Re Lendly Pty Ltd (ACN 108 502 745)
[2024] VSC 540
•5 September 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 02111
IN THE MATTER of Lendly Pty Ltd (ACN 108 502 745)
BETWEEN:
| L&K THE STORY PTY LTD ACN 608 869 772 IN ITS OWN CAPACITY AND IN ITS CAPACITY AS THE TRUSTEE OF THE LAKIN FAMILY TRUST ABN 72 186 936 074 & ORS (according to the attached Schedule) | Plaintiffs/Defendants by Counterclaim |
| v | |
| MADISON GROUP PTY LTD (ACN 125 462 491) IN ITS OWN CAPACITY AND IN ITS CAPACITY AS THE TRUSTEE OF THE MADISON GROUP TRUST (ABN 44 166 412 212) & ORS (according to the attached Schedule) | Defendants/Plaintiffs by Counterclaim |
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JUDGE: | Matthews J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 29, 30 April and 1, 2, 7, 15 May 2024 |
DATE OF JUDGMENT: | 5 September 2024 |
CASE MAY BE CITED AS: | Re Lendly Pty Ltd (ACN 108 502 745) |
MEDIUM NEUTRAL CITATION: | [2024] VSC 540 |
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CORPORATIONS – Oppression proceeding – Two of three instances of oppression alleged by plaintiff made out – Two instances of oppression alleged by defendants not made out – Corporations Act 2001 (Cth) ss 232, 233.
CORPORATIONS – Oppression proceeding – Whether a failure by majority shareholder to buy out the minority shareholder at fair value is oppressive conduct – Re a company [1983] 2 All ER 36; McWilliam v LJR McWilliam Estates Pty Ltd (1990) 20 NSWLR 703; Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLC 193; Lucy v Lomas [2002] NSWSC 448; Tomanovic v Global Mortgage Equity Corp Pty Ltd (2011) 288 ALR 310 considered.
CORPORATIONS – Oppression proceeding – Application for winding up on just and equitable ground – Relief – Compulsory buy-out ordered, with company to be wound up if buy-out is not effected.
CORPORATIONS – Directors’ duties – Director held to have breached ss 181(1)(b) and 182 of Corporations Act 2001 (Cth) – Compensation to company ordered.
CONTRACTS – Breach – Allegations of breach of two contracts established – No damages for breach awarded.
CONTRACTS – Rectification – Defendants’ contingent claim for rectification of contract dismissed.
ESTOPPEL – Defendants’ contingent claim of estoppel dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs/Defendants by Counterclaim | Mr A Segal of counsel | Christopher Farah Solicitor |
| For the Defendants/Plaintiffs by Counterclaim | Mr A Ounapuu of counsel | King and Collins |
Contents
A.. Introduction and overview
B.. Factual Background
B.1 Events prior to July 2018
B.1.1 Early Buy-In Discussions
B.1.2 Memorandum of understanding
B.1.3 Further Buy-In Discussions
B.1.4 Execution of acquisition agreements
B.1.5 Acquisition Agreements
B.2 Events from July 2018
B.2.1 Overview of arrangements after Lakin joined Lendly
B.2.2 2018 reconciliation of Lendly’s bank account
B.2.3 Preparation of FY2018 financial accounts
B.2.4 Maric Meeting
B.3 Events from January 2019
B.3.1 FY2018 accounts are finalised
B.3.2 FY2018 tax refund
B.3.3 Lendly’s brokerage business takes a hit and Lakin seeks further equity
B.4 Events from October 2019
B.5 Events from August 2020
B.5.1 Lakin considers relocation to Sydney
B.5.2 Lakin returns to Sydney
B.5.3 Lendly hires staff in Sydney
B.5.4 Discussion of cash in the Lendly bank account
B.5.5 Discussion of Lendly’s value
B.5.6 Discussion of new hires and Lakin’s location
B.6 Events from April 2021
B.6.1 Relationship breakdown
B.6.2 Buy-Out Discussions
B.6.3 Lakin’s 3 May Offer
B.6.4 Lazzaro’s 13 May Offer
B.6.5 The First Withdrawal
B.6.6 Dropbox files
B.6.7 Events after the First Withdrawal
B.6.8 FY2020 accounts and salary ‘true-up’
B.6.9 The Second Withdrawal
B.6.10 Events after the Second Withdrawal
B.6.11 Lazzaro’s 16 December Offer
B.7 Events from January 2022
B.8 Lendly today
C.. Pleadings
C.1 Pleaded allegations
C.2 Relief sought
D.. Evidence and witnesses
D.1 Lay evidence
D.1.1 Lakin
D.1.2 Lazzaro
D.1.3 Maric
D.1.4 Mrs Lazzaro and Penton
D.2 Expert evidence
E... Relevant legal principles
E.1 Non-Oppression matters
E.1.1 Principles of construction
E.1.2 Breach of director’s duties
E.1.3 Rectification
E.1.4 Estoppel
E.2 Oppression matters
E.2.1 Legislative provisions
E.2.2 Key applicable principles
E.3 Winding up relief
E.3.1 Legislative provisions
E.3.2 Key applicable principles
F... Issues for the Court’s determination
F.1 Non-Oppression Matters
F.2 Oppression Matters
F.3 Valuation
F.4Winding up pursuant to s 461(1) of the Act
F.5 The First and Second Withdrawals
G.. Were the defendants entitled to the amounts withdrawn by the First Withdrawal and/or the Second Withdrawal?
G.1 The First Withdrawal
G.1.1 Claims
G.1.2 L&K’s submissions
G.1.3 Defendants’ submissions
G.1.4 Consideration
G.2 The Second Withdrawal
G.2.1 Evidence
G.2.2 Pleadings
G.2.3 L&K’s submissions
G.2.4 Defendants’ submissions
G.2.5 Consideration
H.. Non-Oppression Matters
H.1 Were the First Withdrawal and/or the Second Withdrawal a breach of the No Funds Agreement?
H.1.1 Evidence
H.1.2 Pleadings
H.1.3 L&K’s submissions
H.1.4 Defendants’ submissions
H.1.5 Consideration
H.2 Was the First Withdrawal a breach of the SHA?
H.2.1 Pleadings
H.2.2 L&K’s submissions
H.2.3 Defendants’ submissions
H.2.4 Consideration
H.3 Was the Second Withdrawal a breach of the SHA?
H.3.1 Pleadings
H.3.2 L&K’s submissions
H.3.3 Defendants’ submissions
H.3.4 Consideration
H.4 Did Lazzaro breach his duties as a director by causing the First Withdrawal to be made?
H.4.1 Pleadings
H.4.2 Plaintiffs’ submissions
H.4.3 Defendants’ submissions
H.4.4 Consideration
H.5 Defendants’ contingent rectification claim
H.5.1 Evidence
H.5.2 Pleadings
H.5.3 Defendants’ submissions
H.5.4 L&K’s submissions
H.5.5 Consideration
H.6 Defendants’ estoppel argument
H.6.1 Evidence
H.6.2 Pleadings
H.6.3 Defendants’ submissions
H.6.4 L&K’s submissions
H.6.5 Consideration
H.7 Remedies in respect of the found Non-Oppression Matters
I.... L&K’s oppression claim
I.1 The Withdrawals
I.1.1 Pleadings
I.1.2 L&K’s submissions
I.1.3 Defendants’ submissions
I.1.4 Consideration
I.2 Refusal to purchase L&K shares at a fair price
I.2.1 Evidence
I.2.2 Pleadings
I.2.3 L&K’s submissions
I.2.4 Defendants’ submissions
I.2.5 Consideration
J.... Madison and Menlo’s oppression claim
J.1 Evidence
J.2 Pleadings
J.3 Defendants’ submissions
J.4 L&K’s submissions
J.5 Consideration
J.5.1 Lakin’s relocation to Sydney
J.5.2 Lakin’s extension of his annual leave
J.5.3 Lakin’s resignation as an employee of Lendly
J.5.4 Other matters relied upon: circular resolution and SHA process for share transfers
J.5.5 Have L&K and/or Lakin conducted Lendly’s affairs in an oppressive manner?
K.. Conclusions regarding oppression
L... The appropriate remedy for oppression
L.1 L&K’s submissions
L.2 Defendants’ submissions
L.3 Consideration
M. Valuation
M.1 Applicable principles
M.2 Approach taken by the Experts to valuation of Lendly
M.2.1 Summary of Experts’ separate opinions on valuation of Lendly
M.2.2 The Joint Statement
M.3 Disputed elements for valuation of Lendly
M.4 Valuation Date
M.4.1 Submissions
M.4.2 Consideration
M.5 Approach to calculating FME: financial year for FY2023 or annualization of the last seven months of FY2023?
