FEDERAL COURT OF AUSTRALIA

Rambaldi; in the matter of Philip Charles Weeden, a bankrupt v Weeden [2008] FCA 1597

BANKRUPTCY – transfer of small minority shareholding in closely-held private company to majority shareholder – transfer for nominal sum on day prior to minority shareholder filing for bankruptcy – market value of shares – articles of association include pre-emptive rights and directors’ right of refusal to transfer – no dividends paid for substantial period and none to be paid in future

CORPORATIONS – valuation of minority shareholdings in proprietary companies

Acts Interpretation Act 1901 (Cth) s 15AB

Bankruptcy Act 1966 (Cth) s 120

Corporations Act 2001 (Cth) ss 232, 461, 1072C

Evidence Act 1995 (Cth) s 79

Federal Court Rules (Cth) O 29 r 2

Income Tax Assessment Act 1936 (Cth) Div 7A

Explanatory Memorandum to the Bankruptcy Amendment Bill 1996 (Cth)

Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 cited

Cannane v Official Trustee (1996) 65 FCR 453 distinguished

Deputy Federal Commissioner of Taxation v Gold Estates of Australia (1903) Ltd (1934) 51 CLR 509 cited

Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 distinguished

Gambotto v WCP Limited (1995) 182 CLR 432 cited

Geita Sebea v Territory of Papua (1941) 67 CLR 544 cited

Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 cited

Hilder v Dexter [1902] AC 474 cited

Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 applied

Mallett v Mallet (1984) 156 CLR 605 cited

Mike Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd (1995) 122 FLR 294 applied

Mordecai v Mordecai (1988) 12 NSWLR 58 applied

Re Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 535 distinguished

Scottish Cooperative Wholesale Society Ltd v Meyer [1959] AC 324 cited

Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) 19 ACLC 517 cited

Spencer v The Commonwealth (1907) 5 CLR 418 applied

Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer Vizagapatam [1939] AC 302 cited

Lonergan W, The Valuation of Businesses, Shares and Other Equity (4^th ed, Allen & Unwin, 2003)

IN THE MATTER OF PHILIP CHARLES WEEDEN, a bankrupt

GESS MICHELE RAMBALDI and ANDREW REGINALD YEO (AS JOINT & SEVERAL TRUSTEES OF THE PROPERTY OF PHILIP CHARLES WEEDEN, A BANKRUPT) v PHILIP CHARLES WEEDEN and BETTY WEEDEN

VID 1053 of 2007

HEEREY J

27 OCTOBER 2008

MELBOURNE

IN THE MATTER OF PHILIP CHARLES WEEDEN, A BANKRUPT

THE COURT ORDERS THAT:

1.                  The preliminary question:

Within the meaning of s 120(1)(b) of the Bankruptcy Act 1996 (Cth), what was the market value of the fully paid ordinary share held by the first respondent in

1.         Weeden Estates Pty Ltd;

2.         PCW Estates Pty Ltd;

3.         BW Estates Pty Ltd

at the time of the transfer of such share by the first respondent to the second respondent on 5 February 2007?

be answered as follows:

1.         $38,308;

2.         $32,762;

3.         $34,328.

2.                  The respondents pay the applicants’ costs of the preliminary question. 

3.                  The substantive application be adjourned for further directions.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF PHILIP CHARLES WEEDEN, A BANKRUPT

REASONS FOR JUDGMENT

1                     On 5 February 2007 the first respondent Mr Philip Weeden transferred to the second respondent, his mother Mrs Betty Weeden, one share held by him in each of the companies Weeden Estates Pty Ltd, PCW Estates Pty Ltd and BW Estates Pty Ltd (collectively, the Weeden Companies).  Each share represented two per cent of the issued capital of the company.  The consideration was $2 for each share, a total of $6.  Mrs Weeden already held the remaining 98 per cent.

2                     On the following day, 6 February, Mr Weeden became a bankrupt upon the acceptance by the Official Receiver of a debtor’s petition presented by him.  The applicants are the trustees of Mr Weeden’s bankrupt estate.  They seek an order under s 120 of the Bankruptcy Act 1966 (Cth), or alternatively under s 121, setting aside the transfers.  Section 120(1) provides that a transfer of property by a person who later becomes a bankrupt is void against the trustee in the transferor’s bankruptcy if the transfer took place less than five years before the commencement of the bankruptcy and

(b)        the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.

