Brady Queen Pty Ltd v 280 Queen Street Pty Ltd (No 3)
[2019] VSC 307
•5 April 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2017 00204
| BRADY QUEEN PTY LTD (ACN 600 268 817) (IN ITS OWN CAPACITY AND AS TRUSTEE OF THE BRADY QUEEN UNIT TRUST) | Plaintiff |
| v | |
| 280 QUEEN PTY LTD (ACN 600 087 741) AUSTHOME DEVELOPMENTS PTY LTD (ACN 140 051 387) (IN ITS OWN CAPACITY AND AS TRUSTEE OF THE WU FAMILY TRUST) | First Defendant Second Defendant |
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JUDGE: | Sifris J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 March 2019 |
DATE OF JUDGMENT: | 5 April 2019 |
CASE MAY BE CITED AS: | Brady Queen Pty Ltd v 280 Queen Street Pty Ltd & Anor (No 3) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 307 |
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CORPORATIONS – Oppression – Buy-out order – Assessment of methodology and value of the property, shares and units referred to Special Referee appointed by the Court pursuant to Order 50 of the Supreme Court (General Civil Procedure) Rules 2015.
PRACTICE AND PROCEDURE – Whether report of Special Referee should be adopted in whole or in part – Proper approach – Adopted in whole – Wenco Industrial Pty Ltd v WW Industries Pty Ltd [2009] VSCA 191; (2009) 25 VR 119 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | A Schlicht and C Dawes | Capstone Koroneos Legal Pty Ltd |
| For the Defendants | M Robins QC and N Kaskani | Aptum Legal Pty Ltd |
HIS HONOUR:
AIntroduction[1]
[1]The background is taken from my previous Judgment in this proceeding: Brady Queen Pty Ltd v 280 Queen Street Pty Ltd & Anor (No 2) (Unreported, Sifris J, 10 August 2018, Supreme Court of Victoria) (Second Judgment).
The parties are shareholders in a company, 280 Queen Pty Ltd (the Company). The Company is the registered proprietor of the land situated at 272-280 Queen Street (the Property).
The Company is the trustee of the 280 Queen Unit Trust (the Unit Trust). The Unit Trust was created in order to undertake the development of the Property[2] by a joint venture comprising interests ultimately held by Mr Anthony Brady (Brady) and Mr David Wu (Wu) (the Development). Each of Brady and Wu are directors of the Company.
[2]The parties proposed to develop a multi-storey multi-use high rise tower.
The plaintiff (Brady Queen) holds 2/3 of the shares in the Company and 2/3 of the units in the Unit Trust. The plaintiff by counterclaim/second defendant (Austhome) holds 1/3 of the shares and units.
The proceeding involves competing claims of conduct said to constitute oppression under section 232 of the Corporations Act 2001 (Cth) (the Act).
Brady Queen alleges that Austhome and Wu have engaged in conduct that is contrary to the interests of members as a whole and/or oppressive, unfairly prejudicial or unfairly discriminatory by, amongst other things:
(a) failing to negotiate a joint venture agreement;
(b) failing to pay necessary expenses or sign cheques;
(c) attempting to exclude Brady Queen from the management of the Development;
(d) failing to provide books and records;
(e) failing to agree to a feasibility study and engage relevant experts;
(f) seeking to impose various conditions on the joint venture.
Brady Queen sought orders under s 233 of the Act that it purchase Austhome’s shares in the Company and units in the Unit Trust, or in the alternative, that the Company and Unit Trust be wound up.
Austhome contests these allegations, and counterclaims, alleging Brady Queen and Brady have engaged in conduct that is oppressive, unfairly prejudicial or unfairly discriminatory in various respects.
Austhome sought orders under s 233 of the Act that Brady Queen buy Austhome’s shares in the Company and units in the Unit Trust, or in the alternative, such orders under s 233 of the Act that the Court considers appropriate.
The parties are in agreement, as is self-evident, that the relationship between them has broken down. This is an understatement. The parties have failed to negotiate a joint venture agreement[3] and disagree about many aspects of the Development. The Development has been at a standstill for some time. It has hardly got off the ground. Feasibility studies have not been undertaken, experts have not been engaged and a building contract is a long way away. On 15 June 2016, a planning permit was issued for the redevelopment of the Property as a 67 level mixed use building (Permit). The Permit has 31 conditions and, unless extended, will expire if the Development is not completed within five years from the date of the permit.[4]
[3]The parties entered into Heads of Agreement on 2 June 2014. The units were issued in early July 2014. Since then the parties have been unable to negotiate and agree on a more detailed joint venture agreement as contemplated.
[4]Or if the Development is not commenced within two or three years of the date of the Permit. It is not clear which timeframe applies. In any event, Wu without any reference to the other directions, took steps to extend the Permit for a 2 further years. An extension of only 1 year was granted.
As is evident from the pleadings, the parties are in agreement that an appropriate remedy in the proceeding is that Austhome’s shares in the Company and units in the Unit Trust be purchased by Brady Queen. The parties however disagree as to the value of those shares and units, and in particular the value of the development at 280 Queen Street, and the methodology by which that Development is to be valued. It is obvious enough that the value of the Property is a critical part of the value of the shares and units.
Austhome submits that the Property and therefore the shares and units ought to be valued on an income basis using a discounted cash flow methodology (DCF methodology).
The DCF methodology involves calculating the investment value of the Property by estimating the projected income and outgoings of the Property upon completion and then applying an appropriate discount factor to reflect risks associated with the forecasted cash flows and the time value of money.