M.5.1 The Experts’ approaches
M.5.2 Parties’ submissions
M.5.3 Consideration
M.6 FME adjustments for matters which are still not agreed
M.6.1 Rent
M.6.2 Director roles/wages
M.6.3 Earnings multiple
M.7 Calculation of Net Surplus Assets so as to be able to calculate the Equity Value of Lendly
M.8 Conclusion regarding valuation and the price to be paid for L&K’s shares
N.. Winding up
N.1 Evidence
N.2 Pleadings
N.3 L&K’s submissions
N.4 Defendants’ submissions
N.5 Consideration
O.. Conclusion
HER HONOUR:
A Introduction and overview
Lendly Pty Ltd operates a novated vehicle leasing business, by which it provides novated leases as a form of financial arrangement.[1] Lendly is the second plaintiff and third defendant by counterclaim in this proceeding.
[1]A novated lease is a motor vehicle lease which has been novated, that is, the obligations in the contract have been transferred from one party to another. A lease is novated with a three-way agreement (deed of novation) between the lessee, the lessor (usually a finance company), and a third party, under which all parties agree that the third party will take on some or all of the lessee's obligations under the lease (generally this is making the rental payments instead of the lessee).
From 1 July 2018, the second defendant by counterclaim, Mr Christopher (Kit) Lakin, and the third defendant and third plaintiff by counterclaim, Mr Benjamin Lazzaro, have been co-directors of Lendly. From the same date until recently, Lakin and Lazzaro have also both been employees of Lendly.[2]
[2]On 28 March 2024, Lakin gave notice of his resignation as an employee of Lendly. Lakin ceased his employment on 12 April 2024.
Lakin and Lazzaro own shareholdings in Lendly as follows:
(a)Forty percent of the shares in Lendly are owned by a company controlled by Lakin named L&K The Story Pty Ltd (L&K). Lakin is the sole director of L&K. L&K is the first plaintiff and first defendant by counterclaim in this proceeding.
(b)Fifty percent of the shares in Lendly are owned by a company controlled by Lazzaro named Madison Group Pty Ltd. Madison is the first defendant and first plaintiff by counterclaim in this proceeding.
(c)Ten percent of the shares in Lendly are owned by a second company controlled by Lazzaro named Menlo Park Pty Ltd. Menlo is the second defendant and second plaintiff by counterclaim in this proceeding.
Since around April 2021, Lakin and Lazzaro, along with their corporate alter egos (L&K, Madison and Menlo) have been in dispute about several matters concerning the Lendly business and the management of Lendly. By this proceeding, both the Lakin interests and the Lazzaro interests seek to ventilate their grievances and seek relief against each other. In addition, L&K sought and obtained leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Act) to make claims on behalf of Lendly against Lazzaro for breach of his duties as a director of Lendly.
As shareholders, L&K makes allegations of oppressive conduct against Madison and Menlo, and they in turn make allegations of oppressive conduct against L&K, pursuant to ss 232 and 233 of the Act.
Central to the issues in this case are L&K’s allegations concerning two withdrawals from Lendly’s bank account by Lazzaro of $530,000 on 14 May 2021 (the First Withdrawal), and $111,428 on 30 July 2021 (the Second Withdrawal), (together, the Withdrawals). The Withdrawals are the basis for L&K’s allegations of breaches of two agreements between the parties, for the claims that Lazzaro breached his directors’ duties, and for two of the three oppression claims made by L&K.
L&K seeks relief to the effect that Madison and Menlo purchase L&K’s shares in Lendly at a fair and reasonable value to be determined by the Court. If I do not find that my jurisdiction is enlivened to order that relief pursuant to s 233 of the Act, L&K seeks orders in the alternative under s 461 of the Act for a just and equitable winding up due to the breakdown of the relationship between Lakin and Lazzaro and the deadlock in the management of the company. On behalf of Lendly, L&K also seeks relief in respect of alleged breaches by Lazzaro of his duties as a director of Lendly.[3]
[3]For completeness, I note that references to the ‘plaintiffs’ throughout this judgment are made for convenience, however, the only claim brought by both L&K and Lendly is the breach of directors’ duties claim.
The defendants deny the plaintiffs’ claims. They also claim that Lakin and L&K have acted oppressively towards them by conduct including Lakin relocating to Sydney, refusing to return to Melbourne as his place of work, and subsequently resigning as an employee of Lendly. The defendants seek an order declaring their entitlement to purchase L&K’s shares (ie, a permissive buy out order), an order requiring L&K to pay back the Vendor Loan balance (as defined later in these reasons), and other contingent claims for relief.
The issues for determination in this case will be set out more fulsomely later in these reasons. For present purposes, they can be expressed as follows:
(a)Were the defendants entitled to the amounts of the Withdrawals?
(b)Did the defendants breach two of their agreements with L&K and/or Lakin by making the Withdrawals?
(c)Did Lazzaro breached his duties as a director of Lendly by making the First Withdrawal?
(d)Have either of the defendants’ contingent claims, being one of rectification of the shareholders agreement and the other a claim of estoppel, been made out?
(e)Have the defendants have conducted Lendly’s affairs in a manner oppressive to L&K by making the Withdrawals and refusing to purchase L&K’s shares at a fair price?
(f)Have L&K and/or Lakin conducted Lendly’s affairs in a manner oppressive to the defendants by Lakin relocating to Sydney, refusing to return to Melbourne as his place of work, extending his annual leave, resigning as an employee, failing to follow an agreed share transfer procedure, and failing to approve a circular resolution?
(g)Should the Court order a buy-out of L&K’s shares in Lendly by the defendants and, if so, at what price and on what terms?
(h)Should the Court order that Lendly be wound up?
B Factual Background
This case, as with most shareholder oppression proceedings, is factually dense and many of the facts were disputed by the parties. In this section, I set out the parties’ accounts of the facts, and, on occasion and where convenient, I include their submissions relating to the facts. Other submissions as to facts are summarised in subsequent sections of these reasons.
B.1 Events prior to July 2018
B.1.1 Early Buy-In Discussions
Lakin has been working in the novated vehicle leasing industry in Australia for over 15 years. Before he joined the Lendly business, the company was solely owned by Lazzaro. Lazzaro had been a director of Lendly since 12 July 2012 and he became the sole registered director of Lendly in February 2015. As at around mid-2017, Lazzaro remained the sole director of Lendly, and its shareholders were Madison and Menlo (with each holding 50% of the issued shares in the company).
In December 2017, Lazzaro and Lakin met and began to discuss Lakin joining Lendly (the Buy-In Discussions). Lakin resided in Sydney at this time and Lazzaro resided in Melbourne. The Lendly business was based in Melbourne. The Buy-In Discussions were partly in writing (by email and exchange of documents) and partly oral (by telephone and in‑person conversations of Lazzaro and Lakin). I set out some key communications that formed part of the Buy-In Discussions below. The parties dispute some of the precise content of the Buy-In Discussions and there was evidence given at trial in respect of the content discussed by telephone and in-person. At times, the parties even differ over what some of the email correspondence means.
On 1 December 2017, Lakin and Lazzaro had their first in-person meeting over dinner at the Stokehouse restaurant in St Kilda for around two hours (Stokehouse Meeting). At this time, less than 15% of Lendly’s income was generated from novated leases. The evidence of the parties about the Stokehouse Meeting is as follows:
(a)According to Lakin, at the Stokehouse Meeting, the pair discussed his plans to start his own novated leasing company, his experience in the industry, the prospect of working together, the benefits of growing a novated leasing business within a finance broking company arising from the diversification of revenue streams, their visions of the business (including planned exit timelines of around five to seven years), and their other business passions. No specific details as to the terms on which they might work together were discussed, including where Lakin would be based. The discussion was preliminary and introductory. In cross-examination, it was put to Lakin that Lazzaro said at the Stokehouse Meeting that he was looking for a business partner to be based in Melbourne. Lakin denied that this was said.
(b)Lazzaro also gave oral evidence about the Stokehouse Meeting. Among other things discussed, Lazzaro says that he talked about his desire to grow the novated leasing side of Lendly’s business. He mentioned his buy out of the previous Lendly business partner for around $1 million and said that this was not something he was keen to go through again because it was financially draining.[4] He said that Lakin would need to be based in Melbourne in order to be part of the business. Lazzaro’s evidence is that Lakin replied that he was open to this basis for working together, but would need to see where the deal was going. Lazzaro says he asked Lakin if he would be committed to staying in the business through to completion or a sale event, so that he and Lazzaro would exit the business together. Lazzaro’s evidence is that they were ‘still nowhere near doing a deal’ by the end of the Stokehouse Meeting, and (as noted above) that Lakin merely said he was open to being based in Melbourne. However, the defendants’ case also included an assertion that a binding agreement was reached on this day about Lakin and Lazzaro’s timeline and exit strategy (as is discussed later in these reasons).