“Market value” is the market value of the property at the time of the transfer: s 120(7). 

3                     The parties have consented to an order under O 29 r 2 of the Federal Court Rules that the following question be decided separately: 

Within the meaning of s 120(1)(b) of the Bankruptcy Act 1996 (Cth), what was the market value of the fully paid ordinary share held by the first respondent in

1.         Weeden Estates Pty Ltd;

2.         PCW Estates Pty Ltd;

3.         BW Estates Pty Ltd

at the time of the transfer of such share by the first respondent to the second respondent on 5 February 2007?

4                     While a determination of actual market value will no doubt be of assistance to the parties, and the hearing has been conducted on that basis, for the purposes of s 120(1)(b) the applicants need only show that the consideration given was less than the market value, whatever that might be. 

5                     The bankruptcy of Mr Weeden came about as a result of the failure of the company MSD Sports Pty Ltd which operated a retail chain of sporting apparel and equipment stores under the name Melbourne Sports Depot.  Mr Weeden was the sole director, secretary and shareholder of MSD.  It went into voluntary administration in July 2006 with total liabilities of some $2.4 million and unsecured creditors of almost $2 million. 

6                     On 6 December 2006 judgment was entered by consent in the County Court against Mr Weeden in two actions for amounts totalling approximately $500,000 plus interest and costs. 

7                     On 11 January 2007 Mr Weeden resigned as a director of each of the Weeden Companies.  The remaining directors are Mrs Weeden and Mrs Pamela Goldstone, Mr Weeden’s sister.  Mrs Goldstone holds an Enduring Power of Attorney from Mrs Weeden.

8                     On 16 January 2007 Mr Weeden was served with a bankruptcy notice in respect of one of the County Court judgments.  The last date for compliance was 6 February 2007.

9                     In his statement of affairs Mr Weeden disclosed unsecured creditors totalling $596,010.91 and no divisible assets. 

Circumstances of the transfers

10                  By about late 2004 Mrs Weeden was diagnosed with Alzheimer’s disease and by the end of 2006 or early 2007 her mental faculties, including her powers of concentration and both long and short term memory, were diminishing with increasing rapidity.  In addition her physical health was poor.

11                  Prior to the transfers Mr Weeden’s solicitors obtained a valuation of his shares in the Weeden Companies from Mr Mark Lipson, a director in the firm Sothertons, Chartered Accountants.  In a report dated 5 February 2007 Mr Lipson concluded that the shares had no market value and that it was “reasonable therefore to transfer these shares to the existing shareholder [ie Mrs Weeden] at $2 per share”.  I shall returnlater to details of Mr Lipson’s valuation and evidence he gave at the hearing. 

12                  At a subsequent meeting of his creditors Mr Weeden said that he transferred the shares in the Weeden Companies in order to “streamline his affairs” as “he considered it appropriate to transfer the shares at market value”.  He said that he had transferred the shares after he had taken advice from his solicitor and that he understood the term “streamlined”

to be a process of simplifying the affairs so that the bankruptcy was less complicated… [and that] he needed to divest himself of the shares to avoid bankruptcy.  [This was done] in order to avoid the complexities that would have been incurred with the family companies, the advice given to him was to have the affairs simplified by transferring the shares. 

He said that he arrived at the market value after consulting Mr Lipson.

13                  Mr Weeden did not give evidence.  Thus there is no explanation as to why, with bankruptcy imminent, he did not wait to ask the trustee in bankruptcy whether such “streamlining” was necessary or desirable. 

Assets of the Weeden Companies

14                  The Weeden Companies together with other entities (collectively, the Related Entities) constitute the Weeden Group, which is under the control of the Weeden family.  There are other Associated Entities (the Associated Entities).  The accounts of the Weeden Companies for the year ended 30 June 2006 were in evidence.  By their non-response to a notice to admit, the respondents have admitted that as at February 2007 the assets of the various Weeden Companies were as follows:

15                  With one minor exception, the Weeden Companies’ assets consist of loans to Related Entities.  The assets of those entities include:

·        External investments, including shares in listed companies and holdings in land and property investments;

·        Amounts receivable from others of the Weeden Companies and Related Entities;

·        Amounts receivable from some Associated Entities.

