exhibit MFI1 which provides examples of trading terms with third party suppliers.

90. [113]

    Blooms also negotiates an agreement with a primary wholesale provider and a secondary wholesale provider, which provides warehouse and logistics services to many suppliers. The pharmacies in the Blooms Group negotiate the terms of trade for local merchandise themselves.

91. [114]

    Blooms also negotiates terms of trade with suppliers and wholesalers of dispensary items. From the records of Blooms, it can be ascertained that there are 138,944 unique products stocked in Blooms’ pharmacies. Of that number, 8,522 are dispensary items and 130,422 are front of shop items. The front of shop items comprise 5,231 which are core merchandise and 125,191 which are local merchandise.

92. [115]

    Of the sales conducted in the twelve-month period to May 2024, 70% of the sales in Blooms Pharmacies were dispensary items and 30% were front of shop items. Of the front of shop items sold, 75% were core merchandise and 25% were local merchandise. Mr Foran calculates that on such a basis, Blooms negotiates terms of trade equating with 21.4% of total sales.

93. [116]

    The calculation seems to assume that Blooms does not negotiate terms of trade on dispensary items, although, at paragraph [7] of the same affidavit, Mr Foran testifies that Blooms negotiates terms of trade with suppliers and wholesalers of dispensary items. It also calculates percentage sales on the volume of items rather than the amount of sales or the level of profit.

94. [117]

    Mr Foran then testifies as to the use of the software program known as the Inventory Management System (IMS). IMS is offered as a service by Blooms and all Blooms Pharmacies except nine use the system.

95. [118]

    According to Mr Foran, IMS collects information only about core merchandise. When core merchandise drops below the minimum stock appropriate for the particular pharmacy, the IMS automatically calculates an order to restore the inventory level to its maximum. The minima and maxima vary depending upon the operation of the pharmacy in question.

96. [119]

    Blooms Own Brand Products are generic products carrying the Blooms logo. Percentages of non-dispensary items obtained from the IMS are provided by Mr Foran and the arrangements for the ordering of core merchandise are set out. Dispensary items are not ordered via the IMS.

97. [120]

    Lastly, Mr Foran states that Blooms provides advice on the layout of a pharmacy and how to display products. According to Mr Foran, many pharmacies do not take the advice provided. Mr Foran was not the subject of cross-examination.

98. [121]

    The only other “lay” evidence are the affidavits of solicitors. The first is from Beverley Newbold, a solicitor and partner at MinterEllison, who is the solicitor on the record for the first defendant, the Council. Ms Newbold exhibits a number of documents which speak for themselves. There are three affidavits affirmed by Ms Newbold, the latter two of which are before the Court in evidence in the substantive proceedings. There is also an affidavit by Courtney Tran, a senior associate at MinterEllison (and not to be confused with the Mr Tran involved in the attempt to register the financial interest). Further documents are referred to in that affidavit. Again, the documents speak for themselves.

99. [122]

    There are two expert reports from Mr Russell Maisner of Global Treasury Risk Management, which is a financial services consultancy business, dated 8 June 2024 and 15 October 2024, and an expert report from Christine Oliver of 26 September 2024. There is also a joint expert report dated 15 November 2024. Each expert was separately the subject of cross-examination.

100. [123]

     Most of the expert evidence dealt with the appropriateness or otherwise of the interest rate payable to Blooms under the loan agreements applicable to Consulting Partner loans.

101. [124]

     The joint expert report (hereinafter “the Report”) summarises those matters upon which the experts agree and those on which they disagree. Consequently, these reasons will deal with the Report, rather than the individual expert reports. However, some of the aspects of the Report may be understood far more easily by reference to the individual reports of the experts.

102. [125]

     As set out in paragraph 2.2 of the Report, the experts agree that the term of the Tran Loan is seven years, which is longer than a typical small business loan and longer loan terms generally increase the risk to the lender and attract higher interest rates.

103. [126]

     The borrower is capable of capitalising up to 50% of the interest if the borrower confirmed to Blooms, the lender, that the capitalisation was not due to insufficient funds, the borrower had paid at least one of the last two interest payments in full and had not deferred interest payments on more than two other occasions in a twelve-month period.

104. [127]

     Blooms’ security position is relevant to the rate of interest charged on the loan. Specifically, unsecured loans are higher risk and attract higher interest rates than secured loans. Where there is security, the risk is inversely proportional to the quality of the security. The higher the quality of the security, the lower is the risk of the loan and, ordinarily, that impacts as a lower interest rate.

105. [128]

     The quality of security arises from the value and marketability of the assets or other resources such as guarantees covered by the security, the lender’s ability to control the realisation or liquidation of those assets, the extent to which the lender has a priority entitlement; and the lender’s ability to protect that priority.

106. [129]

     The last-mentioned aspect was the subject of some significant evidence relating to the risk of subordination of the lender’s position. In this respect, subordination relates to the capacity to prioritise other loans or another facility over the security that may be possessed by Blooms. Subordination creates a higher risk for the lender as to the ultimate realisation of principal (and interest) by providing the lender with less access to the borrower’s assets if the borrower were to default and thereby undermines whatever security may be otherwise possessed by the lender.

107. [130]

     The differences between the experts depend significantly on the view one takes of the loan agreement, the requirements of the partnership agreement, the OSLA and the capacity of Blooms to sell the interests in the pharmacy should there be any default. Mr Maisner takes the view that Blooms has no security and his second report sets out the reasons for that.

108. [131]

     Ms Oliver’s opinion is that Blooms has security over the investment itself, encompassing interest the borrower may have had in the assets of the pharmacy, the amounts due to the borrower in connection with such an interest, and the debts owed to the borrower by the Pharmacy or other partners as a result of the conduct of the Pharmacy Business.

109. [132]

     Mr Maisner also takes the view that Blooms has no capacity, other than the capacity to direct consideration, to control the realisation of any assets to which the loan applies. On the other hand, Ms Oliver expresses the opinion that Blooms has the ability to control the realisation of the assets because it is able to force the borrower to conduct a sale of the borrower’s interests in the event of default and, during the sales process, the borrower is required to consult with Blooms, provide Blooms with the proposed terms for the sale, and obtain Blooms’ consent before completion.

110. [133]

     For similar reasons, Mr Maisner takes the view, in relation to security, that Blooms is able to grant a senior secured position to NAB at any time and this, in turn, puts the Tran Loan in a subordinated position, if it were granted, and as such would be unsecured. Ms Oliver recites the circumstance that at the time of the report there were no secured creditors and, therefore, there was no subordination and Blooms’ security was, at least, equal to unsecured creditors.

111. [134]

     The experts also deal with the risk of subordination and differ as to its effect. Mr Maisner expresses the view that the risk of subordination is real. He refers to the circumstance that a senior finance facility is available to be taken from NAB at any stage.

112. [135]

     Ms Oliver expresses the opinion that the risk of subordination was extremely limited because security could only be granted ahead of Blooms with Blooms’ consent. In Ms Oliver’s understanding, such consent can be reasonably declined by a lender where the provision of security would materially compromise a security position of the lender or could be granted on a conditional basis.

113. [136]

     Mr Maisner refers to the circumstance that the consent of Blooms is required, on his understanding, only in relation to a security interest other than a “Permitted Security”. A Permitted Security is defined as a security interest in respect of the assets of the Pharmacy granted in favour of NAB, which is also Blooms’ banker.

114. [137]

     There are significant differences between the experts on a number of matters that impact the risk associated with the lending. First, Mr Maisner has assessed the marketability of the Pharmacy Business as being restricted, because of the limited parties who are capable of legally purchasing pharmacy assets. He expresses no opinion about the view expressed by PKF (Blooms’ annual valuer) as to its marketability.

115. [138]

     Ms Oliver, on the other hand, treats the Pharmacy Business as capable of being sold based on the PKF opinion that “there is strong demand for pharmacy businesses” and her experience of the sale of pharmacies in Victoria. Otherwise, neither expert has experience of the marketability of pharmacy businesses in New South Wales.

116. [139]

     Mr Maisner approaches it from a position of realisation in the event of financial distress and Ms Oliver comments that PKF does not provide detail of the basis of the statement as to marketability.

117. [140]

     Essentially, the remainder of the joint report (and the remainder of the individual reports) deal with the appropriateness of the interest rates, which opinion depends upon the attitudes taken to some of the earlier issues already outlined. In relation to the comparability of interest rates, the experts agree on some relatively obvious aspects upon which, with respect, one could take judicial notice.

118. [141]

     Nevertheless, the experts do agree that whether another interest rate charged in relation to another loan is comparable for the purposes of determining the appropriateness of the interest rates in the Tran Loan depends upon the comparability of the terms of that loan with the Tran Loan and, in particular, the length of the loan, the cashflows, including the amount and timing of the drawdown of the principal (which is often related to the duration of the loan itself), the payment terms for interest and the timing of the repayment of the principal. It also depends upon the security position of the lender.

119. [142]

     Mr Maisner agrees that there are some factors which allow for a degree of comparability between the Tran Loan and the Alluth and Sidgreaves loan agreements (the loans that predated the purchase by Tran), which are set out in clause 4.3.1(b) of Ms Oliver’s report. Those factors are that the loans were used to acquire an interest in the Pharmacy Business and were, together, for a 50% interest in the Pharmacy; interest was payable monthly; the combined principal was drawn entirely at inception; payments under the earlier loans were interest only with no repayment of principal required in the term of the loan; and, although the loans do not provide for security over assets, to the extent that each of those loans is to be secured against the borrower’s interest in the assets and goodwill of the Pharmacy Business, there is security over assets.

120. [143]

     However, the earlier loans were for only two years as compared to the Tran Loan which was for seven years. Notwithstanding those factors being comparable, because of the loan term and other factors, the earlier loans were less risky and, for the reasons given in his report (and to a lesser degree summarised above), Mr Maisner considers that earlier loans were provided at an interest rate that was “well below what a reasonable lender in the position of Blooms would charge on a commercial loan”. Further, Mr Maisner, having calculated the cost of funds for Blooms at 14%, considers the earlier loan interest rate, at 8.07%, to be uncommercial for Blooms, as would any loan be if it were below 14%.

121. [144]

     Ms Oliver accepts that the earlier loans were less risky than the Tran Loan due to the difference in duration but considers them a relevant benchmark for the interest rate on the Tran Loan. This is particularly the case because they were provided over the same interest (the 50% interest in the Pharmacy Business) and were, but for the loan duration, intended to be on similar terms to the Tran Loan.