Brady Queen submits that the Property should be valued on the basis of a direct comparison approach (Direct Comparison methodology). This involves a determination of the current fair market value by reference to actual sales of comparable properties.
BDisposition of the case
In my earlier Judgment, I considered that it was unnecessary to conduct a trial in order to determine whether the particular conduct alleged constituted oppressive conduct. The matters referred to in paragraph 9 above and the parties’ respective pleadings ‘all clearly evidence[d] the inability of the contemplated joint venture to proceed. This is not in the interests of the company, the trust, the shareholders or unit holders, as indeed has effectively been conceded [by the parties].’ Accordingly, on 10 August 2018, I declared that ‘the conduct of the affairs of 280 Queen Pty Ltd is, and has been contrary to the interests of the members as a whole’.[5]
[5]Second Judgment [26]-[28].
I ordered that Brady Queen purchase the shares held by Austhome in 280 Queen, and the units held by Austhome in the Unit Trust at a price to be determined by the Court.
For the purposes of such determination, I appointed John O’Grady as Special Referee (O’Grady), pursuant to r 50.01 of the Supreme Court (General Civil Procedure) Rules 2015 (Rules), and referred five questions for his determination. The questions are set out in Annexure 1 to my order of 10 August 2018 (Questions). Annexure 2 sets out directions relating to the conduct of the reference. O’Grady’s report is dated 6 February 2019 (Report).
The Questions and answers which form the basis of the Report are as follows –
Question 1: What is the most appropriate valuation methodology to determine the market value of the property situated at 280 Queen Street, Melbourne (‘the Property‘)? Is it:
a) The direct comparison approach; or
b) The discounted cash flow approach; or
c) Some other, and if so what approach?
Answer:In my opinion, the correct valuation methodology is the Direct Comparison approach with sales evidence of other comparable properties.
Question 2Based on the answer to Question 1, what is the market valuation of the Property?
Answer:In accordance with prevailing market conditions as at 31 January 2019, the current market value of the freehold interest in the subject property at 280 Queen Street Melbourne is $41,500,000 (Forty One Million, Five Hundred Thousand Dollars) excluding GST.
Question 3Further to Question 1, what is the most appropriate methodology to determine the value of shares in 280 Queen Street Pty Ltd and the units in the 280 Queen Street Unit Trust.
Answer:The units in the 280 Queen Street Unit Trust should be valued by reference to the realisable value of its net tangible assets.
Question 4In determining the value of the shares and units as referred to in question 3, is the fact that, such shares and units are to be acquired by the majority shareholder and majority unitholder, with the opportunity to develop the Property, a relevant factor?
Answer:In providing a value for the shares and units no premium has been added for majority control nor has any discount been applied for minority ownership. The reason for this being is that the project will require an extended time to procure all endorsed plans and construction permits to enable construction to commence but most importantly an unknown but lengthy period will be required to procure sufficient qualified pre-sales in order to obtain construction funding. As such, the anticipated commencement date for the proposed residential tower complex remains difficult to estimate given the current disruption to the apartment market in inner Melbourne. It requires too much speculation to ascertain the value of the development opportunity with reference to the tenure of the current market conditions.
I accept paragraph 75(c) of the Plaintiff’s submissions dated 26 October 2018 that the acquisition of the Shares and Units by the majority shareholder has no bearing on the appropriate methodology to be applied to the valuation.
Question 5Further to Question 2 and based upon the answers to Questions 3 and 4, what is the value of the shares and units.
Answer:The net asset value of the Shares and Units is assessed at $37,645,299, which when divided by the 35,500,000 shares on issue a proportional value per unit of $1.06 is confirmed and adopted by myself.
Brady Queen accepts the Report and has urged the Court to accept it without any change, modification or qualification. Austhome rejects the Report and has submitted that the Court should not accept it for several reasons.
CThe Report
The Report is well structured, thorough and discloses the path of reasoning that has led O’Grady to his opinion as to the correct methodology and consequent value of the Property, shares and units.
Section A is an introduction and includes a Timeline of Proceedings.
Section B contains the answers to the 5 Questions with a short rationale for each answer.
Section C sets out some Preliminary Valuation Considerations. In Section C.1, headed Current Market Conditions, O’Grady makes the comment that ‘[t]he market for Melbourne CBD development sites peaked in December 2017.’ He points to various (and numerous) events that caused demand to slow including ‘strong lending restrictions for both apartment purchasers and property developers.’ He concludes the section by giving his opinion to the effect that ‘completed apartments in the inner Melbourne precinct of CBD, Southbank and Docklands are currently reflecting reductions in 10 to 12% against the historic contract purchase price.’[6]
[6]Report [22].
Section D contains a very good summary of each parties’ submission. The dates of the submissions are referred to.
Section E.1 deals with the Expert Reports of Brady Queen. After referring in detail to the report of Chris Smirnakos (Smirnakos) dated 22 January 2018, O’Grady says –
58. Mr Smirnakos concluded his estimate of the then current market value of the freehold interest in the subject property at $37,000,000 (Thirty-Seven Million Dollars) excluding GST and being relevant to prevailing levels of value as at the 22 January 2018.
…
57. Mr Smirnakos has concluded his valuation utilising a Direct Comparison approach against his established analysis of 12 development site sales evidence which occurred between April 2015 to November 2017 within the Melbourne Central Business District (‘CBD’) and as detailed within his report. The valuation conclusion was drawn from the blend of 3 analyses being:
Direct Comparison Basis Indicated Market Value
$/sqm of Site Area $37,000,000
$/unit site $38,400,000
$/sqm of NSA $37,400,000
…
60. I have concluded the Mr Smirnakos’ valuation report utilises the correct direct comparison data and analyses as well as his valuation methodology.