16                  The Weeden Companies do not carry on any active business.  They are beneficiaries of trusts of which Related Entities are trustees.  Some of the amounts payable to the Weeden Companies are subject to formal agreements prepared in accordance with Div 7A of the Income Tax Assessment Act 1936 (Cth).  Interest has been charged on these loans and the entities are repaying them in accordance with the terms of these agreements.  The interest rate charged on these loans is the rate set by the statutory authorities.  According to the opinion of the applicants’ expert accounting witness, Mr David Ferrier, which was not disputed, this rate is a commercial rate.

17                  According to instructions given to Mr Lipson at the time of his February 2007 valuation, the Weeden Companies have not declared dividends since 1988 and the directors have “expressed an intention of not declaring dividends in the foreseeable future”.  The Companies “will no longer receive any further distributions from any trust associated with Betty Weeden or the Weeden Family”.  These assertions were not the subject of evidence before me, although they are receivable as admissions against interest. 

The applicants’ case

18                  The applicants called Mr David Ferrier of BDO Kendalls.  His valuation is based on the estimation of the net proceeds from an orderly realisation of assets on liquidation.  After applying a minority discount of 10 per cent his value of the shares transferred is as follows:

The respondents’ case

19                  The respondents say that there was no income from the shares and little prospect of a two per cent shareholder compelling a winding up.  There was no prospective commercial investor who would buy the shares.  There was simply no market and consequently no market value.

20                  Alternatively, they say that Mr Ferrier’s valuation is flawed.  On Mr Lipson’s valuation on a liquidation basis, assessing the risk of success in an oppression claim and accounting for the time value of money, each share has a market value of $2,698.33.  However, as already noted, if this is the market value it is still significantly more than the consideration received and thus would be enough for the applicants’ purpose.

Market value

21                  Section 120 in its present form was introduced in 1996 to overcome the decision of the High Court in Barton v Official Receiver (1986) 161 CLR 75.  The provision considered in that case had used the expression “valuable consideration”.  The High Court held that it was sufficient that the consideration given for the purchase had a “real and substantial value” and not one which was “merely nominal or trivial or colourable”.  The Explanatory Memorandum at the time of the 1996 amendment stated at par 84.13:

The expression “market value” is intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount or incentive for purchase being offered.  The expression is not intended to include a situation where the property was being disposed of at a ‘fire sale’, at discounted prices because of some immediate need on the part of the owner to liquidate his or her assets.  Of course, there may be differing opinions as to the precise market value of some property, for example house properties, where valuers or real estate agents may give kerbside valuations which spread over a range of monetary values.  However, if the property was transferred for an amount less than the lowest amount in the range, the transfer would be a transfer at undervalue, for the purposes of this section.

22                  It was common ground that the term “market value” as it appears in s 120(1)(b) is to be construed consistently with the valuation principles stated in Spencer v The Commonwealth (1907) 5 CLR 418 at 432, 436-437, 440 et seq.  As the High Court said in Deputy Federal Commissioner of Taxation v Gold Estates of Australia (1903) Ltd (1934) 51 CLR 509 at 515:

The supposition must be made that a sale is not forced, and that the owner is willing to sell on reasonable terms, and negotiates with a person willing to buy, that the one is not so anxious to sell and the other to buy, as to disregard the effect of any business consideration, and that each is equipped with knowledge of the existing relevant circumstances.

23                  It is central to the respondents’ case that there was in fact no prospective purchaser for Mr Weeden’s shares (apart from Mrs Weeden, a circumstance to which I shall return).  The relevance of that fact, if it be a fact, needs to be considered in the light of a passage from the judgment of Griffith CJ in Spencer, a case which concerned compensation for the compulsory acquisition of land.

24                  Griffith CJ dealt with the very situation where actual buyers of the property in question are likely to be hard, or impossible, to find.  His Honour at 5 CLR 431 noted that, in the case of chattels which are the subject of frequent sale or purchase, the value of the articles is taken to be the current price.  Someone wishing to sell such articles can readily find a purchaser at a price which is fairly certain and, conversely, a would-be buyer can find a seller at about the same price.  In many cases the same considerations apply to land, where the price per acre is “as definitely fixed as the price of wheat or sugar”.  His Honour continued (at 431-2):

But in the case of a new port, in a new State, where the area of land is limited, and each piece differs in many of its characteristics from the rest, it is impossible to apply any such rule.  Bearing in mind that value implies the existence of a willing buyer as well as of a willing seller, some modification of the rule must be made in order to make it applicable to the case of a piece of land which has any unique value.  It may be that the land is fit for many purposes, and will in all probability be soon required for some of them, but there may be no one actually willing at the moment to buy it at any price. Still it does not follow that the land has no value.  In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?”  It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural.  The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

