Giacci v Giacci
[2006] WASC 239 (S)
•3 AUGUST 2006
| JURISDICTION | : | SUPREME COURT OF WESTERN AUSTRALIA IN CHAMBERS |
| CITATION | : | GIACCI -v- GIACCI & ANOR [2006] WASC 239 (S) |
| CORAM | : MARTIN CJ | ||
| HEARD | : 3 AUGUST 2006 | ||
| DELIVERED | : 3 AUGUST 2006 | ||
| SUPPLEMENTARY | |||
| DECISION | : 7 NOVEMBER 2006 | ||
| FILE NO/S |
| ||
| BETWEEN | : ANTONIO CARMINO GIACCI |
Plaintiff
AND
MARIO MICHELE GIACCI
First Defendant
PETER LOUIS GIACCI
Second Defendant
Catchwords:
Corporations law - Supplementary decision to reasons published 3 August 2006 relating to s 232 and s 233 quasi partnership broken down - Where defendants able to buy out plaintiff's shareholding in company - Further evidence adduced on market value - Delay in the defendants' purchase - Settlement occuring later than the Judge anticipated when earlier reasons published - Lost opportunity to earn or receive a dividend by reason of settlement occurring less than halfway through the financial year - Terms of settlement - Turns on own facts
[2006] WASC 239 (S)
Legislation:
Nil
Result:
The defendants purchase the plaintiff's shareholding on certain terms
The parties file written submissions as to costs within 21 days
Liberty to apply in respect of the calculation of interest
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr M L Bennett |
| First Defendant | : | Mr R E Keen |
| Second Defendant | : | Mr R E Keen |
Solicitors:
| Plaintiff | : | Lavan Legal |
| First Defendant | : | Taylor Smart |
| Second Defendant | : | Taylor Smart |
Case(s) referred to in judgment(s):
Nil
[2006] WASC 239 (S)
MARTIN CJ: The question before me today concerns whether, and if so, to what extent, the orders I foreshadowed when pronouncing my reasons for decision in this matter generally on 3 August 2006 should be modified; first, to allow for the delay in settlement of the purchase of the plaintiff's shares beyond that expected at the time my reasons were pronounced; and second, to compensate for the opportunity denied to the plaintiff to earn or receive a dividend in Giacci Holdings Pty Ltd ("the Company") in which he holds shares by reason of settlement occurring a little less than halfway through the financial year during which the plaintiff has been a shareholder.
2 Settlement will now take place significantly later than anticipated at
the time I pronounced my reasons on 3 August 2006. It will occur, pursuant to orders that I will shortly pronounce, on approximately 22 November 2006. The reasons for the delay in settlement have been addressed in various affidavits and documents presented at various hearings before me since 3 August 2006 and do not need to be detailed here, other than perhaps by the general description that they were largely occasioned by the steps which it was necessary for the defendants to take in order to obtain finance to purchase the plaintiff's shares.
3 The question which now arises is whether any allowance should be
made for additional compensation to the plaintiff to reflect that delay in settlement and the opportunity denied to the plaintiff for receipt of dividend and, if so, in what terms. The plaintiff says that compensation should be paid and it should be paid by reference to either budgeted profits or actual profits assessed between 1 July 2006 and the date of settlement.
4 The defendants, on the other hand, say that the compensation should
be provided at the rate of interest due on court judgments, calculated from 23 August 2006 up until the date of settlement. In a minute produced to me last week the defendants proposed that interest should run from 1 July 2006, but now resile from that position and assert that interest should only be paid from 23 August 2006.
5 Both sides are agreed that when compensation is assessed, credit
should be given for interest which has been paid by the defendants at the
rate of 6 per cent since 23 August 2006.6 When I gave my reasons for decision on 3 August 2006, and in
relation to the question of interest, which was one of the issues ventilated
before me in the substantive hearing, I said this at [105] - [107]:
[2006] WASC 239 (S)
"I turn then to the question of interest. Although the price has been assessed by reference to the accounts as at 30 November 2005 and also by reference to a balance date of 21 December 2005, the plaintiff remains the owner of the shares in Giacci Holdings to this day. He will remain the owner of those shares until settlement with all the rights and obligations of ownership. It seems to me, therefore, that there is no basis in logic to assess the price as if there had been a transfer in November or December of last year.