Section E.1 also considers the Expert Witness Statement of Michael Smith dated 21 March 2018. After referring to Smith’s evidence, O’Grady says –
63.I comment that I also consider the most appropriate method of valuation of the aforementioned company shares and trust units will be the fair market value of the Net Tangible Assets method as detailed later in this report.
Section E.2 deals with the Expert Reports of Austhome. After referring in detail to the Expert Report of Les Brown (Brown) dated 9 July 2018, O’Grady, in rejecting Brown’s methodology, says –
94.I comment that the use of selective escalation methodology does tend to overinflate adjusted values due to issues relating to the escalation rates applied. I state that for the above reasons and the fact that escalation is not an approved or acceptable valuation methodology, that I am unable to place any reliance or reference to his valuation conclusions.
Section 9.2 also deals with the 4 Expert Reports of Greg Meredith (Meredith).[7] After summarising his reports, O’Grady, in rejecting Meredith’s methodology, says –
105. In my opinion, the Discounted Cash Flow (DCF) method of deducing an appropriate land valuation for the subject property at this time is totally impractical. The reason being for this statement is that the project currently has a planning permit for a 67 level apartment tower but no endorsed plans. The project has no pre-sales and all of the future cashflow items are all assumptions. The total Gross Realisation Value (GRV) of the planned project is proposed to be $492,822,600.
106. In the current property market which is experiencing substantial disruption in the metropolitan apartment market and significant cost increases for concrete and steel, I am of the opinion that the subject property as a planned 415 apartment residential tower building over 67 levels is far too embryonic in its project development to date to be able to accurately model the future cash flow with any degree of accuracy.
107. I find that I cannot place any reliance on Mr Meredith’s reports and his DCF based investment conclusions at this stage of the project.
[7]The Reports are dated 3 April 2018, 18 June 2018, 9 November 2018 and 12 December 2018.
Section F is critical and methodically sets out O’Grady’s Freehold Valuation Rationale. It refers to the planning permit and assumes that a 2 year extension would be granted.[8] The proposed development is set out in paragraph [120].
[8]As noted in footnote 4, although a 2 year extension was applied for by Wu, only a 1 year extension was granted.
Section G is headed ‘Development Site Sales Evidence’ and refers to ‘the 9 most recent development site sales that have occurred in the Melbourne CBD [which] are reasonable comparable to the subject land’.[9] Included in the 9 properties is the property situated at 288 Queen Street and 328 Lt Lonsdale Street.
[9]Report [121].
Section H provides for an adjustment to the previous section as a result of the basis upon which three of the properties were sold.[10] The analysis is contained in a chart following paragraph [126]. O’Grady determined that the average site value is $31,323/sqm.
[10]Paragraph [124] sets out the particular vendor terms which required the adjustment to present value. It is not suggested that this methodology is incorrect.
Section I contains O’Grady’s Valuation Comments. It is as well to set out in full –
127. Based upon the fact that the subject property is yet to conclude works and actions to have its concept plans adjusted and finally endorsed to achieve the aforementioned accommodation capacity, I have carried out a detailed analysis of 10 recent sales of (9 individual properties with 1 property selling twice in quick succession) Melbourne CBD based development sites that I consider have good comparability to the subject property and analysed in the attached Melbourne CBD Development Site Sales Evidence.
128. Out of the 10 selected sale properties, 3 were sold on extended vendor interest free settlement terms. I have rationalised those 3 properties back to an adjusted purchase price on a cash equivalent basis by assuming a 10% deposit and a discount rate of 6.75% pa (calculated daily) and a discount period for every day of vendor settlement term that exceeds a 90 day conventional settlement period. This went on to adjust the 3 property sales back to a cash equivalent value. This was done to be financially comparable to the remaining sales evidence.
129. The adjusted sales are 318-326 Queen Street, 288 Queen Street and 328 Little Lonsdale Street, and 295-309 King Street, and are the top 3 sales analysed on the second attached schedule headed ‘Cash Equivalent Present Value Calculations’.
130. The then adjusted present value sales generally reflect the following value ranges:
Land Value as $/sqm (range) = $21,904 to $35,836/sqm
Land Value as $/sqm (average all sales): = $31,323/sqm
Apartment value by Unit: = $89,116 to $107,208/apt
131. In my opinion, the most comparable sale to the subject property is the December 2018 sale of 288 Queen Street and 328 Little Lonsdale Street which sold as a 760 sqm site to a suburban property developer for $25,888,888 reflecting a rate of $34,064/sqm of site area and $32,544/sqm when adjusted on a cash equivalent basis. It is important to note that this site is directly opposite the subject land on the north east corner of Queen and Little Lonsdale Streets. Selling agents confirm that the land was acquired principally as a long-term land banking opportunity that could produce about a 4.5% gross return by redressing the leasing and rental opportunities in the buildings.
