Munroe and Munroe

[2011] FamCA 616

FAMILY COURT OF AUSTRALIA

MUNROE & MUNROE [2011] FamCA 616

FAMILY LAW – Expert witnesses

APPLICANT: Ms Munroe

RESPONDENT: Mr Munroe

FILE NUMBER: SYC 1200 of 2008

DATE DELIVERED: 13 July 2011

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Stevenson J

HEARING DATE: 6 April 2011, 1 July 2011

REPRESENTATION

SOLICITOR FOR THE APPLICANT: Mr Taylor,
Hughes & Taylor

COUNSEL FOR THE RESPONDENT: Mr Serisier

SOLICITOR FOR THE RESPONDENT: Walker Kissane & Plummer

Orders

1. That Mr B is henceforth treated as an expert witness in the case for the wife.

2. That the husband have leave pursuant to rule 15.49 to adduce evidence of an expert witness, Mr C and to rely upon the report annexed to his affidavit sworn 23 May 2011.

3. That, within 28 days Mr B and Mr C, confer and that the solicitor for the wife provide Mr B with and that the solicitor for the husband provide Mr C with a copy of the document entitled “Experts’ Conferences – Guidelines for Expert Witnesses and Those Instructing Them in Cases in the Family Court of Australia”, the text of which is set out in Schedule 5 of the Rules of the Family Court.

4. Pursuant to rule 15.69(2) order:

   (a)Mr B and Mr C are to attend the conference pursuant to this order

   (b)the conference is to occur at a place and at a time agreed to by the solicitors for the parties

5. That, at such conference the experts must:

   (a)       identify the issues that are agreed and not agreed

   (b)       if practicable, reach agreement on any outstanding issue

   (c)       identify the reason for disagreement on any issue

   (d)identify what action (if any) may be taken to resolve any outstanding issues and

   (e)prepare a joint statement specifying the matters mentioned in paragraphs (a) and (d) and to deliver a copy of the statement to each party.

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

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYC 1200  of 2008

Ms Munroe

Applicant

And

Mr Munroe

Respondent

REASONS FOR JUDGMENT

the proceedings  

1. By an Application in a Case filed on 21 April 2011 the husband sought leave to adduce evidence from a chartered accountant, Mr C, in relation to the valuation of a company known as D Pty Ltd.  This company operates in the building industry.  The company has been valued by an agreed single expert, Mr B.  The wife opposed this application but, in the event that the husband is successful, she sought leave to use Mr B’s reports as her own expert evidence.  Further, in that event, the wife sought directions for a conference of the two experts.

2. On 7 August 2008 the parties agreed to the appointment of Mr B as a single expert.  In a report dated 15 January 2009, he valued the company at $1,615,560.  Mr B had available financial statements for the years 1999 to 2007 but disregarded this data for the period 1999 to 2002.  He applied a capitalisation rate of 38% to the company’s future maintainable earnings before interest and tax (“EBIT”).

3. Mr B updated his report on 18 March 2011, when he applied the same methodology and arrived at a valuation of $1,133,131.  He had available financial statements for the years 2008 to 2010.  Mr B noted significant fluctuations in revenue growth and net profit over these years, with a significant decrease taking place in the 2010 year. 

4. The husband explained these fluctuations, essentially, by the loss of a major subcontracting arrangement with E Pty Ltd.  It appeared to be common ground that an illness of the husband had resulted in a drop in the performance of the company and the consequent loss of these contractual arrangements. 

5. Mr B annualised the turnover figure for the six months to 31 December 2010, being $587,000, to $1,174,000 for the 2011 year.  He took into account that the financial statements for the years 2006 to 2010 inclusive and disregarded the same data for earlier years.  On this occasion Mr B applied a capitalisation rate of 45% and arrived at a valuation of $1,180,000 for the company. 

6. In a report dated 23 May 2011 Mr C valued the company at $335,663 as at 30 June 2010.  Before preparing his report he held a conference with the husband, his lawyers and the company’s new accountant Mr F.  Subsequently he spoke by telephone with the husband, a bookkeeper and Mr G, an accountant previously retained by the company.