[4]That previous business partner had held 50% of the shares in Lendly. Lazzaro funded the purchase from that previous shareholder with a loan from Lendly to Menlo.
On 9 December 2017, Lazzaro emailed Lakin a profit and loss statement for Lendly for the financial year ended 30 June 2017 (FY2017) and notes to the statement. Among other things, the statement recorded licence fees of $125,281.78.
On 11 December 2017, in response to Lakin’s request for a year-to-date profit and loss summary, Lazzaro attached an Excel workbook entitled ‘Lendly Pty Ltd – Profit Loss FY17 YTD.xls’ and stated ‘[m]y License fees are currently showing as $130K’. The workbook showed licence fees incurred from 1 July 2017 to 11 December 2017 of $130,818.18. Lazzaro says he told Lakin ‘I've always maintained the Lendly main bank account sitting at $100K (this is basically retained earnings carried forward) for monthly operating expenses, wages, BAS etc’.
The importance of keeping the bank balance at around the $100,000 mark was one controversy in the proceeding. Under cross-examination, Lazzaro did not concede that a lower bank balance might not allow Lendly to cover expenses such as wages, as at the time that comment was made, he had discretion to move the bank account balance up and down at any time, and had full control over how much money was in the account. Lazzaro drew a distinction in this regard between a sole-director and shareholder company and another structure.
On 13 December 2017, Lazzaro provided Lendly’s balance sheet to Lakin by email. The balance sheet recorded:
(a)under the heading ‘Non-Current Assets’, three loans, being a loan payable by the Menlo Park Trust[5] to Lendly totalling $644,916 (the Menlo Loan), a loan payable by Lazzaro totalling $147,200 and an ‘unsecured’ loan of $30,000; and
(b)under the heading ‘Equity’, among other line items:
(i)‘Retained Earnings’ of $467,473.63; and
(ii)‘Retained Earnings (B)’ of $689,433.09.
[5]In correspondence to Lakin dated 16 December 2017, Lazzaro describes the Menlo Park Trust as an entity ‘created solely for purpose of acquiring Lendly shares through shareholder buy-out agreement in the final share buyback. It is a holding trust only’.
On around 16 December 2017, Lakin had a conversation with Mr Sameer Kassam at CharterNet[6] regarding the Lendly business. According to Lakin, he discussed with Mr Kassam the balance sheet and notes that Lazzaro had emailed to Lakin on 13 December 2017. Lakin’s recollection is that Mr Kassam asked about Lazzaro’s valuation of Lendly and expressed the view that the valuation was not high or low, based on the information in the balance sheet. They also discussed the licence fees and any intellectual property implications of those, the reference to the Menlo Loan on the balance sheet, and the importance of ensuring that previous shareholder buy‑outs had been completed and that there were no further debts owing. With regard to the Menlo Loan, Lakin recollects that Mr Kassam was not concerned about it because it was money owed to Lendly rather than a debt Lendly owed. The retained earnings were not discussed. Lakin recollects that the Menlo Loan was not considered an important issue at the time because it was an asset of Lendly and he and his accountants at CharterNet were focussed on liabilities of the business and ensuring that no debts were owed.
[6]At the time, CharterNet were Lakin’s personal accountants. Later, they were also Lendly’s accountants for a time.
On 16 December 2017, Lazzaro provided responses to various queries from Lakin regarding the financial situation of Lendly, by way of an email attachment. In that attachment, Lazzaro stated to Lakin that:
(a)‘The License [sic] Fees is how we draw profits from Lendly. So when we see any licence fee or variations in amounts we need to know this is simply money being drawn down by shareholders. These are not in [sic] related and these are not fixed amounts’.[7]
(b)‘The licence fees are solely for the purpose of personal tax planning. Instead of taking wages we have drawn profits as licence Fees. You could easily also call them consulting fees as easily etc. There are no ip issues relating to the use of licence fees’.
(c)Some other queries Lakin had raised required more time to answer.
[7]Lazzaro said at the hearing that the words ‘in related’ suggested a typographical error, he could not be sure what he had originally meant by that sentence, but may have meant to say ‘IP related’.
Lakin states that he never received any further answers regarding those other queries, including whether Lazzaro would be in a position to pay back the ‘loans to trusts’ and square up the balance sheet. Lazzaro says that Lakin’s evidence is totally incorrect, that he explained what the loans were by phone with Lakin that day, but did not answer how they would be paid off until April 2018 (as he had not decided what to do until that later time). He says that it was not his practice always to record in writing what had been discussed between them, with emails being sent where further clarification was needed or if documents were to be provided electronically.
Lazzaro gave evidence about a telephone conversation on 16 December 2017. According to Lazzaro, he explained to Lakin what the Menlo Loan represented in the financial records (being related to the buy-out of a prior shareholder), but did not say whether he would repay the Menlo Loan prior to Lakin joining the business. The information communicated about the Menlo Loan is an aspect of the Buy-In Discussions which is disputed. The defendants say that Lakin was informed in around December 2017 that the Menlo Loan would be repaid gradually over time.
At some time in late 2017, Lakin says that he first discussed with Lazzaro the valuation of Lendly by telephone. Lakin’s evidence was that Lazzaro explained he had previously bought out a 50% business partner for $1 million and that he would not sell equity in Lendly for less than that value.
Lazzaro gave evidence about a conversation on 20 December 2017, in which Lakin discussed the equity he was seeking in Lendly. In that conversation, Lazzaro said that he was open to discussing Lakin entering the business with a larger equity share than the proportion then contemplated.
Further communication occurred by email on 21 and 24 December 2017 regarding Lakin’s expected income and desired equity in Lendly.
On 27 December 2017, Lakin wrote to Lazzaro by email, setting out what he described as a ‘stretching forecast’ for the next three years of 100% revenue growth year on year, attaching an Excel Workbook with details of that plan. In the email, Lakin states:
Another thing that I am clear on as I put these numbers together is that maintaining a Sydney presence is vital to the future success of Lendly NL[8] for lead generation and possible sales talent acquisition. However it is becoming evident that I (and in turn my family) might need to be in Melbourne for at least the first 6 months to ensure we are doing everything we can to get the business off on the right path. This is something I need to consider carefully.
[8]NL stands for ‘novated leasing’.
Lakin’s evidence is that Lazzaro had not mentioned the topic of where Lakin would be based at this point and that Lakin’s email raised the topic as part of the Buy-In Discussions; Lakin had reached the conclusion by himself that he might need to be based in Melbourne for at least the first six months.
The Buy-In Discussions continued into the following year. Emails were exchanged as part of the negotiations in late January and early February 2018.
Lazzaro gave evidence about conversations by telephone in early January 2018 while Lazzaro was abroad, about how Lakin would pay for a larger equity share in Lendly, as Lakin was proposing a share of around 40%. Lazzaro says that he suggested the idea of a vendor loan. Lakin disclosed that he had up to $200,000 to contribute to the purchase price of the shares, and Lazzaro proposed supplementing this cash amount with a vendor loan of $200,000, for a total equity share of 20%.
The defendants say that, in around late January 2018, Lazzaro told Lakin that he would not draw down on the funds in the Lendly bank account at completion of the buy-in, because Lakin did not have any funds to put into Lendly. They say that Lazzaro told Lakin that he would leave the funds in the bank account as working capital, on the understanding that those funds would be drawn upon by Madison and Menlo at a later date.
On 21 January 2018, Lakin stated in an email to Lazzaro that he and his family ‘are now prepared to make that next sacrifice and leave [their] support networks to go to Melbourne’. Lakin says that he could not recall anything being said regarding where he would be based between the time of his 27 December 2017 email (described at paragraph 25 above) and the time of sending this email. Lakin’s evidence is that the ‘sacrifice’ was one he had offered himself, without prompting from Lazzaro.
Lazzaro gave evidence about a conversation on around 26 January 2018 concerning the final details of Lakin’s entry into the business. Lazzaro told Lakin that he could not join the business without putting money down, but Lakin wanted a higher equity share, and this led them to consider a larger vendor loan of $400,000 combined with a payment of $200,000, for a 30% shareholding in Lendly. According to Lazzaro, the conversation then moved to where Lakin would be based, and Lazzaro agreed that Lendly would assist Lakin with relocation costs by advancing him an amount to cover them. That is, it would be set off against later drawings. Lakin expressed that he was concerned about the change in income on arrival in Melbourne, leading Lazzaro to offer Lakin a vendor loan for the whole of the 30% shareholding, with no money down, on the premise that it would allow Lakin to relocate with his family with a safety net. Lazzaro says he agreed in this conversation that Lendly would guarantee Lakin an income of $150,000 a year. Lazzaro says Lakin was pleased with the offer of a vendor loan of $600,000 and accepted the income guarantee. Lazzaro was not cross-examined on this evidence.