132. Fundamentally this aforementioned sale and the aforementioned analysed sale values have supported my primary method of assessment that the subject property can be valued at the rate of $32,500/sqm on site area. In addition, I have tested my primary method of valuation by applying varying unitised values to include land values of $85,000/unit/2 bedroom apartment and $100,000/unit/3 bedroom apartment together with alternate assessments of $1,000/sqm of NSA (net saleable area) floor space as well as $1250/sqm of NSA for retail floor space. The 3 individual estimates are detailed as follows:
133. I comment that I have determined the current market value of the subject land as an unencumbered freehold development site at $41,500,000 excluding GST to be calculated as follows:
Land Area: 1277sqm @ $32,500/sqm = $41,502,500
Rounded to $41,500,000
Section J contains the Valuation of the Shares and Units. It is as well to set out in full -
135. As the appointed Special Referee in this matter, I have elected to appoint Mr Paul Lom in his capacity as Director of PKF Corporate Pty Ltd to assist myself with the updated inclusion of the assessed market value of the subject freehold property at $41,500,000 into the balance sheet accounts of the 280 Queen Street Unit Trust.
136. Mr Paul Lom and myself have collaborated on the respective values of both shares in the company of 280 Queen Street Pty Ltd and units in the 280 Queen Unit Trust.
137. As stated in Mr Lom’s written report to me dated the 25th January 2019 and under paragraph 5.1 on page 5 of his report, he has stated that “I believe that the shares in 280 Queen Pty Ltd have a nil value”. I comment that I concur with Mr Lom’s assessment of nil value in this instance.
138. However, within his report to myself, Mr Lom has set out in Appendix E to his report the statements of financial position of the 280 Queen Unit Trust as at the Financial Year End 30 June 2017 and 30 June 2018 together with estimates in the Statement of Financial position for the valuation date of 31 January 2019 as shown in his report as Appendix E.
139. As reflected within his report to myself, Mr Lom and myself discussed the issue of the application of discounts and/or premiums to be applied to the minority shareholding as an appropriate adjustment to the deemed value of the minority shareholding as market parity value as can be seen in paragraphs 4.12 and 5.11 of Mr Lom’s report which is attached here as Appendix 3.
140. Accordingly, I have concluded that the value of the minority shareholding of Austhome Pty Ltd to be sold to Brady Queen Pty Ltd has been assessed at a $1.060/unit and calculated below as follows:
DAusthome submissions
Austhome submits that there are six broad areas of ‘Wenco error’[11] demonstrated by the Special Referee in the Report. A summary of the contended errors, taken directly from Austhome’s submissions, is set out below:
[11]Wenco Industries Pty Ltd v WW Industries Pty Ltd [2009] VSCA 191 (Wenco).
(a) The special reference was conducted below on an agreed basis that the valuation date be that of the inspection of the property, namely 8 November 2018. But O’Grady unilaterally and without notice to or agreement by Austhome, changed the agreed valuation date at paragraphs [108] to [110] of the Report. That change was for the misconceived purpose of enabling him to have regard to ‘post trial’ comparative sales evidence on which Austhome had no opportunity whatsoever to comment (i.e. 288 Queen Street: see the Report at paragraphs [127] to [131]) and which supposed comparative sales evidence was then given disproportionate weight to by him despite that it was open to challenge as to both its relevance and weight (if any). This, conduct by O’Grady was also a serious breach of procedural fairness and Austhome’s rights to natural justice. (Ground 1).
(b) O’Grady imposed on the parties a unilateral requirement that he ‘engage’ an accountant to advise him, Paul Lom (Lom), on accounting issues. O’Grady then inappropriately essentially deferred to Lom in answering Questions 3 to 5 of the Questions, whilst not giving Lom the full materials relevant to those issues. This amounted to an effective abdication of his decision in answering the critical Questions 3 to 5 to Lom (see the Report at [46] and [135] to [140]) and thereby reflected an excess of jurisdiction by O’Grady and a fundamental breach of the Wenco principles. (Ground 2).
(c) The Special Referee failed to have regard to or apply the correct and well settled valuation methodology applicable to the valuation of minority interests pursuant to buy-out orders in oppression cases. His superficial and erroneous reasons for the rejection thereof are inadequately explained at paragraphs [34] and [48] of the Report, and his statement at [104] reflects a fatal misunderstanding of Questions 3 to 5 and the task required of him (and not by some self-appointed agent or delegate on his behalf) to answer those questions. This reflected an error of law or principle and another a fundamental breach of the Wenco principles. (Ground 3).
(d) An evidentiary hearing was conducted before O’Grady on 14 December 2018. Austhome then cross examined the two experts of the plaintiff (Brady), no lay evidence being led by Brady Queen. Austhome offered its own expert and lay witnesses for cross examination by Brady or examination by O’Grady. But neither Brady Queen nor O’Grady required those witnesses to attend or sought to put any questions to any of Austhome’s lay or expert witnesses. The Report at paragraphs [53] to [60] failed to have any regard to the detailed cross examination of Smirnakos, Brady’s land valuer, or, by contrast, Brady Queen’s failure to cross-examine Brown, Austhome’s land valuer. Further, O’Grady then failed to properly apply well settled principle to critically assess the evidence in light of that significant omission by baldly accepting the Brady submission referred to at [36] to [49] of the Report. The Special Referee then compounded that error by an opaque assertion that Smirnakos’ evidence was credible, see the Report at paragraphs [38] and [45], rather than undertaking a reasoned and transparent analysis of that oral evidence, as addressed by the written submissions by Austhome in that regard, and demonstrating why nevertheless Smirnakos’ evidence was (somehow) credible. This reflected a further fundamental ‘Wenco error’. (Ground 4).