25                  Mr Lipson pointed out some unattractive features (for a purchaser) of the shares in question: they were a small minority, they were subject to pre-emptive rights in the Articles of Association and a directors’ discretion to refuse registration, there was a long-subsisting policy of not declaring dividends, etc.  However, these are matters going to the quantum of market value.  They do not deny the existence of market value.  Indeed, Mr Lipson implicitly recognised this.  In his report of 24 September 2008 he said that he did not believe there was a “deep and identifiable market” for the shares in the Weeden Companies.  It follows that, in his opinion, there was a market, albeit one which did not have the desirable attributes mentioned.  In re-examination he was asked:

Q.        And (senior counsel for the applicants) suggested that this often happens; that a minority shareholder in a closely held family company often seeks to sell the shares to outsiders on the – would you say that happens – that does happen often?

A.        It rarely happens in private companies within family groups.  It rarely, rarely happens.  I can – it is not something that would be in the normal – in the normal course of events. … It is very rare that in a closely held family context that a minority shareholder will seek to dispose of their interest to an outsider or stranger.

So whether or not such sales happen often, the fact remains that they can, and do, happen.

26                  In this context, at least in the circumstances of the present case, we are not concerned with the definition of a market in the competition law sense.  It is rather a question whether the transfer impugned under s 120 was a transfer of property which has value because it can be bought and sold.  Minority shares in proprietary companies in Australia by their nature can be, and are in fact, bought and sold.

27                  Ms Rome-Sievers for the respondents referred to observations by Beaumont and Hill JJ, with whom Lehane J agreed, in Cannane v Official Trustee (1996) 65 FCR 453 at 471 et seq.  Those observations deal with a quite different setting, a company which had a deficiency of assets.  Its controller, Mr Cannane, contemplated using it as a vehicle for a backdoor listing on the stock exchange.  The only value from the point of view of a prospective purchaser was “something extraneous to the shares, namely the assurance by Mr Cannane that the benefit of the advantageous back door listing would inure to (the company)” (at 472).

28                  I now turn to the issues in dispute between Mr Lipson and Mr Ferrier which go to the quantum of market value.

Is a valuation on a liquidation basis appropriate?

29                  Neither valuer considered a capitalisation of future earnings basis appropriate; see Mallett v Mallet (1984) 156 CLR 605 at 627.

30                  Ms Rome-Sievers referred to a passage in the judgment of Aickin J in Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 396 where his Honour said:

Where no individual shareholder can procure liquidation and where there is no likelihood of the holders of four out of the five shares joining together in the foreseeable future to wind up the company it can seldom be appropriate to use s. 18 (2) (c).

That case concerned liability for Commonwealth gift duty.  Section 18(2)(c) of the Gift Duty Assessment Act 1942 (Cth) provided in effect that where a gift included shares in an unlisted company, the Commissioner might, in his discretion, adopt as the value of those shares the sum the holder would receive in the event of the company being voluntarily wound up on the date when the gift was made.  On the facts of that case (see the passage from the judgment of the trial judge, Sheppard J, cited at 146 CLR 395) all the members of the Court, except Murphy J, held that it was unnecessary to adopt a winding up basis because the shares were properly valued on an earnings basis. 

31                  In the present case, as already noted, neither valuer suggested an earnings basis would be appropriate.  In any event, the notional winding up in the present case assumes an order made on an oppression petition: Corporations Act 2001 (Cth) s 232, or on the just and equitable and related grounds: s 461(e), (f), (g) and (k), not the voluntary winding up predicated by s 18(2)(c) of the Gift Duty Act as relevant in St Helens Farm.

32                  If, as both valuers agree, a liquidation basis is appropriate, how would the notional purchaser, properly advised, assess the prospects of obtaining a winding up order? 

Would a winding up order be made?

33                  Ms Rome-Sievers points to the history and circumstances of the Weeden Companies.  They are closely held family companies.  They do not carry on any business, their sole economic worth being the potential receipt of trust distributions as beneficiaries of trusts within the wider Weeden Group.  However, the directors of trustees of the relevant trusts have stated that they do not intend to make any distributions in the foreseeable future, and have not done so for some time.  No dividends have been declared by the Weeden Companies since 1988 and are not likely to be declared in the future.

