Andreevich & Andreevich
[2022] FedCFamC1F 608
Federal Circuit and Family Court of Australia
(DIVISION 1)
Andreevich & Andreevich [2022] FedCFamC1F 608
File number(s): MLC 8101 of 2020 Judgment of: MCNAB J Date of judgment: 24 August 2022 Catchwords: FAMILY LAW – PROPERTY – Evidence – Expert Opinion - Application in a Proceeding – To adduce evidence of a further expert witness – Value to Owner valuation compared to Market Value where the applicant’s expert adopted a completely different methodology – whether the single expert provided a valuation of the business – whether failure to permit further evidence may lead to an evidentiary vacuum – leave granted to the applicant to adduce evidence from the other expert Legislation: Family Law Act 1975 (Cth) s 97 (3)
Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) rr 1.04, 1.31, 7.02, 7.08, 7.11, 7.26, 7.31
Cases cited: Keevers & Keevers [2021] FedCFamC1F 338
Moretto & Cosola [2022] FedCFamC1F 433
Neals & Neals [2022] FedCFamC1A 41
Salmon and Ors & Salmon [2020] FamCAFC 134
Tsoutsouvas & Tsoutsouvas & Ors [2012] FamCA 521
Wender & Wender [2017] FamCAFC 48
Division: Division 1 First Instance Number of paragraphs: 37 Date of last submission/s: 11 August 2022 Date of hearing: 11 August 2022 Place: Melbourne Counsel for the Applicant Mr D Whitchurch Solicitor for the Applicant Garland Hawthorn Brahe Counsel for the Respondent Mr L Marchetti Solicitor for the Respondent KHQ Lawyers ORDERS
MLC 8101 of 2020 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MR ANDREEVICH
ApplicantAND: MS ANDREEVICH
Respondent
order made by:
MCNAB J
DATE OF ORDER:
24 August 2022
THE COURT ORDERS THAT:
1.Pursuant to Rule 7.11 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021, the husband have leave to adduce and rely on evidence from Mr B as an expert in the proceedings in relation to the value of the business known as C Company.
2.Within 14 days, Mr D of E Accountants be provided with a copy of the report of Mr B dated 31 May 2022 and the letter from F Accountants (Mr B) to Ms H dated 10 June 2022.
3.Pursuant to Rule 7.31, the parties arrange a conference of expert witnesses, namely Mr B and Mr D as follows:
(a)The conference occur at a time and place to be agreed between the experts;
(b)The conference occur by no later than 15 December 2022;
(c)Prior to the conference, the parties shall provide the experts with a copy of the Divisions Experts’ Conference – Guidelines for expert witnesses and those instructing them in proceedings in the Federal Circuit and Family Court of Australia;
(d)At that conference, the experts must:
(i)Identify the issues that are agreed and not agreed in relation to their respective valuations of C Company;
(ii)If practical, reach agreement on any outstanding issues;
(iii)Identify the reason for disagreement on any issue;
(iv)Identify what action (if any) may be taken to resolve any outstanding issues; and
(v)Prepare a joint statement specifying the matters mentioned in paragraphs the parties expressly agree to be bound by it.
4.If the experts reach agreement on an issue, the agreement does not bind the parties unless the parties expressly agree to be bound by it.
5.The joint statement may be tendered at trial as evidence of matters agreed on and to identify the issues on which evidence will be called.
6.The fees and expenses of Mr D incurred in relation to the conference to be paid by the parties jointly, and Mr B’s fees and expenses are to be paid by the applicant.
7.Reserve the question of costs of and incidental to this application to trial.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Andreevich & Andreevich has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
McNab J:
The applicant husband seeks, pursuant to an Application in a Proceeding (“the application”) filed on 8 July 2022, to adduce and rely on expert evidence of Mr B pursuant to rule 7.11 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (“the Rules”). The applicant relied on an affidavit in support filed 8 July 2022. The expert evidence relates to the value of the business known as C Company.