122. [145]

     The experts then discuss the relevance of the loan book to the interest charged on the Tran Loan. Each of the experts agree that the composition of the loan book, which includes such factors as industry concentration, collective default risk or historical bad debts is relevant when setting the spread between Blooms’ cost of debt and the interest rate charged on the money lent to the Tran interests. Mr Maisner takes the point that the composition of the loan book must take into account the cost of funds, not only the cost of debt, which, as was explained earlier, then translates into the WACC.

123. [146]

     Mr Maisner refers to high default rates to which the PKF report refers and the high concentration risk of similar assets and loans and the lack of natural diversification, all of which are likely to place upward pressure on Blooms’ charged interest rates.

124. [147]

     Ms Oliver refers to the unusual definition of default for the PKF report and, in particular, to the circumstance that PKF categorised all deferred or capitalised loans as being in default, in circumstances where deferral and capitalisation are permitted conduct under the loan agreements. Ms Oliver also refers to the PKF valuation being supported by a bond yield analysis and comments that the default rates in the loan book are not assessed without considering the lender’s strategy and competition.

125. [148]

     The experts then refer to their opinions on the comparability of Reserve Bank of Australia publications on small business lending rates. Mr Maisner takes the view that the RBA small business lending rates are not a relevant benchmark and relies on his experience in ANZ which suggested that all of the small business loans would have some form of security over assets, while the Tran Loan is wholly unsecured and subordinated to the NAB (at least potentially).

126. [149]

     Ms Oliver takes the view that the RBA small business lending rates are a relevant benchmark because they are based on a widespread range of data collected from a broad range of banks and non-bank lenders; and are comparable to the Tran Loan because they are for principal amounts less than $1 million, report rates paid by Australian resident businesses, and include private lenders (which are a subset of non-bank lenders) but particularly, private lenders that lend to pharmacists and other health professionals.

127. [150]

     However, Ms Oliver accepts that the RBA small business lending rates would not be comparable if, contrary to her understanding, there was a material likelihood of Blooms’ security being subordinated to new senior debt.

128. [151]

     There is also a disagreement between the experts as to the comparability of mezzanine loan rates. For the uninitiated, mezzanine lending is lending that is generally unsecured but always takes a lower priority than the senior debt to which it is subordinated.

129. [152]

     One of the differences between the experts is the different view each has as to the likelihood of subordination and its impact. Ms Oliver takes the view that there is no senior debt and there could be no senior debt without Blooms’ consent, as explained above.

130. [153]

     If, contrary to her understanding, there was a material likelihood that Blooms’ security would be subordinated to new senior debt, then mezzanine lending rates would be relevant, according to Ms Oliver.

131. [154]

     Mr Maisner takes the view that the NAB senior facility capacity gives rise to more than a material likelihood that the Blooms’ debt will be subordinated and therefore mezzanine lending rates are an appropriate comparison.

132. [155]

     The Report then discusses the cost of capital for Blooms, and the experts agree that it is appropriate to assume that Blooms’ cost of debt was approximately 5% at the time of the Tran Loan and that the WACC is a reasonable method for measuring the cost of funds. Mr Maisner was instructed that Blooms’ WACC was 17% and relies upon that instruction in his report.

133. [156]

     Ms Oliver did not receive such an instruction. Ms Oliver estimated Blooms’ cost of equity as reasonably being 15%, as compared to the 17% which Blooms itself asserts and which is a major component of the WACC upon which Mr Maisner relies.

134. [157]

     Ms Oliver takes the view that it would be inappropriate to rely upon an instruction of that kind for a report of this kind in circumstances where it is within her expertise to measure the cost of equity and Ms Oliver possesses sufficient information to perform that measurement. In performing the calculation to measure the cost of equity, Ms Oliver utilises the calculation, usually termed CAPM (Capital Asset Pricing Model), which uses the formula:

135. [158]

     Mr Maisner accepts that the CAPM is an appropriate measure of the cost of equity but disagrees with the selection of a figure less than 1.0 for “beta”, which was adopted by Ms Oliver. Ms Oliver selected a figure of 0.74 on the basis of a comparison with entities with comparable risks, which she explained in Appendix JC and included, in respect of the time at which the Tran Loan was provided, betas for non-banking lenders of between 0.07 and 0.45, and betas for franchisors between 0.34 and 2.04 and a combination of businesses that are both a franchisor and lender with a beta of between 0.51 and 0.74. Ms Oliver used the upper end of the last-mentioned range.

136. [159]

     In the opinion of Ms Oliver, Blooms stated cost of equity is of limited relevance to the interest rates charged on the Tran Loan. Ms Oliver provides reasons, which it is unnecessary to repeat.

137. [160]

     Ms Oliver accepts that Blooms’ shareholders desired level of profitability or expected return on equity is not entirely irrelevant but must be qualified by two factors: first, the expected return from the investment in Blooms includes the profitability of both the franchise business (by which Ms Oliver refers to the services and goods provided and the fees charged) and the lending business and is not capable of being calculated solely on the cost of funds or debt in respect to the lending arrangements; and second, desired profitability must be limited by what the market will accept.

138. [161]

     If the rates are set too high, because a higher profitability is sought, and those rates are materially in excess of rates available from other lenders, the borrower will not avail itself of the facility. The latter comment, however, must, in turn, be qualified by the closed nature of the Blooms Pharmacies.

139. [162]

     Each of the experts agree that the cost of debt is one component of (and therefore relevant to) the interest rate charged on the Tran Loan. Each of the experts agree that the cost of debt is not the sole determinant of the appropriate interest rate charged by Blooms, unless Blooms obtained all its funds for lending to its pharmacies as debt from its lender.

140. [163]

     In terms of the cost of capital, Mr Maisner relies upon the instruction given to him that the WACC is 14% and has applied that instruction. Ms Oliver independently calculated the WACC as 12.6% based on a cost of equity of 15% (calculated in accordance with the CAPM) and a capital structure of debt of 22% and equity of 78%. The WACC for Blooms would be 14% only if the cost of equity was, as Mr Maisner was instructed, 17% and the capital structure was debt of 25% and equity of 75%.

141. [164]

     Further, the WACC for Blooms would be 12.3% if calculated on an after-tax basis and, even on the instruction to Mr Maisner, would be 13.6% on an after-tax basis. Mr Maisner expresses the opinion that, in his experience, no after-tax assessment has been applied to the pricing of any loan with which he has been associated.

142. [165]

     The differences between the two experts on the cost of equity infects their different attitude to the direct relevance of Blooms’ WACC on the rates to be charged in the Tran Loan.

143. [166]

     The experts have significant differences in relation to the manner in which the PKF valuation may be treated or utilised. The first point of disagreement is that Mr Maisner takes the view that the PKF analysis, and in particular the PKF analysis of interest rate aspects, is irrelevant because PKF was performing the task of valuing the business, which, for this exercise, has no relevance.

144. [167]

     Ms Oliver takes a different view. Ms Oliver sets out PKF’s analysis of the market rate of interest and comparable interest rates and supports, from her experience, the appropriateness of the manner in which that calculation was performed and that opinion expressed. Ms Oliver also expresses the view that the PKF rate is “an appropriate benchmark” for the Tran Loan.

145. [168]

     As already stated, PKF in its report expresses the view that “there is strong demand for pharmacy businesses”, which statement was the subject of earlier reference. Mr Maisner states that he has no direct experience on the sale of pharmacy assets but notes that those assets are subject to regulation and the sale is permissible to be sold only to other pharmacists.

146. [169]

     It follows, according to Mr Maisner, that there is therefore a limited and restricted group of potential purchasers. Mr Maisner does not refer to the fact that there is also an even more limited pool of pharmacies to be purchased, nor to the rate at which each group grows.

147. [170]

     Ms Oliver expresses the opinion that the strong demand for pharmacy businesses to which PKF refers is relevant to the interest charged on the Tran Loan because it is a factor in considering the quality of the security position possessed by Blooms. Further, Ms Oliver expresses the view that the statement of strong demand is consistent with her experience in relation to pharmacies in Victoria but is not otherwise a matter upon which Ms Oliver can express an opinion.

148. [171]

     Again, there is a difference between the experts on the relevance of the irrevocable and exclusive call option described in the PKF valuation to the interest rate charged on the Tran Loan. Mr Maisner takes the view that it is irrelevant because it does not apply to the Tran Loan.

149. [172]

     Ms Oliver’s view is that the call option described in the PKF valuation is sufficiently comparable to the Tran Loan security. Her reasons for that opinion are that the assets pledged as security over the borrower’s interests are the same; the ranking of the security in the event of default is the same; and the differences between them have a neutral effect on the quality of security. In relation to the last-mentioned aspect, under the Tran Loan, the borrower sells his interest in the Pharmacy Business with Blooms’ consent and under the call option Blooms acquires the interest in the Pharmacy and conducts the sale.

150. [173]

     In those circumstances, while there is a difference which gives Blooms slightly less control of the sale, Ms Oliver takes the view that the differences are neutral. Further, in that respect, the marketability of the Pharmacy Business is better under the Tran Loan because Blooms selling would, in Ms Oliver’s experience, be less attractive to a buyer than the borrower selling its interest directly to the buyer, which would occur under the Tran Loan.

151. [174]

     There is also a difference between the experts in their opinions as to the relevance and the effect of the loans in default in the Blooms’ loan book on the interest rate to be charged in the Tran Loan. Mr Maisner refers to the circumstance that 75% of the existing loan book is in default, showing that a reasonable lender would come to the view that there is high risk of default which would be an upward pressure on interest rates.

152. [175]

     Further, Mr Maisner points out that PKF does not appear to have factored the high rates of historical default into its analysis of whether an interest rate of 20% appropriately reflects the market rate. In Mr Maisner’s opinion, Table 14 of the PKF valuation suggests that the loan is high risk and that the rate of interest needs appropriately to compensate the lender for that risk.

153. [176]

     Ms Oliver reiterates her description of the measure of “default” as being unusual in circumstances where a borrower can be in default by taking advantage of options available under the loan. Nevertheless, rates of default are relevant to the interest charged on the Tran Loan but are not the only factor.

154. [177]

     As earlier stated, each of the experts was subject to cross-examination. The parties declined the suggestion from the Court to have the experts give evidence in conclave, in part, as a result of the availability of the experts.

155. [178]

     In relation to expert evidence, conclave evidence is usually of greater benefit to the Court or the ultimate factfinder as it focuses on the areas of agreement and disagreement and usually narrows them or explains them better. I do not now deal with any part of the cross-examination that has already been summarised by virtue of the joint report and the differences between the experts.