7. Mr C criticised Mr B’s valuation and asserted that the correct methodology should take into account the following matters:

   ·the level of sales and net profits for the years 2000 to 2007 showed fluctuations which could be due in part to these financial statements being prepared on a cash basis, thus omitting amounts for trade debtors and trade creditors

   ·the events which led to the fluctuations in 2008 and 2009 are unlikely to recur

   ·there is a possibility that the financial statements for 2008 and 2009 may have been prepared on a cash basis and thus omitted trade debtors and trade creditors.  If the debtors were included, the 2008 sales would increase by $305,137 and for 2009 would decrease by $443,614

   ·business levels stabilised during the 2008/2009 year and continued throughout the 2009/2010 year and for ten months into 2010/2011.  These business levels are “the best available in determining future maintainable earnings”.

   ·“cash basis results as shown in the financials used in [B] are not indicative of business results” 

8. Mr C concluded that the appropriate future maintainable earnings (“FME”) figure is $138,572.  This figure is the mean of the 2010 EBIT and the annualised figure for 2011.  By comparison, Mr B’s figure was $532,000.

9. Mr C attributed the difference in his valuation and that of Mr B to the following:

   ·Mr B included the years 2006 to 2009 inclusive, whereas he relied only on data relating to 2010 and 2011

   ·Mr B excluded the 2011 year but acknowledged this data as part of a stabilised business level

   ·Mr B wrongly included 109% of “salary associates $63,710 as superannuation associates $69,444” instead of 9% or $5,734, which erroneously increased the 2010 adjusted EBIT by $63,710.

10. Mr C selected a price earnings multiple of 2, which equates to 50% in the terms adopted by Mr B.  He thus calculated the total business value at $277,144. 

11. Mr C then calculated a figure of $177,120 for the net tangible assets of the company.  He maintained that this figure should be calculated by deducting from the going concern value the assets used in normal business operations, less liabilities arising from that use.  He suggested that Mr B did not apply this concept and, as a result, he arrived at a significantly higher figure for goodwill.

12. The onus is on the husband to satisfy the requirements of Rule 15.49 if Mr C is permitted to give evidence as his adversarial expert witness.  This Rule provides:

    15.49      Appointing another expert witness

    (1)   If a single expert witness has been appointed to prepare a report or give evidence in relation to an issue, a party must not tender a report or adduce evidence from another expert witness on the same issue without the court’s permission.

    (2)   The court may allow a party to tender a report or adduce evidence from another expert witness on the same issue if it is satisfied that:

    (a)    there is a substantial body of opinion contrary to any opinion given by the single expert witness and that the contrary opinion is or may be necessary for determining the issue;

    (b)    another expert witness knows of matters, not known to
    the single expert witness, that may be necessary for determining the issue; or

    (c)    there is another special reason for adducing evidence from another expert witness.

13. With respect to Mr C, he failed to identify “a substantial body of opinion” contrary to that of Mr B.  Essentially, they disagreed as to whether the financial statements for any year prior to 2010 should be taken into account.  Mr C certainly gave his reasons for rejecting the data for earlier years but such related to his own views as to this particular company and its recent history, rather than any “substantial body of opinion” contrary to that of Mr B.

14. I am unaware what information the husband and his lawyers provided to Mr C in conference or, indeed, in subsequent telephone conversations.  It cannot simply be assumed that the totality of their instructions appear in his report.  As such, there was a failure by the husband and his lawyers to comply with Rule 15.54(2). 

15. As pointed out by the wife’s legal representative, the husband and his lawyers have made no attempt to arrange a conference with Mr B pursuant to Rule 15.64B or to put questions to him in accordance with Rule 15.65.  In my view, either or both of these options should have been utilised before the husband and his lawyers made the present application.

16. In these circumstances it seems to me that I could justifiably refuse the husband’s application.  I propose, however, to accede to the request for the sole purpose of avoiding the risk of a potential injustice to the husband.  The discrepancy between the valuations of Mr B and Mr C is of such magnitude that I consider it appropriate that they confer and attempt to arrive at a common position or, alternatively, to refine their points of dispute.  I would note that Mr C’s observations as to Mr B’s treatment of the superannuation would appear to be correct and his report will require amendment in that regard. 

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Stevenson delivered on 13 July 2011.

Associate:     

Date:              13 July 2011