Rule 7.02 provides:
The purpose of this Part is as follows:
(a) to ensure that parties obtain expert evidence only in relation to a significant issue in dispute;
(b) to restrict expert evidence to that which is necessary to resolve or determine a proceeding;
(c) to ensure that, if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single expert witness;
(d) to avoid unnecessary costs arising from the appointment of more than one expert witness;
(e) to enable a party to apply for permission to tender a report or adduce evidence from an expert witness appointed by that party, if that is necessary in the interests of justice.
Rule 7.08 provides:
Appointing another expert witness
(1) If a single expert witness has been appointed to prepare a report or give evidence in relation to an issue, a party must not tender a report or adduce evidence from another expert witness on the same issue without the court's permission.
(2) The court may allow a party to tender a report or adduce evidence from another expert witness on the same issue if it is satisfied that:
(a) there is a substantial body of opinion contrary to any opinion given by the single expert witness and the contrary opinion is or may be necessary for determining the issue; or
(b) another expert witness knows of matters, not known to the single expert witness, that may be necessary for determining the issue; or
(c) there is another special reason for adducing evidence from another expert witness.
Rule 7.11 provides:
Application for permission for expert witness
(1) A party may seek permission to tender a report or adduce evidence from an expert witness by filing an Application in a Proceeding.
(2) The affidavit filed with the application must state the following:
(a) whether the party has attempted to agree on the appointment of a single expert witness with the other party and, if not, why not;
(b) the name of the expert witness;
(c) the issue about which the expert witness's evidence is to be given;
(d) the reason the expert evidence is necessary in relation to that issue;
(e) the field in which the expert witness is expert;
(f) the expert witness's training, study or experience that qualifies the expert witness as having specialised knowledge on the issue;
(g) whether there is any previous connection between the expert witness and the party.
(3) When considering whether to permit a party to tender a report or adduce evidence from an expert witness, the court may take into account the following:
(a) the purpose of this Part (see rule 7.02);
(b) the impact of the appointment of an expert witness on the costs of the proceeding;
(c) the likelihood of the appointment expediting or delaying the proceeding;
(d) the complexity of the issues in the proceeding;
(e) whether the evidence should be given by a single expert witness rather than an expert witness appointed by one party only;
(f) whether the expert witness has specialised knowledge, based on the person's training, study or experience:
(i) relevant to the issue on which evidence is to be given; and
(ii) appropriate to the value, complexity and importance of the proceeding.
(4) If the court grants a party permission to tender a report or adduce evidence from an expert witness, the permission is limited to the expert witness named, and the field of expertise stated, in the order.
These proceedings were initiated by the wife on 24 July 2020 through her initiating application, seeking parenting and property orders.
The matter is listed for final hearing on 27 March 2023 for five days. The interim hearing on 11 August 2022 dealt with both property and parenting issues. The interim parenting issues have been dealt with by orders made on that day.
This application relates to the expert valuation of C Company, which is a company operated under the structure of G Pty Ltd, together with the husband’s consultancy services.
C Company was a joint venture, in which the wife attended to service, and the husband acted as a manager.
A single expert, Mr D, was appointed pursuant to orders made by consent on 18 November 2020 to:
Undertake valuations of the two business streams operated under [G Pty Ltd] with such valuations to include an analysis of the income streams and outgoings and to clearly indicate the current separate value of each of the [consultancy] and [service streams] with the costs to be borne equally by the parties.
The applicant notes that joint instructions were first provided to Mr D on 30 September 2020, prior to the proceedings being governed by the single expert rules. Thus he submits the single expert rules ought not to apply. I do not adopt that course.
There were delays involved in obtaining Mr D’s report, the reasons for which are detailed in the applicant’s affidavit in support. On 30 September 2021, Mr D provided the parties with a report, annexed to his affidavit filed 28 October 2021, in which he gave an opinion as to the value of the parties’ net equity interests in G Pty Ltd and the G Trusts. In the single expert report, Mr D used the standard of value known as “value to the owner”, and valued the family equity interest in the business at $19,004. The net equity interest in the G Trust as at 30 June 2020 was assessed to be $401,296.
