Forrest v Appleyard

[2007] NSWSC 889

CITATION:	Forrest v Appleyard & Ors [2007] NSWSC 889
HEARING DATE(S):	30 May 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Brereton J
EX TEMPORE JUDGMENT DATE:	31 May 2007
DECISION:	Further evidence admitted. Report rejected in part. Report varied by substituting Court’s own view based on further evidence. Report as varied adopted.
CATCHWORDS:	PROCEDURE – Reference – to Referee – procedure on motion for adoption/rejection of report – approval of court to such questions – application for leave to adduce further evidence – approach to such applications – where evidence enables Court to substitute its own view to that of referee – VALUATION – equity – taxation investment product – cost of acquisition or future cash flows - taking into account events after relevant date – obligation to form view as to recoverability of receivables.
LEGISLATION CITED:	(NSW) Uniform Civil Procedure Rules 2005, r 20.24
CASES CITED:	Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60 Forrest v Appleyard [2006] NSWSC 281 Foxman Holdings Pty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615 Hughes Bros Pty Ltd v Minister of Public Works (NSWSC, Rolfe J, 17 August 1994, unreported, BC9402885 Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 902 Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 Xuereb v Viola (1998) 18 NSWLR 453
PARTIES:	John James Forrest (plaintiff) Leigh Davern Appleyard (first defendant) Geoffrey Martin Pryke (second defendant) Bruce Anthony Kenny (third defendant)
FILE NUMBER(S):	SC 4583/03
COUNSEL:	Mr J L Doyle (plaintiff) Mr B J Burke (first & third defendants)
SOLICITORS:	Forshaws Neill Solicitors (plaintiff) Schweizer Kobras (first & third defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

Thursday, 31 May 2007

4583/03 John James Forrest v Leigh Appleyard

JUDGMENT (ex tempore)

1 HIS HONOUR: Following a judgment delivered by me on 13 April 2006 [[2006] NSWSC 281] I made orders on 8 May 2006, relevantly as follows:

1. Declare that there is a binding and enforceable agreement between the plaintiff and the defendants that:


1.1 the plaintiff would retire and would be permitted to retire from the Practice, such retirement to take effect from 17 December 1999 for the purposes of calculating his entitlement upon retirement;

1.2 the defendants would pay to the plaintiff a sum equivalent to 45% of the fair market value of the Practice determined in accordance with clause 12.1 of the Shareholders’ Agreement as at 17 December 1999, by four equal instalments payable on 17 December 1999, 17 June 2000, 17 December 2000 and 17 June 2001;

1.3 the plaintiff would transfer or cause to be transferred to the defendants all his shares and his controlled entities in the Company and units in the Trust; and

1.4 the price referred to in 1.2 would be payable by, and the share and units referred to in 1.3 would be transferred to, the defendants, in proportions 45:5:5.


2. Declare that the defendants have paid and the plaintiff has received $55,300 on account of his entitlement referred to in 1.3.

3. Declare that the document entitled “Goodwill Valuation” dated 15 May 2000 delivered by Robert C Knights does not comprise a valuation of the fair market value of the Practice as at 17 December 1999.

4. Declare that the agreement referred to in Order 1 ought to be specifically performed and carried into execution.

5. Order pursuant to Uniform Civil Procedure Rules 2005 (NSW), r 20.14 that it be referred to a suitably qualified valuer of not less than ten years experience in valuing professional practices to inquire into and report what was the fair market value, determined in accordance with the principles set out in the Shareholders’ Agreement, of the Practice (comprising the Company, the Trust, and the business of consulting engineers conducted by the Company as trustee of the Trust) as at 17 December 1999.

6. Direct that (without affecting the powers of the Court as to costs) the parties, namely the plaintiff and the first, second and third defendants, be jointly and severally liable to the referee for the fees payable to him.