34                  The respondents’ case is that no court would make a winding up order in favour of a two per cent shareholder who acquired shares with notice of the past history of the companies and the declared intentions of its directors and other controllers of the Weeden Group.  It is as though, to adopt an aphorism of tort law, such a shareholder “came to the nuisance”.

35                  The concept of oppression and the relevant authorities are discussed extensively by the Full Court of the Supreme Court of Western Australia in Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 at 143-147 in a passage too lengthy to set out, but which I respectfully adopt and incorporate in these reasons.  I particularly note what their Honours said at 145-146:

In our opinion the application of the test involves a question of fairness.  It is for the court to decide whether in balancing the interests of the company as a whole against minority interests the directors have acted so as to unfairly prejudice the interests of the minority.  The court decides this “according to ordinary standards of reasonableness and fair dealing”.  Whether the conduct is unfairly discriminatory will be judged on standards which reasonable directors with such skills as directors should have, acting bona fide, would think to be fair.

36                  The respondents’ defence in a hypothetical oppression and winding up application would necessarily be that the assets of the Weeden Companies can be used for the exclusive benefit of the controllers, through the medium of the Related and Associated Entities.  The minority shareholder in the Weeden Companies can expect nothing by way of income and nothing by way of capital for the indefinite future.  If the net assets of the Weeden Companies were $100 million and the minority interest were 20 per cent, the unfairness of such conduct would be unarguable.  It does not become any less unfair when the minority is smaller.

37                  A controlling majority which diverts assets and opportunities of the company to other entities under its control, and from which it will benefit, will be acting oppressively.  This is essentially the kind of conduct held to be oppressive in Scottish Cooperative Wholesale Society Ltd v Meyer [1959] AC 324 and a breach of fiduciary duty in Mordecai v Mordecai (1988) 12 NSWLR 58.  Similarly, an inflexible policy of not declaring dividends can constitute oppression: Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) 19 ACLC 517 at [51]-[56].  It would be no answer to say that such conduct happened to suit the interests of the Weeden family.  In Gambotto v WCP Limited (1995) 182 CLR 432 the High Court has reaffirmed the willingness of the courts to protect minority shareholders – albeit in the context of a majority seeking to amend Articles of Association.

38                  A hypothetical purchaser, properly advised, is to be credited with an awareness of the foregoing matters.  The price a willing buyer would pay for the shares would reflect the availability of remedies for oppression and entitlement to a winding up order.  Such a purchaser is not to be fixed with previous acquiescence in the policies of the controllers of the Weeden Companies.  Rather the reasonable assumption is that the purchaser would be entitled to the rights conferred at law by the holding of the shares acquired.  Cases such as Re Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 535 where the minority shareholder had accepted the conduct complained of for many years (see 62 FCR at 548, 550, 553) are distinguishable.

Restrictive provisions in the Weeden Companies’ Articles of Association

39                  The Articles of Association of the Weeden Companies contain pre-emptive rights (Article 37-41) and also confer an “absolute discretion” on the Directors to refuse to register any transfer without being bound to assign any reason for such refusal: Article 36. 

40                  Mr Peters SC for the applicants pointed out that s 1072C of the Corporations Act confers rights on the trustee in bankruptcy of a shareholder who becomes bankrupt.  Pre-emptive rights are effectively removed (sub-s (6)) and consent to a transfer of the bankrupt’s shares must not be unreasonably withheld (sub-s (5)).  It was put that the surrounding circumstances in the present case include the imminent bankruptcy of Mr Weeden.  A willing seller in the position of Mr Weeden, in answer to a buyer’s argument that the restrictions in the Articles warranted a lower price, would point out that the next day a trustee in bankruptcy could sell them without any such restrictions.

41                  I doubt whether the circumstance of Mr Weeden’s dire personal financial situation is a factor which legitimately can affect the assessment of market value of the shares.  In Spencer, 5 CLR at 436-7, Barton J said that a claimant for compensation for resumption of land

is entitled to have for his land what it is worth to a man of ordinary prudence and foresight, sight, not holding his land for merely speculative purposes, nor, on the other hand, anxious to sell for any compelling or private reason, but willing to sell as a business man would be to another such person, both of them alike uninfluenced by any consideration of sentiment or need.

42                  However, the existence of restrictive provisions in a company’s Articles of Association does not indicate that a minority holding has no market value; rather it is a factor which may call for an appropriate discount. 