156. [179]

     Mr Maisner made clear that his analysis had assumed that bank loans were not available to the borrower because, in ordinary circumstances, the typical borrower would go to a bank as it provides the cheapest cost of debt. Consequently, he had assumed that Mr Tran did not have bank finance available to him.

157. [180]

     Notwithstanding the instructions to Mr Maisner that there was no security, Mr Maisner confirmed that his understanding was that, while the pharmacist had an equity interest in the underlying business, the lender Blooms had limited recourse over the assets in the underlying Pharmacy Business. He takes the view that the equity interest is not a liquid asset.

158. [181]

     Mr Maisner therefore suggested that the loan agreement should be treated as a limited recourse loan, rather than a wholly unsecured loan. Further, Blooms would have first priority over the sale of assets and any money received from the assets as long as there was no senior creditor.

159. [182]

     Mr Maisner was not able to comment on whether the call option conferred greater or lesser protection for Blooms, and he was instructed that the guarantee from Mr Tran, which is personal, extended no further than the limited recourse that Blooms had over the underlying Pharmacy Business assets.

160. [183]

     Based on his experience, Mr Maisner took the view that there was a real risk of subordination given that a senior finance facility was available to be taken from the NAB at any stage. This was one of the factors taken into account in the formation of the opinion that Blooms could justify a higher interest rate.

161. [184]

     Mr Maisner had assumed and proceeded on the basis that, because the assets could only be sold to another pharmacist, it would be more difficult to sell the assets. This was not an assumption or an instruction given to him from Blooms’ lawyers. This was a significant factor in the reasoning to justify a higher interest rate.

162. [185]

     Mr Maisner agreed in an exchange with the Court that the issue of the restricted pool of purchasers was related to whether there was a restricted supply of businesses to purchase. It was a matter of market forces, supply and demand.

163. [186]

     Mr Maisner has no experience in the pharmacy sector. He also agreed that the risk in relation to marketability would be reduced, but not eliminated, if Blooms were an experienced lender that had a relationship with a pool of potential buyers and would expect that buyers would be found within a relatively prompt timeframe.

164. [187]

     Mr Maisner’s view was that private non-bank loans have a greater relevance to the appropriateness of the interest rate in the Tran loan than bank loans and agreed that loans from Blooms to other pharmacists, if carrying the same risks, would be a better comparator than other private loans or bank loans.

165. [188]

     There was cross-examination on the calculation of the WACC and the appropriateness of the cost of equity as a factor in that determination. Mr Maisner reluctantly agreed that in calculating the cost of equity various models are used, which, generally, have regard to a set of companies considered broadly comparable to the particular company being assessed, in order to estimate what a shareholder would expect to receive as a return.

166. [189]

     The analysis, however, is always backward looking as it looks at historical data and information and seeks to forecast the future on that basis. There are always risks associated with such an analysis.

167. [190]

     In re-examination, Mr Maisner stated that he did not agree with the PKF analysis of comparable companies, used to assess appropriate shareholder return, as the companies are listed trading entities and some of them are global companies. Mr Maisner did not see a close correlation with the Blooms business model. Non-listed companies do not possess the transparency that is associated with listed public companies and comprise a different market.

168. [191]

     Mr Maisner accepted that he was given no assumptions about actual losses incurred by Blooms in respect of the various loans it has made to Consulting Partners. His assumption on losses was based upon Table 14 in the PKF report, which referred to defaulting loans. As already stated, the Table treats as a loan in default all loans which take advantage of the provisions of the loan to pay in a different manner.

169. [192]

     Mr Maisner agreed that ultimately the primary factor for a lender was whether they would ultimately be repaid the money (I assume including interest) and if a lender has experienced lending to a particular class of business over a long period and has confidence that, despite timing issues, it would ultimately be repaid, such would not represent a high risk to the lender. Mr Maisner agreed that he would probably revisit his conclusion in the second report at paragraph [13], given the definition of default that had been pointed out during his evidence and would withdraw the comment that PKF had not appeared to factor in high rates of historical default.

170. [193]

     Mr Maisner expressed the view that default, beyond covenant breach, is best defined as capital loss, but such an opinion is based upon the capacity to capitalise interest. Thus, default, properly defined, in terms of lending risk, is the risk of loss of capital and/or earnings on the capital.

171. [194]

     Further, Mr Maisner expressed the view that an appropriate margin above the cost of funds for a lender is determined by a risk assessment of the borrower on the loan and of the risk of total loss or partial loss. Such an assessment is then utilised in a pricing model and would establish an interest rate level that would be acceptable to the lender (or its investment committee) and can be lent to a borrower.

172. [195]

     Such an assessment is based on the risk of capital loss into the future and not necessarily the position of the borrower on the day that the loan is made. Mr Maisner took the view that when a lender is looking at risk and the assessment of risk, it is assessed across the portfolio of loans to that particular class and the calculation on the rates of default, recovery, arrears, capital loss and the like is made.

173. [196]

     Ms Oliver accepted that higher risk attracts higher interest rate for a loan. In her view, the relevant risk is the risk of recovering the money that has been lent. The factors in that regard in the Tran loan are the duration of the loan of seven years, which is longer than a typical small business loan, to a very small degree that the loan permitted an immediate drawdown of the entirety of the principal, and that the principal is repayable only at the conclusion of the loan.

174. [197]

     The availability of capitalisation of interest may increase the risk to the lender because it defers the time at which the interest element might be paid and the total exposure of the lender. The circumstance that the Tran loan was a limited recourse loan also increases the risk to a degree.

175. [198]

     However, Ms Oliver explained that the risk of a limited recourse loan is the risk of the actual capacity of the lender to recover the amount lent because the limit of the borrower’s liability may drop below the amount owed. Limited recourse loans are not the most typical arrangement.

176. [199]

     Further, loans are typically given with a loan to value ratio, rather than at the full value of the asset. As is obvious, this provides the lender with a buffer.

177. [200]

     In determining a comparable loan, Ms Oliver expressed the process as one in which one examined other loans for overlapping characteristics. The greater the degree of overlapping characteristics, the better the comparison.

178. [201]

     Where the factors do not overlap, it is then appropriate to make allowances or adjustments if those non-overlapping characteristics are relevant to the lender and/or relevant to risk. The process is one in which one seeks to find comparators that have as much in common with the loan being examined as possible.

179. [202]

     Ms Oliver was cross-examined on the inappropriateness of utilising Working Partner loans as a comparator, because they were available only to Working Partners and not to Consulting Partners. Ms Oliver explained that the question of an appropriate interest rate is concerned with the reward that a lender demands for accepting a set of risks. Even if a loan is made available to a certain confined class of persons, if the risks are identical or comparable, then the loan is a useful comparison to determine the reward that a lender would be demanding or requiring in order to offer a loan for such a risk.

180. [203]

     If the Working Partner’s loan was secured against 100% of the value of the Pharmacy Business and the Consulting Partner’s loan was secured only against 50% of the Pharmacy Business, then the level of risk is greater in relation to the Consulting Partner and therefore would involve a higher interest rate.

181. [204]

     If Blooms is lending only to the pharmacy sector, Blooms is at risk of a general downturn in that sector, if one were to occur, which is not a risk faced by diversified lenders.

182. [205]

     After explaining the breakdown published in relation to small business loans in RBA documentation, Ms Oliver agreed that if there were not a material risk of subordination in the Tran loan, then RBA rates would be appropriate comparators, but if there were a material risk of subordination then the RBA data would not be a useful comparison. In the latter circumstance, mezzanine finance would be a better comparator.

183. [206]

     Ms Oliver agreed that the cost of money (which includes the cost of debt and the cost of equity) is a key determinant in the interest rate of loans offered by a lender. According to Ms Oliver, it would be perfectly acceptable to a private company and/or shareholders in a private company not to have a return beyond the cost of money.

184. [207]

     However, such a comment is, in its simplicity, unhelpful, because the cost of money includes the cost of equity, which is the return on the investment for shareholders. The return on equity is that which an investor would require or expect to receive at the time that the investment occurs to be willing to take such a risk.

185. [208]

     Ms Oliver explained many of the terms in the course of her evidence and explained how, in applying the CAPM, she calculated the cost of equity at 15%, which then resulted in a WACC of 12.6%. Ms Oliver suggested that Blooms should be lending money at an interest rate of between 7% and 10%, which would necessarily involve delivering a return on funds lower than the cost of capital, lower than her own measure of the required return on equity, which would signify to equity investors that they would not receive their required rate of return.

186. [209]

     In her view, such a course would be acceptable, and she would not expect investment in the firm to stop but would expect a significant change as to the value of the company, Blooms, involving significant capital losses for existing shareholders, which would probably result in the removal of management.

187. [210]

     Ms Oliver explained her calculation of the beta because the market is a market that is less susceptible to market movements than other businesses.

188. [211]

     There was cross-examination on the characteristics of non-bank lenders that were selected as comparable companies by Ms Oliver. Ms Oliver explained that the comparison was not a simple one and concerned the business as a whole rather than simply the loan book. One must then consider the level of overheads, which involves the efficiency with which the company operates, and the prospects of growth by issuing new loans, which is a factor in the cost of equity and reputational issues.

189. [212]

     In re-examination, Ms Oliver confirmed her adherence to the conclusion as to interest rates, by which, for two primary reasons, she stands. First, markets move and that which an investor might expect in terms of return may not be achievable and may not reflect reality. Secondly, the interest rates that are available in the market suggest that monies are available at a lower rate than the rate Blooms are offering.

190. [213]

     If, in Ms Oliver’s view, there was a condition imposed by NAB that Blooms lend at no less than 20%, it would not alter Ms Oliver’s view as to the appropriate interest rate. Other loans would be available, which did not have such a condition, and they would be available at or under 7% and, if the starting point for the cost of debt was higher, then the adjustment for the particular company to account for risk would be lower and the recommended interest rate would end up being approximately the same.

191. [214]

     However, Ms Oliver agreed that she had not calculated the cost of debt in circumstances where the 5% from NAB was available only on conditional terms and she would need to assess the cost of debt on such terms. Ms Oliver did not know the precise higher amount on which a loan would be available to Blooms, being the cost of debt, and she was unaware as to whether it was below 7% on such a calculation.

192. [215]

     However, the whole process that has been involved in this expert report was an examination of comparable business loans and the loan to Blooms is a business loan. So, according to Ms Oliver, the interest rate would still need to be “within the ballpark of what lenders are offering to businesses” and therefore would be at or under 7% per annum.

193. [216]

     The size of the movement in lending rates to Blooms, if the condition by NAB of lending at 20% were removed, would not be significant to the cost of debt and Blooms should, in terms of market rates, still appropriately charge between 7% and 10% per annum to the Tran interests or Consulting Partners generally.

