J Cannane Pty Ltd (in liq) & Anor v Cannane D.M. & Anor Re Cannane J.V. Ex parte Official Trustee in Bankruptcy - [1995] FCA 665

CATCHWORDS

CORPORATIONS - shares - valuation - private family company - shelf company - no assets - substantial liabilities - proposed vehicle for expected profitable venture - effect of proposed transactions on value of company and shares - sale of two issued shares - whether for valuable consideration or for nominal value - hypothetical willing but not anxious vendor and purchaser - valuation assumptions - whether permissible to assume warranties in valuation exercise that vendors will carry the transaction through to completion - prospects of proposal being completed - contingencies.

BANKRUPTCY - Bankruptcy Act 1966 (Cth) ss 120, 121, Corporations Law s 565 - sale of shares in private company - whether in good faith - whether for valuable consideration - whether intent to defraud creditors.

VALUATION - shares in private company.

Bankruptcy Act 1966 (Cth) ss 6, 120, 121

Corporations Law s 565

Re Abbot [1983] Ch 45

Barton v Official Receiver (1986) 161 CLR 75; (1984) 4 FCR 380

PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515

Spencer v The Commonwealth of Australia (1907) 5 CLR 418

Abrahams v Federal Commissioner of Taxation (1945) 70 CLR 23

McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1

The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

Short v Treasury Commissioners [1948] AC 534

Official Trustee v Marchiori (1983) 69 FLR 290

Lonergan, "The Valuation of Business, Shares and Other Equity", 2nd edition (1994)

J CANNANE PTY LIMITED (IN LIQUIDATION) & ANOR v
DENISE MARY CANNANE & ANOR
No NG 3365 of 1993

Re: JOHN VINCENT CANNANE
Ex parte: OFFICIAL TRUSTEE IN BANKRUPTCY
No NB 1361 of 1993

Tamberlin J
Sydney
25 August 1995

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )    No. NG 3365 of 1993
GENERAL DIVISION                 )

BETWEEN:          J CANNANE PTY LIMITED
  (IN LIQUIDATION)
  (ACN 000 807 723)
  First Applicant

JOHN VOURIS
  (AS LIQUIDATOR OF J CANNANE
  PTY LIMITED (IN
  LIQUIDATION))
  Second Applicant

AND: DENISE MARY CANNANE
First Respondent

WISBECK PTY LIMITED
(ACN 001 344 109)
Second Respondent

IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION,                )    No. NB 1361 of 1993
BANKRUPTCY DISTRICT              )
OF THE STATE OF NEW SOUTH WALES. )

RE: JOHN VINCENT CANNANE
The Bankrupt

EX PARTE:         OFFICIAL TRUSTEE IN
  BANKRUPTCY
  Applicant

ANDREW VINCENT CANNANE
  First Respondent
WISBECK PTY LTD
  (ACN 001 344 109)
  Second Respondent

CORAM:       TAMBERLIN J
PLACE:       SYDNEY
DATED:       25 AUGUST 1995

REASONS FOR JUDGMENT

Nature of the Proceeding

These are two related proceedings which give rise to a common question as to the valuation of two $1 shares in Wisbeck Pty

Ltd ("Wisbeck"), which were transferred by instruments of transfer dated 15 May 1991, by Mr J V Cannane ("JVC") as to one share and J Cannane Pty Limited ("JCPL") as to the other to Andrew Cannane and Denise Cannane respectively. Mrs Cannane is the wife of JVC and Andrew Cannane is the son of JVC and Denise Cannane.

The shares were transferred for a stated consideration of $1 in each case.

JVC was made bankrupt on 28 May 1993 and on 8 June 1993 JCPL was wound up by order of the Supreme Court of New South Wales.

These proceedings are brought by the trustee of JVC's bankrupt estate and by the liquidator of JCPL respectively, to set aside the share transfers under either s 120 or s 121 of the Bankruptcy Act 1966 (Cth) ("the Act"), which are incorporated by reference into the Corporations Law ("the Law") by s 565 of the Law.

A declaration is sought that the transfers of each of the shares was a settlement of property not being a settlement made in favour of a purchaser in good faith and for valuable consideration and as such were void as against the applicants.

A declaration is also sought that the transfers of each of the shares was a disposition of property with intent to defraud creditors and as such were void as against the applicants.

Consequential relief is sought to restrain disposition of shares in the issued capital of Wisbeck and rectification of the register of members to record the Official Trustee in Bankruptcy and JCPL respectively as registered owners of the issued shares so transferred.

The principal issue for consideration is whether the shares were transferred for "valuable consideration". In other words, whether the shares had any substantial value over and above the $1 consideration referred to in the transfers.

The applicants' case is that the shares did have a value which was more than nominal or insignificant and accordingly the transfers were not made for valuable consideration.

In response, the submission of the respondents on this point is that the shares had no more than a nominal or possibly negative value and that the transfer was made at a price equivalent to the value of the shares and therefore for valuable consideration.

Relevant Statutory Provisions

The relevant provisions of the Act provide:

"120. (1)A settlement of property ... not being:

(a)A settlement made ... in favour of a purchaser ... in good faith and for valuable consideration; ...
is, if the settlor becomes a bankrupt and the settlement came into operation ... within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy........ ..

(8)In this section, "settlement of property" includes any disposition of property.

(1)Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

(3)In this section, "disposition of property" includes a mortgage of property or a charge on or in respect of property." (Emphasis added)

Section 6 of the Act provides that a reference to an intent to defraud creditors includes an intent to defraud or to defeat or delay any one or more of the creditors.

In May 1991 s 565 of the Law provided:

"565. (1)A settlement....or transfer of property ... by a company that, if it had been made ... by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator."

It is common ground in the present case that the transfers occurred within two years of the commencement of the bankruptcy.

Parties and Entities
Wisbeck Pty Limited ("Wisbeck")

This was the Cannane family company. The shareholders until 15 May 1991 were JCPL and JVC. As from that date the shareholders became Denise Cannane and Andrew Cannane, as a result of the share transfers. A third share was allotted and issued to Richard Cannane, a son of Denise Cannane and JVC and the brother of Andrew Cannane.

Ausminco Holdings Limited ("Ausminco")

This was a company which engaged in the business of real estate, share investment and commodity trading including local and overseas steel trading. The company had an interest in the coal industry by way of its shareholding in Carbon Consulting International Pty Limited ("CCI"). It was the sole shareholder of Commercial and Domestic Finance Limited. At all material times it owned 94.92% of the issued capital of CCI.

Commercial and Domestic Finance Limited ("CDF")

This was a wholly owned subsidiary of Ausminco and was the holder of 5.08% of the issued shares of CCI.

Carbon Consulting International Pty Limited ("CCI")

This was a wholly owned subsidiary of Ausminco and CDF. Its role was to provide technical and testing services to the coal industry. It is now a wholly owned subsidiary of CCI Holdings Limited ("CCIH"), which was formerly Mendolsohn Corporation Limited.

Mendolsohn Corporation Limited ("Mendolsohn") (later known as CCIH). This was the final purchaser of shares in CCI. It changed its name to CCI Holdings Ltd on 2 May 1991.

John Cannane ("JVC") is the husband of Denise Cannane and the father of Andrew and Richard Cannane.

Denise Cannane is the wife of John Cannane and the mother of Andrew and Richard Cannane.

J Cannane Pty Ltd ("JCPL") is the principal Cannane family company. At all material times the shareholders and directors have been JVC and Denise Cannane. It was wound up on 8 June 1993.

Geoffrey Lambert ("Lambert") at all relevant times was the Managing Director of Mendolsohn.

Kevin Aitken ("Aitken") was JVC's co-director of Ausminco, CCI and CDF.

John Wallis ("Wallis") was a director of CCI.

Denis Wood ("Wood") was a director of CCI.

Events up to the Transfers dated 15 May 1991

JVC had been a director of Ausminco, CCI and CDF since early 1978.