In an email to Lakin two days later, Lazzaro described the conversation on 26 January 2018 as ‘robust’. His evidence is that this email recorded the substance of the discussion which occurred on 26 January 2018, but that this was not an example of a broader practice of his at the time to set out the substance of discussions in writing later.
Under cross-examination, Lakin could not recall the discussion on 26 January 2018, but agreed from the references to relocation costs in that later correspondence (and from his own statements at the time that it would be important for him to be based in Melbourne at the start) that it would suggest that relocation was discussed on 26 January 2018. Lakin says that this discussion must have occurred by phone, given that 26 January is a public holiday. On re-examination, Lakin gave evidence that the discussion was, indeed, robust and covered possible equity percentages. Lakin said that it was in this conversation that he voiced concerns regarding the restriction on his share in profits and buying into the business on that basis, leading the parties to consider a vendor loan for Lakin’s stake in the business and an opportunity to obtain further equity if certain performance targets were reached. According to Lakin, there was no requirement that he be based in Melbourne raised at this time; Lazzaro did not say that it was important Lakin be located in Melbourne. It was important for Lakin, and ‘it would make sense if Mr Lazzaro said that as well’.
In around early February 2018, Lazzaro’s evidence is that a further conversation occurred regarding an option for Lakin to purchase additional equity at a later time at the same price as he had bought in, contingent on a substantial performance goal being met, and Lazzaro asked Lakin to expand on the idea.
L&K says that Lakin and Lazzaro did not agree or discuss the exclusion of retained earnings from the sale of shares to L&K (or that retained earnings would be adjusted, treated differently, or otherwise not form part of the sale of shares). L&K says that the subject of retained earnings and what would happen to them on Lakin acquiring an interest in Lendly was not discussed at all before or during the negotiations.
Lazzaro was cross-examined on his understanding of the retained earnings, and agreed that they are not the same thing as cash or a loan, and agreed that they are an accounting record of the difference between the asset and the liability position of the company.
B.1.2 Memorandum of understanding
On 6 February 2018, a memorandum of understanding was executed by Lendly, Menlo, and Lakin in connection with the Buy-In Discussions (MoU). The MoU recorded the terms that Lendly, Menlo and Lakin intended to include in an eventual agreement for L&K to acquire an interest in Lendly. For the sake of brevity, I will not set out the details of the MoU in these reasons. It is sufficient for now to say that the MoU did not cover any understanding regarding Lakin’s relocation to Melbourne (permanent or otherwise) as part of joining Lendly, nor did it expressly cover entitlement to monies in the Lendly bank account at the time of Lakin joining Lendly, the retained earnings, or the Menlo Loan.[9] The MoU stated that L&K would ‘receive full entitlement to profit distribution … commencing from the date of execution’ of the agreements, based on shareholder equity.
[9]I note that the MoU did refer to an advancement by Lendly to Lakin of relocation costs, to be set off against or deducted from later payments.
Under cross-examination, Lazzaro accepted that all relevant terms were documented or listed in the MOU, as at that point in time.
B.1.3 Further Buy-In Discussions
Following from the MoU, negotiations continued.
From February to June 2018, by emailing back and forth versions of draft agreements,[10] Lakin and Lazzaro then negotiated the terms of a sale agreement and shareholders’ agreement.
[10]The drafts were prepared with assistance from their legal representatives. The legal representatives did not contact each other in this process. Lazzaro, Madison and Menlo were represented by Falcone & Adams and Lakin was represented by Hitch Advisory Pty Ltd.
I will only set out the details of these communications where relevant to the issues remaining in dispute.
On 19 February 2018, Lazzaro asked Lakin by email ‘[w]hen do you anticipate being able to permanently relocate to Melbourne based on this gardening leave?’ In reply, Lakin referred to arrangements for being based full-time in Melbourne from 1 July 2018, but did not expressly state that such move would be permanent.
On 22 February 2018, Lazzaro signed the FY2017 financial statements, which showed that the Menlo Loan had not been discharged and that there were retained earnings of $655,108. I note that Lakin initially disputed having seen these statements prior to executing the transaction agreements to enter the business, but during the trial it was confirmed that the statements were attached to an email to Lakin dated 8 June 2018.
In one email dated 27 February 2018, Lakin emailed to Lazzaro comments from his lawyers, including in relation to the valuation of Lendly and scope of warranties in the draft acquisition agreements:
I’m not sure how much DD/involvement you [meaning Lakin] have had with the business, but at a valuation of $2m, the warranties in Sch 2 of the Sale Agreement are very thin - what’s missing – IP, material contracts, employees, tax compliance etc.
In his reply email dated 27 February 2018, Lazzaro stated:
This feedback is OK. Nothing has been deliberately [omitted]. It doesn't say its all included but neither does it say anything is excluded. Its reasonable to expect that if you are buying 30% equity - there are no exclusions.
L&K says the email dated 27 February 2018 is significant. L&K says it is inconsistent with the defendants’ pleaded case that in around late January 2018, the parties had discussed Lazzaro leaving funds in the bank account for working capital.
Lazzaro’s evidence was that the comment referred to there being ‘no exclusions’ from the intellectual property and other items that were listed. He also says that Lakin had asked him by that time if Lazzaro wanted to clear the balance sheet and it was clear to Lazzaro that Lakin understood what he was buying (ie, what was included or excluded). It was also submitted that this did not represent the end point of negotiations or the final agreement: negotiations continued and after this email, Lakin’s lawyers made substantial further amendments to the draft agreements exchanged. In light of these points, the defendants say that L&K attributes too much weight to the words ‘no exclusions’ in Lazzaro’s email.
On 9 April 2018, Lakin circulated amended word versions of the draft acquisition agreements to Lazzaro. The amendments included the insertion of ‘Assets’ and ‘Affiliate’ as defined terms and a new clause 8 entitled ‘Related Party Liabilities’ in the draft sale and purchase agreement.
In around April 2018, according to Mr Zvonko Maric, Lazzaro’s personal accountant who also took care of Lendly’s accounts, he discussed the treatment of the retained earnings with Lazzaro. His evidence is that this was a general overview of how to manage retained earnings, and Lazzaro indicated that he believed that the retained earnings would be retained by him when Lakin entered the business.
On 11 April 2018, Lazzaro wrote to Maric for advice on the financial records for Lendly and received advice that day, specifically regarding the Menlo Loan. Lazzaro stated:
But Menlo Park still owes Lendly $669,731. This amount of $669,731 represents a loan from Lendly to Menlo Park for the purchase of shares by Menlo from Wilson and that is yet to be repaid. and so remains a debt asset to Lendly due from Menlo . The strategy is that this amount will be gradually paid down over coming years as to be tax effective as part of tax planning strategy.
Maric replied to Lazzaro regarding the Menlo Loan as follows:
Yes
Menlo owes Lendly $669,731 (we have done it this way so that the interest is tax deductable, the reality is that you & Glen had taken the cash from the company in earlier years as loans, rather than taxable dividends) Menlo loan was to be repaid through Future Dividends.
Essentially you are now selling those shares to Kit, under normal circumstances he would pay you $1.0m & you would repay the debt to Lendly & Keep the Surplus $330,269. Paying the dividends in one hit would result in a significant tax bill, we can do that or progressively & smooth out the tax??
Doing it in one hit will cost $181,784 in tax where 49% tax rate over time @ 39% rate would be $86,109, maybe less??
According to Lazzaro, a conversation occurred at some time between 11 April and 16 May 2018, in which he told Lakin that he would not pay out the Menlo Loan prior to completion, and that he would continue to pay it down over time through the loan repayments.[11] Lazzaro says he also expressed that as Lakin planned to enter the business without paying any money, there would be no cash for Lazzaro to pay the tax bill that would result from clearing the Menlo Loan, and that it would not be fair for Lazzaro to be stuck with that tax bill in those circumstances. According to Lazaro, Lakin said that he understood.
[11]The defendants submit that this evidence should be accepted, as it is consistent in terms of timing and content with the advice he received from Maric. They say that it is ‘unlikely in the extreme’ that Lakin would have proceeded with a transaction whereby he agreed to pay $600,000 for 30% of Lendly if the matter of the repayment of the Menlo Loan was truly outstanding, and that it is more likely that Lazzaro told Lakin that the Menlo Loan would remain on the balance sheet and be paid down over time from retained earnings. In this regard, they highlight Lakin’s evidence that he never expected to get the proceeds of the Menlo Loan.
