Gemmell & Gemmell - [2009] FamCA 29

FAMILY COURT OF AUSTRALIA

GEMMELL & GEMMELL

[2009] FamCA 29

FAMILY LAW - PROPERTY - Value of property - Expert evidence – where parties appoint a single expert to value professional practice – where husband applied for rule15.49 permission to adduce expert evidence from another expert on the same issue – significant difference in the two valuations – rule 15.49 grounds established – it does not automatically follow that permission to adduce evidence from another expert – the husband ought to have convened a r 15.64(b) conference between the two experts – Husband’s application dismissed

Family Law Act 1975 (Cth) s 79
Family Law Rules 2004 (Cth) r 15.44, 15.51, 15.49, 15.64

Spencer v The Commonwealth (1907) 5CLR 418
Daniels v Walker (2001) WLF 1382

APPLICANT:

Mr Gemmell

RESPONDENT:

Ms Gemmell

FILE NUMBER:

(P)NCF

329

2005

DATE DELIVERED:

2 February 2009

PLACE DELIVERED:

Newcastle

PLACE HEARD:

Newcastle

JUDGMENT OF:

The Honourable Justice Ryan

HEARING DATE:

29 January 2009

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr T.Bates

SOLICITOR FOR THE APPLICANT:

Attwaters

COUNSEL FOR THE RESPONDENT:

Mr Sullivan

SOLICITOR FOR THE RESPONDENT:

Mullane & Lindsay

Orders

That the husband’s application for Order 2 contained in his Application in a Case filed 14 October 2008 is dismissed.

IT IS NOTED that publication of this judgment under the pseudonym Gemmell & Gemmell is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT NEWCASTLE