7. Direct that the parties deliver to the referee forthwith a copy of this order together with a copy of Division 3 of Part 20 of the CPR

8. Direct that:


(a) subject to paragraphs (b) and (c) hereof the provisions of Pt 20 r 20 shall apply to the conduct of proceedings under the reference;

(b) the reference will commence on 8 June 2006 unless otherwise ordered by the referee;

(c) the referee consider and implement such manner of conducting proceedings under the reference as will, without undue formality or delay, enable a just determination to be made including, if the referee thinks fit:

(i) the making of inquiries by telephone;
(ii) site inspections
(iii) inspection of plant and equipment; and
(iv) communication with experts retained on behalf of the party;


(d) any evidence in chief before the referee shall, unless the referee otherwise permits, be by way of written statements signed by the maker of the statement;

(e) the referee submit the report to the Court in accordance with Pt 20 r 23 addressed to the Equity Division Registrar on or before 8 September 2006

2 Some time passed in finding a referee who was acceptable to both parties, ultimately they agreed on Mr G C A Gower. Further time passed in the conduct of the reference, and from time to time directions were made extending the time for the referee’s report. Ultimately, the referee delivered a report dated 22 February 2007. In it Mr Gower concluded that the fair market value of the practice, based upon the analysis set out in his report, as at 9 December 1999, was $1,243,961. He added that that value was reliant on the recoverability of receivables as at December 1999, including related party loan accounts.

3 The matter came before me on 11 April 2007, when I made directions granting leave to all parties to file motions pursuant to (NSW) Uniform Civil Procedure Rules 2005, r 20.24, in respect of Mr Gower’s report, such motions to be returnable on 30 May 2007, and ancillary directions including provision for service of any affidavit evidence.

4 Both parties have filed motions, the plaintiff Mr Forrest having filed a motion on 17 April 2007 for adoption of the report of Mr Gower, and the first and third defendants Mr Appleyard and Mr Kenny having filed a motion on 18 April 2007 for rejection of parts of the report and remission to the referee for further consideration of the matters in those parts with consideration of the adoption of the balance of the report to be deferred until receipt of any further report of the referee.

5 In substance, the defendants’ motion raises three main issues concerning the referee’s report. The first is the value attributed by the referee to one of the assets of the practice, namely the 1998 Tomato Project, which the referee included as an asset of the practice with a value of $327,825 less a discount for marketability of 30 percent, producing a net value of $229,477. The defendants contend that the Tomato Project was not an asset at all, but that if it was, it was worth substantially less than $229,477. The second complaint raised by the defendants concerns the referee’s assumption that, upon hypothetical sale of the practice, the “usual restraint of trade contractual provisions” would apply, when there was no such restraint contained in the Shareholders Agreement; it is said, as I understand it, that this resulted in the referee adopting a lower capitalisation rate or higher multiplier than otherwise would have been appropriate. The third matter of complaint concerns the referee’s caveat, that his valuation was dependent upon all receivable balances being recoverable, and the accompanying assumption, apparently without examination, that those balances were recoverable; the defendants contend that the valuation should be reduced on account of non-recoverability of, at least, one significant related loan account balance.

The Approach

6 Rule 20.24 relevantly provides as follows:

(1) If a report is made under rule 20.23, the Court may on a matter of fact or law, or both, do any of the following:
(a) It may adopt, vary or reject the report in whole or in part,
(b) It may require an explanation by way of a report from a referee,
(c) It may, on any grounds, remit for further consideration by the referee the whole or any part of the matter referred for a further report,
(d) It may decide any matter on the evidence taken before the referee, without additional evidence,
and must, in any event, give such judgment or make such orders as the Court thinks fit.
(2) Evidence additional to the evidence taken before the referee may not be adduced before the Court except by leave of the Court.

7 The approach of the Court to the exercise of the discretion conferred by Uniform Civil Procedure Rules, r 20.24, to the adoption, rejection or otherwise dealing with a referee’s report have been explained in a series of cases [see Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; Chloride BatteriesAustralia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; Foxman Holdings Pty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615; Xuereb v Viola (1998) 18 NSWLR 453; and Hughes Bros Pty Ltd v Minister of Public Works (NSWSC, Rolfe J, 17 August 1994, unreported, BC9402885]. The relevant principles have been encapsulated by McDougall J in Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 902, in eleven propositions or principles distilled from those decisions, which I gratefully adopt. His Honour’s exposition of the principles was as follows:

(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing.