Lakin says that Lazzaro’s evidence of this conversation is incorrect, and that the fact that the Menlo Loan was still on the books after he joined Lendly was only brought to Lakin’s attention on the preparation of the 2019 financial statements.
On 14 May 2018, Lakin informed Lazzaro by email of his timeline of the move to Melbourne, stating that ‘[f]rom the week of the 6th of August im [sic] only back to Sydney for business development!’ Lakin denied under cross-examination that by this he was indicating that he would be permanently based in Melbourne from the week of 6 August 2018. He says that at no point did he tell Lazzaro that the move to Melbourne would be permanent, and it was important to both of them, at that time, that Lakin be based in Melbourne. The defendants say that it is ‘telling’ that this email was omitted from Lakin’s witness statement.
On around 16 May 2018, Lazzaro met with his solicitor, Ms Erin Penton (Penton). Lazzaro says that he asked Penton’s advice about how to reflect the parties’ agreements concerning retained earnings from before Lakin entered into the business in the draft acquisition agreements. Lazzaro says Penton advised that the definition of ‘Assets’ in the draft agreements could be amended by removing a catch-all category of ‘includes all other assets of the business’, in order to carve out what had been agreed by the parties, such as the cash or the retained earnings. Lazzaro’s evidence was that this change was intended to ensure that ‘the SPA recorded that the cash and the Menlo Loans would not form part of the assets sold to L&K’, and that L&K was buying access to its share of profits from the date of execution of the agreements.
Later that day, Lazzaro sent an email to Lakin about the discussion Lazzaro had with Penton, and the retained earnings was not mentioned in that email. Nor was the changed definition of Assets mentioned in the email. The defendants say that the email did not purport to be an exhaustive list of everything Lazzaro discussed with Penton and that I cannot draw a conclusion from this omission.
Further emails were exchanged in late May. On 8 June 2018, as noted earlier in these reasons, Lazzaro emailed Lakin attaching, inter alia, a copy of the FY2017 financial statements.
Sometime in June 2018, Lazzaro says that a number of telephone conversations occurred regarding the money in Lendly’s bank account at completion. Lazzaro says that he told Lakin that there was a need for working capital from 1 July 2018, as there were a number of costs that needed to be paid by Lendly including wages, rent, GST and superannuation contributions. Lazzaro says that he told Lakin that he would leave the money in the bank account, then, post-completion, reconcile the amount owing to him and draw down on those funds, and then loan funds to Lendly for working capital, but that it should be recognised that this was Lazzaro’s money, and Lakin understood this arrangement. In the event, the working capital was not lent as it was not required.
Lakin also gave oral evidence regarding a discussion in about June 2018 regarding Lendly’s cash and working capital. He says that the upshot of the discussion was that Lazzaro would take the full amount of the bank account on 30 June 2018 and recontribute the amount on 1 July 2018. Lakin was content for this to occur because he considered that Lazzaro was entitled to the cash in the bank account as at that date (as that had been discussed between them and Lakin had ‘capitulated’ on the cash), but not to the retained earnings of the business.
On 15 June 2018, Lazzaro circulated the form of the agreements which were ultimately executed. Lakin’s evidence was that the documents attached to the email were not marked-up to indicate that further changes had been made to the version last exchanged between the parties, and that, in the covering email, Lazzaro stated that there were no changes other than those highlighted by his solicitor (and Lazzaro accepted at the hearing that this statement was false). Lakin stated that, after execution of the documents, he became aware that Lazzaro’s statement was not correct, and that there were changes in the drafts that were not highlighted or marked-up, such as in the definition of ‘Assets’.
Under cross-examination, Lazzaro denied hiding the changes from Lakin and reiterated that he had reached an agreement with Lakin about the Menlo Loan and how it would be paid off, and that he did not think he could conceal something about which they were both in total agreement. He says that he believes that any changes to the agreements reflected what the parties had, in fact, agreed.
B.1.4 Execution of acquisition agreements
On around 1 July 2018:
(a)Lendly, Madison, Menlo, Lazzaro, Lakin and L&K[12] executed a document entitled ‘Agreement for Sale and Purchase of Shares’ (SPA). The SPA was an agreement for, inter alia, L&K to purchase 30% of the issued shares in Lendly for the sum of $600,000 (Purchase Price);
(b)Lendly, Madison, Menlo, L&K, Lazzaro and Lakin executed a shareholders’ agreement (SHA);
(c)Menlo, L&K and Lakin executed a loan agreement whereby, among other matters, Menlo agreed to loan, and L&K agreed to borrow, the Purchase Price (Loan Agreement); and
(d)Menlo, L&K and Lakin executed two security agreements supporting the Loan Agreement whereby, among other matters, the obligations of L&K and Lakin were secured (Security Agreements),
(together, the Acquisition Agreements).
[12]In its own capacity and as trustee of the Lakin Family Trust.
Following from the execution of the Acquisition Agreements, on 1 July 2018, L&K was recorded on the ASIC Register as the holder of 30% of Lendly’s shares, and Lakin became a director and employee of Lendly.
Prior to 1 July 2018, Lendly’s business primarily involved the provision and operation of finance broking, chattel mortgage and vehicle finance services. According to the defendants, before July 2018, Lendly’s business included a novated leasing book and Lendly’s business activities had pivoted away from car finance to focus on growing that novated leasing book. From 1 July 2018, the source of Lendly’s revenue changed such that Lendly’s revenue is now essentially wholly-generated from the provision of novated vehicle leasing services through a platform called Lendly Pay.
In around August 2018, Lakin relocated from Sydney to Melbourne.
B.1.5 Acquisition Agreements
The Acquisition Agreements are the only documents executed by the parties governing L&K’s acquisition of shares in Lendly, and Lakin’s directorship of Lendly.
L&K asserts that the Acquisition Agreements contain all of the terms regarding the basis on which L&K acquired shares in Lendly, and Lakin became a director of Lendly. The L&K points to the ‘entire understanding’ clauses in the SPA (cl 18.3) and SHA (cl 25.2). This assertion is denied by the defendants.
The relevant key terms of the Acquisition Agreements are described below.
B.1.5.1 Relevant terms of the SPA
The SPA relevantly contained the following clauses:
(a)Clause 2.1, which provided that Menlo hereby sells, and L&K hereby purchases the Sale Shares[13] for the Purchase Price, in consideration of and on the terms contained in the SPA, upon certain conditions precedent being met.
(b)Clauses 2.3 and 2.4, regarding the payment of the purchase price and the granting of a mortgage over the Sale Shares until payment is made in full under the Loan Agreement.
(c)Clause 5.7(a)(ii)(5), which sets out an item that Menlo was required to give to L&K on the Completion Date, being ‘evidence of payout or forgiveness of any loans owing to or from [Lendly] by [Menlo] or its Affiliates, if any’.
(d)Clause 8 provides that Menlo acknowledges and agrees that immediately on and after or from the Completion Date, there are no liabilities owing by Lendly to Menlo and its Affiliates, except as expressly provided for in the SPA, and that Menlo will release and forever discharge Lendly from any such liabilities not provided for in the SPA. I note that there were no such liabilities expressly provided for in the SPA.
(e)Clause 18.3 is an entire understanding clause, which provides:
This Agreement is the entire understanding of the parties on the subject matter. The only enforceable obligations and liabilities of the parties in relation to the subject matter are those that arise out of the provisions contained in this Agreement. All representations, communications and prior agreements in relation to the subject matter are merged in and superseded by this Agreement.
B.1.5.2 Relevant terms of the SHA
[13]As defined in cl 1.1 of the SPA, the Sale Shares were 1,440 shares held by Menlo in Lendly.
The SHA relevantly:
(a)Defines ‘Business’ as:
…the business known as Lendly which provides the operation of a platform for consumer lending in respect of motor vehicle and such other associated business as Lendly may carry on from time to time.
(b)Defines ‘Shareholder Representative’ as ‘a person who is actively working in the Business and who is properly appointed by a Shareholder under the [Shareholder’s Agreement], at any time, to act as a director’, being Lazzaro for Madison and Menlo and Lakin for L&K.
(c)In cl 3.1, provides that the objectives of Lendly are to carry on the Business, maximise the value of Lendly and ‘make regular distributions to the shareholders subject to prudent financial management’.