The applicant posed questions to Mr D, pursuant to r 7.26 of the Rules, and Mr D provided responses on 29 October 2021. This letter and responses are annexed to the applicant’s affidavit in support at MA-2 and MA-4.
Mr D considered calculating the valuation using a market value methodology but rejected that approach. In response to questions, he maintained that value to owner was the appropriate methodology to value C Company (see MA-4).
The applicant, through his solicitors, wrote to the wife’s solicitors raising concerns about Mr D’s report not being able to assist in a just and equitable division of the parties’ property. She rejected his concerns. These concerns were brought to the attention of Justice Carter, who during a mention on 28 October 2021, stated that if Mr D’s report did not satisfy the husband, he could obtain an alternate expert for the purpose of the final hearing, and make an application for leave to adduce it at trial. The transcript of this hearing is annexed to the applicant’s affidavit.[1]
[1] Applicant’s affidavit dated 08.07.2022 at annexure GR-3.
On 11 November 2021, the applicant sent instructions to Mr B requesting him to prepare a report as to the value of NMD and prepare a report addressing any deficiencies and errors in the single expert report. In his report, Mr B used the fair market value approach, and concluded that the fair market value is $650,102.[2]
[2] Applicant’s affidavit dated 08.07.2022 at annexure GR-6.
The respondent has objected to the application to adduce and rely on the evidence of Mr B on the basis that the husband and wife had already jointly appointed a single expert, and the husband cannot now seek to engage and rely on another expert to provide an alternate opinion.
The applicant provided written and oral submissions to the court. The applicant submits via his written submissions, filed 12 July 2022, that Mr Lipson’s report fails to provide a valuation of the C Company and the consultancy, and instead provides a value of the parties’ net equity interest in G Pty Ltd. He submits that Mr D was not engaged to provide a valuation on the value to owner standard of valuation. His affidavit lists other concerns, including that:
(1)Mr D applied commission percentages to staff that are well outside the bounds of industry standards. For the wife, who does not take a wage, he applies a wage of 57% of net earnings whereas it is set that the industry standard is 40%.
(2)Mr D made a number of adjustments to normalise the EBITDA… In that process, Mr D made a profit adjustment for COVID-19 restrictions. Mr D obtained the figure by averaging the marketing spend over the previous two years, but he did not make similar adjustments to the growth in income that usually occurs as a result of the advertising.
(3)Mr D did not make adjustments for discretionary costs such as conferences and travel.
(4)Mr D deducts a wage for the wife, but does not add back the funds she deducts for personal use in place of a wage.
The applicant submits that the value of C Company is a significant issue because it is the primary issue in dispute in these property proceedings. In their sworn financial statements filed at the commencement of the proceeding, both parties attributed a value to it, which varied by $250,000, with the husband ascribing the value of $750,000, and the wife $500,000. The value ascribed under Mr D’s report is $19,004, which the wife seeks to adopt as the value of C Company. The husband seeks to rely on the value given under Mr B’s report of $631,098. Thus, the respective valuations that the parties seek to rely on are now $612,092 apart. The applicant further submits that Mr D’s report is unable to assist the court as it does not provide a market value valuation of C Company, and thus Mr B’s report is essential to the resolution of proceedings.
The applicant also submits that Mr D’s report will be 33 months old at the time of the final hearing on 27 March 2023. He notes that the wife has been on notice of his intention to adduce evidence from an alternate expert since 28 October 2021, and he identified Mr B’s as that expert to them on 7 December 2021.
The applicant submits that he has already incurred the cost of the expert report, and the only additional costs that relate to this application, and any requested conference between the experts pursuant to r 7.31, and the cross examination of both experts, if required. Further, he submits this report assists to facilitate the just and equitable division of the parties’ assets.
Further, the applicant submits that r 7.02(e) allows the court to admit competing evidence that is necessary in the interests of justice. He submits there was an error with value to the owner valuation arriving at a value which is substantially less than the fair market value (approximately $630,000) and that these difficulties are so significant that they cannot be dealt with by way of cross-examination of Mr D.