43                  In Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 at 44 Williams J, sitting as a single Justice of the High Court, considered that the presence of restrictive Articles was not a factor that should depreciate value because directors were obliged to exercise fiduciary duties conferred by the Article in a proper manner, bona fide and for the benefit of the company.  Such obligations are enforceable in the courts.  Citing the Privy Council case of Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer Vizagapatam [1939] AC 302, as applied by the High Court in Geita Sebea v Territory of Papua (1941) 67 CLR 544, Williams J said (70 CLR at 44):

…the full value to the seller must be ascertained, however limited the market may be, even where there is only one possible hypothetical purchaser. To a prudent purchaser willing to give full value for the shares sooner than fail to obtain them, this restriction should not, to my mind, have many terrors.

44                  Subsequently Gibbs J in Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 at 569, another single Justice case, rather departed from the approach of Williams J in Abrahams.  Gibbs J said that even though powers given to directors were fiduciary

that does not mean that the presence of restrictive articles has no effect on the value of a minority holding.  From a practical point of view, the possibility of obtaining redress in the courts against a wrongful exercise of a power given by the articles is not a substitute for articles under which the power is not conferred.

45                  This issue is extensively discussed by Young J in Mike Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd (1995) 122 FLR 294 at 303 et seq.  His Honour quoted the view of the leading authority on share valuation in Australia, Mr Wayne Lonergan, in his work The Valuation of Businesses, Shares and Other Equity.  The corresponding passage in the current edition (4^th ed, Allen & Unwin, 2003) at 143:

Few valuers today would share the views of Williams J, and in the light of the significant changes in the world’s capital markets and in view of the comments of Gibbs J in Gregory’s Case… I believe a modern court would, in the absence of a statutory direction to the contrary, generally discount the value of shares to take account of restrictive clauses.

While accepting that he would have followed Abrahams were it not for what Gibbs J said in Gregory, Young J (122 FLR 304) made the following points, first in relation to proprietary company shares generally:

·        A reasonable purchaser would be influenced by restrictive provisions and there should be some discount;

·        Directors have fiduciary duties which can be policed;

·        Litigation to enforce compliance with directors’ obligations will be expensive;

·        But it will also be expensive for the directors, so compromise “somewhere along the line” is likely;

·        Each case must be looked at in its own circumstances;

·        But a large discount merely because of the presence of restrictive clauses would not be appropriate.

In relation to minority holdings:

·        The above remarks also apply to an extent;

·        If the holding is of a size less than that required to block a special resolution the holder is “at the mercy of the majority”;

·        But the courts are still able to contain the wrongdoing of the majority;

·        “To a great extent” directors will be able to make determinations as to retention of moneys, dividend policy and the direction of the company;

·        But there is an “area outside the line where the courts will exercise control”;

·        Where the valuation is on an assets backing basis, the smaller the value of the shares (without discount), the greater the discount that should be applied for the cost and risk of litigation.

46                  An important element in the present case is the special value the shares would have to the majority shareholder – nominally Mrs Weeden but, it is reasonable to infer, a holder under the practical control and direction of Mr Weeden.  This factor is mentioned in the passage from Abrahams cited in [43] above.  Nothing in Gregory casts doubt on it.  In Mordecai, 12 NSWLR at 70, Hope JA, with whom the other members of the New South Wales Court of Appeal agreed, said:

It is well-established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person.  The property is not valueless or diminished in value because there would be no other buyers [Vyricherla and Geita Sebea cited].  On this basis the value of Morpak’s goodwill is to be determined upon the basis of a hypothetical sale to the only persons to whom, on the appellants’ submissions, it could be sold, and to whom the matters which they submit would render the goodwill valueless in any other purchaser’s hands would be irrelevant.

Young J applied the same principle in Mike Gaffikin Marine, 122 FLR at 304.

47                  It might be suggested that the Explanatory Memorandum ([21] above) is inconsistent with this principle insofar as it disregards “any sort of discount or incentive”.  However, the Memorandum is not to be taken too literally.  For example, a range of “kerbside valuations” would hardly be a determination of market value binding on a court.  In any event, an Explanatory Memorandum, however helpful, is not an expression of the will of Parliament and cannot prevail when a statute uses an expression, such as market value, to which courts of the highest authority have given a clear meaning.  While Explanatory Memoranda are explicitly included in the extrinsic materials to which a court may give consideration under s 15AB of the Acts Interpretation Act 1901 (Cth), there may still be something to be said for the trenchant view expressed by Lord Halsbury LC in Hilder v Dexter [1902] AC 474 at 477:

… I believe the worst person to construe (a statute) is the person who is responsible for its drafting. He is very much disposed to confuse what he intended to do with the effect of the language which in fact has been employed.