(d)In cl 3.2, provides positive obligations of shareholders in order to fulfil Lendly’s objectives. Among other things, this clause states that each shareholder must:
(i)‘[c]o-operate and use its best endeavours to ensure that [Lendly] successfully carries on the Business’ (cl 3.2(a));
(ii)‘[m]ake approvals or decisions that are required of it in good faith and in the best interests of the Company and the carrying on of the Business as a commercial venture’ (cl 3.2(c));
(iii)‘[b]e just and faithful in its activities and dealings with the other Shareholders’ (cl 3.2(d)); and
(iv)‘[d]o all things in good faith reasonably within their power which are necessary or desirable to give effect to the spirit and intent of this [Shareholders’] Agreement’ (cl 3.2(f)).
(e)In cl 3.3, places negative obligations on shareholders, providing among other things, that ‘[e]xcept without the prior written consent of all other Shareholders’,[14] no Shareholder will:
[14]Note that this is appears to be a clear drafting error in the SHA, in that ‘without’ should be ‘with’. I understand that the parties to the agreement intended that prior written consent of all shareholders be required before the actions could be taken by a shareholder. This did not appear to be in dispute between the parties.
(A)‘[g]ive any credit or lend any money on behalf of [Lendly] to any other person other than in the ordinary course of business conducted in a normal and proper manner’ (cl 3.3(a)); and
(B)‘[c]ause [Lendly] to incur any liability other than in the ordinary course of business, conducted in a normal and proper manner’ (cl 3.3(e)).
(f)Provides, at cl 3A, an option for L&K to acquire a further 10% shareholding for $200,000 if Lendly achieves gross revenue of $5.5 million (net of GST) for the Period 1 July 2018 to 30 June 2020 (the Cl 3A Option).
(g)Provides, at cl 6, that the ‘parties agree that all decisions affecting [Lendly] and the Business must be unanimous’.
(h)Includes, with respect to advances to shareholders at cl 10.4(a), that at the time of the agreement, Lendly recorded the following advances:
(i)‘[f]rom 1 July 2018, [Lendly] agrees to advance an amount of one hundred and fifty thousand dollars ($150,000.00) per annum to L & K The Story Pty Ltd (A.C.N. 608 869 772) for a maximum of twenty four (24) months, which shall be on account of future profit distributions’; and
(ii)‘[t]he parties must ensure that where any advance is intended to be a loan from the Company to the Shareholder, the terms and conditions of such advance must meet the requirements of Division 7A of the Income Tax Assessment Act 1936 (Cth). The parties will sign separate documentation to evidence such terms and conditions on a case by case basis’.
(i)Includes specific obligations of Shareholders in cl 11, as follows:
(i)‘[e]ach Shareholder Representative must perform its responsibilities as set out in Schedule 3, as described within the Business Plan or in his or her Employment Contract, as the case may be’ (cl 11.1); and
(ii)‘[e]ach Shareholder is responsible for ensuring that its Shareholder Representative performs its responsibilities and if it fails to do so the breach will be treated as a breach of this Agreement by the relevant Shareholder as well as the Shareholder Representative’ (cl 11.2).
(j)Sets out at cl 24, various mutual covenants of Shareholders, including at cl 24(c), an obligation to be just and faithful, as follows:
it will be just and faithful to each other Shareholder in all transactions relating to the conduct of the Company and the completion of all other matters contemplated under this Agreement and not act contrary to the interests of the Company or the Business, including without limitation, any act or omission which may prejudice or breach in any way the provisions of any agreement or arrangement fundamental to the Business and to give a true account of the same when and as often as the same is reasonably required.
(k)Has, at cl 25.2, an entire understanding clause as follows:
This Agreement contains the entire understanding between the parties with regard to the subject matter it deals with. All previous agreements, representations, warranties affecting this subject matter are superseded by this document and have no effect.
The SHA also contains provisions relating to a shareholder seeking to transfer its shares (or being deemed to be seeking to do so). In this regard, the SHA provides that:
(a)A shareholder who wishes to sell all of its shares in Lendly at a particular price must issue a notice to the Lendly board (Transfer Notice) stating this (cl 14.1).
(b)If certain events occur in relation to a shareholder, they are deemed to have issued a Transfer Notice that it wishes to sell all of its shares at the Market Price (cl 14.2).[15] The certain events include where:
[15]Market Price is defined in the SHA as the price reached in accordance with cl 16. Clause 16 provides for the determination of a market price if a fair market price is not agreed by the shareholders within five days of a shareholder issuing (or being deemed to have issued) a Transfer Notice under sub-clause 14.2, including provision for the appointment of an independent valuer.
(i)‘a Shareholder or its Shareholder Representative is persistently and materially in breach of its obligations under this Agreement’ (cl 14.2(b)); or
(ii)pursuant to cl 14.2(c), a Shareholder or its Shareholder Representative:
(i)ceases to be actively involved in the Business for a period of ninety (90) days (without the prior written consent of the other Shareholders or unless permitted by this Agreement (i.e. temporary, extended absence due to illness or incapacitation )); or
(ii)ceases to be actively involved in the Business for a continuous period of three hundred and sixty five (365) days due to illness or incapacitation and there is no reasonable prospect of such Shareholder or Shareholder Representative being able to return lo an active role in Business within a ninety (90) day period.
(iii)breaches any of the following clauses of this Agreement:
(a)clause 11.1 (Responsibilities of Shareholder Representatives);
(b)clause 19 (Restraints); or
(c)clause 20 (Confidentiality),
and fails to rectify such breach within thirty (30) days of a notice in writing from [Lendly] stating:
(a)the nature of the breach;
(b)the consequences of a breach of this clause; and
(c)(if the breach is capable of being rectified) what the Shareholder (or its Shareholder Representative) is required to do to rectify it.
(c)The selling shareholder must first offer its shares to the other shareholders. If the other shareholders do not accept the offer, then the selling shareholder can offer to sell the shares to a third party, on terms no more favourable to the third party than had been offered to the other shareholders. The shareholders can refuse consent to the third party transfer, in which event the business must be sold (cl 15.8).
B.1.5.3 The Loan Agreement
The Loan Agreement was between Menlo as trustee for the Menlo Park Trust (defined as the Lender), L&K as trustee for the Lakin Family Trust (defined as the Borrower), and L&K and Lakin (together, defined as the Guarantor).
According to the Loan Agreement, the Loan Amount is $600,000, with an interest rate of 5% per annum.[16] The date by which L&K is to repay the Loan Amount (Loan Repayment Date) is 30 June 2028.[17] The agreement provided that on completion of L&K’s purchase of shares in Lendly under the SPA, the Loan Amount is deemed to have been drawn down by L&K and, until the Loan Amount and interest are repaid in full, Menlo is a mortgagee in respect of the shares. L&K charged the shares in favour of Menlo to secure repayment of the Loan Amount and interest component. The Guarantor guarantees repayment of the Loan Amount and interest under the Loan Agreement.
[16]Cl 1 and Items 1 and 3 of the attached schedule to the Loan Agreement. Item 4 provided that interest would capitalise on a monthly basis.
[17]Unless the loan is repaid earlier or the date is varied by mutual agreement in writing: cl 1 and Item 7 of the attached schedule to the Loan Agreement.
Pursuant to cl 5, L&K agreed to execute the ‘Security Agreement (Borrower)’, being a security agreement annexed to the Loan Agreement, in favour of Menlo and agreed that Menlo will register its interest in the mortgage over the shares and its entitlements under the ‘Security Agreement (Borrower)’ on the Personal Property Securities Register (PPSR). L&K was also required to deliver up to Menlo the share certificates to enable this registration on the PPSR to occur. On repayment of the Loan Amount and interest, the mortgage would be discharged and Menlo agreed to discharge its registered interest on the PPSR.
As at 1 May 2024, the defendants say that the amount owing pursuant to the Loan Agreement was:
(a)principal — $600,000; and
(b)interest —$206,052.10.
L&K notes that the Loan Agreement is not due for repayment until 30 June 2028 but accepts that these sums would be the applicable amount if it were to be repaid on 1 May 2024.
Lazzaro’s evidence was that this Vendor Loan was structured to reflect the agreement between him and Lakin that both would work in the business for up to 10 years and then exit Lendly together, with the whole amount of the loan being repayable after 10 years. He says that this binding agreement was reached at the meeting at the Stokehouse restaurant on 1 December 2017, however, he did not provide any evidence of this agreement in his examination-in-chief, referring to it only on cross-examination. This purported rationale for the length of the loan term is not mentioned in the Loan Agreement.
B.1.5.4 The Security Agreements
As noted earlier in these reasons, two Security Agreements were executed on 1 July 2018 in connection with Lakin joining Lendly. There is no need for me to set out any further detail regarding the two Security Agreements.
B.2 Events from July 2018
B.2.1 Overview of arrangements after Lakin joined Lendly
From 1 July 2018 until recently, when Lakin ceased to be an employee of Lendly, he and Lazzaro were paid a salary and statutory entitlements in their capacities as employees of Lendly. Both Lakin and Lazzaro were paid on a monthly basis and did not have formal written employment contracts.