The applicant submits that even if the court is not satisfied that the requirements under r 7.11 are met, the court can dispense with these requirements pursuant to r 1.31 if it is in the interests of justice to do so:
Court may make orders or dispense with these Rules
(1) The court may, in the interests of justice, dispense with compliance, or full compliance, with any of these Rules at any time.
(2) If, in a proceeding, the court gives a direction or makes an order that is inconsistent with any of these Rules, the direction or order of the court prevails in that proceeding.
He submits it is in the interests of justice to allow the report of Mr B to be relied upon due to the fact that Mr D’s report adopts the value to owner standard of valuation, which he submits results in a valuation substantially less than the fair market value, referring to Wender & Wender [2017] FamCAFC 48 at [68] – [70]:
[68] I accept the submission of the wife that the approach of Mr C was “erroneous in principle”. “Value to the owner” is certainly a well-recognised approach in family law, but it is applied where the circumstances require the valuer to take into account the benefits that accrue to an owner which might not necessarily be available to any third party purchaser. Those circumstances commonly arise where there is no market for the business, or more particularly the interest of the owner in the business. The prime example of that is where the interest of the party being valued is a shareholding, and usually a minority shareholding in a company, and more often than not a family company. What is then taken into account in the valuation, are the benefits which accrue to the owner through that shareholding. For example, in Harrison and Harrison (1996) FLC 92–682 the Full Court approved the approach of the trial judge in adopting the concept of “value to owner” where the facts were as follows (at page 83,087):
The husband’s submission was that although the shares can be artificially valued they are valueless because unrealisable. This ignores the benefits which accrue to the husband through their ownership. Amongst those benefits are the rights to receive dividends, which in the past have been substantial, the buffer of a loan account, the provision of a motor car, yacht and trailer, the contribution toward certain household bills and the flexibility of being, if not self-employed, employed by a company in which he is a shareholder and director and whose ethos allows him a degree of autonomy. It also effectively ignores the assets of and business conducted by the companies and the reality of the husband’s interest in them.
[69] It is sometimes said that what is being ascertained here is a “realistic value” based upon the worth of the shares to the owner. However, Warnick J in Ramsey & Ramsey (1997) FLC 92–742, at 83,997 challenged that description commenting that in fact the value to the owner often has a strong “notional” aspect, in contrast to the reality of the market.
[70] There has been one case that I am aware of where the concept of “the value to the owner” has been applied to other than a share valuation. That case Scott & Scott [2006] FamCA 1379. The issue there was the valuation of the husband’s interest in a medical practice. However, the trial judge found sufficient similarities between the valuation of that interest as a result of there being a partnership agreement, and the valuation of shares to be able to apply the concept of “the value to the owner”, and the Full Court agreed. The trial judge said this:
In my view there are similarities between the valuation of shares referred to in these cases and the valuation of the husband’s interest in the medical partnership and medical trust. The Partnership Agreement fixes the value of the goodwill but also provides for that value to be altered by agreement …
Respondent’s Submissions
The respondent opposes this application, and filed a Response to an Application in a Proceeding (“the response”) and affidavit in support on 1 August 2022.
Further, she disagrees with the husband’s submission that Mr D’s report is not fit for purpose and submits that it does provide a valuation of C Company. She refers to paragraphs 4.1 - 4.54 of Mr D’s report. In response to the applicant’s criticism of the value to owner standard, she notes that Mr D in paragraphs 2.26 and 2.32 of his report considers both a value to owner, and fair market value approach:
In accordance with my instructions, I have been engaged to provide a valuation of the equity interests in the group of entities listed in paragraph 2.1. Given the purpose of the assessment, in my opinion, the standard of value known as Value to Owner is appropriate.
In the context of family law matters, the standard of value known as Value to the Owner (VTO) is generally defined as the value to a particular individual, based on that individual’s requirements and expectations. In my opinion, this concept represents “what a reasonable, prudent business person, in the position of the parties, willing but not anxious to exchange the asset for cash, and reasonably informed of the relevant facts, would see as the cash equivalent of the relevant assets to the Parties1.”