194. [217]

     As can be seen from the summary of the evidence of the experts and the concentration of the parties’ legal representatives, much attention has been paid to the interest rate charged by Blooms and the risk associated with the loans. The concentration on these issues is a result of the argument that the interest rate charged by Blooms to the Consulting Partner is well above market rates and, consequently, that Blooms has a financial interest in the Pharmacy Business.

195. [218]

     As a matter of principle, such a proposition may or may not be so. Thus far, the Court has analysed the relationship between Blooms and the Pharmacy Business only by examining the OSLA. But the three-way relationship between Working Partner, Consulting Partner and Blooms is determined by three documents: the OSLA (which has already been summarised); the loan agreements (usually only to the Consulting Partner, but sometimes also to the Working Partner); and the Partnership Agreement.

196. [219]

     The Loan Agreement between Blooms and the interest associated with Tran Pharmacy was executed on 23 August 2022. Blooms is described as the lender, Tran Pharmacy (Cronulla South) Pty Ltd is described as the borrower and David Huynh Tran is the guarantor.

197. [220]

     The amount lent is $520,000, which on the evidence is the entire value of the 50% share to be purchased by Tran Pharmacy. The terms of the loan are obviously an adaptation of a proforma document, presumably drafted by Blooms, and clause 1.4 of the loan document accepts that Blooms is the drafter, and mandates that the agreement must not be interpreted or construed to the disadvantage of Blooms as a result of it having been responsible for its preparation. It is unnecessary to summarise all of the requirements of the Loan Agreement, but the Court will summarise those that are most relevant to the issues between the parties.

198. [221]

     As earlier stated in relation to the comments of the expert witnesses, the drawdown of the $520,000 occurs immediately and it is borrowed for the purpose of purchasing the 50% interest as Consulting Partner in the Pharmacy Business. By clause 3, the borrower is required to pay interest. The interest rate is defined by the schedule as being an initial interest rate of 20% per annum and the repayment date is the seventh anniversary of the date that Tran Pharmacy advanced the loan monies.

199. [222]

     Further, the specified interest rate is defined by clause 3(b) of the Loan Agreement as the initial interest rate referred to above plus any increase. The increase occurs when the RBA cash rate increases by more than 0.25% from the cash rate at the commencement of the agreement. However, the new increased rate for the Tran loan cannot be such as to increase the amount by more than the increment by which the initial interest rate exceeded the RBA cash rate.

200. [223]

     The interest accrues on the outstanding amount of the loan, which is interest only, but includes any capitalised interest, on a daily basis and must be paid on each interest payment date.

201. [224]

     By operation of clause 3(e), any interest that is not paid on the interest payment date may be deferred, provided that the borrower, Tran Pharmacy, states or certifies in writing that such payment was not made as a result of insufficient funds, and remains outstanding as accrued but unpaid interest until paid in cash or capitalised pursuant to the subclause. The subclause then allows deferred interest which has not been paid in cash by the last day of the financial year to be capitalised and added to (and deemed to be part of) the principal amount of the loan.

202. [225]

     As is normal in any loan, the borrower, Tran Pharmacy, is required to repay the loan in full as at the repayment date, which, as stated, is the seventh anniversary or the last day of the duration of the loan itself.

203. [226]

     If the interest in the Pharmacy Business is sold by Tran interests, then the priority of repayment under the loan is first to the payment of any deferred interest, then to any capitalised interest and thirdly to the payment of the principal and, only after all of those payments are made does Tran Pharmacy have any ability to utilise any funds received. By clause 4.2(b) the borrower is not permitted to dispose of or sell any Pharmacy Interest or interest therein or any monies recoverable in connection with the Pharmacy Interests of Tran Pharmacy unless the proceeds from that disposal or sale are sufficient to pay the deferred interest, the capitalised interest and the allocated loan amount.

204. [227]

     If the OSLA is terminated then, subject to notice having been given, Blooms may terminate the loan at which point the principal is repayable. Other than for the payment of capitalised interest, there can be no prepayment of principal except in an amount equal to or greater than $250,000.

205. [228]

     Further, Tran Pharmacy are not entitled to repay all or any part of the loan or principal outstanding, other than capitalised interest, at any time prior to the second anniversary of the commencement of the loan without the prior written consent of Blooms, which can be withheld in its absolute discretion. There are conditions precedent to the drawing down of the monies which are irrelevant for present purposes.

206. [229]

     By clause 8.1(j), Tran Pharmacy and the guarantor warrant that they hold all of its assets, including the Pharmacy Interests, free and clear of any security interest or any other adverse right. By clause 9.3, the guarantor, Mr Tran, is required to perform a number of tasks, albeit not unusual in relation to his and his corporation’s conduct.

207. [230]

     The effect and operation of Clause 10 of the Loan Agreement was the subject of submissions. It is in the following terms:

208. [231]

     As can be seen from the above extract, Tran Pharmacy is prohibited from selling or assigning or otherwise transferring or disposing of the legal or beneficial interest in any Pharmacy Interest, any Pharmacy Business or any other Pharmacy Asset without the prior written consent of Blooms. Further, if the creating of a security interest was not otherwise disposing of a legal or beneficial interest, the Tran Interest cannot create another Security Interest over or attached to the Pharmacy Interest or Asset of any Pharmacy Business or any Pharmacy Asset, again without the prior written consent of Blooms.

209. [232]

     The prior written consent may not be unreasonably withheld, but it would seem to the Court that the creation of a security interest or the disposal of interests that would prejudice the priority of Blooms’ loan or prevent, hinder or impede the repayment of interest or principal would be a condition that would allow the consent to be withheld.

210. [233]

     Subclause 11.1(a)(i) makes clear that the deferral of interest or its capitalisation is not a default event for the purposes of clause 10 of the Loan. However, it is treated as a default event for the purposes of the PKF Report and, in particular, Table 14 of the Report.

211. [234]

     Subclause 11.4 of the Loan Agreement deals with the sale of the Pharmacy Interests on default or retirement. If there were a failure to make a prepayment or repayment required within five business days of the notice from the lender of such failure, the lender is entitled to provide notice and the borrower, if notified, must sell the Pharmacy Interests or other Pharmacy Assets or give notice of its, his or her intention to retire.

212. [235]

     In so doing, Tran Pharmacy is required to consult Blooms in relation to the sale; to effect the sale in accordance with the Pharmacy Partnership documentation; to ensure that payment is made in cash at completion of the sale; to ensure that a fair market price is obtained; to give Blooms not less than five business days’ notice of any sale setting out all of the commercial terms of that sale and the detail of any permitted senior bank debt which is to be repaid from the proceeds of that sale; and, to ensure that the buyer is a person who is entitled to purchase and conduct a pharmacy.

213. [236]

     Further, the borrower may not enter into any binding agreement for a sale without the prior written consent of Blooms, which may not be unreasonably withheld, and on completion, all sale proceeds are paid to Blooms who then remit that which is remaining after the payment of all loan amounts.

214. [237]

     Clause 12 establishes the default rate of interest for any monies owing on default, including, for this purpose, Deferred Interest, until, if it occurs, the Deferred Interest is capitalised.

215. [238]

     The default rate is an additional 2% on the outstanding amounts, being the principal and any interest, including capitalised interest. Depending on profitability and marginal tax rates and/or capital gains tax, there may be an incentive on the borrower to defer interest and capitalise. The ordinary interest on the principal is $104,000p.a., assuming no default. If there were deferral, the 22% interest rate is calculated daily on the principal plus outstanding interest.

216. [239]

     The capitalisation to the amount of $104,000 and without default interest is “near” impossible because interest is payable monthly and can only be capitalised (subject to capitalisation with the consent of Blooms) at the end of each financial year. Therefore, default interest would have been payable in relation to the amount not paid in the first month of the financial year until the end of the financial year and on all other monthly amounts not paid for the duration of their non-payment. The qualification on impossibility arises as a result of the capacity of Blooms to consent to capitalisation at any time and not require the borrower to await the conclusion of the financial year.

217. [240]

     There is no evidence of the practice of Blooms in allowing, permitting or granting capitalisation of deferred debt immediately each month. I infer that such a course is unlikely because of its impact on cash flow.

218. [241]

     As already stated, subclause 14.1 of the Loan Agreement limits the borrower’s liability to that which may be realised from the Pharmacy Assets or any proceeds of sale or disposal of such assets. Clause 22 sets out the guarantee provided by the guarantor.

219. [242]

     As is ordinarily the case, the guarantor guarantees the punctual performance of the obligations of the borrower under the agreement and is classified as the principal obligor for any amounts not paid when due by the borrower under or in connection with the agreement. The borrower’s liability is limited to that which is received (with some currently irrelevant exceptions) from the proceeds of sale or disposal, but the guarantee is not expressly limited by the limit on that which may be obtained from the borrower. The guarantor guarantees all monies not paid and, it would seem, applies to any shortfall between the receipt of monies from the sale and any monies owing to Blooms as a result of non-payment of principal or capitalised interest or any other amounts owing.

220. [243]

     The Partnership Agreement between Tran Pharmacy and the other corporate partners is also a proforma document crafted by Blooms and executed by all partners in Blooms Pharmacies. The Court has before it the agreement between Tran Pharmacy, Sidgreaves Pharmacy and Alluth (the latter two being the earlier partners).

221. [244]

     Of the three documents, the Partnership Agreement is the least relevant in determining the relationship between Blooms and the Pharmacy Business and whether Blooms has a financial interest in the Pharmacy Business. Blooms is not a party to the Partnership Agreement although, possibly for obvious reasons, there are references to Blooms, which is a defined term in the Partnership Agreement.

222. [245]

     The Partnership Agreement defines the two partners other than Tran Pharmacy, each of which hold a 25% interest in the Partnership, as the Working Partner and requires 100% of fulltime or as agreed work capacity. It defines the Tran Pharmacy as working shifts and a casual basis as agreed. Given the general information otherwise available to the Court, Tran Pharmacy is the Consulting Partner and the other two are the Working Partners.

223. [246]

     The Partnership Agreement defines the Loan Agreement as being the loan between Tran and Blooms to which reference has already been made in these reasons. The purpose of the Partnership is to share the profit benefits derived from carrying on the Pharmacy Business in accordance with the obligations.

224. [247]

     Because Tran Pharmacy is a corporate entity, Mr Tran is the chairperson of the Partnership and has a casting vote. There are provisions for the raising of additional capital by resolution, the capital to be raised from the partners proportional to the shares held by each partner.