(2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation; that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.

(4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.

(5) 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 the facility of referring complex technical issues to independent experts for enquiry and report.

(6) 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”.

(7) 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. Thus, 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.

(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.

(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.

(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.

(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.

8 In the present case the defendants sought to adduce evidence, which I received provisionally subject to the question as to whether leave should be granted. First, there was evidence of Mr Appleyard, which was directed essentially to the capacity of himself and companies in which he had an interest to repay loans which underpinned a related company loan account of the practice. Secondly, there was evidence of an accountant, Patricia Young, relating to the 1998 Tomato Project. Thirdly, there was evidence of Mr Finney, an accountant, who expressed opinions as an expert as to whether the referee had applied appropriate valuation principles or had departed from them, and in some respects the consequences of those departures. Mr Appleyard and Mr Finney were subject to some, albeit abbreviated, cross-examination. As in the case on an application to adduce fresh evidence in an appeal so in this context, it is usually difficult to decide in advance whether evidence of this type should or should not be received – that is to say, whether leave to adduce further evidence should be granted. Usually, that question has to be resolved after the evidence is provisionally received, in the context of the entirety of the application. I have adopted that approach here.

9 I turn then to consider the three issues to which the defendants’ application gives rise.

The Tomato Project Valuation

10 The first is the 1998 Tomato Project. It appears to have been a tax deferral product in which investments were sought largely, if not exclusively, for the purpose of gaining short term taxation advantages – although in a submission which the defendants made to the referee, it was asserted that there was a genuine anticipation also of a reward or return from the investment. Thus, in a letter to the referee, dated 20 November 2006, the defendants’ solicitors Schweizer Kobras, under the heading “Tax Based Investments”, referred to various projects, including the 1998 Tomato Project, as having been “intended both to minimise tax for the participants and also to build up capital assets. It was seen to be an investment with real ongoing potential”. As it transpired, the Australian Tax Office subsequently disallowed the deductions claimed as a result of the investment in the 1998 Tomato Project, but that was not a fact known or in contemplation as at December 1999.

11 When the investment in the 1998 Tomato Project was made, it was initially recorded as an asset at cost in the balance sheet of the practice. In the same year it was, in effect, written off as an expense. As a result, in the balance sheet which immediately preceded the date of valuation, it did not appear as an asset. In his report, Mr Gower observed that the practice’s $327,825 investment in the 1998 Tomato Project was written off for tax and accounting purposes and was not recorded in the practice’s balance sheet as an asset, but that it nonetheless remained an asset of the practice, albeit unrecorded in the balance sheet. He proceeded to say that, as at December 1999, there was an expectation of future returns that would support a value, in connection with which he referred to documents, contained in Appendix 6 of his report, which set out forecast or projected results of the Tomato Project for years up to 2019. The evidence is that these documents were brought into existence in or about 2002, for the purpose of negotiations with the Australian Taxation Office, and were not in existence at the date of valuation. Mr Gower added back the Tomato Project as an asset at its cost of acquisition, but then deducted a 30 percent marketability discount, to reflect there would have been only a limited secondary market for such an investment.

12 Mr Finney’s evidence, at least in his report, was to the effect that the Tomato Project was not an asset. I would have thought that this was a question of law and not a matter of expert accounting opinion, and that it was fairly clear that the acquisition of a bundle of rights, which on any view the Tomato Project involved, was the acquisition of valuable property – that is, property capable of being valued. In any event, in the course of his cross-examination, Mr Finney resiled from the position that the interest in the Tomato Project was not a valuable asset, and accepted that the true issue was the method of valuing it, rather than whether or not it was a valuable asset. As to the method of valuation, he said that such an asset was to be valued according to its future earning potential or capacity. Mr Finney did not, in his reports, undertake that exercise. On the other hand, the referee did not explain in his report why it was appropriate to adopt the cost of acquisition as a value.