For the avoidance of doubt, VTO should not be confused with the concepts of return on equity or return to owner.
A going concern Fair Market Value (FMV) approach values the underlying assets by assessing the market value of each asset and liability on a going concern basis. This may include incorporating a value for intangible assets not recorded on the balance sheet (brand names, patents and unidentifiable intangibles) to reflect the profitability, market position and attractiveness of the business. In an FMV valuation, risk is considered from the perspective of a hypothetical willing but not anxious buyer.
In contrast, the VTO standard of value considers risk from the perspective of the existing owner and assumes that the party wishing to hold on to the asset will do so in good faith and seek to maximise the value that could be obtained in a hypothetical sale.
If the business is saleable at its proper or highest value to the existing owners or an industry participant, then it should be assessed on the basis of a notional sale to them.
VTO may not reflect the actual market price at valuation date or the assessment date.
The respondent further refers to paragraph 2.27 of Mr D’s report, that a value to owner approach represents:
What a reasonable, prudent business person in the position of the parties, willing but not anxious to exchange the assets for cash, and reasonably informed of the relevant facts, would see as the cash equivalent of the relevant assets to the parties.
She refers to the recent decision of Wilson J in Keevers & Keevers [2021] FedCFamC1F 338 at [37]:
The phrase “interests of justice” is used twice in rule 7.02. The first rule in 7.02(c) in reference to the imperative of not compromising the interests of justice by restricting, if practicable, expert evidence or an issue to the evidence of a single expert. The second is the permissive provision in rule 7.02(e) to enabling a party to seek the court’s permission to adduce evidence from an expert other than a single expert if that is necessary in the interests of justice. In other words, by no means is it to be taken as granted that a witness who is not a single expert will be permitted to adduce evidence. Application must first be made for that witness to do so. The grant of permission is predicated on the evidence of the proposed witness who is not a single expert being “necessary in the interests of justice”.
Emphasis added.
Further, she submits referring to Salmon and Ors & Salmon [2020] FamCAFC 134 that the underlying purpose of the Rule is the statutory requirement of s 97 (3) of the Family Law Act is to endeavour that:
…each case is resolved in a just and timely manner at a cost to the parties and the court that is reasonable in the circumstances of the case…
Reference was also made to r 1.04 which provides “is to ensure that each case is resolved in a just and timely manner at a cost to the parties and the court that is reasonable in the circumstances of the case”.
The respondent submits that per Keevers & Keevers [2021] FedCFamC1F 338:
[34] Various observations have been made in the authorities in relation to rule 15.49 especially about the potential for imbalance that inures when parties agree on the appointment of a single expert then one party, despite the appointment of the single expert, later attempts to adduce evidence contrary to that given by the single expert. In Tsoutsouvas & Tsoutsouvas and Ors the following was said of that situation -
A number of cases highlighted the need to address questions to a single expert or to take the steps provided for in the Rules (such as a conference) to clarify a single expert report before embarking upon an application to be allowed to adduce evidence other tan from another expert witness.
…
[36] It must not be overlooked that one of the purposes of Part 7.1 of the FCFCOA (FL) Rules, as reposed in rule 7.02(c), is to ensure that if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single expert… Accordingly, having an agreed single expert on an issue then having an adversarial witness on the same issue creates an imbalance, undermining the original purpose of appointing a single expert, as was observed in Tsoutsouvas.
In relation to the differential in the two reports, the respondent refers to Neales & Neales [2022] FedCFamC1A 41 at [24] where it was held that there was no merit in the argument that “the difference of approximately $11 million in value between the single expert and the husband’s expert, justified in part, the appointment of another expert”. Reference was also made to Tsoutsouvas & Tsoutsouvas& Ors [2012] FamCA 521 at [26]:
In any case where a single expert has been appointed, allowing another party to tender evidence from another expert on the same issues creates an imbalance. That is, only one party may have what may be described as an adversarial expert, whilst the other party has only the evidence of the single expert who has acted within the constraints, in terms of instructions, as provided for in the Rules. The further possibility is the other party seeking to have their own expert to redress that perceived imbalance, undermining the original purpose of appointing a single expert; that is, to avoid a “battle of the experts”.