225. [248]

     The voting at any meeting or for any resolution is determined also by the proportion of partnership shares. Given that most if not all partnerships for any Blooms Pharmacy consist of a Working Partner and Consulting Partner, each holding 50% of the shares, the casting vote held by the Consulting Partner is important.

226. [249]

     One of the clauses to which the parties paid significant attention is clause 4 which deals with financial provisions. Most of the clause is unexceptional. Subclause 4.8 deals with finance supported by the business. The clause has some confusing aspects.

227. [250]

     By subclause 4.8(a), subclause 4.8 is said to apply “if any Partner (Funded Partner) has entered into a Facility to fund their acquisition of Partnership Units on terms that include … the other Partners giving a guarantee and indemnity to the Bank in respect of the Facility (Guarantee); and all the Partners giving to the Bank, as security for the Facility and for each Guarantee, a Security Interest or Security Interests over the Business and any of its assets”. Thus, the clause only applies if a partner has entered into a Facility of that kind.

228. [251]

     By subclause 4.8(b), there is a restriction on entering into a Facility, which provides that “A Funded Partner must not: enter into a Facility; or grant or cause any Security Interest to be given … without the prior written consent of each of the other Partners”. Given the terms of subclause 4.8(a), ordinarily, subclause 4.8(b) would apply only if the funded partner already had a Facility and would not restrict the entering into of the original Facility.

229. [252]

     Nevertheless, given the principles of construction that are applicable to a contract of this kind and applicable generally to instruments of any kind, it would appear that the proper construction of subclause 4.8(b) is that the restriction applies to the initial Facility that renders the Partner a Funded Partner. There are then restrictions on the variation of the terms of any Facility to which partners have consented.

230. [253]

     Subclause 4.10 requires each Partner to discharge their personal obligations including in relation to any Facility from their own personal or business bank accounts.

231. [254]

     Subclause 5.3(c) is said to be subject to subclause 5.3(a) but otherwise requires, while the partnership is in existence, any partner not to carry on any business which is the same or similar to the Pharmacy Business to which the Partnership Agreement relates, without the written consent of each other partner. The restriction does not apply to interests already possessed.

232. [255]

     Subclause 5.3(a) to which, it is said, subclause 5.3(c) is subjected, provides that each partner is free to carry on or have an interest or involvement in any other business under licence from Blooms, which shall not constitute a breach of the Deed. The effect of the two provisions is that a partner may hold an interest in another Blooms Pharmacy but not any other pharmacy, unless in the latter circumstance, the partner has the written consent of each other partner (and by other documents, Blooms).

233. [256]

     Subclause 10.5 deals with the effect of default or exit events and subclause 10.6 deals with the sale of the business as a going concern. Subclause 11.2 deals with the valuation of any departing partner’s equity which is based upon new financial statements prepared by the accountants who prepared the last financial statements of the partnership. The financial statements upon which the valuation is based must be at the valuation date and must be adjusted to market value, the value of assets other than stock not previously included at market value.

234. [257]

     However, a partner is not permitted to dispose of interests in the partnership unless it follows the exercise of the call option created by clause 10 or has been sanctioned by a unanimous resolution of the partners and otherwise complies with subclause 12.2. Further, each pharmacist who is the principal of a corporate pharmacist provides a guarantee to each other partner which guarantee deals with the due and punctual payment of all monies by the corporate entity under the deed or pursuant to any transaction contemplated by the deed and the performance of all its obligations under the Partnership Agreement.

Principles on construction

1. [258]

   It is unnecessary to deal at length with the principles of construction of a statute which have been stated by the highest authority in Australia on many occasions. It is, however, necessary to restate some fundamental principles which the Court necessarily applies in dealing with the construction of a statute and, to a lesser extent, the construction of contracts.

2. [259]

   The prima facie basis upon which a statute or other instrument is construed is that the provisions of the statute or other instrument are given a purposive construction in that the Court attempts to discern the purpose of the statute or instrument and to give effect to that purpose. The process is an objective exercise.

3. [260]

   Further, the context of the statute or instrument is a fundamental aspect of discerning that purpose and the proper construction of the statute or instrument. The words of the instrument or statute are the primary source for discerning the context and purpose to be given effect, but the dictionary definitions of words are not simply taken and added together in order to achieve the construction of a document.

4. [261]

   Rather, the words of the statute (and other instruments) are used to assess the purpose of the legislature or parties and the construction of any part of a statute or instrument requires the provisions to be read in the context of the document as a whole to achieve the purpose of the legislature or the parties’ intention and the operation of the provision, with other provisions of the document, in a manner that gives rise to the achievement of harmonious goals. These principles are oft expressed and well-known.

5. [262]

   The High Court in SZTAL v Minister for Immigration summarised the principles in the following way:

6. [263]

   In SZTAL, Gageler J (as the Chief Justice then was) issued a dissenting judgment but summarised the principles and took the same approach as the majority. His Honour expressed the principles in the following way:

7. [264]

   As these passages make clear, the Court is required to examine the entirety of a statute it is seeking to construe and, from the words of that statute, in the context of the whole of the statute, determine the construction of the statute by giving the words a meaning that both achieves the purposes of the statute and which results in the provisions of the statute achieving harmonious goals. [30]

8. [265]

   The same or similar approach is taken, as already stated, in relation to contracts, which, for present purposes, includes the OSLA, the Loan Agreement and the Partnership Agreement. The High Court in Toll v Alphapharm said:

9. [266]

   The subjective intention of the parties is not the basis upon which a contract is construed. Rather, as the High Court has made clear, the Court is required to reach an objective construction.

10. [267]

    However, an objective construction, again, does not construe or interpret the contract in a vacuum. The purpose of the construction exercise by a court is to ascertain objectively the intention of the parties to the contract.

11. [268]

    In performing such a task, the Court must, as with all documents, take a purposive approach. [32] The Court must, again, read the document as a whole and take into account the context in which the contract was made, including its commercial purpose, seeking, once more, to arrive at a construction that achieves the harmonious operation of a contract as a whole, in its context. [33]

12. [269]

    In dealing with the purpose of the parties, as stated, the Court ascertains the “mutual intention” derived from the words of the contract, not the subjective intention of one or more of them. The words of the contract are interpreted in a way that would be used by a reasonable person in the circumstances in which the contract was created. [34]

13. [270]

    The Court applies the above principles to the construction of the statute and to the construction of the contracts in question. While the Partnership Agreement is a deed, the principles of construction are the same for a deed as for a contract (if the deed were not a contract). [35]

Jurisdiction of the Court and the principles on judicial review

1. [271]

   The plaintiff seeks a declaration pursuant to the terms of s 75 of the Supreme Court Act 1970 (NSW) and purportedly relies also on the provisions of s 69 of the Supreme Court Act. The summons is taken, purportedly, in the supervisory jurisdiction of the Court.

2. [272]

   The provisions of s 69 of the Supreme Court Act do not confer jurisdiction on the Court. The writs of prohibition, mandamus and certiorari are within the inherent jurisdiction of the Court conferred by the Third Charter of Justice effective from 1824.

3. [273]

   The Third Charter of Justice of 1823 was issued pursuant to the Imperial Act 4 Geo IV, c. 96. The provisions of s 69 prohibit the issue of writs of prohibition, mandamus or certiorari and continue the jurisdiction of the Court, previously exercised, to grant the relief or remedy otherwise than by the issue of a writ and in accordance with the Supreme Court Act itself.

4. [274]

   Nothing in the summons commencing these proceedings seeks the quashing of any decision either on account of error of law or on account of error of jurisdiction. Certiorari therefore cannot issue. Further, no order sought in the summons seeks to prohibit any person from giving effect to any decision of a court or tribunal acting judicially on account of any error of law or error of jurisdiction.

5. [275]

   Lastly, the plaintiff does not seek, in the summons or otherwise, any order requiring any officer of the government, tribunal or court to exercise a jurisdiction or make a decision that has not been made. The plaintiff’s reliance on s 69 of the Supreme Court Act is therefore misplaced.

6. [276]

   The reliance by the plaintiff on the provisions of s 75 of the Supreme Court Act is in a different category. Section 75 clarifies that proceedings are not open to objection on the ground that merely declaratory relief is sought and permits the Court to make “binding declarations of right”, whether or not any consequential relief is sought or obtained. The provision relies on and follows the English Rules, and the jurisdiction was described by Lord Diplock in the following terms:

7. [277]

   Moreover, a declaration will bind only the parties to the proceedings in the Court. [37]

8. [278]

   More importantly, as submitted by the Council in these proceedings, the issuing of a declaration is discretionary. In this case, the plaintiff applies to the Court and, in so doing, seeks to pre-empt the appeal already lodged in and adjourned by NCAT, pursuant to the provisions already outlined.

9. [279]

   In so doing, Blooms seeks an order from the Court inconsistent with the determination of the Council while leaving the determination of the Council extant. The legislature has given the jurisdiction to approve or not to approve to the Council and permitted a full appeal to NCAT. As earlier explained, it is a criminal offence to operate a pharmacy or to hold a financial interest in an operating pharmacy without the consent of the Council.

10. [280]

    There may be an internal appeal in NCAT to an Appeal Panel and from NCAT there is an appeal on a question of law pursuant to the terms of s 83 of the CAT Act. Such an appeal to the Court may be taken only with the leave of the Court.

11. [281]

    In order to seek a declaration from the Court, a party must show an interest in the relief. Even though the application to the Council is an application by Tran Pharmacy to register its interests, the Council has refused to register that interest on the basis that to do so would involve the granting of registration in circumstances where Blooms, the plaintiff in the proceedings before the Court, would hold a financial interest, which is prohibited.

12. [282]

    The decision, if applied in other situations and even if confined only to the current situation, produced an impediment to the operation of the plaintiff’s business as it is currently structured. Such an effect was clear and imminent; not remote, indirect or fanciful. Accordingly, Blooms has an interest in the question and that interest is of an intensity and degree that is well above that of an ordinary member of the public. [38]

13. [283]

    While interest in a problem will not, without more, suffice to permit a party to seek declarations, injury to legal rights is not essential. [39] In this case, the decision, in my view, if not an actual injury to the legal rights of the plaintiff, is so close to it that Blooms must be seen to have sufficient interest to seek the declaration.

14. [284]

    It would seem that, in accordance with the comments of French J (as his Honour the Chief Justice then was) in Cameron, [40] even derivative or relational interests will be sufficient to support a claim for declaratory relief, provided that the interest agitated is an interest greater than a mere member of the public who may have an academic interest in the subject matter or may have rights in other circumstances which are affected by any judgment in the application that may be made. I have no doubt, in these proceedings, that Blooms is an appropriate plaintiff for declaratory relief.