13 As Mr Finney agreed in the course of his oral evidence, I do not see how the cost of acquisition is a suitable guide to the present value of a taxation product such as this. Its value is to be found in the present value of the future cash flows to be derived from it, rather than in its cost of acquisition. In merely adopting the cost of acquisition, the referee departed from proper valuation principle, and did not address the true issue – namely, not whether the asset should be added back, but at what value it should be added back.

14 Moreover, the referee expressed the view that, absent information current as at December 1999, it was permissible to have regard to information brought into existence in 2002 as to anticipated future cash flows. That was also a departure from appropriate valuation principle, particularly when the referee (properly) declined to have regard to the circumstance that the taxation deductions were disallowed some years after 1999. He ought only have considered what was known or contemplated in 1999.

15 Although the parties’ submissions before the referee did, to some extent, touch on the Tomato Project, I have not been taken to any material in them which squarely addressed the question of how it was to be valued, nor to any material in which the referee foreshadowed or sought assistance on the method of valuation of the Tomato Project. Given the potential materiality of adding back an asset valued at net $230,000 (after the marketability discount), the errors of principle by the referee and the circumstance that the issue does not appear to have been clearly dealt with in the submissions before the referee, it is appropriate to permit further evidence on that topic – in particular that of Mr Finney and Ms Young – to illuminate it before the Court.

16 It follows that I find that the first ground of the defendants’ motion is made good. Precisely what relief should be granted will depend, in part, upon the outcome of the other grounds.

The Restraint of Trade Assumption

17 The second issue is the restraint of trade question. The referee, in the course of considering the factors which impacted on the valuation of goodwill, and in particular the appropriate capitalisation multiple, observed:

68. The specific matters in this regard that I have considered as at 17 December 1999 are:


...

(g) None of the participants were subject to any restraint of trade in event of resignation, retirement or removal.
69. I assume, however, that in maximising the value of the Practice’s goodwill for the remaining participants any sale or transfer of the goodwill would be made to suitably qualified person in a manner that ensures an orderly transition process and usual restraint of trade contractual provisions.

18 The defendants contend that there is an inconsistency between those two passages, and that it was inappropriate for the referee to make any such assumption about “usual” restraint of trade contractual provisions. Mr Finney gave evidence to that effect, but he added that, as things transpired in this case, Mr Forrest took very little with him and as a matter of practicality disregarding this assumption would have made no material difference in the valuation outcome.

19 In my view, the defendants’ contention (and Mr Finney’s original position) misconceives what the referee was saying and doing in paragraphs 68 and 69. The referee had accurately recorded that, in the event of resignation, retirement or removal from the practice, no individual participant is subject to any contractual restraint, but he assumed that if the proprietors sold the practice as a whole to an arm’s length purchaser, then they would act in their financial interests by giving a “usual restraint of trade” in the Contract for Sale of the practice. The referee’s first reference, in paragraph 68(g), was to the absence of restraints in the Shareholders Agreement. That is quite a different matter from the assumption, in paragraph 69, that in the hypothetical Contract for Sale of the practice, there would be a “usual restraint of trade provision”. The referee’s assumption in this regard seems to me an entirely reasonable one. In the course of his cross-examination, Mr Finney came to accept that he may have misconceived what the referee was assuming in paragraph 69.

20 Even if there were some error in this respect, which I do not accept, it is of marginal significance and minimal impact. It was one of many factors which affected selection of the capitalisation rate. The referee said that the appropriate multiplier for similar practices was usually in the range of 2.5­­-5, and that in this case a multiplier in the lower end of that range, namely, 2.5-3 was appropriate. The science is an inexact one, and it is far from apparent that absence of the assumption about a restraint of trade would have made a significant difference. Indeed, Mr Finney’s own evidence was that, as it transpired, it made no material difference. Accordingly, even if I thought there were some error in this regard, as a matter of discretion, in accordance with the principles I have summarised above, I would be disinclined to reject this aspect of the referee’s report.