On 21 July 1989, a finance facility was entered into between the State Bank of New South Wales ("State Bank") and Barclays Bank Australia Ltd ("Barclays Bank") on the one hand, and Ausminco, whereby the banks agreed to lend $22 million to Ausminco. The loan was guaranteed by JVC and JCPL, among others.

In about June 1990 JVC and Aitken, then directors of Ausminco, which owned about 95% of the shares in CCI, were considering the sale of the CCI shares out of the ownership of Ausminco.

The purpose was to sell the shares in CCI to a listed public company and to arrange for Ausminco to be paid for those shares by the allotment of shares in the public company. It was envisaged that the allotment would give Ausminco a majority interest in the public company.

The idea was that at the end of the series of contemplated transactions Ausminco would own a majority interest in a public company which in turn would own all the shares in CCI. As it turned out Mendolsohn was the public company contemplated to acquire the shares.

It was proposed that as result of these transactions, CCI would achieve what is commonly referred to as "a back door listing".

These proposals were still under discussion when on 2 November 1990, the banks appointed Kevin Shirlaw and John Smith as Receivers and Managers of Ausminco, and CDF. This introduced new complications into the transactions because it became necessary to deal with the new parties who were in control of Ausminco.

On 22 November 1990 Lambert of Mendolsohn wrote to the receiver of Ausminco to confirm that Mendolsohn had an agreement with Ausminco and CDF to buy all of the issued capital of CCI. The consideration was said to be $4 million to be paid wholly in shares of 20 cents par in the company. The basis of the agreement was expressed to be as follows:

"(1)Mendolsohn (MCL) purchases all the shares in CCI for an issue of 20,000,000 shares of 20 cents each.

(2)On change in control of MCL CCI will cause MCL to repay a loan of $47,779 to Fayara Securities Ltd and G E Lambert ...

(3)CCI will not pay a proposed dividend of $300,000 prior to settlement.

(4)The costs incurred in the transaction, other than disbursements paid progressively, are to be paid immediately shareholder approval to the deal is obtained."

Lambert stated that it was his understanding that the receiver would prefer cash for the business. He stated that subject to finalisation of funding, Mendolsohn would purchase the equity in CCI and the debt due to Ausminco from CCI (being a sum of approximately $433,000) for a total of $2 million cash as an alternative to the deal fully set out (above) in the letter.

On 5 December 1990, JCPL applied for a $2 million facility from the Bank of Singapore ("BOS") to enable it to purchase CCI from "the liquidator" of Ausminco, which clearly should be a reference to the receiver. The total facility required was $2.850 million. $2 million of this was to be used to purchase CCI. The $850,000 above the $2 million purchase price was to refinance the existing mortgages on property owned by Cannane family interests.

By letter of 6 December 1990 Lambert notified Mr Smith, the receiver, that there was an agreement to acquire CCI as set out in the letter of 22 November 1990. He stated his understanding to be that Mr Smith had been advised by the directors of CCI in early November that the sale had been agreed. He expressed concern that CCI was actively being offered around the market by the receiver.

On 12 December 1990 JVC and Aitken, who had previously been directors of CCI, were removed from office as directors in that company and there were thereafter only two directors, namely Messrs Wallis and Wood. In a letter of 10 December 1990 to the Stock Exchange, Wallis made it clear that the statement of directors of CCI which appeared in a public information memorandum regarding the acquisition of the company by Mendolsohn was signed without the knowledge or consent of Messrs Wallis and Wood. It was put to JVC in cross-examination that the statement in the information memorandum was the reason for his removal as a director, but this was denied.

On 28 December 1990, Lambert wrote to the Manager of the Stock Exchange stating that, at an extraordinary meeting of shareholders held on that date, a resolution was passed that subject to the completion of the acquisition by Mendolsohn of all of the issued shares in the capital of CCI, and the issue and allotment of 20 million shares in the capital of Mendolsohn (or such lesser number of shares of 20 cents each as would equate to the actual consideration paid to the vendors, or interests associated with the vendors) of all of the issued shares in the capital of CCI, and subject to the passing of all other resolutions set out in the Notice
convening the meeting, the name of Mendolsohn be changed to CCI Holdings Limited.

On 22 January 1991 Mendolsohn made a cash offer to the Receiver and Manager of Ausminco proposing $1.1 million for the shares in CCI plus $433,000 in repayment of the net inter-company loans between CCI and Ausminco. The total consideration was thus $1.533 million.

About 5 February 1991 JCPL made an application to BOS seeking a $1.3 million loan to enable it to purchase CCI from the Receiver and Manager of Ausminco. That company also sought a further loan of $900,000 to refinance mortgages on residential premises at 26 Burrawong Avenue, Clifton Gardens.

On 22 February 1991, a Notice of Demand was served on behalf of the State Bank and Barclays Bank on JVC and JCPL seeking payment of $6,591,284.61.

On 26 February 1991, Lambert wrote to the Receiver of Ausminco, offering a cash alternative for the purchase of all the issued shares in the capital of CCI and the net indebtedness of CCI to Ausminco for $1.2 million cash.

On 14 March 1991, Lambert sent an amended offer to the Receiver for a total consideration of $1.310 million to be paid in cash on settlement.

On 27 March 1991 Mallesons Stephen Jaques ("Mallesons") on behalf of the Receivers of Ausminco wrote to the solicitors for Mendolsohn regarding the proposed share purchase and enclosed a draft agreement. The price set out in the draft agreement was $1.310 million. The vendors were Ausminco and CDF and the purchaser was Mendolsohn. On completion the vendors agreed to deliver executed transfers in favour of the purchaser and also to deliver to Mendolsohn an executed set off and release agreement between CCI and Ausminco, whereby the companies agreed to set off their mutual debts of $200,000 and $633,000. Ausminco was to release CCI from its net debt of $433,000. Mendolsohn was to pay Ausminco and CCI on completion the purchase price for the shares by bank cheque. The total number of shares to be sold was 1,094,592 with 55,556 shares being sold by CDF and the balance by Ausminco.

On 2 April 1991 JVC wrote to his accountant, Mr Hopper of Nygh Hopper and Partners. So far as relevant the letter reads:

"... I am near to concluding the deal to buy CCI and would like to bounce a few ideas of (sic) you....

For the purchase of CCI my preferred position would be to acquire the shares in Denise's name or company controlled by her. My thoughts are:

A.As Wisbeck P/L has no real purpose in life, and it's (sic) only asset is a few shares in Keycorp and a $82,000 liability to J Cannane P/L, we could sell/transfer the shareholding to Denise and my son. This could then be the vehicle to buy the shares in CCI. It would save setting up a new company. Alternatively I could put the CCI shares into Denise's name, however there is (sic) tax problems with dividends being assessable at top personal rate.

B.Assuming Wisbeck purchases shares in CCI I would propose J. Cannane P/L would charge a management fee for managing the investment. This would flow (sic) income from Wisbeck and utilise J. Cannane P/L tax losses.

C.As Wisbeck has no funds I would propose J. Cannane P/L would lend the funds to Wisbeck.

D.The acquisition transaction should flow as follows

1.Wisbeck borrows from J. Cannane P/L - $1,333,000.

2.Wisbeck purchases 10 Million [M]endolsohn (to be renamed CCI Holdings) shares of 20 cents (par) at discounted price 7.01 cents - $701,000. Wisbeck lends Mendolsohn $632,000.

Mendolsohn will be raising $1.5 Million through a share issue. Of these funds Wisbeck loan will be repayed (sic).

F.The shares issue reduces Wisbeck Holdings in Mendelsohn (sic) from 75% to 48% with a theoretical (par) value of $2.0 M.

G.Shortly after acquiring CCI, Mendolsohn will pay a $300,000 dividend of which [illegible] will flow to Wisbeck. I would see the following effect on the Wisbeck P/L.

30 June 1991

Dividend CCI $225,000

Success Fee - J.C.P/L (200,000)

Management Fee - J.C. P/L (25,000)
Interest J.C. P/L (66,000)

Loss for year(66,000)

C/F Losses 1990 (69,000)

Loss Carried Forward (135,000)

I would appreciate you (sic) thoughts on these issues and would like to discuss them with you over the next week....."