(e) Similarly, to (d) above, O’Grady uncritically accepted Smith’s first report at paragraphs [61] to [63] of the Report. This was despite the frankly admitted limits of Smith’s instructions and the failure by Brady to further instruct Smith as to the matters in Meredith’s later reports or the other voluminous assumption materials advanced by Austhome. O’Grady’s uncritical acceptance of part only of Smith’s evidence, whilst ignoring its effect as a totality, despite Smith’s candid and frank concessions as to the limits of his initial instructions by Brady Queen, and the wholesale rejection by the Special Referee of Meredith’s unchallenged contrary evidence reflected a further fundamental ‘Wenco error’. (Ground 5)
(f) Further to (e) above, O’Grady gave no weight in the Report to, and barely engaged with, Austhome’s other unchallenged detailed evidence as to DCF methodology and the assumptions relied upon in support in respect of the valuation of the units and shares. This was in circumstances where Brady Queen did not cross-examine Austhome’s witnesses, led no positive evidence on the assumptions advanced by Austhome’s witnesses, it was conceded that Smith’s supposed second report was never intended by him to be an expert report at all and Brady Queen led no alternative opinion evidence on the DCF methodology. The Report does not engage with or address the detail or substance of this evidence, other than, with respect, in cursory and superficial ways such as at paragraph [42], consistent with O’Grady’s misapplication of the principles set out in Hamod v State of New South Wales (Hamod)[12] and his obligations as a court-ordered Special Referee. This amounted to a further fundamental ‘Wenco error’. (Ground 6)
[12][2011] NSWCA 375.
ELegal Principles
Order 50.04 of the Rules provides that:
The Court may as the interests of justice require adopt the report of a special referee or decline to adopt the report in whole or in part, and make such order or give such judgement as it thinks fit.
Order 50.03 of the Rules provides that:
(1) The special referee may in the referee’s report -
(a) submit any question arising on the reference for the decision of the Court; or
(b) make a statement of facts found by the referee from which the Court may draw such inferences as it thinks fit.
(2) On the receipt of the special referee’s report, the Court –
(a) shall give notice thereof to the parties; and
(b) may by order –
(i) require the special referee to provide a further report explaining any matter mentioned or not mentioned in the report;
(ii) remit the whole or any part of the question originally referred to the special referee for further consideration by that referee or any other special referee;
(iii) vary the report.
(3) An application by a party for an order under paragraph (2)(b) shall be made on not less than three days’ notice to the other party or parties.
The applicable legal principles were not in dispute and emerge from the cases. A very brief review is set out hereunder.
A referee’s report has no effect unless and until it is adopted by the Court in whole or in part in accordance with Order 50.04 of the Rules. It is the order of the Court adopting, varying or rejecting a referee’s report that has legal consequence.[13]
[13]Astor Properties Pty Ltd v L’Union des Assurance de Paris (1989) 17 NSWLR 483 [490].
The power of the court to adopt the report of a special referee or to decline to adopt the report in whole or in part is to be exercised ‘as the interests of justice’ require. Rule 50.04 gives to the court a wide and flexible discretionary jurisdiction the exercise of which is fixed by what is in the interest of justice in all the circumstances.[14]
[14]Nicholls v Stamer [1980] VR 479, 495; Integer Computing Pty Ltd v Facom Australia Ltd (Unreported, Marks J, 10 April 1987, Supreme Court of Victoria) (Integer Computing), referred to in Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60 (Chloride Batteries); Super Pty Ltd v SIP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; Plumley v Adgauge Pty Ltd (1998) 29 ACSR 315; [1998] VSCA 70; Kilpatrick Green Pty Ltd v Leading Synthetics Pty Ltd (Unreported, Gillard J, 5 June 1998, Supreme Court of Victoria); Harris v Kaarimba Pty Ltd & Anor [2018] VSC 72.
An order that a special referee make a further report may be appropriate where the original report contains significant inconsistencies, or its meaning is uncertain, or it appears to proceed on a misconception.[15]
[15]See Integer Computing (Unreported, Marks J, 10 April 1987, Supreme Court of Victoria), referred to in Chloride Batteries (1988) 17 NSWLR 60.
The principles that guide the Court’s discretion in considering whether to adopt a special referee’s report under r 50.04 were stated by the Court of Appeal in Wenco. Those principles include:[16]
(a)… where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and facility of referring complex technical issues to independent experts for inquiry and report;
(b) … if the referee’s report reveals some error of principle, absence or excess of jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact-finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than “unsafe and unsatisfactory”;
(c) … generally, the referee’s findings of fact should not be re-agitated in the court. The court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. The court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence;
(d) … the purpose of r 50.01 and 50.04 would be frustrated if the court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was sufficient material on which the conclusions could be reached.
[16][2009] VSCA 191; (2009) 25 VR 119 [17].
FConsideration – DCF Methodology (Ground 4 to 6)
As may be expected, with the benefit of hindsight, the Questions may have been better formulated. However, the critical Questions relating to the appropriate methodology for valuing the Property and the consequent value of the shares and units have been satisfactorily and adequately dealt with in the Report. I propose to accept the Report. The grounds put forward by Austhome as to why the Report should not be accepted are without merit and are properly rejected. There is no Wenco error as submitted. To the contrary. A proper application of the Wenco principles compels an unqualified acceptance of the Report.
Much of the criticism relates to and flows from the rejection by O’Grady of the DCF methodology.[17] It is necessary and desirable to deal with this aspect first. If O’Grady’s approach, methodology, analysis and opinion is correct and involves no error or misapprehension, or some other vitiating factor, much of Austhome’s criticism falls away.
[17]Ground 4 to 6 are for the most part, if not entirely, based on his acceptance of the Direct Comparison methodology and the rejection of the DCF methodology, and in particular, the process and reasoning involved in such rejection.