48                  Mr Ferrier has applied a 10 per cent “minority discount”.  To some extent that overlaps with a further discount for litigation risk which he fixes at 25 per cent.

49                   Mr Ferrier’s figures quoted in [18] above do not take into account this latter discount because his instructions were to assume as a fact that the applicants (strictly speaking, that should be a hypothetical purchaser) would be able to establish oppression and obtain a winding up order.  Mr Lipson’s corresponding discount is 92.5 per cent, ie he assumes the chance of success at 7.5 per cent.  The estimate of the prospects of success in litigation is probably not something within the specialised knowledge of a Chartered Accountant: see Evidence Act 1995 (Cth) s 79.

50                  Considering the factors mentioned by Young J ([45] above), I am inclined to think 10 per cent is not enough for a minority discount.  It is true that one factor arguing for a small discount is that we are concerned here with valuation on a net realisable assets basis.  Most of the authorities deal with valuation on the basis of capitalisation of future maintainable dividends.  In such a setting a hypothetical purchaser would be concerned with the effect of restrictive provisions such as a discretion to refuse registration should he wish to sell the shares in the future.  However, when, as in the present case, a winding up is to be assumed, such a consideration does not arise.

51                  On the other hand, the pro rata value of the shares, before the application of any discount, is $210,796.  That must be getting towards a level of value below which litigation becomes an uneconomic exercise.  As such, the relatively small value argues for a higher discount (see the last-mentioned factor in [45] above).

52                  Since the discount for acquiring a minority shareholding is wrapped up with the litigation risk and expense factor, I think it is more realistic to fix the one discounting figure.  I would assess it at 50 per cent.

Recoverability of loans to Related and Associated Entities

53                  Mr Lipson says that a liquidator of the Weeden Companies would have to issue notices of demand to the Related and Associated Entities who would “in all likelihood, challenge any action to repay”.  There was a “likelihood” that those entities would need to be placed in liquidation in order to realise their assets in order to meet their obligations to the Weeden Companies.

54                  The respondents have not adduced any evidence to support these assertions.  There is no suggestion, let alone evidence, of any matter which might give rise to a defence against recovery claims by a liquidator of the Weeden Companies.  There is no qualification to the accounts of the Weeden Companies which are in evidence, so presumably the directors were of the view that the assets had the recoverable values stated.  By designating the loans as current assets, the directors are taken to have adopted applicable criteria for a relevant asset from the Australian Accounting Standards Board standards AASB 5.A and 101.66, which in the circumstances would be either that

(c)        it is expected to be realised within 12 months after the reporting date; or

(d)        it is cash or a cash equivalent…

55                  If, as seems the only available conclusion on the evidence, there would be no answer to a liquidator’s claims, it is not reasonable to assume a likelihood that the Related and Associated Entities would need to be put into liquidation.  Rather, it is to be assumed they would be able to pay, and would pay, amounts due to the Weeden Companies.

Time value of money

56                  Mr Lipson says that it is reasonable to assume that the realisation of assets involving a successful oppression action and a series of winding up applications would take a considerable amount of time, on his estimate between two and four years.  A potential purchaser would discount the expected realisation at the purchaser’s required rate of return.  In the present circumstances, a purchaser would require a return significantly above more orthodox and conventional investments.  Mr Lipson adopts 25 per cent.

57                  The estimate of the time oppression proceedings would take is outside Mr Lipson’s area of expertise.  Given modern Fast Track procedures in this Court, I would think six to eight months is more realistic.  Once a winding up order were obtained, as already mentioned there is no evidence to support the assumption of further delay in recovery by a liquidator.  Moreover, the assets themselves will be earning income in the meantime.  I do not think any discount is appropriate.

Assessment of market value

58                  A 50 per cent discount should be applied to the pro rata net realisable asset value.  The result is:

Orders

59                  The preliminary question will be answered accordingly.  There will be an order that the respondents pay the applicants’ costs of the preliminary question.  The substantive application will be adjourned for further directions.

Associate:

Dated:         27 October 2008