15. [285]

    In a similar manner to the jurisdiction of the Court to issue writs or orders in the nature of a writ, the Supreme Court has and had inherent jurisdiction to grant declaratory relief. [41] The provisions of s 75 of the Supreme Court Act, reflecting the English Rules, merely clarify that no consequential relief is needed for the jurisdiction to be exercised.

16. [286]

    The discretion to exercise the jurisdiction to which s 75 refers is a wide one but it is not wholly unlimited. It is mostly confined, to the extent that confining is required, by the exercise of discretion of the Court.

17. [287]

    The current application by summons does not seek the determination of the powers of the Council or NCAT. There can be no real dispute that the Council had the jurisdiction and power to make the orders it did. Rather, as stated earlier, the plaintiff seeks a declaration that there is no financial interest possessed by Blooms if the Tran Pharmacy interests are registered as a means of precluding such a determination by NCAT.

18. [288]

    While NCAT may be bound, as a matter of authority and precedent, by a determination of the Court and, possibly, by reason of estoppel or res judicata, technically NCAT is not bound by the declaration, if it were made. On the other hand, prohibition or certiorari would bind NCAT and, in the case of certiorari, quash, assuming such an order were sought, the determination and/or decision of the Council.

19. [289]

    Where, as here, a declaration is sought which has the effect of interfering with proceedings that are before another court or an administrative tribunal required to act judicially, there are serious discretionary reasons why the Court will not exercise its discretion to issue declaratory relief and it has been said that such relief will be granted, in those circumstances, only in exceptional cases. [42]

20. [290]

    While the judgment in Jackson v Slattery turned, to some extent, on the existence of a privative clause, [43] the comments of the Court of Appeal made clear that, even if there were no privative clause operating, the Court would not have given any remedy until the proceedings, in that case an inquiry, had completed. [44]

21. [291]

    The jurisdiction of the Court to issue declarations was the subject of analysis by Einstein J. His Honour’s learned and lengthy analysis bears repeating. His Honour said: [45]

22. [292]

    In dealing with an issue that has been decided by an administrative tribunal which has been given the jurisdiction to determine the issue and, in so doing, pre-empting the process of appeal on issues of fact and law that have been prescribed by the legislature, the admonitions of the High Court as to the role of courts in judicial review of an administrative decision need to be noted. In Attorney-General (NSW) v Quin, [46] Brennan J (as his Honour the Chief Justice then was) said:

23. [293]

    These principles inform the jurisdiction of the Court and the discretion to be exercised by the Court when considering the issues before it and whether it should issue a declaration as sought by the plaintiff, Blooms.

Consideration

1. [294]

   It is important to note that there are tensions in the OSLA. Blooms relies on phrases in the OSLA which refer to aspects of the supply of goods “at the request of the Partnership”. However, there are aspects of the OSLA which, even if the request of the Partnership is theoretically required, disclose that the practical operation of the OSLA precludes or seriously inhibits the capacity of the Partnership not to request the goods or services mentioned.

2. [295]

   It is important to note that the term “Core Merchandise” is defined as all goods and services recorded from time to time as core range products in the point of sale software. This software is controlled by Blooms, and the core range products may be varied by Blooms from time to time. However, Core Merchandise always includes Blooms Own Brand Products.

3. [296]

   Further, Blooms charges a fee based upon the floor size and number of staff in the pharmacy. Such a fee does not vary depending upon the services requested. Thus, should a Blooms Pharmacy not request services other than Additional Services or Additional Goods, the Pharmacy Business will be paying for services that are not provided.

4. [297]

   Those goods and services are generally necessary for the proper running of the business and, if not requested from Blooms, then it would have to be sought from another supplier of those goods and services or created by the Pharmacy Business itself. In other words, if the Pharmacy Business does not request Core Merchandise and/or services mentioned (other than additional goods and services), the Pharmacy Business will be paying for the goods and/or services twice: firstly, in the fee payable to Blooms as the base fee; and secondly, for the services ordered or created otherwise than through Blooms. This makes wholly impractical a failure by the Pharmacy Business to request the goods and services to which the clauses refer. It provides an economic disincentive which, it would seem, would be prohibitive.

5. [298]

   Moreover, as already pointed out in the summary of the OSLA, Blooms makes available to the Pharmacy Business its system, its retailing knowhow and proprietary systems and methodologies for management of floor space, stock and staff. [47] The Pharmacy Business is required and agrees in the OSLA to upgrade its information technology hardware as recommended by Blooms from time to time, including personal computers, laptops, servers, switches, wireless access points, scanners, receipt printers and label printers at the cost of the Pharmacy Business.

6. [299]

   By subclause 5.2 of the OSLA, Merchandising Support Services are provided by Blooms, theoretically at the request of the Partnership, and it is Blooms that determines the demand for the merchandise, negotiates the terms of trade agreements, arranges for the acquisition of the merchandise, manages the Pharmacy Business’ entitlements to volume discounts and other benefits and administers the Ecommerce website enabling click and collect services. The Pharmacy Business appoints Blooms as its agent for the purposes of entering into agreements or arrangements for the supply of Core Merchandise, seemingly irrevocably during the duration of the OSLA. If the Pharmacy Business were not to request Blooms to provide Core Merchandise, it could not sell stock which competed with Blooms Own Brand Products. [48]

7. [300]

   While there is a qualification that Blooms is capable of giving prior consent, which can only be withheld if Blooms reasonably considers that its use may detrimentally affect its goodwill, such a qualification has little work to do, given that selling goods in competition with Blooms Own Brand Products would, almost by definition, detrimentally affect the goodwill of Blooms. Further, the Pharmacy Business is required to use its best endeavours "to preserve the value and goodwill” of the trademark (i.e. Blooms). [49] The goodwill in the trademarks remains the property of Blooms and at all times vests in Blooms, as one would expect. [50]

8. [301]

   Over and above all of those aspects, the OSLA is, as earlier explained, said to be executed for the purpose of the Pharmacy Business retailing Blooms Own Brand Products. Given such an essential aspect of the OSLA and the earlier-mentioned conditions, the expressed need for a “request” from the Pharmacy Business does not, on a proper construction of the OSLA, reflect the reality of the relationship.

9. [302]

   Blooms is also required to supply to the Pharmacy Business (described as the Partnership) marketing collateral for point-of-sale promotions, and the Pharmacy Business is required to use its best endeavours to use and display the collateral in the ways recommended by Blooms. This means that the advertising of specials or particular promotions must be displayed in the manner recommended by Blooms and, for a Pharmacy Business not then to stock the goods and/or services advertised, would necessarily harm the Pharmacy Business and harm Blooms’ goodwill. It is a cause for immediate termination for the Pharmacy Business to act contrary to “Blooms values and strategy” or otherwise to act “adversely to the interest of Blooms”.

10. [303]

    If Blooms were not entitled to terminate immediately as a consequence of a failure to buy Core Merchandise and manage it and market it in accordance with its recommendations, then Blooms, in its absolute discretion, may or may not renew the licence governed by the OSLA.

11. [304]

    Apart from the above issues, the partners in the Pharmacy Business are not entitled to hold any interest in a pharmacy that is not a Blooms Pharmacy. The combination of duties, summarised above, leaves little room for the Court to be satisfied that Blooms does not control the operation of the Pharmacy Business, the manner in which it sells goods, the price at which such goods are sold, and the products that it offers for sale.

12. [305]

    Even accepting the theoretical capacity available in subclauses 5.1 and 5.2.1 of the OSLA not to request merchandise, there is no evidence that satisfies the Court that the Tran Pharmacy would not request the services or was not intending to request the services or that any other Blooms Pharmacy had not requested the services described. The Court is not satisfied that any pharmacy, including the Tran Pharmacy or the Cronulla South Pharmacy when it was to operate, would not request the services. Mr Tran did not give evidence.

13. [306]

    The question the Court must then answer is whether such an arrangement is caught by the National Law and gives to Blooms a financial interest, such that it would be precluded from being registered or, more relevantly, the Tran Pharmacy would, by virtue of the arrangement, be ineligible for registration. I have already recited the provisions of the National Law that are relevant. I have also extracted and reiterated the principles applicable to the construction of the statute.

14. [307]

    It is difficult to envisage a monetary interest that is not a financial interest. Yet, the legislature has deliberately chosen to use each descriptor. Further, the legislature has chosen to utilise the term “directly or indirectly”.

15. [308]

    The definitions utilised by the legislature in Schedule 5F of the National Law require comment. The provisions of clause 1 of Schedule 5F use the term “means” to outline the definition of each term.

16. [309]

    In the case of the term “financial interest”, it describes it as having the meaning in clause 2 of the Schedule, similarly to other definitions. The term “pharmacy” uses the term “means” and then provides that the meaning “includes” and goes on to express the view that it “does not include” public hospital pharmacies.

17. [310]

    Neither of those definitions, as terms, is particularly relevant to the issues before the Court in these proceedings. However, the different use by the legislature of “means” and “includes” is relevant. [51]

18. [311]

    Clause 2 of Schedule 5F, which is incorporated in clause 1 of the Schedule, extracted above, uses the term “means” and also uses the term “includes”. By subclause 2(2) of the Schedule, the legislature has indicated that a “financial interest” does not include certain other arrangements.

19. [312]

    Interestingly, paragraph 2(2)(c) expresses the view that a financial interest does not include an interest of a person in the “profits of a pharmacy business because the person is an employee” other than a legal or beneficial ownership of shares. One would expect, in those circumstances, that an ability to share in the profits of a pharmacy business would, without that exemption, be sufficient to render someone a person who has a “direct or indirect monetary or financial interest”. [52]

20. [313]

    The term “financial interest” is not, as it is defined, narrow. Nor is it intended to be narrow. It is significantly broadened by the use of the terms “direct or indirect”.

21. [314]

    The term “financial interest” is not limited to a proprietary interest. [53] In the Now.com judgment, Young CJ in Eq was dealing with a previous statutory definition, which has obvious similarities and a situation where the proposed interest was as a shareholder in a company which carried on a pharmacy business. Such a situation is now expressly dealt with by the legislature.