In rejecting the DCF methodology, O’Grady, as previously noted, said –
105.In my opinion, the Discounted Cash Flow (DCF) method of deducing an appropriate land valuation for the subject property at this time is totally impractical. The reason being for this statement is that the project currently has a planning permit for a 67 level apartment tower but no endorsed plans. The project has no pre-sales and all of the future cashflow items are all assumptions. The total Gross Realisation Value (GRV) of the planned project is proposed to be $492,822,600.
106. In the current property market which is experiencing substantial disruption in the metropolitan apartment market and significant cost increases for concrete and steel, I am of the opinion that the subject property as a planned 415 apartment residential tower building over 67 levels is far too embryonic in its project development to date to be able to accurately model the future cash flow with any degree of accuracy.
107. I find that I cannot place any reliance on Mr Meredith’s reports and his DCF based investment conclusions at this stage of the project.
Further, in his answer to Question 1 , O’Grady provided the following rationale –
Market Value is defined as the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
My reason for determining that the Direct Comparison approach being the correct valuation methodology is based on traditional and industry accepted valuation practices.
Discounted Cash Flow can be used to analyse Market Value but is only appropriate in circumstances where the Project is sufficiently advanced to be able to include an accurate project timeline, endorsed plans, construction permits, final construction contracts and the required volume of qualified pre-sales. I consider the current status of the proposed development to be too embryonic to enable any accurate portrayal of land value as a function of the overall feasibility.
It is clear, from an analysis of the Report, that in expressing his opinion in relation to the valuation methodology, and preferring the Direct Comparison methodology, O’Grady has engaged in a ‘thorough, analytical and scientific approach’ to the Question.[18]
[18]Wenco [2009] VSCA 191; (2009) 25 VR 119 [17(d)].
It was submitted that he failed to consider and deal with or provide precise reasons for rejecting the substantial body of (uncontradicted) evidence both expert and lay, in relation to the DCF methodology.[19] The corollary of the submission is that a proper consideration would have compelled acceptance of the DCF methodology, the evidence being overwhelming, it should not have been summarily dismissed and the other method almost summarily accepted. I do not accept this contention.
[19]Having rejected the DCF methodology, for the reasons given, it was not necessary or desirable O’Grady to assess this substantial body of evidence. It simply was not relevant. The fact that it was not contradicted does not make it relevant to the critical question.
In providing his expert opinion, O’Grady rejected this contended valuation methodology. This does not mean he did not consider the evidence in support of it. He did. However, for the reasons given he rejected the approach as a matter of principle. The reasons are short but entirely compelling. In the circumstances, there was no need to explore and provide reasons for rejecting all of the evidence that related to this unacceptable approach. The evidence disclosed the entirely hypothetical nature of the approach and its assumptions. Plans have not even been approved. Feasibility studies have not been conducted. Indeed, the parties could not even agree as to the precise nature and extent of the Development. In my opinion, O’Grady’s opinion in relation to valuation methodology was not only open to him, but is entirely compelling. I would have and do reach the same conclusion in relation to this Question.
There is no error of principle. His preference and opinion to the effect that the correct valuation method is the Direct Comparison methodology is not an error of principle. The reasons for preferring this method do not contain any errors of principle and none have been suggested. It is his opinion. His rejection of the DCF methodology is not an error of principle. It is his opinion. It is no error to reject uncontradicted evidence that is irrelevant and supports a valuation method that is not acceptable. There is and can be no error in rejecting a methodology that an expert on proper grounds does not accept.
There is clearly no absence or excess of jurisdiction in rejecting the DCF methodology. This is precisely what he was required to do and did after a consideration of all of the evidence.
Further, there is no ‘patent misapprehension of the evidence or perversity or manifest unreasonable in fact finding that would ordinarily be a reason for rejection.’ O’Grady fully understood the evidence and accorded it no weight. He rejected it. In his opinion, having considered the evidence, he decided not to accept the DCF methodology. There was no need to specifically deal with all aspects and the evidence in support of it within his Report. He identified it and said that he had considered it together with the submissions and then stated his conclusions. He was entitled to the course he took and his decision and opinion, with which I entirely agree, is simply not open to challenge.[20] So far as unreasonableness it concerned, it cannot be said that no reasonable tribunal of fact could have reached the conclusion. In Wenco, the Court said (as cited above) that the test ‘is more stringent than “unsafe and unsatisfactory”’.[21] The opinion of O’Grady is entirely safe and satisfactory. Austhome does not like it, but it is simply not open to challenge.
[20]Given the state of the Development (see paragraph [9]) the DCF methodology is self-evidently hypothetical and speculative. It requires far too many assumptions about all sorts of matters and is inappropriate, particularly in circumstances where there are not even any agreed plans, or indeed as pointed out, any feasibility studies or agreement as to the nature and scope of the Development. Needless to say, there is not even a building contract or specifications.
[21]Wenco [2009] VSCA 191; (2009) 25 VR 119 [17(e)].
To re-agitate such findings of fact in an area in which the Special Referee enjoys technical expertise, there must be more than merely ‘unsafe or unsatisfactory’. No patent misapprehension of the evidence or perversity or manifest unreasonableness in fact-finding is demonstrated. No Wenco error exists.
From the above, it follows that grounds 4 to 6 are not made out. Some further specific matters relating to these grounds are set out below.