The mention of Wisbeck in this letter from JVC to his accountant is the first time that this company had been referred to in the history of this matter.

By letter dated 9 April 1991, the solicitors for the Receivers sent a letter to the solicitors for Mendolsohn, enclosing an amended draft agreement reflecting their then instructions. The purchase price was expressed to be $877,000 in lieu of $1.310 million. The purchase price was to be paid on completion. This included a promise to pay Ausminco the net indebtedness of $433,000. Again the payment was to be by bank cheque on completion. The purchase price of $877,000 was to be apportioned between Ausminco and CDF in the sums of $832,488 and $44,512 respectively.

On 10 April 1991 further Notices of Demand were served on JCPL and JVC for $6,752,044.26. It was common ground that neither JCPL nor JVC had any ability to repay this sum.

On 17 April 1991 BOS approved a cash advance to Wisbeck for funds to purchase CCI shares. The amount of the loan was $2.2 million for the purpose of purchasing a 100% shareholding in CCI from the liquidator (meaning the receiver) of Ausminco in the sum of $1.3 million and included refinancing existing first and second mortgages on property at Clifton Gardens in the sum of $900,000. The internal memorandum of BOS of that date, stated that:

"Following discussions with his taxation advisors Cannane has requested a change in the structure of the loan for the purchase of the CCI shareholding by interposing a shelf company (Wisbeck Pty Ltd) as the Borrower and holder of the CCI shareholding."

This memorandum observes that this request did not materially affect BOS's position as it would now hold a charge over both Wisbeck and JCPL. The "amendment" was recommended for approval.

On 18 April 1991, State Bank and Barclays Bank commenced proceedings against JCPL and JVC in the Supreme Court of New South Wales. Judgment was given on 26 June 1992 awarding the banks a sum of $6,948,188.21.

On 22 April 1991 JVC was appointed as a director of Mendolsohn. At this stage no contract had been concluded with Mendolsohn.

On 29 April 1991 JVC arranged for Wisbeck to pay an establishment fee of $11,000 in relation to facilities approved by BOS referred to above.

On 2 May 1991 Mendolsohn changed its name to CCI Holdings Limited. This is said by the applicants to demonstrate a firm view on the part of the Cannane interests that the transaction then contemplated would proceed to completion.

On 7 May 1991 Mendolsohn submitted a draft announcement to the Stock Exchange concerning the anticipated settlement on, or before, 17 May 1991 of a transaction whereby Mendolsohn would own 100% of CCI and would change its name to "CCI Holdings Limited". It was anticipated that the company would be the leading coal technology and coal superintendent group in Australia. Reference is made to the "back door listing" of CCI having been sponsored by Hambros Securities Ltd. The document refers to Mendolsohn issuing a total of 10 million shares of 20 cents paid to 8.77 cents to enable the acquisition of all of the issued capital of CCI. This was said to represent one half of the number of shares which shareholders approved at the extraordinary general meeting held on 28 December 1990. It was said that the 10 million shares would be issued to [blank] Pty Ltd (described as a company associated with JVC who also controlled Ausminco, the vendor of the shares in CCI). In order to pay the shares to 20c it was proposed to credit 11.23 cents from the share premium reserve.

It is further stated that in addition [blank] Pty Ltd would advance Mendolsohn the sum of $433,000 by way of unsecured loan which would be on-lent to CCI to enable CCI to repay its net indebtedness to Ausminco.

On 13 May 1991 JVC, on the letterhead of JCPL, wrote to his accountant asking him to effect the "restructuring" of Wisbeck and enclosed two share transfers. Instructions were given to issue one share in Wisbeck to Richard Cannane.

By transfer dated 15 May 1991, but probably executed a day or so before that date, JVC transferred his share in Wisbeck to Andrew Cannane for a stated consideration of $1. At the same time JCPL transferred its share in Wisbeck to Denise Cannane for the stated consideration of $1.

The transfers dated 15 May 1991 were in the following standard form:

"I/We the registered holder(s) and undersigned Seller(s) for the above consideration do hereby transfer to the above name(s) hereinafter called the Buyer(s)..... the securities as specified above standing in my/our name(s) in the books of the above-named Company..." (Emphasis added)

On 15 May 1991 the accountants to JVC sent him three new share certificates, minutes of meeting of directors, an application for shares, a notification of allotment of shares and a share transfer form to "give effect to the rearrangement of shareholders of the company as requested" in the letter of 13 May 1991. The letter asked JVC to arrange for the documents to be signed under the Wisbeck company seal and to return them with a cheque payable to the Office of State Revenue for stamp duty in the sum of $20.

On 15 May 1991 the transactions were documented by minutes of meeting of directors of Wisbeck approving the share transfers and allotting one ordinary share to Richard Cannane. There was also a notification of allotment of shares in respect of the allotment of one ordinary share in Wisbeck to Richard Cannane.

On 20 May 1991 Mallesons wrote to the solicitor for Mendolsohn enclosing a revised agreement for the purchase of shares.

On 27 May 1991 a redraft of the proposed announcement concerning the acquisition of the CCI shares was sent by CCIH to the Stock Exchange stating:

"The 10 million shares will be issued to Wisbeck Pty Ltd (a company associated with Mr J Cannane who also controls Ausminco the vendor of shares in Carbon). Mr Cannane founded Carbon in 1977.

... Wisbeck Pty Ltd will advance CCI the sum of $633,000 by way of unsecured loan at commercial rates of interest ... The funds will be on lent to Carbon (upon acquisition) to enable Carbon to repay its net indebtedness to Ausminco...."

On 7 June 1991 Lambert on behalf of CCIH (formerly Mendolsohn) wrote to the Receiver of Ausminco offering to acquire all the issued shares in CCI and the net indebtedness of CCI to Ausminco for $600,000 cash on settlement and to pay out on settlement the total indebtedness of CCI to National Australia Bank up to a maximum of $1,500,000.

In the period 7-14 June 1991 there was an offer by CCIH for the purchase of CCI at an increased price of $700,000 including the discharge of the net inter-company indebtedness and on the basis of a deferred payment of $100,000.

On 26 June 1991 BOS wrote to Wisbeck stating that it was prepared to provide $600,000 to fund the purchase of 75% of the issued capital of CCIH from the Receiver of Ausminco on the basis that CCIH would acquire the whole of the capital of CCI from Ausminco and CDF.

On 2 July 1991 CCIH confirmed its offer of $700,000 payable as to $600,000 in cash on settlement and as to $100,000 on 31 October 1991. It also expressed willingness to pay a non-refundable deposit of $50,000 for an option until 12 August 1991.
On 9 July 1991 a further form of share sale agreement was submitted by Mallesons to the solicitors for CCIH. This letter referred to the Receiver "currently considering" alternative offers and "invited" CCIH to make an offer for the CCI shares and provide (i) an executed copy of the enclosed Share Sale Agreement, (ii) a bank cheque for $50,000 and (iii) a letter from BOS confirming finance.

On 12 July 1991 the solicitors for CCIH submitted an offer to the receiver to buy shares in CCI together with an Agreement for Purchase of Shares, duly executed by CCIH and a bank cheque for $50,000. The covering letter stated that the letter from BOS would be sent as soon as available. Reference is also made to documentation for the purposes of s 205 of the Law.

On 19 July 1991 BOS indicated that it was disposed to provide $600,000 to Wisbeck to enable it to use those funds to take up shares in CCIH on the basis that CCIH would then acquire the whole issued capital of CCI from the receivers of Ausminco and CDF.

On 26 July 1991 Mallesons wrote rejecting CCIH's offer of 12 July 1991 and returning the bank cheque.

On 31 July 1991 BOS offered an aggregate facility with a limit of $1.5 million to fund the purchase of 100% of the shareholding in CCI, in an amount of $600,000 and as to the balance sum of $900,000 to refinance existing mortgages over the property at Clifton Gardens.