Lendly’s shareholders received dividends at the end of FY2018, FY2019 and FY2020 in proportion to their respective shareholdings, in accordance with the Acquisition Agreements (in particular, cl 3.1 and cl 3.2 of the SHA).
At all material times since 1 July 2018, prior to the end of financial year dividend declaration and distribution, Lendly’s shareholders, via their Shareholder Representatives, regularly and periodically drew funds from Lendly’s Bank account (Pre‑Dividend Withdrawals). L&K, for example, made Pre‑Dividend Withdrawals on a monthly basis. The defendants say that any Pre-Dividend Withdrawals during a given financial year remained liable to be recalled by Lendly, if and when required, to meet operational expenses.
At the end of each financial year, an annual exercise occurred whereby the amounts of Pre-Dividend Withdrawals of each shareholder (or their Shareholder Representative) were deducted from, or reconciled against, the total dividends to be paid to that shareholder at the end of the financial year. The salaries paid to Lakin and Lazzaro were also deducted from the distribution of declared dividends to their respective shareholder entities.
Lakin’s responsibilities at Lendly included oversight of the novated leasing side of the business, business development, sales operations, and managing finance broking employees.
B.2.2 2018 reconciliation of Lendly’s bank account
Between 15 July 2018 and 27 October 2018, Lazzaro undertook a reconciliation of Lendly’s bank account as at 30 June 2018.
Lazzaro gave evidence regarding a conversation with Mrs Dawn Lazzaro (his wife, who also works in the Lendly business) on 15 July 2018, regarding the profits prior to 1 July 2018. According to Lazzaro, Mrs Lazzaro asked when that money would be taken out of the Lendly bank account and asked if Lakin understood that he was not entitled to the money, and if this was in writing. Lazzaro replied that Lakin understood but that it was not in writing, and that he would send an email to Lakin on the topic for peace of mind.
Lazzaro informed Lakin that he would conduct a reconciliation exercise. On 15 July 2018, Lazzaro stated in an email to Lakin that he would:
reconcile/adjust the bank account in the coming week, draw on the adjusted balance and then re-contribute a lump sum back into the Company bank account for working capital…So in effect, I will advance a credit for working capital to get us going into 2018/19 but we need to recognise that these funds [are] actually profit from last year that have not been received by Ben.
On 15 July 2018, Lakin replied to Lazzaro’s email, stating: ‘[r]oger that on all of the below’.
On 27 October 2018, Lazzaro emailed Lakin with the outcome of the reconciliation exercise and attached an Excel workbook. In the covering email, Lazzaro stated that he had taken the Lendly bank account balance as at 29 June 2018, added to that figure revenue which related to sales made before 1 July 2018 but received after then, and deducted amounts for expenses which were paid post‑1 July 2018 but incurred prior to that time. This led to an adjusted balance in Lazzaro’s favour of $145,736.
Lakin did not recall his response to the abovementioned email.
On 28 October 2018, Lazzaro withdrew the sum of $145,736.00 from Lendly’s bank account. [18] He told Lakin before making the withdrawal. The withdrawal was described as ‘Madison license fee’. Lazzaro’s evidence was that this was because Madison was the entity owned by him which had a bank account and that was the term used by Lendly to describe money taken out of the company that did not represent profits.
[18]According to Lazzaro, in the event, he did not lend Lendly working capital at this time, because Lendly had accrued sufficient cash in its bank account from sales, however, at a later date when deciding on the dividend policy for FY2018, it became apparent that Lendly needed some working capital. Lazzaro then decided to re-categorise the withdrawal of $145,736 as a dividend entitlement, which meant that the amount was effectively loaned to Lendly and could be drawn down later by Lazzaro. Lakin states that he was not informed or aware that the amount had been so re-classified.
L&K asserts that this withdrawal represented the final reconciliation of what belonged to the defendants from the Lendly business as at 30 June 2018. The defendants say that the reconciliation exercise was required because the agreement was concluded on a ‘no cash’ basis, such that the cash in the bank account had to be ‘swept’.
Lazzaro’s evidence on this point is confusing. He says that the sum of $145,736.00 was re-contributed to Lendly and re-categorised as a dividend, and as a result, Lazzaro did not take any cash out on the later completion of the tax return. He says he retains an entitlement to that money to this day. However, he also agreed with counsel for the plaintiffs that the sum was not deposited back in the Lendly bank account. He says he swapped his entitlement to a dividend at a later date for this amount already withdrawn, and did not withdraw a dividend entitlement. While counsel for the defendants attempted to clarify this in oral closings, the situation remains confused. However, it is not necessary to expand on this issue further as I do not think it factors into the consideration of the retained earnings question.
B.2.3 Preparation of FY2018 financial accounts
As noted above, prior to Lakin joining Lendly, the business accounts were prepared by Maric. One matter which was discussed once Lakin joined the business was the possibility of Lakin’s personal accountants, CharterNet, taking over the accounting work for Lendly moving forward. For example, on 19 July 2018, Lakin and Lazzaro exchanged emails regarding the option of transferring Lendly’s accounting work to CharterNet. At this time, the FY2018 accounts (ie, the accounts for the financial year prior to Lakin’s entry into the business) had not been finalised and the co‑directors also had not agreed how they would draw funds from the business in future.
In late 2018, Lakin and Lazzaro discussed their preferences for drawing funds from Lendly. Lakin’s evidence was that for around four or five months after joining Lendly, he had not drawn any funds and had left money that was accruing in the bank account as working capital. Lakin discussed with Lazzaro how he should draw funds from Lendly as income. Lakin preferred an approach involving shareholder loans and salary payments which would be reconciled against dividends at the end of each financial year, whereas Lazzaro preferred that they continue Lendly’s prior licence fee approach. Lakin recalled that only one conversation occurred on this topic around that time, in the Port Melbourne office.
On 11 December 2018, Lazzaro says he had a discussion with Maric, who was chasing Lazzaro regarding the financial accounts for Lendly for FY2018. Lazzaro said he told Maric that Lakin should be involved in the conversation because of his coming into the business on 1 July 2018, and that the Menlo Loan and ‘cash at bank’ needed to be discussed.
Maric’s evidence is that around that time, Lazzaro informed him of pressure from Lakin to change accountants to CharterNet because of the referrals Lendly was receiving from them, and Maric was understanding of this and had no objection. As for the conversation detailed at paragraph 95, Maric says:
Mr Lazzaro made it clear that the final task I'd be doing for Lendly would be preparing the 2018 financial statements. Part of that was deciding what to do with the retained earnings basically of Lendly that were present at 30 June 2018. We've commenced preparing the accounts for 2018 and my staff had processed it and were at the concluding stages of finalising the accounts… [Lazzaro] wanted to have a meeting and to work through the conclusion of the 2018 accounts… he said he would bring Mr Lakin to the meeting with himself to, to discuss a few options.
B.2.4 Maric Meeting
On 13 December 2018, Lazzaro and Lakin attended a meeting with Maric at his office in Drouin (the Maric Meeting). The duration, content and outcomes of the Maric Meeting are disputed by the parties.[19]
[19]The calendar invitation was in evidence. It was named ‘Zvonko Maric – Introduction’ and provided for a meeting duration of 45 minutes. It was put to Lazzaro that the meeting, in fact lasted 45 minutes rather than 2-3 hours as Lazzaro claims, this was rejected by Lazzaro.
According to the defendants, during the Maric Meeting, Maric, Lakin and Lazzaro discussed the best treatment of Lendly’s retained profits of $760,601 such that they would accrue for the benefit of Madison and/or Menlo but not L&K. The defendants plead that it was agreed at the meeting that Madison and/or Menlo would charge licence fees of $1,080,337 (plus GST), being the retained profits of $760,601 plus franking credits of $319,736 which, after repayment of the Menlo Loan, would result in a net payment of $566,502.20 (inclusive of GST). The agreement is alleged to have been partly oral (in the course of the discussion at Maric’s office) and, it is said, can be partly implied and/or inferred.[20]
[20]The inferences or implications said to be are drawn from Lakin’s receipt of correspondence involving Lendly’s accountant (CharterNet) referring to matters including the Menlo Park Trust debit loan, receipt of interest and payment of licence fees, sent on 5 March 2020, 11 March 2020, 8 April 2020 and 30 June 2021, to which Lakin did not respond or do anything in response, and that Lakin signed Lendly’s financial statements for FY2019 and FY2020 which both recorded receipt of interest from Menlo, payment of licence fees to Menlo, and the reduction of the Menlo Loan.