The evidence (Grounds 4 to 5)
Given the conclusion I have reached, it is not strictly necessary to deal specifically with these grounds. They relate to the discredited DCF methodology. However, I do not accept, as contended by Austhome, that O’Grady had no regard to the cross-examination of Smirnakos, Brady Queen’s expert land valuer.[22] In fact the Report expressly sets out that O’Grady, found both Smirnakos and Smith, Brady Queen’s expert accountant, to be reliable and credible witnesses;[23] a finding open to him, having heard the detailed cross-examination of those witnesses. In addition to finding Smirnakos to be a credible witness, O’Grady found that the process undertaken by Smirnakos to determine market value of the Property was, itself, credible and in accordance with accepted valuation practices when valuing major development sites.[24]
[22]Austhome’s Submissions dated 22 February 2019 at [2(d)], referring to the Report at [53] to [60].
[23]Report [38].
[24]Report [45] and [60].
By contrast, in relation to Austhome’s experts, O’Grady:
(a) makes a number of criticisms of the approach taken by Brown and, in particular, observes that the ‘escalation methodology’ employed by Brown ‘is not a legitimate valuation methodology and is not endorsed nor supported by the IVSC or by the API’;[25] and
(b) states that he has a direct conflict with Meredith’s interpretation of what is the correct valuation methodology to be applied to determine the market value of the Property. O’Grady states that he cannot place any reliance on Meredith’s reports,[26] that the DCF methodology applied by Meredith is ‘totally impractical’ for determining an appropriate land valuation for the Property at this time[27] and that ‘the projected Development Cash Flows [relied upon by Meredith] are almost 100% pure assumptions relating to their projected development performance of construction and pre-sale timetables’;[28]
[25]Report [91], [66] to [94]. The IVSC is the International Valuation Standards Committee and the API is the Australian Property Institute.
[26]Report [107].
[27]Report [105].
[28]Report [42].
Austhome accepted that Smith was a truthful and independent witness,[29] but is critical of O’Grady for accepting Smith’s first report. Austhome argues that Smith ought to have been asked about Meredith’s later reports and to comment on the voluminous further material advanced by Austhome. However, as found by O’Grady, Austhome’s material contained almost entirely ‘pure assumptions’[30] and Meredith’s approach was inappropriate given the development is currently ‘far too embryonic…to be able to accurately model the future cash flow with any degree of accuracy’.[31] As such, the provision of yet more speculative future cash flow material would have been an exercise in futility.
The valuation method (Ground 6)
[29]Report. [46]
[30]Report [42].
[31]Report [106].
It is not strictly necessary to deal with this ground, given my earlier findings and conclusion. As pointed out, the ground is entirely misconceived and unrealistic and must fail.
Firstly, and to repeat, O’Grady gave no weight to Meredith’s report because he concluded – and set out detailed reasons at paragraphs [95] to [107] of his Report for so concluding – that the DCF methodology was ‘totally impractical’ for determining the market value for the Property at this time.[32]
[32]Report [105].
Secondly, and again to repeat, I reject Austhome’s submission to the effect that its evidence was ‘unchallenged’.[33] Meredith’s report was challenged, consistently and in detail, in:
(a) Brady Queen’s document, ‘Disputed Assumptions, Greg Meredith Expert Report dated 18 June 2018,’ dated 18 September 2018;
(b) Brady Queen’s written submissions to the Special Referee dated 26 October, 19 November and 24 December 2018; and in oral submissions made on behalf of Brady Queen on 17 December 2018.
[33]Austhome’s Submissions dated 22 February 2019 [2(f)].
Thirdly, the case of Hamod has not, in my opinion, been misapplied by O’Grady. That case makes it clear that: [34]
[338]Even if evidence is unchallenged, a party may be able to demonstrate that the evidence is inherently illogical or unreliable, or that the evidence is based on an incorrect or incomplete history or upon unproven assumptions. These last two factors are particularly relevant where expert evidence is not challenged in cross-examination’ (emphasis added);
[339]Even if unchallenged evidence is not shown to be defective, a court is not bound to accept it if the opposing party calls evidence of a substantial nature which contradicts it (emphasis added).
O’Grady’s consideration of Meredith’s report does not offend the principles in Hamod, nor does it demonstrate any Wenco error.
[34][2011] NSWCA 375 [338]-[339].
Finally, and for similar reasons I do not accept the Jones v Dunkel[35] argument in Austhome’s submissions. It is misconceived as Brady Queen called its witnesses. In any event, the rules of evidence do not apply to this reference.
[35](1959) 101 CLR 298.
GConsideration – Valuation date (Ground 1)
The decision to value the Property as at 31 January 2019, rather than the earlier date of 8 November 2018 was not only open to O’Grady but also the subject of a thorough, analytical and manifestly well-reasoned approach by the Special Referee. No Wenco error is demonstrated.
First, it is relevant to note that no date for the valuation was specified in the Order. Further, there is no reason why the later date should not be accepted. In fact, there is every reason to accept the later date, being more proximate to the determination of the fair value of the shares and units by the Court.
Secondly, the fact that the neighbouring property on the opposite side of Little Lonsdale street was sold in December 2018 and, given its proximity to the Property ought, as it was, to have been taken into account. Further, there was significant further material provided to O’Grady subsequent to 8 November 2019. He was fully entitled to take that material into account.[36]
[36]At [109] to [110] of the Report, O’Grady acknowledged that the parties had generally agreed to the earlier valuation date of 8 November 2018. However, he allowed both parties ‘to serve himself with additional submissions past the original valuation date, with the latest being 24 January 2019.’ He considered it preferable to adopt 31 January 2019, being the date of the intended delivery of the Report and of his most recent external inspection of the Property.