On 2 August 1991 an offer was made by Wisbeck through its solicitors to purchase CCI for a deposit of $50,000, a balance of purchase of $117,000, a discharge of CCI indebtedness to Ausminco in the sum of $433,000 and a transfer of 500,000 shares in CCIH credited as fully paid to 20 cents, by Wisbeck to Ausminco, to be placed on the market, on the basis that CCIH directors would guarantee to pay to Ausminco on 30 November 1991 the sum of $100,000 less the proceeds of sale by Ausminco of the shares.

On 6 August 1991 a sale agreement, in respect of the CCI shares, was entered into between Ausminco and CDF as vendors, and Wisbeck as purchaser for the sale of CCI. The consideration for the shares was $700,000 to be paid (i) on execution of the agreement, $50,000 (ii) on completion $550,000 and (iii) as to $100,000 on 30 November 1991.

On 8 August 1991 Wisbeck accepted the offer of finance by BOS.

On 9 August 1991 BOS offered to finance Wisbeck in the sum of $600,000 to enable it to buy the whole of the shares in CCI and on sell the same to CCIH in exchange for 10 million shares in CCIH. $900,000 was offered to refinance mortgages over the property at Clifton Gardens.

On 20 August 1991 the revised offer of finance of 9 August 1991 was accepted by JVC on behalf of Wisbeck.

On 20 August 1991 a deed was executed amending the agreement to purchase between Ausminco and CDF, and Wisbeck. On the same date a loan agreement was made between Wisbeck and BOS. An agreement was made between Wisbeck and CCIH for the allotment of 10.5 million shares in the capital of CCIH to Wisbeck. Of these, 10 million were to be allotted as partly paid to 6 cents each on the basis that the balance 14 cents was to come from the share premium revenue and 500,000 were allotted fully paid at a par value of 20 cents.

On 21 August 1991 an announcement was made to the Australian Stock Exchange.

1992/1993

On 26 June 1992 judgment was entered against JVC and JCPL for $6,948,188.21 by the Supreme Court of New South Wales.

On 18 September 1992 a summons was taken out to wind up JCPL.
On 21 October 1992 JVC committed an act of bankruptcy. On 28 May 1993 a sequestration order was made in respect of JVC's estate and on 8 June 1993 a winding up order was made in respect of JCPL.

The Valuation Issue

Expert valuation evidence was adduced by both sides in the form of reports and there was cross-examination of each valuer.

Mr Humphrey was called by the applicants and Mr Hunter by the respondents.

I accept both valuers as duly qualified and experienced to give valuation evidence as to the value of the shares in Wisbeck, the subject of the transactions in issue. In the case of Mr Hunter it is true to say that much of his experience related to liquidation and insolvency matters. However, I do not think that this detracts from the force of his evidence when compared with that of Mr Humphrey.

Applicants' Evidence

Mr Humphrey was requested by the applicants to:

"... provide you with my opinion whether, in purchasing one share each in Wisbeck on 15 May 1991 for $1 each, Andrew and Denise Cannane gave consideration which was real and had substantial value in a commercial sense relative to the real worth of the shares, as opposed to consideration which was merely nominal, trivial or colourable."

These instructions reflect the principles set out by Sir Robert Megarry V-C in ReAbbott [1983] Ch 45 at 57. These principles were adopted by the High Court in Barton v Official Receiver (1986) 161 CLR 75 at 86, and were also applied in the Barton case when it was before the Full Federal Court, reported at (1984) 4 FCR 380 per Sweeney J at 384 and Lockhart J at 396. See also PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 532.4.

There was no real dispute in the present case as to the relevant legal principles. Rather, the contest centred on the appropriate valuation principles and approach.

Mr Humphrey defined "real and substantial value in a commercial sense" as representing "fair market value", being "that price which might be negotiated between a willing but not anxious vendor and a willing but not anxious purchaser acting at arm's length." This approach is in turn founded on the statement of Griffith CJ in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 at 432, where it was said:

"The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together."

Although that decision related to land valuation, it has been applied in relation to the valuation of shares.

See for example Lonergan, "The Valuation of Businesses, Shares and Other Equity", 2nd edition (1994) at 10-11; Abrahams v Federal Commissioner of Taxation (1945) 70 CLR 23 at 29-30; McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1 at 10-12.

Mr Humphrey, when making his evaluation, was instructed to adopt nine assumptions as at 15 May 1991. These are found in paragrapgh 5 of his report and are as follows:

(a)JVC was supporting Mendolsohn in respect of negotiations with the Receiver and Manager of Ausminco for the acquisition from Ausminco of CCI;

(b)JVC proposed that Wisbeck would use loan funds obtained by it from BOS to subscribe for 10 million shares (representing 74.7%) credited as fully paid in Mendolsohn's reconstructed capital for $877,000 and Mendolsohn would use the subscription monies to acquire 100% of CCI shares for $877,000 from Ausminco. Wisbeck would also borrow $433,000 which would be lent to Mendolsohn at commercial rates and on-lent by Mendolsohn to CCI to repay its indebtedness to Ausminco;

(c)Wisbeck had access to funding from BOS and had accepted an offer of a loan facility from BOS to fund the purchase of CCI and loan to Mendolsohn;

(d)JVC would continue to be actively involved in progressing the transaction on behalf of an intending purchaser;

(e)Wisbeck would remain as the purchase vehicle the subject of the transaction pursuant to paragraph (b) above;

(f)JVC considered there to be very good prospects of completing the acquisition of CCI;

(g)CCI will not remit $300,000 proposed dividend in its financial statements at 30 June 1990;

(h)Mendolsohn will not execute the proposed placement of shares following acquisition of CCI or if it did so, Wisbeck would retain a controlling interest in Mendolsohn;

(i)if the transaction proceeded, then it is highly likely that Mendolsohn would be reinstated to trading on the ASX.

The approach of Mr Humphrey was to adopt all the above assumptions and to further assume that the acquisition of CCI would be completed. He then considered the amount which a hypothetical willing but not anxious vendor would have been prepared to receive for such a shareholding having regard to an appropriate discount to reflect the risk as at 15 May 1991, that the assumptions in (g) to (i) above proved to be false or that the acquisition of CCI might not be completed.

He went on to say:

"Since any purchaser acting at arm's length would require specific warranties in respect of assumptions (d) and (e) ... above I do not consider it appropriate to allow any discount in respect of these factors."

In summary, he considered that a discount should be given in relation to assumptions (g) to (i) and to the contingency that the transactions might not be completed, but not in respect of assumptions (d) and (e) which related to the continued involvement of JVC on behalf of a purchaser to ensure that Wisbeck remained as the purchase vehicle. The purchaser would require warranties in respect of (d) and (e) and (f) and these eliminated the necessity to discount the price otherwise estimated.

He was not prepared or indeed able to quantify the amount of any discount for factors (g) to (i) but his view was that "it would have been totally unrealistic" to discount the shares by 100%.

Mr Humphrey recognised that it was of critical importance to his valuation that JVC would continue to be actively involved
in progress of the transaction on behalf of an intending purchaser and that Wisbeck would remain the purchase vehicle.

In cross-examination the following exchange occurred:

"Q.You have given your value on the basis that there is a specific warranty that the probability referred to in clause 4D (sic) would inevitably occur?

A.That's correct.

Q.And you have given your opinion on the basis that the probability referred to in 5E (sic) inevitably occur?

A.That's correct.

Q.May I take it that the reason you say that a purchaser at arms length would require specific warranties...is because without such warranties your opinion is that a purchaser acting at arms length would not touch Wisbeck?

A.I think that's correct.

Q.In other words, unless you are able to offer the shares for sale with those warranties, you could not expect there to be any willing, but not over-anxious purchaser for Wisbeck shares, that is what you have just said, is it not?

A.I think - that's correct.

Q.And that is your opinion, is it not?

A.That's correct.

Q.So, that your whole valuation proceeds on the premise that certain warranties will be given?