The Recoverability of Receivables

21 I turn then to the third issue, which is that of recoverability of receivables. As I have recorded, the referee concluded his report with a caveat that his valuation was reliant on recoverability of the practice’s receivables as at December 1999, including related party loan accounts. A little earlier in his report, he had indicated that he similarly assumed, in accordance with the balance sheet, that all receivables were recoverable. The report does not reveal any examination of receivable balances to ascertain whether or not they truly were recoverable, or whether or not a hypothetical purchaser would insist on some discount, having regard to a risk as to recoverability. The defendant contends that the referee in that respect failed to apply proper valuation practice and principles in assuming recoverability without examining it, and that his valuation cannot, therefore, be relied on, because a critical assumption has not been made good.

22 Amongst the assets of the practice, which underpin the referee’s ultimate valuation of $1,324,000, are three related party loan accounts, namely Manoral Pty Limited at $563,489, KM Australia Pty Limited at $8,000, and Morgage Pty Ltd at $2,150. Manoral was the trustee of the Appleyard Forrest Unit Trust, through which Mr Forrest’s and Mr Appleyard’s interests in the practice were held; it was entitled beneficially to 90 percent of the practice, minority interests holding the other 10 percent.

23 Even making the adjustment concerning the Tomato Project to which I have referred, the value of the practice as a whole, on Mr Gower’s approach, would exceed $1 million, and Manoral’s 90 percent would therefore exceed $900,000. In his report, Mr Finney said that, as Manoral was the trustee of the Appleyard Forrest Unit Trust and the vehicle by which Mr Appleyard and Mr Forrest participated in the practice, it might be argued that Manoral’s indebtedness to the practice might be offset by its share of the practice and that it had, in effect, already taken out of the practice its share up to the extent of its indebtedness. He added:

Provided Manoral’s 90 percent share of the value of the practice exceeds the amount Manoral owes to the practice there should be no need to further consider the ability of Manoral to repay its indebtedness, ...

24 For reasons which Mr Finney has not explained, he nonetheless proceeded to examine the ability of Manoral otherwise to repay its indebtedness, although it is fair to say that in the summary of his report he made no adjustment for recoverability, and when he addressed the question in a supplementary report, he plainly did so only as a matter of assumption and not as a matter of opinion. But if it be necessary to go further than that first opinion of Mr Finney, and to “drill down” into the evidence of Manoral’s financial position, what emerges can be summarised as follows.

25 Manoral’s 1999 balance sheet shows an excess of assets over liabilities of some $624,000, after providing for its indebtedness to the practice. Mr Appleyard suggested that that figure of $624,000 had to be reduced, because the capital profits reserve of $750,000 reflected goodwill in the practice which was no longer to be valued at $750,000, but (according to Mr Gower) at $440,000. However, this argument addresses the wrong side of the balance sheet. The capital profits reserve on the liabilities side is the result of revaluations on the asset side of the balance sheet. It would only be if the value attributed to Manoral’s interest in the practice – that is in the AFCE Unit Trust – were reduced, that any corresponding reduction in the capital profits reserve would be appropriate. As the AFCE Unit Trust is shown at $900,000 in Manoral’s balance sheet, (being 900,000 $1 units at cost), and, on Mr Gower’s valuation, 90 percent of the valuation of the practice is or exceeds $900,000, no such reduction is appropriate.

26 However, the surplus of assets in Manoral remains underpinned by a number of further related party loans, relevantly $148,000 due from Mann Street Properties Pty Limited (an Appleyard company), $582,000 due from Computer CAV Pty Limited (another Appleyard company), and $347,000 due from Balvale Pty Limited (Mr Forrest’s company).