22. [315]

    Nevertheless, his Honour, in dealing with the submission that the then legislation did not displace the undoubted principles of company law, determined that the defendant had a “pecuniary interest” (the term used in that legislation and not defined but used similarly). One of the submissions put by the defendant was that the Court could not look at a “controlling interest”, to which Young CJ in Eq said:

23. [316]

    The learned Chief Judge in Equity in the Now.com judgment later described that the determination of whether a person has a pecuniary interest (in these proceedings a financial interest) turns not on whether there is a proprietary interest but rather “is a question of fact and degree as to whether in any particular case a person who is involved in arrangements with a pharmacy business does have a [financial] interest”. [55]

24. [317]

    His Honour went on to say that, dealing with the factual circumstances before the Court in the Now.com judgment, a “shareholder in a position to control a single business subsidiary company and whose conduct indicates an intention to do so to its probable financial benefit holds a pecuniary interest in the subsidiary’s business”. [56]

25. [318]

    With respect to his Honour, I agree that the determination of whether there is a financial interest held by a person involved in arrangements with a pharmacy business is a question of fact and degree. Because of that circumstance, the value of former judgments in different factual circumstances is unhelpful, except to the extent that principles are established in the determination of the question or the manner in which those facts are and that degree is to be treated.

26. [319]

    Nevertheless, previous judgments should be analysed to provide the principles that underpin them. The plaintiff, Blooms, relies for example on the finding that a landlord’s receipt of rent generated by a tenant’s business does not give rise to a financial interest. [57] It also relies on judgments dealing with normal contractual arrangements for the provision of services or goods, even at discounted rates and does not give rise to a financial interest. Yet, properly understood, those judgments deal with “arm’s length” relationships. [58]

27. [320]

    The submission of the plaintiff, Blooms, on the effect of the judgment of the Court of Appeal in White is to the point. Blooms submits that the effect of the decision was, amongst other things, that a normal franchise arrangement did not give rise to a financial interest.

28. [321]

    However, their Honours (Handley, Beazley and Stein JJA) were determining an appeal from a dismissal of proceedings in the District Court which, in turn, was an appeal from a decision of the then Pharmacy Board. Their Honours determined that the breadth of the definition of pecuniary interest, as it then was, could be discerned from the exemption for contracts of employment and bills of sale. At the time there was no definition of the term.

29. [322]

    The Court of Appeal (Handley JA, with whom Beazley and Stein JJA agreed) initially declined to issue certiorari against the District Court of New South Wales because, in the circumstances, even though the wrong test was used, no different outcome would have been achieved. The reference to the wrong test is a reference to the circumstance that the District Court relied upon a series of decisions relating to local council and the prohibition on councillors voting when they have a conflict of interest.

30. [323]

    Notwithstanding the judgment issued and reported in the New South Wales Law Reports (the first White judgment), the Court of Appeal reconvened and reconsidered its judgment, vacated the orders and quashed the decision of the District Court. [59] It considered it could do so because the judgment had not been entered.

31. [324]

    Whether or not it could do so, the second judgment vacated the orders made in the first judgment and quashed the judgment of the District Court. The Court of Appeal held that the circumstance that the management agreements were, in reality, franchise agreements, did not establish as a matter of law that they gave the management company a pecuniary interest in the pharmacy and that, therefore, the appeal to the District Court was required to be decided.

32. [325]

    In other words, the ultimate judgment of the Court of Appeal did not decide whether the franchise agreements before them were or were not sufficient to provide a pecuniary interest in the pharmacy. It only decided, ultimately, that it might or might not. Franchise arrangements did not, as a matter of law, establish that the management company had a pecuniary interest in the pharmacy.

33. [326]

    However, the Court of Appeal, as a consequence of the first White judgment, plainly favoured the view that in the circumstances before them the franchise arrangement did provide for the franchisor to have a pecuniary interest.

34. [327]

    The Court has thus far examined the relationship between Blooms and the Pharmacy Business while the Pharmacy Business is operating. A financial interest may be possessed by a person or entity in circumstances where the person or entity has no role in the day-to-day conduct of the Pharmacy.

35. [328]

    The breadth of the term, as noted by the Court of Appeal in the first White judgment summarised above, makes it clear that the determination of a then pecuniary interest, and the determination of that which is now called a financial interest, is performed on the basis of the real and effective relationship between the parties, not the formal or theoretical relationship.

36. [329]

    The National Law itself makes clear that a person may have a financial interest even though the person has no role in the day-to-day management of the pharmacy. A partner or non-executive shareholder in a corporate entity that owns a pharmacy, even when a manager is appointed and has full discretion to run the pharmacy, would still possess a financial interest in the pharmacy.

37. [330]

    As already stated, the breadth of the term is significantly expanded by the use of the words “directly or indirectly”. Further, it would seem that the need to exempt an employee receiving profit share suggests that any sharing of profits with a person would be sufficient, prima facie, for the person to have a financial interest in the pharmacy. The terms of clause 3(3) of Schedule 5F suggests that the legislature considered a “security interest” may well amount to a “financial interest”.

38. [331]

    Assuming, for example, that a non-pharmacist manager was contracted as an independent contractor to assist in the operation of the pharmacy and was paid, in part, on a profit sharing basis, it would seem, given that the person is not an employee, that the person would, at least prima facie, hold a financial interest in the pharmacy. [60]

39. [332]

    There may be many other interests that would qualify as a financial interest, directly or indirectly, where the person holding the interest has no role in the pharmacy itself. One only needs to consider, apart from the partner or shareholder to which the Court referred above, a person who was the beneficiary of a trust operated by a corporate trustee which owned the pharmacy business.

40. [333]

    Even if the corporate trustee subleased the pharmacy business to a registered pharmacist for a fixed term, the corporate trustee (and in my view, the beneficiary) would have an indirect financial interest in the pharmacy business because it would have an interest in the business’ increased value and would obtain and retain the profits on the sale of the business. This last aspect brings the Court to the operation of the OSLA and the Loan Agreement together.

41. [334]

    As already summarised, the Consulting Partner suffers no risk as a consequence of the Loan Agreement. The Consulting Partner invests no capital in the purchase of the 50% interest. The Consulting Partner borrows the entirety of the purchase money for the 50% interest from Blooms.

42. [335]

    The terms of the loan provide for the Consulting Partner to pay interest only and, in some circumstances, to defer and/or to capitalise that interest. No capital is repaid during the term of the loan, although special payments of more than $250,000 may be made after the first two years of the loan.

43. [336]

    At the conclusion of the loan, subject to the grant of a loan for a further period, the principal is repayable. However, if the Consulting Partner does not repay the principal, then Blooms is able to force the sale of the interest and may only recover, in relation to the debt of the Consulting Partner in that capacity, that which is owing from the proceeds of the sale. It is a limited recourse loan.

44. [337]

    Consequently, the Consulting Partner, in that capacity, suffers no risk on account of the loan or the purchase of the 50% interest. The risk is borne by Blooms. The risk manifests if the value of the interest (i.e. 50% of the value of the Pharmacy Business), on sale, is less than the amount of the loan. Such an eventuality, if it were ever to manifest, is a risk borne entirely by Blooms.

45. [338]

    There are complications associated with the proper interpretation of the guarantee, which the principal of the Consulting Partner company executes. The guarantee is a term of the Loan Agreement.

46. [339]

    If, on its proper interpretation, the guarantee covers all monies that would be payable notwithstanding the limited recourse aspect of the liability to repay, then the risk would be faced by the guarantor. Each of the parties before the Court submits that the guarantor is liable only to the extent of the limited recourse governing the repayments to Blooms. While I have some doubt that such is the effect of the guarantee, I accept, for the purposes of these proceedings, the uncontested position of each of the parties.

47. [340]

    The circumstance that Blooms faces the risk associated with a fall in the value of the Pharmacy Business highlights the impact of the effect of the terms upon which the business or an interest in the business may be sold. As earlier summarised, if the OSLA is in force, then the business or an interest in the business may not be sold otherwise than with the approval of Blooms and to a purchaser of whom Blooms approves. If the OSLA is not renewed or the borrowing pharmacist is retiring, then the loan principal is repayable forthwith and any sale must be at market value and the proceeds of the sale paid to Blooms, which, after calculating the amount owed to it, will pay any remainder to the borrower.

48. [341]

    The expert reports are lacking in some respects. This is not a criticism of the experts. Neither of the experts has experience with the pharmacy industry in New South Wales. The Council, on the other hand, is an expert body constituted for that very purpose.

49. [342]

    The only evidence as to the capacity to sell pharmacies at an increasing price in New South Wales is the opinion expressed in, or the inference available from, the PKF expert reports. Those reports express the view that Blooms has no difficulty selling pharmacies or interests in pharmacies. Such a statement accords with common sense.

50. [343]

    There are legislative restrictions on the number of pharmacies that may be registered in a particular area. There are also restrictions on those that may purchase an interest in a pharmacy. However, every year the universities produce pharmacists. It would be most surprising if, for that reason, the pool of potential purchasers was not increasing at a significantly greater rate than the pool of potential pharmacies. As Mr Maisner points out, the cost of a pharmacy or an interest in a pharmacy is a matter of supply and demand.

51. [344]

    The effect of supply and demand has its limits. The limit is imposed by the potential profit from the business purchased.

52. [345]

    The renewal of the OSLA is at the absolute discretion of Blooms. Blooms, in turn, controls who may purchase an interest in a Blooms Pharmacy and offers to pharmacists the capacity to purchase a 50% interest in a pharmacy without any capital risk. This explains why the Consulting Partner would borrow from Blooms and not a bank. It undermines totally the view expressed by Mr Maisner that bank loans were not available as the reason a Blooms loan was sought.

53. [346]

    The combination of the OSLA and the Loan Agreement as a limited recourse loan results in a huge incentive on pharmacists utilising the arrangement offered by Blooms. That there is such an incentive does not mean that Blooms has a financial interest in the pharmacy.

54. [347]

    However, the circumstance that Blooms has a financial interest in the sale price of interests in the Pharmacy suggests that Blooms has an indirect financial interest in the Pharmacy Business. Because the repayment of the loan is dependent upon the increasing price of pharmacies (or a price that is not falling), Blooms has an interest in the value of the Pharmacy Business. Blooms’ interest in the value appears to be financial. Consequently, that is an indirect financial interest in the Pharmacy Business.

55. [348]

    Moreover, the value of the pharmacy interest depends, at least in part, on the profitability of the Pharmacy Business. The interest identified above is in many respects greater than the interest that may derive from a share in the profits of the business, which has occasioned the exemption for an employee earning a profit-share and to which earlier reference has been made.

56. [349]

    It may be that there is evidence that would contradict some of the inferences drawn or the assumptions made above. However, such evidence has not been adduced.

57. [350]

    On the current state of the evidence, the Court is not satisfied that Blooms has no financial interest in the Pharmacy. It is for the plaintiff to establish that it has no financial interest.