In addition, no evidence has been led as to what rights and obligations have accrued since November or December of last year. For example, no evidence has been led in relation to dividends, payment of salaries or other drawings from the company and so forth. Nor is there any evidence which would enable me to infer that the value of the company is higher today than as would have been assessed as at either November or December 2005.
To the contrary, the evidence was that at that date the company was trading at a loss which, if continuing, as to which I have no way of knowing, would have reduced the company's capital base between then and now. So for those reasons I do not think it is appropriate to make any allowance for interest."
7 The dearth of evidence as to the position of the Company, to which I
then referred, has been augmented by affidavits filed since then and to which I will now refer. The first in point of time was the affidavit of Antonio Carmino Giacci sworn 11 October 2006. In par 2 of that affidavit Mr Giacci refers to discovered documents which show a consolidated budget for the Giacci Group ("the Group") forecasting a net profit for the year ended 30 June 2007 of $5,438,535.
8 Annexed to Mr Giacci's affidavit as ACG1 is a discovered document
being a comparison of budget versus actual figures for the Group for the month of July 2006. On the figures in that document it was recorded that an actual profit of $285,555 had been achieved as against a budgeted profit of $271,279.
9 Also attached to Mr Giacci's affidavit as ACGZ, are documents
prepared by the Company, apparently for submission to the bank, which show sensitivity analyses of the budget forecasts. On one of those analyses, described as the worst case scenario, the net profit for the year
[2006] WASC 239 (S)
was estimated at $3,396,238. On another of the scenarios, described as the best case scenario, net profit for the year was estimated at $7,355,228.
10 An affidavit of Philip John Patterson sworn 13 October 2006 was
also read subject to objection. There are a number of portions of the affidavit that I think are relevant. I begin with par 10 where Mr Patterson deposes that he has been advised by the second defendant and believes that the plaintiff has at all times since the interim injunction was lifted by Master Sanderson on 21 December 2005 been receiving his entitlements as a director. The entitlements the plaintiff has received are identical to the entitlements being received by the first and second defendants.
11 Mr Patterson goes on to depose that since 1 July 2006 the plaintiff
has received the following entitlements: (1) $29,030 by way of directors' entitlements; (2) the use of a company car; (3) the use of a company mobile telephone; (4) a monthly motor vehicle allowance. Mr Patterson also deposes that since 23 August 2006 the plaintiff has also been receiving the weekly sum of $9230, which represents interest at the rate of 6 per cent on the sum of $8 million. That sum is, of course, the amount which I indicated would be the purchase price.
12 Also attached to Mr Patterson's affidavit of 13 October 2006, as
PJP1, is a comparison of the budget versus actual figures for the Group for the year ended 30 June 2006. In that document budgeted profit for that year is shown at $3,577,561, whereas the actual results for that year were a loss of $1,145,331. There are other documents which show a somewhat different projected profit for the year ended 30 June 2006, but of the same order of magnitude. So it is clear that at least for that year returns fell very substantially short of budget.
13 Also attached to that affidavit of Mr Patterson, as PJP3, was a letter
from Mr Fordham, a director of Nautilus Financial Concepts, dated 12 October 2006. Objection was taken to the receipt of that letter when the affidavit was read and I ruled that I would treat the letter as submission because I was not persuaded that it had evidentiary value. In par 4 of that letter Mr Fordham observes:
"Our understanding is that cash rates at the present are approximately 6% which would indicate that compensation of 6% is reasonable."