27 Balvale and Computer CAV, which are the unit holders in the Appleyard Forrest Unit Trust, were beneficially entitled to the net assets of Manoral in its capacity as trustee of that trust. So far as Balvale is concerned, Mr Appleyard argues that the debt it owes Manoral should be regarded as irrecoverable, because of some slight evidence as to the financial position of Balvale and its attitude to repayability of that loan. So far as I can see, the only evidence of Balvale’s financial position is an admission attributed to Mr Forrest in paragraph 14 of Mr Appleyard’s affidavit, namely, that Balvale really has no assets “other than its investment in the Appleyard Forrest Unit Trust.” Based on the balance sheet of Manoral, Balvale’s investment in the Appleyard Forrest Unit Trust would be worth about $312,000, and while that would not fully cover the $347,000 said to be due to Manoral, it would leave only a small portion irrecoverable. However, further concern is occasioned by the fact that, in proceedings brought by Manoral against Balvale to recover that loan account, Balvale has denied that the advance represented by this figure is a loan at all. For present purposes, I am prepared to proceed on the basis that the Balvale debt to Manoral would be regarded by a hypothetical purchaser of the practice as of dubious recoverability. But even writing it off in totality would still leave a surplus of $300,000 in Manoral after providing for its debt to the practice, and so would not justify discounting the debt due to the practice for any risk as to recoverability.

28 So far as the Computer CAV debt is concerned, the balance sheet of Computer CAV discloses, as Mr Appleyard points out, a net deficiency of funds of $301. However, it does so after claiming as the value of its investment in the Appleyard Forrest Unit Trust only $19.34, because that investment is valued at cost, not at valuation. When revalued to valuation, according to the Manoral balance sheet, that would increase the assets of Computer CAV by approximately $312,000. There would then be no deficiency, but a surplus of just under $312,000 in Computer CAV. That does not bespeak an inability to repay its debts. It is true that, in turn, Computer CAV’s balance sheet is underpinned by loans to Mr and Mrs Appleyard totalling some $568,000. Mr Appleyard prepared balance sheets of his and his wife’s position at the relevant date, referring at least to their main assets and liabilities, which show that he had net assets of some $17,000 and she net liabilities of $106,000. However, in the course of Mr Appleyard’s evidence, he was unable to explain how the value attributed to his interest in Computer CAV was brought to account, it being shown at only $135,000, when between him and his wife it would seem that their interest in Computer CAV would be in the order of just under $312,000. When their interests in Computer CAV are revalued, the joint assets of himself and his wife would appear to be adequate, though not by much, to pay all his and her liabilities.

29 It is true that there may be a small deficiency in respect of the repayability of the Mann Street Properties loan, but not such as to impact ultimately on the recoverability of the practice’s loan to Manoral, having regard to the extent of the surplus of assets over liabilities in Manoral.

30 I have considered whether some allowance ought to have been made for the risk that the Manoral loan would not be recoverable by the practice. However, as it seems to me, an arm’s length purchaser of the practice would prudently insist that outstanding related party loans be repaid at the time of purchase and sale of the practice, out of the share of that proprietor who owed the money. In other words, in very rough terms, if the purchaser were to pay a million dollars to acquire the practice, of which Manoral (as 90% owner) was entitled to $900,000, and Manoral owed the practice $500,000, then upon settlement the purchaser would be in a position to insist that the price payable to Manoral of $900,000 and the debt due by it to the practice of $500,000 be set off. In those circumstances, I do not think there was any material risk of non-recoverability of the Manoral loan. The other two companies which were indebted to the practice owed such relatively small amounts that, in the context of Mr Appleyard’s earning capacity of some $200,000 per year, I do not think they would realistically be seen, on a commercial basis, to be not recoverable.

31 In my view, therefore, there was an error of valuation principle in the referee’s approach. He failed to undertake part of the essential task, namely, to form a view as to the recoverability of the loans, when he simply assumed their recoverability. The error could have been a very material one, but examination of the evidence adduced on this application shows that, in fact, the assumption was correct, so that no interference with the referee’s result in that respect is warranted.

The Consequences and Conclusion

32 Accordingly, I have concluded there were two material errors of principle in the referee’s report, one in respect of his approach to the Tomato Project, and the other in respect of his approach to recoverability of debt. If I were left with no more than that, it would have been necessary to reject the report in part and remit it for reconsideration.