58. [351]

    In Pham, [61] Barrett J (as his Honour then was) referred to the Second Reading Speech of the predecessor Act and the purposes of the statutory scheme and cited with approval the stated intention that the provisions, mirrored in the National Law, were implemented to protect pharmacists’ business interests as well as the public. [62]

59. [352]

    Earlier in these reasons, the Court set out some of the provisions of Schedule 5F of the National Law. The terms of clause 12 of the Schedule mandate or require the application for approval of premises and the application for the registration of a financial interest. They do so by the use of the word “must”. Subclause 12(1) of the Schedule utilises the term “may”. In that respect, it is facultative: it allows a person to make application.

60. [353]

    Subclause 12(6) permits the Council to require the application to be verified by statutory declaration. Subclause 12(7) is in the following terms:

61. [354]

    In the first White judgment, supra, which is unaffected by any comment in the second judgment vacating the original orders, the Court of Appeal determined that the provisions equivalent to subclause 12(7) of Schedule 5F were discretionary and reposed in the Council (or its then equivalent) a discretion as to whether it will refuse or approve the application, namely in this case, the registration of the holder of the financial interest. [63] The terms of the jurisdiction of the relevant authority have not altered and the terms have been promulgated again.

62. [355]

    The Court as presently constituted is bound by the judgment of the Court of Appeal. The Council has a discretion to approve or not. This is emphasised by the requirement not to approve in the circumstances prescribed by subclause 12(8) of the Schedule.

63. [356]

    Moreover, the legislature’s different use of the term “may” and “must” in the different subclauses discloses that the legislature intended the terms to be used differently. Since the only outcome of an application is to refuse it or approve it, the conclusion of the Court of Appeal, apart from being binding, has significant support.

64. [357]

    A court or tribunal adjudicating a matter before it must exercise the jurisdiction conferred unless there are express words that permit the court or tribunal not to exercise the jurisdiction conferred, or words of necessary intendment to that effect. [64]

65. [358]

    The judgment of Deane J in The Electrical Trades Union case, supra, was in dissent, but was cited with approval by a majority of the High Court in this respect. [65]

66. [359]

    The issue is fundamental. Where a jurisdiction is conferred on a court or tribunal for the public benefit or for the purpose of conferring rights or benefits, an application to the tribunal properly made creates a duty for the tribunal to exercise its jurisdiction, which is not then at liberty to refuse to deal with the matter. In The Queensland Electricity Commission case, supra, Deane J said:

67. [360]

    Because the Council does not have the discretionary power simply to ignore an application or refuse to deal with it, the only possible outcomes of an application are the granting of it or refusal of it. Yet, the legislature has utilised the word “may” and should, in those circumstances, be taken to have intended that there be a discretion to grant or to refuse the application, other than in the circumstances outlined in subclause 12(8) of the Schedule which requires the refusal of the application.

68. [361]

    So much was the decision of the Court of Appeal to which earlier reference has been made. The Court of Appeal stated:

69. [362]

    It is appropriate to reiterate certain principles and admonitions of the High Court in the manner in which courts should deal with judicial review of an administrative decision. While the current proceedings are not strictly reviewing the decision of the Council, it is an approach that is apposite in the circumstances. In Attorney-General NSW v Quin, [68] Brennan J said:

70. [363]

    The underpinning assumption of the prayer for relief in the summons is that the legislature has required the objective existence of, relevantly, a financial interest in order for the registration of the interest to be refused. In Parisienne Basket, [70] the High Court clarified that while the legislature could make the objective existence of a precondition the determinant of the jurisdiction of an inferior court or tribunal, such a result should only be determined if the intention is clearly expressed by the legislature. The High Court said:

71. [364]

    The above issue is inextricably connected with the discretion of the Court not to issue declaratory relief. Where there is a specialist tribunal appointed for its expertise under a statute to deal with matters arising under the provisions of that statute and which is given the jurisdiction to determine disputes concerning the rights and privileges which are wholly dependent upon the statute, then the courts should be careful not to intervene too readily in the jurisdiction conferred.

72. [365]

    The Council has the capacity to determine whether, for example, there has been created a market or sub-market in the sale of Blooms Pharmacies. It has the capacity to determine whether the combination of the OSLA and the Loan Agreement and its terms, and the practical application of those terms, results in Blooms having a financial interest in the operation of the Pharmacy or in the Pharmacy itself as a result, in particular, of the restrictions on sale and the process by which it is sold.

73. [366]

    If, in accordance with the principles on judicial review, the Council were to bona fide exercise its jurisdiction, not in the process of taking a wrong approach or asking itself the wrong question, and derived an answer which was open to it, the Court might not intervene in that result. Successful judicial review depends upon similar questions to the factors associated with the intervention on appeal from a discretionary judgment. Is there a mistake of law or fact; is there the application of wrong principle; or is there manifest error?

74. [367]

    The Court, too, is bound by the principle that where an application is properly made to it and is within its jurisdiction, then jurisdiction should be exercised. However, in the area of declaratory relief and judicial review, there is a discretion not to make orders, the effect of which would be to interfere with the process established by the legislature for the determination of particular rights.

75. [368]

    The aforesaid discretion is even more pronounced in these circumstances. The Court would be issuing a declaration, the effect of which would be to declare that there is no financial interest in circumstances where the Council has refused an application for registration and in circumstances where the decision to refuse registration is extant.

76. [369]

    The Court has not been requested to quash the decision of the Council. There is in place an appeal, pursuant to the National Law and the CAT Act to NCAT. This application, if it were granted on the merits (or refused on the merits) potentially sets up inconsistent judgments of this Court and NCAT and/or the Council. The Council’s decision has effect under the statute and is binding until it is quashed. Until it is quashed, it would be illegal, i.e. a criminal offence, for Tran Pharmacy to operate or have an interest in the Pharmacy Business, if it continued in the current relationship with Blooms.

77. [370]

    Of course, NCAT, if the declaration were to issue, may take the view that it would hear the appeal and quash the decision of the Council. But such a course would be to pre-empt the independent exercise of the jurisdiction conferred on NCAT. The jurisdiction conferred on NCAT is at least as broad as the jurisdiction conferred on the Council and broader than that exercised by the Court. NCAT, like the Council, is required to take account of government policy, its own expertise and that which is “unjust”.

78. [371]

    The Court is not entitled to exercise its jurisdiction on the basis of its own knowledge and otherwise than in accordance with the evidence before it. The evidence before it does not establish that there is, even on the balance of probabilities, no financial interest held by Blooms as a consequence of the arrangements for the conduct of the pharmacies under the OSLA together with the conditions imposed in relation to the Loan Agreement, and in particular the sale of any interests that are subject to the loan.

79. [372]

    As stated, the Council is entitled to utilise its own expertise and NCAT, likewise, is entitled to exercise any expertise it may have in those areas. Evidence of the sale price and market associated with interests in pharmacies and, in particular, interests in Blooms Pharmacies, is incomplete in these proceedings. Apart from the circumstance that I am not satisfied that Blooms will have no financial interest in the pharmacy if the Tran interest is registered under the terms currently proposed, as a matter of discretion, for the reasons expressed relating to the Court’s discretion not to issue declarations, I will not issue the declaration sought by the plaintiff.

80. [373]

    There are other matters that need noting but which have not been the basis of the orders I am to issue. First, the OSLA expresses the independence of the Pharmacy Business and the absence of any right in Blooms to control the Business. However, the absence of the creation of any right to control is qualified by the significant exception “other than for the purpose of Blooms performing its obligations under [the OSLA]”. [72]

81. [374]

    The parties to the OSLA expressly acknowledge that Blooms does not have a financial interest in the Pharmacy Business in contravention of the Pharmacy Laws. [73] Such a statement is self-serving and, for the purposes of deciding this judgment, of limited utility.

82. [375]

    As to the differences between the experts, there are a number of aspects. I prefer the opinion of Ms Oliver because she has experience with the pharmacy sector. Even though her experience is in Victoria she is better placed than Mr Maisner. Further, Mr Maisner was instructed on the cost of capital. Such an instruction becomes self-serving. I prefer the opinion independently calculated by Ms Oliver, which accords generally with the view expressed in the PKF Report.

83. [376]

    I consider the reasonable rate for the Consulting Partner loan to be at or about 12.6% and the 20% initial interest rate charged is almost double (1.6 times) the said rate. I also consider that the loan to the Working Partner is comparable but such an exception that significant adjustments would be necessary.

84. [377]

    Further, the instructed cost of capital seems to have very little basis. I do not consider the Consulting Partner loans to be high risk, given the control over the sale of interests and the evidence as to the ease with which sales may be effected.

85. [378]

    A return of 17% on investment in a low-risk area is obviously desirable to an investor but I am not satisfied that it is the real cost of capital. I do accept the CAPM calculation and a cost of capital of 15%, which forms the basis for the WACC calculation of 12.6%. I am not satisfied that the “arrangement” with NAB that Blooms would charge no less than 20% interest is a condition on the loan to Blooms or binding on it. It seems a very informal arrangement.

86. [379]

    Next, the issue I do not accept from the evidence of Ms Oliver is the notion that the rate of interest should be as low as 7%. First, I do not consider that responsible management would deliberately operate at a loss in any long-term section of a business’ operation. Secondly, I do not consider that management would undertake a course that would probably result in a change of management. Thirdly, the loans are desirable to the borrower because of the limited recourse aspect, the capacity to borrow the total purchase cost and the absence of any financial risk and, therefore, the competition with other lenders is less relevant.

87. [380]

    Lastly, I do not consider subordination to be a significant risk. If NAB were to provide a facility to the Working Partner, it would be for no more than 50% of the Pharmacy Business, which one can infer for present purposes, is $520,000. I ignore, for present purposes, the knowledge that NAB is likely to have an LVR (Loan to Value Ratio) and lend less than the entirety of the value of the interest.

88. [381]

    But the sale of the business, as the experience of Blooms discloses, will net more than that which is necessary to satisfy the loan (or so Blooms would infer). Consequently, Blooms would not see a real risk to its security in the subordination of its loan, and it should not impact the loan interest rates.

89. [382]

    The Court makes the following orders:

    1. (1)

       Judgment for the first defendant.

    2. (2)

       Summons dismissed.

    3. (3)

       The plaintiff will pay the first defendant’s costs of and incidental to the proceedings.

    4. (4)

       Any party seeking a special or different order as to costs may apply within 14 days in writing to the Associate to Justice Rothman with a submission and any accompanying document other than a document already in evidence upon which it relies for that application. Other than the accompanying documents, the submission shall be no more than five pages. Any party adversely affected by the application for a different or special order as to costs may reply. Such reply has the same conditions as those imposed on any applicant.

    5. (5)

       Otherwise, the proceedings are dismissed.