A.That's correct.

....
Q.So that you would say that unless Mr Cannane were to give a warranty on behalf of J Cannane Pty Limited, you could not expect that there would be any willing, but [not] over-anxious purchaser for that share in Wisbeck owned by J Cannane Pty Limited on 15 May?

A.That's correct.

Q.In relation to the share owned by Mr Cannane personally in Wisbeck...does it also follow that without a warranty by him, it is your opinion that no willing but [not] over-anxious purchaser would be prepared to touch Wisbeck?

A.That's correct.

Q.So that, may I take it, that without Mr Cannane giving a warranty in support of a sale of Wisbeck by J Cannane Pty Limited and/or Mr Cannane personally, your opinion is that there would be no willing, but not over-anxious purchaser who would be prepared to touch Wisbeck?

A.I think as I indicated earlier, that gets to the heart of assumption 5(d) which I see being a critical assumption. 5(e) looks at Wisbeck remaining as a purchase vehicle and I think as I indicated, you would need to really review the factual circumstances concerning the ability of Wisbeck to proceed without Mr Cannane as well. But my professional view would be that the level of uncertainty may be such that there would be no commercial value." (Emphasis added).

The conclusion reached by Mr Humphrey was that if the proposed transaction as at 15 May 1991 was completed, then a single share in Wisbeck would be worth $167,000 on a minority valuation basis and two shares would be worth $606,000 if
owned by the same interest on the basis that this interest would control the company. He described this latter valuation as a controlling valuation basis.

Whilst the respondents do not accept the quantum of these valuations they did not seek to contend that the figures of $167,000 and $606,000 respectively, arrived at on the basis of a completed transaction, were incorrect. The real contest was whether it was appropriate to value the shares on the basis of a completed transaction and then discount the estimated value by reference to the contingencies foreseeable as at 15 May 1991 and whether the shares must have more than a nominal or trivial value as a result of the anticipated series of transactions after that date.

Mr Humphrey considered that in purchasing one share each in Wisbeck on 15 May 1991 for $1 each, Andrew and Denise Cannane gave consideration which was nominal or trivial and which had no real or substantial value in a commercial sense relative to the real worth of the shares.

He gave consideration to the potential fair market value of the Wisbeck shares on the basis of the assumptions. He had regard to the acceptance on 29 April 1991 by Wisbeck of the $2.2 million funding facility by BOS pursuant to its letter of offer of 18 April 1991 and also to JVC's view as at 2 April 1991 that he was near to concluding the deal to buy CCI.

Mr Humphrey also stated that even if it is assumed that the structure of the transaction was revised from that which he assumed, so that Wisbeck purchased CCI from Ausminco and on-sold CCI to Mendolsohn in exchange for a 74.7% shareholding therein, his conclusion would not alter. This of course was what in fact did occur. The reason he gave was that the revised structure would have an immaterial impact on the transaction.

Respondents' Valuation Evidence

This is contained in a report by Mr Hunter. He was asked to determine whether the shares in Wisbeck as at mid-May 1991 had a nominal value or a real and substantial value. He adopted an amount of less than $100 as indicating nominal value and $100 or more as indicating a value other than nominal. There is no contest as to this measure of nominal value.

He considers that, as at mid-May 1991, Wisbeck was virtually a non-operating entity. It had no real business activities and no relevant sources of income. Therefore, he considered it would be inappropriate to adopt an earnings basis in valuing Wisbeck's shares at that date.

He considered that the shares should be valued on an asset backing basis. Having reviewed the financial accounts of Wisbeck, he concluded that as at 30 June 1991, Wisbeck had a net deficiency of assets over liabilities of $61,267.
His conclusion was that as at mid-May 1991 Wisbeck shares had a nominal value only and had no real or substantial value. Indeed, his view was that they had no commercial value whatsoever. He points out that since as at mid-May 1991 a clean shelf company could be acquired for approximately $1000 (not having any liabilities or contingent liabilities), a potential buyer wanting a corporate vehicle for use in respect of a possible future transaction would invariably opt for this alternative, rather than purchase a 15 year old company such as Wisbeck.

In his view, no-one (other than members of the family of the existing shareholders) would buy the shares in Wisbeck, given the potential for there being contingent liabilities and the uncertainty of the value of any warranties that may be provided by the company's then shareholders.

In relation to Mr Humphrey's report he considered that the assumptions, outlined earlier, made by Mr Humphrey should not be taken into account in arriving at the valuation. He did not consider it appropriate to value the shares of a company which has no contractual rights to proposed transactions on the assumption that contractual rights might be acquired which would, if acquired, thereafter cause the company to have additional value. However, he did agree in cross-examination that if one were considering the value of the shares at the moment before settlement, or as at the day before, there was involved an assessment of the probability of the deal proceeding to finality. He agreed that in an extreme example "... if it was to settle in a minute you might form the view that it is highly probable that the deal will be consummated", and that it would be absurd to completely ignore the possibility that such a right would come into existence. That seems to me to be a realistic approach but it does not mean that one can project such a defined and final situation back to a date weeks or months earlier when the expectation was still subject to many uncertainties and contingencies.

In relation to the acquisition of a shelf company Mr Humphrey gave the following evidence:

"Q.Let us assume that the only assets and the only liabilities were disclosed in respect of a soiled company and there were warranties revealing that there was a deficiency of assets of $70,000 would you recommend to a client, if that was all you knew, that the client wanting a shelf company could safely buy that for $800 and use it as the shelf company rather than buying conserve (sic) number 777 for the same amount of money?

A.I think if you are asking me to assume that there were no other contingent liabilities or assets, then certainly I think as I indicated earlier I would recommend to my client that they bought an off the shelf company.

Q.One of the reasons would be because the company which I have just described would, in your opinion, have no value at all?

A.That's correct."

Submissions on Valuation

The applicants' submissions on the valuation issue, in substance, can be summarised as follows:

Shares in a company are purchased on the basis of the perceived value of the company taking into account its assets, prospects and likely dividends.

The exercise is to determine the point at which an informed and willing but not anxious buyer will come to agreement with an informed but not anxious seller in respect of the share.

In performing that exercise valuers take into account matters which cannot be known with certainty such as future profits. When assessing the weight to be given to future matters, it is necessary to evaluate the probability of the events occurring.

One does not assume matters which are known not to be true, for example, it is irrelevant to proceed on the basis that JVC or JCPL were in bankruptcy or liquidation as at 15 May 1991 and the shares were sold by the liquidator or trustee on that date.

When assessing whether valuable consideration was given for the shares it is appropriate to have regard to the opportunity or prospect that Wisbeck had, as at 15 May 1991, of acquiring an interest in CCI despite the fact that there was no contractually binding arrangement between CCIH and the receivers of Ausminco. This involves an assessment of the probability of the opportunity being realised. To do otherwise is unrealistic and to ignore the apparent motivation of persons involved in the transaction.

Mr Hunter accepted that if the shares were to be valued the day before settlement or minutes before settlement, then it is a matter which might be taken into account. It is therefore said to be relevant that a proposed transaction must be given some weight in estimating value, even if it did not proceed to completion until several months had expired.

As at 15 May 1991 it was highly probable that JVC was supporting Mendolsohn in respect of the negotiations with the receiver and manager of Ausminco for the acquisition of CCI shares. It was also highly probable that JVC considered there to be very good prospects of completing the acquisition of CCI. It was further highly probable that if the transaction proceeded Mendolsohn would be reinstated to trading on the Stock Exchange.

As to the probability of the CCI acquisition proceeding to finality a number of matters as at mid-May 1991 are referred to, including the following:

(a)The Receivers of Ausminco and CDF were likely to be willing and anxious vendors.

(b)Price had been agreed, subject to documentation and consents.

(c)JVC was appointed director of Mendolsohn on 22 April 1991. Mendolsohn changed its name to CCI Holdings Limited on 2 May 1991.

(d)JVC acted for CCI, whilst not being a director, without the company's authority although he made the lack of authority known to BOS in "accepting" that bank's offer of 18 April 1991.