The respondent submits that although the court has the power to exercise its discretion to dispense with compliance with the rules pursuant to r 1.31 if it is "in the interests of justice", it is not in the interests of justice to do so in these circumstances. She submits that the interests of justice should preclude the husband from “undermining the original purpose of appointing a single expert and avoid a ‘battle of the experts’”.
Consideration
In this proceeding, the difference between the expert opinion of Mr D and Mr B represent a substantial difference when regard is had to the total asset pool. The husband contends that a substantial injustice would follow if the court restricted the evidence to the valuation of Mr D.
Whilst the purpose of the rules is directed at avoiding a "battle of experts" and the often disproportionate costs that may follow if evidence from multiple experts is admitted (see Tsoutsouvas & Ors [2012] FamCA 521 at [26]), it does not follow that the Rules contained in r 7.08 can be engaged in a manner that would compromise the interests of justice. As was noted by Reithmuller J in Moretto & Cosola [2022] FedCFamC1F 433 at [10]:
Concerns as to potential injustice if parties are confined to a single expert witness, where there were considerable differences in the amounts in relevant valuations, were the basis of decisions permitting evidence from another expert in Pitt & Pitt [2009] FamCA 620, Verdon & Verdon (2020) 62 Fam LR 573, Jess & Garvey [2021] FedCFamC1F 189, and Carolan & Lawler [2021] FedCFamC1F 239. Although, in other decisions, even large differences in the valuation amounts have not been sufficient, on their own, to persuade the court to permit evidence from another expert: see, for example, Keevers & Keevers [2021] FedCFamC1F 338; and Padnall & Padnall (No 3) [2014] FamCA 904. However, as the Full Court noted in Neales & Neales [2022] FedCFamC1A 41 that it is erroneous to refuse leave when focusing only upon the difference in values: at [42]. Whilst these cases appear to indicate a diversity of judicial opinion, they may be better explained by reference to the reasons of Watts J in HRBH & IABH [2009] FamCA 1131, where his Honour noted the potential practical difficulty that may arise where the single expert’s evidence on an important factor is so undermined by cross-examination that there would then be “a vacuum in the evidence”: at [8].
Turning to the operation of r 7.08 (2) in this case, the fact that each expert has approached the task of valuation in a fundamentally different way is such as to constitute the expression of an opinion contrary to any opinion given by the single expert and that contrary opinion is or may be necessary to be adduced for the purposes of determining the issue. This is not a case where two valuers adopting the same methodology have reached different conclusions, nor is it a case where a single expert has fully explored and revealed the results of using different methodologies and then decided a particular result. The experts have approached the task in a fundamentally different way leading to a substantially different result. In Salmon and Ors & Salmon [2020] FamCAFC 134 at [35] the Full Court noted:
if a contrary opinion is founded upon identified and accepted methodology recognised it within the field, or some identified and recognised field of expertise different to that founding the single expert opinion, then the requirement of "a substantial body of opinion" will be fulfilled.
Further, there is a real doubt as to whether the court can be placed in the position of determining the valuation following cross examination of the single expert, Mr D. The matters that need to be put to Mr D in cross examination should be capable of being before the court as evidence. If that is not to happen, the court may be in a position of having to deal with unproven assertions put as propositions to the witness. That could also lead to a position that Mr D is effectively challenged under cross examination but there is no contrary evidence before the court that could enable the court to form the basis of a finding as to the true value of the asset. In effect, the refusal to admit the contrary evidence may lead to an evidential vacuum.
For these reasons the court is of the view that r 7.08 (2) (a) has been satisfied and it is appropriate to grant leave to permit the applicant to adduce evidence from Mr B. I will also make orders for the valuers to confer by 15 December 2022 for the purposes of agreeing a method of valuation and the value of the business. I reserve the question of the costs of this application to trial.
I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McNab. Associate:
Dated: 24 August 2022
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