14 I digress to observe that I remain of the view that that is not
admissible evidence as to a commercial rate of interest. The expertise of the witness is not established, nor is the factual basis upon which he
[2006] WASC 239 (S)
expresses that assertion identified by the evidence, so I will treat that only
as submission.15 Also attached to Mr Patterson's affidavit, as PJP4, is a printout giving
a rather different version of the returns for the month of July 2006. In that printout it is suggested that budgeted profit for that month was $216,373 whereas the actual result for that month was a loss of $74,380. I pointed out at a previous hearing that there was no explanation on the face of the affidavit for the difference between those figures and the figures in the other document to which I have referred.
A further affidavit was provided by Mr Patterson sworn 16 October 2006 in which he deposed at par 4 that the actual figures for July 2006 showed a loss of $74,380, which is the figure to which I previously referred. However, again that affidavit does not condescend to any significant explanation of the difference between those two figures other than to say in par 5 that Mr Patterson had been advised by Mr Fordham that the major reason for the change in results was due to substantial subcontractor payments not being captured in the draft July numbers. He went on to say that he had been advised by Mr Fordham that the review of the draft July accounts was undertaken by Taylor Woodings as part of the current internal audit on behalf of BankWest.
17 An affidavit of John Patrick Fordham, sworn 2 November 2006, has
also been provided. In par 3 of that affidavit Mr Fordham deposes that the actual figures for July 2006 in fact show a profit of $31,817 against a budgeted profit of $271,279. Mr Fordham goes on to explain that part of the reason for the discrepancy in the earlier figures to which I have referred is the apparent confusion between the Group budget figures compared to the Giacci Bros consolidated budget figures. He then goes on to depose that the actual figures for July 2006 showing a profit of $31,817 are different from the results in the draft management accounts; again, he says, due to substantial subcontractor payments not being included in the draft July numbers.
18 At par 5 Mr Fordham deposes to the historical position of the Group
and deposes that the budget for the year ended 30 June 2006 was for a net profit after tax of just over $4,027,000. Again I observe that that is somewhat different to the figure of $3,577,561 contained in the document to which I earlier referred. I would infer that the explanation for that might well be the difference between the budget figure for Giacci Bros Pty Ltd as compared to the Group. It does not, however, alter the general
[2006] WASC 239 (S)
conclusion which I drew from that document which is to the effect that the
previous budget performance of the Group has not been predictable.19 Mr Fordham goes on to depose in par 5 to the actual result for the
year ended 30 June 2006, a loss of $1,145,331, which does coincide with the figure to which I referred to earlier. Mr Fordham deposes in par 9 of his affidavit to the September management accounts for the Group showing a profit of $240,596 for the month and a profit of $773,673 for the three-month period ending 30 September 2006. He asserts that figure is $29,820 below budget.
20 There is perhaps a question mark about that observation because if
one adds the figures in the budget period for those three months a somewhat different number would be identified; but at all events it is sufficient for me to observe that at least in those first three months of the year, the actual performance is in roughly the same area as the budget performance, although there have been substantial monthly variations.
21 On that subject I refer to annexure JPF8 to Mr Fordham's affidavit
which shows a detailed breakdown of the budget, income and expenditure for the month of July 2006 as compared to actual. Consideration of that document shows quite substantial variances between budget and actual, particularly in the area of costs.
22 For example, in the case of the hire of subcontractors, a budget
variance of $300,330 is shown; in relation to plant costs - tyres, there is a variance of $80,983; in relation to fuel, there is a variance of $59,386; in relation to raw materials, there is a variance of $71,500; in relation to depreciation, there is a variance of $145,603 and in relation to salaries and wages for staff, a variance of $63,130 is shown.
23 The point I draw from that document, and which is evident in the
documents that have been produced, is that there is inevitably a degree of volatility, variability and unpredictability in the returns, particularly if figures are taken on a monthly basis.
24 The longer the period of time, the more reliable the results. As we
have seen, three months provides a more reliable picture of the performance of the company than one month; but three months obviously provides a less reliable picture of the performance of the company than would a 12-month analysis. Of course, we do not have the benefit of a 12-month analysis because settlement will take place prior to that period expiring.