(e)JVC procured funding for the purchase in the name of Wisbeck and paid the establishment fee.

(f)Mendolsohn informed representatives of the Stock Exchange on 7 May 1991 of the transaction.

(g)The arrangement for Wisbeck to subscribe for shares in Mendolsohn had been agreed and was as set forth in the announcement to the Stock Exchange.

Assumption of JVC supporting Mendolsohn in Negotiations

The applicants refer to a number of considerations to support the conclusion that there was a likelihood that JVC would continue to support Mendolsohn in negotiations and bring the deal home to Wisbeck. These included the facts that:

(a)JVC was anxious to get a back door listing for CCI, with himself or an interest associated with him receiving a majority interest in CCI's holding company.

(b)JVC was in close contact and co-operated with Lambert of Mendolsohn who informed him of offers being made.

(c)JVC organised funding of the CCI acquisition on behalf of Mendolsohn.

(d)JVC's loan applications to BOS corresponded in amounts to the offers made from time to time by Mendolsohn.

Structure of Proposed Transactions

The applicants point out that the structure of the transaction was confirmed in the draft announcement to the Stock Exchange
of 7 May 1991 and that JVC was consulted about the terms of that announcement and approved of it.

They rely on the circumstance that the completed transaction reflected the substance of the arrangements between JVC and Mendolsohn.

Funding as at 15 May 1991

As at 15 May 1991 JVC through Wisbeck obtained funding from BOS and had accepted the loan offer and paid the establishment fee.

Continuing Involvement of Cannane and Wisbeck - Warranties

The applicants point out that:

(a)JVC accepted that if he were a willing vendor he would have promoted a proposed sale of the shares and that he would have expected the purchaser to seek warranties as to title, assets and liabilities.

(b)In the event of the transaction proceeding, JVC agreed that he would expect to be asked to warrant that he would remain involved in promoting the deal and that it would be delivered into Wisbeck. He agreed that if he was willing to sell the shares he would have given such warranties.
(c)If the purchaser of the shares in Wisbeck were a third party JVC would have remained involved to secure the deal for the new owners subject to receiving a suitable remuneration.

(d)As between Cannane family members it was accepted that JVC would remain personally involved in promoting any deal and would ensure that the deal would be delivered into Wisbeck.

(e)One can assume that, on the sale of the shares, warranties in the nature of those described above would be given. It was said to be inherently probable that such warranties would be sought and given. Also JVC considered that warranties would have been given by him to a hypothetical purchaser.

(f)Mr Humphrey's view, that unless the warranties were given you would not have a willing but not anxious vendor, should be accepted (emphasis added).

Cannane's view of prospects of completing the transaction

(a)JVC's evidence was that he was "hopeful" although not completely confident that the deal would proceed.

(b)The change of name of Mendolsohn on 2 May 1991 and the appointment of JVC as a director of Mendolsohn disclose that JVC had a "confident expectation" that the deal would proceed.

In summary, the applicants submit that if Mr Humphrey's assumptions are made out as at 15 May 1991, the shares either had a value of $167,000 or $606,000 depending on whether the valuation is made on a minority or controlling basis. If regard is had to the probable completion of the transaction, in valuing the Wisbeck shares, then the consideration given was not real and substantial. It is submitted that it would only be permissible to value the shares at $1 if it was to be assumed that there was no possibility of any of the assumptions being made out. To support this a calculation is made to the effect that even assuming a valuation basis of $167,000 per share on a minority basis, then in order to justify a consideration of $1 as adequate, a discount of 99.9941 % would be required.

I accept that it is not necessary for the applicants to establish that the values assigned by Mr Humphrey are correct. Nor is it necessary for the Court to determine what level of discount is appropriate. If the Court is satisfied that the stated consideration was "nominal, trivial or colourable" in relation to the value of the shares, then there has not been a bona fide sale for valuable consideration.

The Respondents' Submission on Valuation

The respondents submit that by 2 April 1991 JVC decided he did not wish to pursue the potential transaction with Ausminco and Mendolsohn involving purchase of CCI either in his own name or in the name of JCPL. For this reason he decided to introduce a family company, Wisbeck, in which neither he nor JCPL would have any financial interest so that the transaction would flow to the benefit of this company. It is said that he was anxious for his wife and his children to acquire in effect a "shelf company" which could thereafter pursue the opportunity which had presented itself in relation to the proposed transaction.

Wisbeck was first introduced into the transaction as in effect a shelf company in early April 1991. The sole shareholders in that company were JVC and JCPL. The company had been incorporated on 3 March 1976. It was a not a "clean" shelf company because it had entered into some business transactions but does not appear to have been active since 1984. The directors of Wisbeck at all material times were JVC and Denise Cannane.

As at 2 April 1991 when JVC wrote to his accountant, Mr Hopper, and at all material times up to and including 15 May 1991, Wisbeck had no commercial value and JVC was of the opinion that it had "no real purpose in life". It had a
significant deficiency of shareholders' funds and conducted no business activity.

It is pointed out that the letter of 2 April 1991 from JVC to the accountant, Mr Hopper, stated that he preferred to acquire the shares in his wife's name or in a company controlled by her. At that stage it is clear that JVC decided that Wisbeck could be the vehicle to buy the shares in CCI as it would save setting up a new company. He considered alternatives. He raised the possibility of transferring the CCI shares into his wife's name but anticipated tax problems with dividends being assessable at top personal tax rates. On 9 April 1991, Mr Hopper advised JVC that Wisbeck could be used in the transaction but that he should transfer the shares in it to Denise Cannane and his son because it would be "sensible for members of your family other than you to acquire any future assets that might arise".

It is pointed out that the share transactions were made formally and documented and that stamp duty was paid.

It is also pointed out that as at 15 May 1991 there was no agreement for the sale of CCI by Ausminco, or CDF, nor had any formal loan agreement been entered into by Wisbeck with any financier and that in fact the transaction was not concluded until 20 August 1991.

Reference is made to an offer for finance to Wisbeck in late April 1991 by BOS and to the payment of an establishment fee of $11,000. However, reference is made to the fact that this offer was subject to numerous conditions and was never taken up and ultimately lapsed.

The respondents submit that no weight should be given to the prospect of the transaction being completed in such a way as to confer a benefit on Wisbeck. That company, it is said, is only in the same position as any shelf company with no assets which could have been selected for a future transaction, and as at 15 May 1991, its shares should have attributed to them no more value than such a shelf company. Indeed, it was an even worse position because it had liabilities in the order of $61,000 at that time.

In my view, this submission is irrelevant because the fact is that the transaction did not proceed through a shelf company but rather through Wisbeck. It may well have been that JVC considered Wisbeck would perform the same function as a shelf company, but it is necessary to look at what in fact happened, rather than to speculate on what might be the position if a different vehicle had been used.

It is submitted that if it is assumed, as at 15 May 1991, both JVC and JCPL were in bankruptcy and liquidation respectively, then the question is what would a liquidator or receiver have obtained for the shares. In my view, this question is not relevant because that was not the situation. Furthermore, it does not take the matter any further. The real question is what price could have been achieved for the shares as at 15 May 1991 using the Spencer test. The fact that a liquidator or trustee may hypothetically be the sellers makes no difference to the present exercise.

Warranties

The inclusion of warranties in the valuation exercise is a central issue. It arises in this way. A submission, made by the respondents, related to the question of warranties to be given by the seller of the shares on 15 May 1991 in relation to completion of the transaction. The respondents point out that it is critical to the opinion expressed by Mr Humphrey that assumptions 5(d) and (e) are made out. They contend that he is wrong in assuming that the test requires an assumption that warranties would be given by the seller to promote the completion of the inchoate transaction for the benefit of the buyer and would ensure that the benefit of the transaction flowed to Wisbeck. The respondents submit that it would be "commercially unreal" to expect JCPL and JVC to carry the transaction through to completion for the benefit of Wisbeck, if Wisbeck were not controlled or owned by members of the family or family interests so that the benefit of the transaction flowed to the family. This is a case where the transaction proposed could be rendered nugatory in the
unrestricted volition of JVC and/or JCPL. Cf The Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 at 93.