FILE NUMBER: (P)NCF329 of 2005

MR GEMMELL

Applicant

And

MS GEMMELL

Respondent

REASONS FOR JUDGMENT

In his Application in a Case filed 14 October 2008, Mr Gemmell (“the husband”) applied for permission pursuant to r 15.51(1) of the Family Law Rules 2004 to call expert evidence concerning the value of his professional practice. This application is brought in the context of contested s 79 proceedings for the adjustment of property in which the other party is Ms Gemmell (“the wife”). At the commencement of the hearing the husband’s counsel presented his case reliant upon r 15.49(2) in lieu of r 15.51. Because the parties have previously appointed a single expert to investigate and report upon this issue I agree that the application invokes r 15.49(2) considerations and not r 15.51(1). The wife opposes the husband’s application.
Rule 15.49 is as follows:
(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 that the contrary opinion is or may be necessary for determining the issue;
(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
A party need only establish one of the grounds in sub-rule (2). Having done so the use of the word “may” shows the rule is discretionary.
It is unnecessary to provide a detailed background of the parties’ circumstances or this litigation. For present purposes, it is sufficient to record that the s 79 proceedings are listed for final hearing for four days commencing 2 June 2009. On 29 January 2009 the parties entered into consent orders concerning their three children’s parenting and living arrangements. It seems likely the wife will seek s 44(3) leave to commence out of time an application for spousal maintenance, in relation to which both the leave and substantive applications will be heard at the same time as the s 79 proceedings.
On 15 August 2008 the parties and Docket Registrar compiled a single balance sheet in which the wife asserts the parties have assets worth approximately $4.3 million while the husband asserts they are $3.262 million. In addition the wife argues for add backs of $47,500 and the husband $72,500. Concerning superannuation assets the wife’s values total $453,000 and the husband $226,000. The wife asserts liabilities worth $1.223 million and the husband $808,000.
As has been apparent throughout these proceedings an important issue is the value of the parties’ interest in a professional practice, its associated entities and a self managed superannuation fund. To address this issue, pursuant to r 15.44 the parties appointed Mr S of D Chartered Accountants single expert to value M Gemmell Pty Ltd (MGPL), H Trust, H Street Property Partnership, Gemmell Properties Pty Ltd and Gemmell Superannuation Fund. Adopting a capitalisation of future maintainable earnings methodology with a capitalisation rate between 2 percent and 2.5 percent as at 30 June 2007 Mr S valued M Gemmell Pty Ltd at $581,189. Goodwill in the vicinity of $654,000 is MGPL’s most significant asset. As both parties propose the husband retains the business and it appeared unlikely to Mr S the business would be sold, he considered an asset based methodology inappropriate and rejected the use of “rules of thumb” as a theoretically flawed valuation metric.
For present purposes it is unnecessary to consider Mr S’s opinions concerning the other entities detailed above.
Following service of Mr S’s first report both parties submitted questions which resulted in additional reports from Mr S on 27 June 2008 and 12 December 2008. Concerning MGPL, summarised, the husband questioned Mr S’s use of only two years financial results for the company and suggested four years’ results provide a more representative calculation of annual gross fees and average profit. In his final report Mr S explained his rationale for in this case, using the smaller number of years. The husband raised questions concerning the wife’s debit loan account with the company and relevantly Mr S’s capitalisation rate and his rejection of a “rules of thumb” valuation method. Also whether a super profit method would be a preferable and more accurate methodology than the capitalisation of future maintainable earnings method which Mr S adopted. None of these questions and propositions resulted in Mr S changing his opinion.
The husband retained Mr B of B Pty Ltd to assess the market value of the professional practice. By the time Mr B undertook his valuation the financial statements for the year ended 30 June 2008 were available. When averaged across the 2006, 2007 and 2008 financial years, he calculates the average annual gross fees for the practice was $739,666 with the average real profit being $620,133. Mr B explained that when estimating the goodwill market value of professional practices, he adopts “traditional market goodwill valuation based on a percentage of annual gross fees more commonly referred to as the “rule of thumb” approach and a super profit method, as a supportive method. Regarding market sales evidence, Mr B summarised five sales of rural professional practices completed between 2005 and 2007. Of these, three were located in inland New South Wales, one on the NSW north coast and one on the NSW south coast. The wife’s solicitor pointed out that none of the transactions said to support market sales evidence and thus the applicable percentage of gross fees to determine goodwill appears to relate to the sale of a Newcastle professional practice or a practice in a comparable location. While Mr B says these sales “could be considerable comparable” the wife submits it is significant he does not say they are comparable. In any event, reliant upon the goodwill percentage of gross fees calculation from these sales, Mr B determines the husband’s professional practice has a goodwill value between $44,380 and $73,966.
Using the super profit valuation method, with a capitalisation rate of 1 to 1.5 percent Mr B concludes the market value of the practice falls within the range of $74,552 and $111,828. On the basis the husband as a contractor/employee would receive 65 percent of his gross fees (approximately $481,000) Mr B says the husband is annually approximately $140,000 better off conducting his own practice. This conclusion underpins his calculation of the practices’ after tax super profit and ultimately his opinion that whether by reference to market sales evidence, the traditional approach to the valuation of professional practice goodwill or the super profit method, the practice is worth $106,300.
Turning then to the application of the rules to the facts. On the face of it, there is a difference in the two valuer’s opinions in the vicinity of $500,000. Compared to the size of the asset pool and objectively this is a significant sum. The gravamen of the husband’s submission is that the court is faced with a genuine disagreement between two appropriately qualified experts concerning the appropriate valuation methodology. Each of the valuers asserts a substantial body of opinion which supports their preferred methodology and opinion. I agree with the husband’s submission that if Mr B’s evidence concerning market sales evidence and contractor/employee remuneration is accepted this evidence may be necessary for determination of the valuation issue. Sub-rule 2(a) is thus satisfied.
The husband’s submission concerning sub-rule 2(b) focuses on the single expert’s statement in his first report (at par E10.1) regarding the lack of information concerning actual sales of professional practices and (at par E11.2) where he says he is unaware of any “rules of thumb” valuations in the profession which have widespread application. Notwithstanding the uncertainty concerning the comparability of Mr B’s quoted sales the husband submits this is potentially relevant evidence not known to the single expert witness. In a similar vein, he submits Mr B has experience in buying and selling professional practices and thus brings direct market expertise to the case which knowledge is not apparent in the single expert witnesses’ report. When one has regard to the oft quoted principles concerning the purpose and nature of valuations contained in Spencer v The Commonwealth (1907) 5CLR 418; 14 ALR 253 I am satisfied that potentially this direct market evidence and expertise may be necessary for determining the valuation issue. Sub-rule (2)(b) is thus satisfied.
Having regard to these matters the applicant has satisfied the essential requirements in the rules and it is not necessary, therefore, to determine whether there is another special reason for allowing the husband to adduce evidence from Mr B.
The rule, however, is discretionary and notwithstanding my findings, it does not automatically follow that the husband should be granted leave. In Daniels v Walker (2001) WLF1382 Lord Woolf M.R. when considering whether permission should be given to instruct another expert, said:
In a case where there is a substantial sum involved, one starts, as I have indicated, from the position that, wherever possible, a joint report is obtained. If there is disagreement on that report, then there would be an issue as to whether to ask questions or whether to get your own expert’s report. If questions do not resolve the question and a party, or both parties, obtain their own expert’s report, then that will result in a decision having to be reached as to what evidence should be called. That decision should not be taken until there has been a meeting between the experts involved. It may be that agreement could then be reached; it may be that agreement is reached as a result of asking the appropriate questions. It is only as a last resort that you accept that it is necessary for oral evidence be given before the experts before the court. The cross examination of expert witnesses at the hearing, even in a substantial case, can be very expensive.
With these comments Latham J agreed. The rules with which their Lordships and I are concerned differ slightly but share a similar purpose. Neither court’s rules’ requires that a party convenes a conference of experts as a procedural precondition to an application for permission to adduce evidence from another expert. The rationale for imposing such a step as a matter of discretion is as Lord Woolf’s remarks demonstrate apparent. A conference of experts potentially will narrow the issues and significantly reduce the amount of trial time. This achieves a lessening of costs for the parties as well as courts. In the event there remain outstanding issues these can then be considered in the context of an application such as this.
Rule 15.64(b) enables a party to convene a conference with a single expert witness prior to the hearing for the purpose of clarifying the single expert’s report. This includes, as the note to sub-rule 1(4) reveals, enabling arrangements for a conference which includes the attendance of another expert. If the parties are unable to agree upon the arrangements for the conference, by sub-rule 7: “The Court, on the application by a party, may order that a conference be held in accordance in any conditions the Court determines.” The husband has not sought the wife’s consent to convene r 15.64(b) conference nor, the court’s leave out of time to do so. If the purpose of Pt 15.5 as described in r 15.42 is to be achieved, then consistent with Lord Woolf’s remarks before pressing his application for permission to adduce evidence from Mr B, the husband ought to have convened an r 15.64(b) conference between Mr S and Mr B. Fortunately there is sufficient time prior to the scheduled hearing for this to occur. If the husband decides to take this course he might consider whether Mr B is asked to provide more particulars of the sales mentioned in his report. Also that he addresses the other matters mentioned on the wife’s behalf during addresses. This additional information may well assist the expert’s deliberations at any future conference.
Having regard to the whole of the circumstances the husband’s application is premature and will be dismissed. If, having convened the conference of experts, whether by agreement or pursuant to an order, the husband, if he considers it appropriate, may again seek permission pursuant to r 15.49(2) to call evidence from Mr B.
For these reasons the husband’s Application in a Case filed 14 October 2008 is dismissed.

I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Ryan

Associate:

Date: 2 February 2009