[2006] WASC 239 (S)
25 So the conclusions that I draw from that evidence are as follows:
first, it is clear that the company traded at a very substantial loss over the financial year to the end of June 2006; notwithstanding that a substantial profit had been predicted for that year. Second, substantial profit is predicted for the coming year and is, at this stage, being achieved.
26 However, and third, it cannot be said with any certainty whether a
profit will emerge, when it will emerge or what the amount will be; but on the information presently available, on the balance of probabilities, it is more likely than not that a profit will be earned in an amount of many millions of dollars. However, the risk of whether or not that profit will be earned will be taken by the defendants pursuant to the orders that I will in due course pronounce.
27 The fourth conclusion that I draw is that the extent to which profits
would result or will result in dividends payable to shareholders is a matter for the board of the Company; a board which is, of course, controlled by the defendants, and has been so controlled at all material times. In the exercise of their power to declare a dividend, the defendants as directors may legitimately take account of the need to restore capital to the company as a result of past losses and the need to invest further capital in the company by way of plant acquisitions.
28 My fifth conclusion (although it may be an observation) is that
rightly or wrongly, on the basis of the evidence then available and for the reasons given by Mr Calder in evidence, which were not contradicted and which I accepted, the price which I set for the purchase of the plaintiff's shareholding was fixed by reference to the asset backing of the Company and not by reference to its ongoing profits.
29 The next observation I make is that the plaintiff has continued to
enjoy at least some of the entitlements of shareholding and directorship during the period of delay. Conversely, of course, he has taken the risk during that period of whether settlement would occur and he has had obligations as a director to perform.
30 I also observe that interest has been paid at the rate of 6 per cent
since 23 August 2006; being the rate payable on judgments entered by the Court. In the reasons which I delivered on 3 August 2006 I formed the view, which I took to be consistent with the position of each of the parties, that the price at which I should arrive was a price which reflected market value. I took that to be an assessment of the price the hypothetical vendor
[2006] WASC 239 (S)
and purchaser would have arrived at had they negotiated a sale of the
plaintiff's shareholding in the company.31 In my opinion, I should adopt the same approach to the resolution of
this question and therefore ask myself in the circumstances which have now transpired: what terms would the hypothetical vendor and purchaser have negotiated in order to make provision for significant delay between the time at which the purchase price was agreed and the time at which settlement would take place; during which time, the plaintiff would remain a shareholder with all the rights and obligations which accrued from that position, be at risk of whether or not settlement would in fact take place, and, by reason of settlement occurring prior to the end of the financial year, be deprived of the opportunity to receive any declaration of dividend in respect of his shareholding during that period?
32 In my view, the hypothetical parties to such a negotiation would
bring to account the various uncertainties to which I have referred. They would bring to account the likelihood that the figures over a short period such as three or four months would provide an unreliable guide to the profitability of the company over a longer period and would also bring to account the fact that the declaration of dividend in any company is always uncertain and is under the control of the directors.
33 The conclusion that I draw from those considerations is that the
parties to the hypothetical negotiation would have endeavoured to deal with that uncertainty and the allocation of risks as between the vendor plaintiff on the one hand and the defendant purchasers on the other by providing for compensation to the vendor plaintiff in the form of interest to be paid on the purchase price, but at a commercial rate reflecting the risks being taken and the prospect of profit foregone. I do not think that they would simply have adopted the rate specified by the court on default judgments.
34 As to the time from which that rate would run, because the
compensation would reflect in substantial part the foregone opportunity of the plaintiff to receive a dividend in respect of shares held by him during a period over which, on the balance of probabilities, profits will be earned; it seems to me, that the hypothetical vendor and purchaser would have specified that the compensation to be paid under their agreement would reflect that which was foregone; namely, the value of the shareholding during a profit-earning period.