Whilst as at 15 May 1991, one may have anticipated that there was a reasonable prospect that the transaction would be carried through for the benefit of the Cannane family, in a form generally in accordance with that proposed at that time, because Wisbeck would remain controlled by family members, such an assumption could not be made in the event of the sale of the shares to an outside purchaser on arm's length commercial terms. Accordingly, the respondent contends that an outside purchaser would pay no more than $1 each for the shares because it was open to JVC and JCPL to divert the benefit of the transaction to another entity as they saw fit in the interests of the family.

In response to this suggestion the applicants submit that inherent in the notion of a willing vendor is a presumption of willingness to give such warranties as would achieve a proper commercial price. I do not accept this submission.

The hypothetical willing vendor is a legal construct. Such a vendor can be taken to be adequately informed of relevant matters relating to the company and its transactions; to be willing but not anxious to sell; and to act in a rational and objective way. Cf Lonergan (supra) at 10-11. However, I do not consider that such a vendor can be assumed to be willing to give special warranties, assurances or guarantees of a continuing nature such as those suggested in the present case by Mr Humphrey, in order to dispose of the shares in Wisbeck, The valuation exercise is essentially an objective one. It is not in my view appropriate to import into the negotiations, collateral commitments on the part of directors, shareholders or third parties, unrelated to the rights attaching to the shares. Caution must be exercised when making assumptions on which to ground a valuation of shares. Cf Short v Treasury Commissioners [1948] AC 534 at 547.

Essentially, the submission of the respondents is that any value which is attributable to shares, on the exercise suggested by the applicants, which requires an assumption to be made that special warranties will be given, does not value the shares as such, but rather values the warranties or collateral assurances which it is suggested would be given by the sellers. Accordingly, whilst it may be the case that if such warranties were presumed to have been given by JVC and JCPL and the transaction completed, then the value of the shares might be other than nominal, a valuer of those shares is not entitled to make the assumption, when making the valuation, that such warranties would be given.

In my opinion the submission on behalf of the respondents is correct.

The value of the warranties, in turn, would depend on the financial worth of the person or entity giving the warranties. If the warranty is given by a person or entity with undoubted financial resources or is backed up with an unconditional bank guarantee, for example, the warranty would have real commercial worth, but if given by a person or entity with no substantial financial resources it may be illusory or commercially worthless. This means that even if one were to accept that warranties of the type suggested would be given, to retain Wisbeck as the effective beneficiary, the buyer would in addition need to be assured that the warranty would be supported by a worthwhile financial commitment or ability to pay damages if the warranty was not honoured. In my opinion, it is not appropriate to inject into the hypothetical Spencer sale, assumed warranties of continuing commitment to the transaction to delivery of the benefit to Wisbeck; and an assumption that the giver of the warranty is of real financial substance. This is to read far too much into the concept of an arm's length sale between a non-anxious, willing seller and buyer.

In many cases valuations are made on the basis of an assumed contract between seller and buyer which will often contain warranties and conditions of a standard nature. For example, on a sale of business, it may be assumed as part of the valuation exercise, that standard conditions will apply to the sale in the form of uniform or industry agreements often put out by associations or societies regulating the conduct of persons engaged in those activities. There may be special conditions added to those contracts as the result of particular negotiations between the parties. Such special conditions, however, are not a necessary part of the hypothetical sale.

Taking the sale of a parcel of land, as an example, a valuer will normally assume, in the absence of evidence to the contrary, that a standard Law Society/Real Estate Institute contract containing a set of usual printed terms will be used to regulate the rights and obligations of the vendor and purchaser. Any special terms or conditions in addition to or variation of the standard terms can significantly affect the legitimacy or amount of a valuation. One instance of this would be where a contract is made subject to a development approval for a hotel being granted on the land in question. In the event that there is no approval the contract may be rescinded. The special condition in such a case is vital to the existence of the sale itself.

Valuers will frequently obtain copies of contracts relating to sales of parcels of land, which are used as "comparable sales" to see if there are any special conditions or warranties as to terms of payment which would impact on the reliability of the sale as a comparable sale. Unusually favourable vendor finance or special conditions as to ministerial approvals could, for example, dramatically affect the price a purchaser is prepared to pay or even whether a purchaser would enter into such a contract.

Where it is sought to ground the valuation on a set of warranties or conditions which require a continuing involvement of the seller in negotiations, financing, and possibly different structural arrangements, there is imported into the notional sale a series of extraneous and special obligations which go far beyond the terms of a standard sale transaction. In these circumstances the value could be said to be conferred on the shares not as a result of the rights attaching to, or potential of, a particular share, but as a direct result of the special warranties and obligations agreed to be given or assumed by the seller.

I do not consider that an expectation as to the completion of the prospective agreement as at 15 May 1991 can be accurately characterised as an asset or contingent asset of the company at that time. The transaction was then an inchoate arrangement which had been negotiated to an advanced stage with a probability that if JVC and JCPL continued to promote it and direct it to Wisbeck, it would enhance and increase the assets of Wisbeck and give substantial value to the shares in question. However this result would necessitate the continued co-operation, through to completion, of the sellers JVC and JCPL.

As at 15 May 1991 it was in the unfettered discretion and volition of JVC and JCPL as to whether the transaction would be completed using that company or some other legal entity or person. In these circumstances it cannot be said, in my view, that it is appropriate to assume that the transaction has been completed and then to discount back from that figure. The reality is that the transaction was not certain to take place. There were no legal or contractual rights of any kind in force as at 15 May 1991 in relation to the transaction. The proposals were still in the realm of expectation. It was possible for the transaction to be aborted at the unilateral option of the existing shareholders as they saw fit. Of course, the fact is as it turned out, the shareholders did co-operate but this was in the circumstances where Wisbeck remained controlled and owned by members of the Cannane family and the benefit flowed to them through Wisbeck. It was, however, also quite possible for the transaction to be aborted by the financiers and/or by the other parties to the envisaged transactions. It is possible they may not have wished to contract with or lend funds to Wisbeck if its shares were sold to an outsider and was no longer associated with Cannane interests. They were not contractually tied down to the proposals. There was no guarantee as at 15 May 1991 that CCIH, for example, would continue to completion of the transaction.

For the foregoing reasons I am not satisfied that the Wisbeck shares can be valued on the assumption of a continuing involvement by JVC and Cannane interests in the transaction if a sale were effected and I do not accept the valuation of Mr Humphrey since critical assumptions 5(e) and (f) cannot be made. I prefer the evidence of Mr Hunter.

Accordingly, in my view, the prospect that an expected future benefit might be channelled to Wisbeck in the event that existing shareholders decided not to change the corporate vehicle did not confer any more than a nominal value on the undertaking of the company and therefore on the shares in Wisbeck as at mid-May 1991.

In the light of the above I am not satisfied that the shares in Wisbeck were transferred at or for a greater amount than their true value on that date.

Other Matters

In the course of argument reference was made to some other argument which I will deal with briefly.

Purchaser

The applicants submitted that Andrew Cannane was not "a purchaser" of the share because he simply signed the share transfer without being conscious of what it was.

He has only been aware for the past 18 months or so that he was a shareholder in Wisbeck. He had no recollection of signing the share transfer forms. As at 15 May 1991 he was 18 years old.

In my view Andrew Cannane was a "purchaser". Clearly he acted on his father's bidding. His father gave evidence, which was not challenged in cross-examination, that when he handed the transfer to Andrew he said:

"We have a company called Wisbeck.... Will you please sign this transfer so that you can become the owner of one of the shares?."

Andrew said:

"Yes I will".

On this evidence he was aware that he was accepting a transfer of a share which was to become his property. In my view he was a purchaser of the share. He was told and understood the nature and effect of the transfer. The second matter raised was that the consideration of $1 has never been paid nor called for. I find that this is the fact. On the basis of this fact the applicants submit that neither Denise Cannane nor Andrew Cannane were purchasers.