33 In circumstances where my original judgment on liability was delivered in April last year, and it took almost a year to resolve the initial reference, and then a further four months to the present to review it in this Court, it seems to me that it would achieve nothing to visit further delay and further substantial costs on the parties by remitting the matter to the referee for further consideration, when the evidence that has been adduced in this Court enables me to form a view on the issues that otherwise would be remitted.

34 Uniform Civil Procure Rules r 20.24(1)(d) authorises the Court to decide any matter on the evidence taken before the referee with or without additional evidence. The above discussion of the recoverability of debt issue shows that ultimately no provision for irrecoverability is warranted. I do not overlook the fact that Mr Finney gave evidence that there should be a 2 percent deduction for risk on trade debt, but that seems to me a matter well within the realm of any ordinary valuation process and if it were to be argued, it ought to have been argued before the referee. I am not prepared to revisit a matter as relatively minor as that, that was not pursued before the referee; the reference is not to be treated as a “trial run”.

35 So far as the Tomato Project is concerned, the Information Memorandum pursuant to which investments were made contained forecasts of results for the years 1998, 1999, 2000, 2001 and 2002. While losses were projected for the first two of those years, those years had already passed by the valuation date. For the ensuing two years, net approximate returns were projected of $2,845, $2,942 and $3,041 respectively per farm. This suggests a level of maintainable earnings per farm of about $3,000 per annum. In the course of Mr Finney’s oral evidence, he agreed that it would not be unreasonable to approach the matter by adopting a capitalisation rate of 30 percent (or a multiplier of 3.33) in respect of that level of maintainable earnings in that context, although it must be said that he added the caveat that he had not closely considered the appropriateness of any multiplier, but conceded that the one that was suggested to him was one which implied a substantial degree of risk. That would produce a value of $10,000 per farm, or $150,000 for all 15 farms that the practice acquired. Mr Finney pointed out that expectations had not been met and losses had been greater than planned in the first two years of the project and, on reflection, that has persuaded me, in the interests of adopting a conservative approach, that a slightly lower capitalisation rate should be adopted; I would use a multiplier of 3 rather than of 3.33. On that basis, the 15 farms in the project would be valued at $135,000.

36 Mr Gower, it will be recalled, valued them at net $229,000; accordingly a reduction in his total valuation of $85,477 is required, producing a fair market value of the practice of $1,149,484.

37 It follows that it is in the interests of justice to admit the further evidence tendered by the defendants as it will facilitate the quick, just and cheap resolution of the outstanding issues in these proceedings.

38 My orders are:

(1) Grant leave to the first and third defendants, pursuant to r 20.24(2), to adduce on the present application the further evidence contained in the affidavits of Mr Finney, Ms Young and Mr Appleyard, which so far has been admitted only provisionally and subject to leave.

(2) Order that the report of GCA Gower, dated 22 February 2007, be rejected insofar as it values the Tomato Project and includes such valuation in the value of the practice.

(3) Vary the report by substituting a value for the Tomato Project of $135,000 for $229,477, and consequently by varying the fair market value of the practice from $1,243,961 to $1,149,484.

(4) Order that the report as so varied be otherwise adopted.

39 It follows that, for the purpose of the orders made on 8 May 2006, the fair market value of the practice will be $1,149,484.

40 It seems to me that on the present motions both parties have had a measure of success and a measure of failure. On the one hand, the defendants have succeeded in achieving a material reduction in the valuation. On the other, most of their arguments have failed. It seems to me that the justice of the case would be reflected in the first and third defendants bearing some but not all of the plaintiff’s costs of the argument on the adoption of the report.

41 I order that the first and third defendants pay 35 percent of the plaintiff’s costs of the plaintiff’s Motion filed 17 May, and the defendants’ motion filed 18 May, 2007.

42 I grant liberty to both parties to apply in the event of any difficulty arising in the implementation of the Court’s orders.

43 I order that the exhibits be returned.

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