[2006] WASC 239 (S)
35 I therefore conclude that they would have specified in their
agreement that compensation would be payable to the plaintiff, to reflect delay in settlement and the foregone opportunity to derive dividend, at a commercial rate of interest, to be derived from analogous circumstances, starting from 1 July 2006.
36 The difficulty that I have in giving effect to that conclusion is that
there is simply no evidence before me as to what that commercial rate would be. I suggested to the parties in argument that at least one guide to such a rate would be the Joint Form of General Conditions in common use in the marketplace in relation to contracts for the sale of land and, if the parties would like me to, I would be happy to apply that rate to the conclusions that I have just derived. Alternatively, I will give the parties the opportunity to put on further evidence as to what they suggest a commercial rate would be.
As parties have agreed that an appropriate commercial rate of interest is 9 per cent, the orders I propose to make are:
1. That the defendants do purchase the plaintiff's shareholding in the Company and Giacci Bros Pty Ltd on the following terms:
1.1
Settlement of the sale of the shareholding shall be effected on or before 2 November 2006 at the offices of the plaintiff's solicitors;
1.2
The defendants' solicitors shall give the plaintiff's solicitors two clear business days notice in writing of any date (other than 22 November 2006) of the defendants' proposed settlement and endeavour to agree a date and time convenient to the plaintiff's solicitors and the defendants' solicitors for settlement. Failing agreement, settlement shall take place at 2 pm on 22 November 2006 at the offices of the plaintiff's solicitors;
1.3
The purchase price shall be the sum of $8 million. The purchase price shall be increased by the additional sum calculated by application of the formula set out herein, such sum to compensate to the plaintiff; first, for delay occasioned by the delay in settlement between the hearing of the matter and settlement pursuant to this order; and second, for any right that the plaintiff would have had (but for
[2006] WASC 239 (S)
the sale of his shares in the company Giacci Bros Pty Ltd) to receive any dividend or other payment of or on account of profits of the company Giacci Bros Pty Ltd in the financial year 2006/2007; namely:
(X + Y) - Z
Where:
X = $8 million;
Y = interest on the initial sum of $8 million at the rate of 9 per cent per annum calculated on a daily basis, such balance to be adjusted to reflect the receipt from time to time of payments made by the defendants on account of interest as and from 1 July 2006 up to and including the date of settlement; and
Z = such clear funds as have been paid by the defendants to the plaintiff pursuant to the defendants' interlocutory undertaking to pay interest on the sum of $8 million up to the date of settlement;
1.4
At settlement the purchase price should be paid by bank cheque in exchange for transfers of the shareholding:
1.4.1 In the Company; and 1.4.2 In Giacci Bros Pty Ltd signed by the plaintiff as trustee of the AC Giacci Family Trust in favour of Mario Michelle Giacci as trustee of the MM Giacci Family Trust and Peter Louis Giacci as trustee of the PL Giacci Family Trust as tenants in common in equal shares;
1.5
At settlement the defendants shall resolve to accept such transfer of the shareholding notwithstanding the pre-emptive rights in Article 19 of the Constitution of the Company and any similar rights in the Constitution of Giacci Bros Pty Ltd;
1.6
At settlement the plaintiff shall provide his signed resignation as a director of the Company and the other companies in the Group set out below and a
[2006] WASC 239 (S)
deed signed by him forever relinquishing his rights under Article 62 of the Constitution of the Company and any other similar rights in the other companies in the Group. The companies referred to are: Giacci Bros Pty Ltd, Giacci Concrete Pty Ltd, Giacci Contracting Pty Ltd, Giacci Contracting Pty Ltd, Giacci Management Services Pty Ltd, Giacci Group Operations Pty Ltd, Lido Limestone Pty Ltd and Giacci Port Services Pty Ltd;
2. That the plaintiff and the defendants file written submissions as to the appropriate costs order to be made in respect of this matter contended by each of them, such submissions to be filed and served within 21 days from the date hereof;
3. That there be liberty to apply, in particular to vary the direction that I have made with respect to the calculation of interest.
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