I do not accept this submission. The share transfers dated 15 May 1991 state that the consideration is $1 and further state that the "registered holder(s) ... for the above consideration do hereby transfer .... the securities as specified above."

The share certificate dated the same day states that the sum of $1 per share has been paid.

I am satisfied that the transfer was in consideration of a promise to pay the $1 amount and that, if necessary, this amount could be sued for by the transferors.

In my opinion each of the transferees was a "purchaser" within the meaning of the section.

Intention to Defraud

It is clear from the evidence that the share transfers were made with the intent, on the part of JVC and JCPL, that the fruit of any benefits which might accrue to Wisbeck and any consequential increase in value of the shares, as a result of the proposed transactions, should not fall into the hands of creditors of JVC and JCPL. I therefore find that the transfers were made by them with an intent to defraud, defeat or delay creditors as to any increased worth of the shares, within s 6 of the Act.

Purchasers in Good Faith

Under s 121 the wording used to characterise the purchaser is different to that used in s 120(1)(a). Whereas the latter provision refers to "purchaser ... in good faith", the former refers to a purchaser "who acted in good faith". There is something to be said for the view that a requirement to act "in good faith" may impose a more stringent duty of inquiry or investigation on the part of the purchaser, than a requirement that the purchaser should be a person who purchased in good faith. The latter is arguably a more passive concept. However this may be, I consider in the present case that Mrs Cannane and her son, Andrew, did not come within either of these descriptions.

The question of good faith was considered by the Full Federal Court in Grellman (supra) where at 527-528 the Court said:

"The appellant's submission that the burden of proof is on the party seeking to avoid the transaction was not disputed by the respondent, and in our opinion is correct.

....

In Butcher v Stead (1875) LR 7 HL 839 the Lord Chancellor (Lord Cairns) said (at 847) in relation to s 92 of the Bankruptcy Act 1869 (UK): "I think there can be no doubt that the words 'in good faith' mean without notice that any fraud or fraudulent preference is intended." In Re Hyams; Official Receiver v Hyams (at 256) Gibbs J, in relation to the meaning accorded to good faith by the Lord Chancellor in Butcher v Stead (supra), said " ... In the context of the Australian statute this exposition may be modified to read 'without notice that any fraud or preference contrary to the statute is intended'." This formulation of the meaning of "in good faith" in s 120(1) was applied by the Full Court of the Supreme Court of Queensland in Re Pacific Projects Pty Ltd (In liq) [1990] 2 Qd R 541 at 545. Gibbs J, when sitting as a judge of the Supreme Court of Queensland, had earlier posed the relevant question in a case under s 46 of the Mercantile Act 1867 (Qld) as whether the disponee of a disposition made by the disponor with intention to defraud creditors was "privy to the fraud": see Re Barnes; Ex parte Stapleton (supra) (at 240).

In Mogridge v Clapp [1892] 3 Ch 382 at 401 Kay LJ, in considering a provision under the Settled Land Act 1882 (UK) which required a dealing with a tenant for life to be one in good faith, said that good faith "must mean or involve a belief that all is being regularly and properly done". That statement was applied to ss 120 and 121 by Fisher J in Official Trustee v Marchiori (at 298).

In substance the notion of good faith expressed by these authorities is the same, and should be followed ...."

As at mid-May 1991 I am satisfied that Andrew Cannane was content to accede to his father's request to execute the transfer without inquiry and to participate in the transaction so as to give effect to his father's intentions or purposes, whatever they may have been. Indeed, his affidavit states that his father often said to him words to the effect that:

"I've got a document here mate for you to sign, would you please sign it."

There was no evidence that he ever questioned such requests or failed to comply with them. Turning a blind eye or acceding to the request of a powerful figure without question is no defence. As Fisher J pointed out in Official Trustee v Marchiori (1983) 69 FLR 290 at 297-298:

"The difficulties on the part of creditors which were referred to by the Full Court of Victoria in Michael v Thompson (supra) are compounded if the person seeking to perpetrate the fraud effects a transfer to a child. If the attempt is successful, there is considerable justification for applying the label of "The Cheat's Charter" (see 91 Law Quarterly Review 86) to s. 121 of the Act. It would be too easy to defeat the just claims of creditors and to avoid the intention of Parliament."

In these circumstances it is my view that Andrew Cannane could not be said to have acted in good faith within the meaning of those words as used in s 121 of the Act. He made no inquiry as to his father's plans and turned a blind eye to the purpose or effect of the transaction.

In accepting the share transferred to her, Denise Cannane was concerned to place any assets which may accrue to Wisbeck beyond the control of creditors. JVC agreed that his object was to "quarantine" Wisbeck's shares which I took to mean that he intended to place them beyond the reach of creditors because he anticipated that the benefit of the transactions would in due course flow through to Wisbeck, and Denise Cannane was aware of and privy to this purpose.

In her affidavit of 27 July 1994, Mrs Cannane said that in about April 1991 she had a discussion with her husband in which he said words to the effect:

"I have had professional advice that in view of my situation which could be in financial jeopardy it would be in our best interests to keep me out of the purchase of Carbon Consulting International Pty Limited."

She then said words to the effect:

"I think that would be a good idea. How are we going to do it?"

Evidence was given by Mrs Cannane that she regarded the possible benefits to flow to Wisbeck from the proposed transactions not as present assets but rather as a future possibility or future assets. Nevertheless, on the evidence I am satisfied that she accepted the transfer having clearly in mind the contingency that JVC and JCPL might be made bankrupt or placed in liquidation respectively. At the time the transfers were made JVC and Denise Cannane believed that the substantial benefits which would, more likely than not, accrue to Wisbeck as a result of the series of transactions being implemented would be diverted from the creditors by the transfer of the shares to family members.

Andrew Cannane was simply doing his father's bidding and was in effect serving as his alter-ego in implementing the diversion.

I am satisfied that both transfers were made for the purpose and with the intent to delay or defeat creditors and that neither of the purchasers acted in good faith.

Settlement

The respondents submit that there was no "settlement" of property in the present case, as required by s 120 of the Act. They contend that where shares are of only nominal value there is no "settlement".

The term "settlement" is intended to connote a transaction or transactions with an end or purpose which involves a disposition of property to be held for the enjoyment of some other person, as opposed to an arrangement whereby the property is to be immediately dispersed. The concept of "settlement" involves the retention of the property settled. In the present case that essential element is missing. The "property" is only nominal in value in my view. In addition, it cannot be said that the transfers of the shares were made for the purpose of being retained for the enjoyment of another person. It may in fact eventuate that the shares are held for a long time by the transferees, but it cannot be said that the "end and purpose" of the transfer was necessarily retention for their benefit. See Barton v Official Receiver (1984) 4 FCR 380 at 394-395 per Lockhart J.

Accordingly, on the conclusion I have reached as to the value of the company and consequently as to the value of shares in it, there was no settlement of property in the present case.

Conclusion

The two transfers of shares were dispositions of property. They were made with intent to defraud creditors. Although I am not satisfied that the transfers were not made for valuable consideration, I am satisfied that they were not made in favour of persons who acted in good faith and accordingly they are void as against the Official Trustee in Bankruptcy, as to the transfer from JVC to Andrew Cannane and as against the liquidator of JCPL, in relation to the transfer from JCPL to Denise Cannane.

Direction

I direct the parties to bring in short minutes to give effect to the above reasons and conclusions in each of the proceedings and to include therein any suggested orders as to costs.

I certify that this and
the preceding fifty-eight (58)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.

Associate:

Date: 25 August 1995

Counsel for Applicants: Mr J Stevenson
Mr M Cohen

Solicitors for Applicants: Mallesons Stephen Jaques

Counsel for Respondents: Mr P R Graham QC
Mr E A Day

Solicitors for Respondents: Ferrier & Associates

Date of Hearing: 19-22 June 1995

Date Judgment Delivered: 25 August 1995