Although the parties were not given an opportunity to make submissions in relation to 288 Queen Street, and notwithstanding the stated importance of this property in O’Grady’s consideration, it is clear that this sale simply confirmed O’Grady’s opinion as to value. This is specifically referred to in paragraph [132] of the Report, which is extracted in paragraph [31] above. After considering the sales of 9 properties, O’Grady concluded that the average value of the land per square metre was $31,323. The sale of 288 Queen Street reflected a square metre land value of $34,064 (or $32,544) bringing the average up. If O’Grady (or the Court) was persuaded to exclude it from his consideration, the value per square metre would be lower. The property at 288 Queen Street, although important, was one of nine properties considered by O’Grady. In the circumstances, further submissions were unnecessary and would have made no difference. No Wenco error is demonstrated.
HConsideration - The engagement of Paul Lom (Ground 2)
Not only was O’Grady entirely justified in seeking input from Lom, as an accounting expert, in respect of Questions 3 to 5, but the parties were consulted at the commencement of the reference[37] about Lom’s appointment and made no objection then or at any time during the reference. The first time such an objection was raised was in Austhome’s submissions filed and served on 22 March 2019. In particular, Austhome raised no concern as to any excess of jurisdiction nor any ‘effective abdication’ as now asserted. No excess of jurisdiction or manifest unreasonableness in fact-finding is established. No Wenco error is demonstrated. Finally, there was no need to give Lom any of the material in relation to the DCF methodology. He was not asked about this aspect. O’Grady determined the issue and Lom was asked to accept this methodology.[38]
[37]The fact of an appointment of an accounting expert was raised in para 2.2 of the Referee’s letter of appointment which letter of appointment was agreed to and signed by Austhome. See exhibit ADN-1 to the affidavit of Alexander David Nicol.
[38]If I am wrong and the input from Lom does constitute an ‘effective abdication’ I would simply ignore Lom’s report and determine the issues myself. I would reach the same conclusions as Lom. Lom’s opinion is clear and evidences a thorough and analytical approach.
IConsideration - Valuation of minority interests (Ground 3)
The principles relied on by Austhome in relation to buy-out orders in oppression cases are not appropriate in the context of this particular case. The Special Referee notes that his task, in accordance with Questions 1 and 2 is to ‘conclude a market valuation for the subject property…and not to indulge any deviation from that market concept’. Given that Questions 1 and 2 expressly ask the Special Referee about the ‘market value’ of the Property, it is impossible to see how O’Grady could have erred in taking this approach. No absence or excess of jurisdiction or manifest unreasonableness in fact-finding is established. No Wenco error is demonstrated.
Further, Lom – in relation to Questions 3 to 5 – does consider whether the Shares and Units ought to be valued differently because they are minority interests. He does not consider that any premium is justified for control. In fact, Lom suggests that although there is a basis to conclude that, the ‘fair value’ of the Units held by Austhome is the proportional value of the Units, reduced by both a ‘minority discount’ of 10 per cent and a ‘marketability discount’ of 15 per cent, he considers that discounts should not apply because of the order for sale by the Court. O’Grady has agreed and not accepted or applied any discounts.[39] In my opinion there is no basis for them and I do not propose to allow any discount. In this case, the fair value of the shares and units is the value based on the net tangible assets. There is simply no adequate, sufficient or evidentiary basis for any premium or discount, or any other valuation.
[39]Paragraph [4] of Lom’s Report, which is Appendix 3 to the Report. (See also Section J and the answer to Question 4 within the Report).
I reject Austhome’s submission to the effect that the shares and in particular, the units should be valued on a basis other than the realisable value of the net tangible assets, and that in this regard O’Grady (and Lom) failed to apply the legal principles applicable to oppression cases. They did nothing of the sort. First, the submission seeks to determine the value of the units by reference to the discredited DCF methodology. The DCF methodology was properly rejected and the only realistic basis for the valuation was that based on the net tangible assets for the reasons given. Secondly, there was no ‘violation’ of the principles set down in ES Gordon Pty Ltd v Idemeneo (No 123) Pty Ltd.[40] The discussion by Young J of a ‘fair price’ on the page noted, does not in any way detract from and is in no way inconsistent with the fair value determined by O’Grady and Lom and endorsed by this Court.
[40](1994) 15 ACSR 536, 540.
FDisposition
I do not propose to vary the Report, and instead, I propose to adopt it in whole.
It is in the interests of justice to accept the Report. The DCF methodology has been thoroughly discredited and so it should be. This was the opinion of an expert engaged for this purpose. As noted, the basis of his opinion is clear and unequivocal. There are no material inconsistencies and it does not proceed on any misconception. Austhome has concentrated most of its submissions on this discredited valuation methodology. There is no Wenco error in this regard. The attack on the Direct Comparison methodology was limited to Grounds 1 to 3, which are without merit for the reasons given. There was no attack on the valuation itself, that is, the average land value per square metre.[41] Yet, that was the most critical point of all. It was the basis for the fair value.
[41]Save perhaps for the expert report of Brown, adduced by Austhome, which expressed an opinion of $900/sqm. O’Grady rejected Brown’s methodology and conclusion at paragraphs [66] to [94] of the Report. See paragraph [26] above.
The value of the shares and units is $37,645,299. When divided by the 35,500,000 units on issue, the proportional value per unit is $1.06. The value of Austhome’s interest, as the holder 11,715,000 units in the Unit Trust, is $12,417,900. Austhome is entitled to a sum in this amount from Brady Queen.
I will hear from the parties as to the appropriate form of order, costs and directions as to the remaining issues and further conduct of the proceeding.
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