Lazzaro’s evidence about the Maric Meeting was that they quickly turned to discussion of Lendly’s accounts and how to reflect their agreements so as to allow Maric to finalise the accounts, including accounting options for the Menlo Loan to be paid down over a number of years so as to avoid a large tax bill, the payment of dividends in proportion to shareholdings, and accounting for the reconciliation of the cash in the bank account. His oral evidence did not contain the detailed numbers referred to in the previous paragraph. They also discussed their goals and timeline for exiting the business, and what it might be worth in future. Maric explained options for the retained earnings, Menlo Loan and cash, using a legal pad and the financials as a reference point, including creation of a special class of dividend or share, or grossing up the amount that is owed (to account for the fact that Lazzaro would not be taking that money as a dividend). According to Lazzaro, Lakin said that he was more skewed towards the license fee approach, subject to taking some advice on it’ Lazzaro said he would leave the decision to Lakin and did not care which option was chosen, as long as it was equitable for both parties.[21] As can be seen, the defendants’ position as to what agreement was reached at this meeting was somewhat confused. In the hearing, Lazzaro gave evidence as follows:
So I can be clear, the agreement that we had in the meeting in December 18 was that I would not declare a dividend to allow Mr Maric to close the financial accounts for 2018. We proposed a couple of different options for how to deal with, ah, the accounting methods going forward, and we left those options with Mr Lakin and we were waiting for Mr Lakin to tell us his preferred method. We couldn't deal with the accounting until he made a decision… the agreement was that we wouldn't declare a dividend and allow the loans to be paid off using the Div 7A…It was to be done in an equitable manner for Mr Lakin.
[21]Counsel for the defendants submitted that equitable must be read in the context of the three options proposed at that meeting, one of which would have meant Lakin lost a large capital gains tax advantage, and one of which involved Lazzaro’s entities not receiving franking credits, which would mean that Lazzaro lost some value. The option which they say was adopted was the most equitable.
Maric’s evidence was that the primary purpose of the Maric Meeting was to provide him with direction to finalise the accounts and he outlined three options for the retained earnings as at 30 June 2018, those options were discussed, and it was ultimately left for Lakin to decide which option would be preferred. Maric says that he was subsequently instructed ‘that there would be no fully franked dividend being declared and an alternate mechanism would be utilised to deal with his pre-December 2018 profits’. In cross-examination, Maric did not recall topics of the meeting suggested to him by counsel for the plaintiffs, including an explanation of novated leasing and discussion of whether there was an ability for Maric to refer novated leasing business to Lendly, or Lakin sharing his preference and the advice of his accountants that drawing of profits should be done by way of shareholder loans. He says the meeting went for around two hours.
In contrast, in its pleadings, L&K alleges that the purpose of the Maric Meeting was to facilitate Lakin’s introduction to Maric, and for Lazzaro to convince Lakin that Maric should be retained as Lendly’s accountant. Lakin’s evidence was that the meeting with Maric went for no more than an hour and that the meeting was set up to discuss how earnings should be drawn from the business, and for Maric to explain the historic licence fee approach. Lazzaro also asked Lakin to explain to Maric the tax deductibility differences between a novated lease and chattel mortgage, to encourage Maric to start referring clients to Lendly.[22]
[22]Lakin’s accountant CharterNet had referred a large number of clients to Lendly while Maric had not referred any, and this was one factor that Lazzaro and Lakin were considering in their discussions of which accountant Lendly should use.
According to Lakin, the Maric Meeting was about future accounts not past matters, there was nothing further of relevance discussed, and the FY2018 accounts were not discussed.[23] On this point, the defendants say that the proximity of the meeting to the finalisation of the FY2018 accounts suggests that this is incorrect, and the FY2018 accounts were discussed at the meeting.
[23]Lakin also says that Maric provided him with information around a relocation tax benefits for which Lakin did not think he was eligible.
Lakin denies that the recording of payment down of the Menlo Loan was discussed, or that there was any discussion of the treatment of Lendly’s retained profits at the Maric Meeting (should there be any left after the Menlo Loan) was paid down. It is denied that any agreement was reached for the payment of $566,502.20 to the defendants.
After the Maric Meeting, on the same day, Lazzaro wrote to Ms Karen Cartwright, who assisted with Lendly’s bookkeeping at that time, by email. In that email, Lazzaro stated:
After meeting with the accountant today, I need to redress all licence Fees I have drawn since July 1. I will no longer draw money from Lendly to Madison (as licence Fees) due to gst issues arising from. Effectively I need to undo the transactions and process as drawings instead. I understand that there are gst implications for each Madison and Lendly.[24]
[24]Ms Cartwright then recategorized the licence fees in Lendly’s bookkeeping software to loan advances.
However, I note that licence fees did continue to be charged to Lendly after this time and were recorded in the financial accounts for the company in the following years.
The invoice issued by Maric concerning work for Lendly (including the Maric Meeting) was in evidence and discussed in the hearing.[25]
B.3 Events from January 2019
[25]Maric charged $550 in connection with the meeting and noted that the meeting was to discuss future tax structure and other tax considerations for Lendly.
B.3.1 FY2018 accounts are finalised
On 18 January 2019, Lazzaro sent Lakin a copy of the FY2018 financial statements, which showed Lendly receiving interest payments, the decrease of the Menlo Loan, and licence fees. Lakin’s evidence was that he did not recall receiving the statements or seeing that the Menlo Loan was going down.
The last financial statements and tax return to be prepared for Lendly by Maric were for FY2018, which were finalised in around January or February 2019. After the Maric Meeting, and some time before October 2019, Lendly changed accountants to CharterNet.
B.3.2 FY2018 tax refund
On 8 February 2019, Lazzaro wrote to Lakin to explain that a deposit into the Lendly bank account of $35,552.70 was a tax refund in relation to FY2018, stating that there was no impact on Lendly as it related to tax credits from the prior year. Lakin did not object to Lazzaro taking this sum, and says that this did not involve a further capitulation on his part regarding Lazzaro’s entitlement to Lendly’s pre‑1 July 2018 accounts, nor does it show that Lakin agreed to Lazzaro’s entitlement to all things from the pre‑1 July 2018 period.
B.3.3 Lendly’s brokerage business takes a hit and Lakin seeks further equity
On 4 April 2019, BMW Finance ceased its brokerage dealings with Lendly. This had a significant impact on Lendly’s non-novated leasing side of the business.
Lazzaro provided oral evidence about a meeting with Lakin at a café in Port Melbourne on that day. According to Lazzaro, he told Lakin that he had not seen the announcement from BMW coming, and both acknowledged that this would have an impact on the business and that they needed to decide what to do. Lakin raised that a lot of time was being spent on that side of the business, that there had been a few new hires that had been unsuccessful, and that he was acutely aware of the runway ahead of Lendly. They agreed to focus all of their attention and effort on the novated leasing side of the business moving forward.
According to Lakin, at the abovementioned meeting, he raised that BMW Finance’s actions were contrary to what he says Lazzaro had told him in the Buy-In Discussions, that the performance targets necessary to activate the additional equity option in cl 3A of the SPA may be more difficult to achieve and that Lakin felt his contribution to the business was disproportionate to the money that he was making.[26] Lakin told Lazzaro that, in those circumstances, he wanted to increase his equity by 20% to move to a 50:50 partnership, for no additional cost. According to Lakin, Lazzaro did not provide a response to Lakin’s request; he took in what Lakin had said, did not disagree, but said he needed to reflect on it.
[26]Lakin gave evidence that in this period, he had had to focus on recruitment and maintaining finance broker revenue due to staff turnover and absences, such that he had not had sufficient time to dedicate to the novated leasing side of the business.
The defendants say I should reject any suggestion that Lazzaro misled Lakin in respect of the Buy-In Discussions, as no evidence established that such representations were made, let alone that the representations were false.
Lakin says that a further in-person discussion occurred a few days later, in which Lazzaro agreed that what he had said during the Buy-In Discussions regarding BMW Finance had not come to fruition and that he felt bad about this, and offered Lakin 10% more equity in Lendly. Lakin says that he replied that he would need to think about the offer, and he accepted it in the following days.
Lazzaro gave oral evidence about a telephone conversation in which Lakin stated that recent events had made it difficult for him to trigger the option in the SPA, and indicated that he had begun to feel unhappy with his investment in Lendly. Lakin expressed to Lazzaro that his investment represented a greater involvement in the business than was reflected in his shareholding, that he should receive up to 50%, and asked what Lazzaro would do about this. Lazzaro says the discussion became heated and that he acknowledged that it would be hard for Lakin to trigger the option.
Lazzaro gave evidence about a further conversation, occurring in person, in which he said that he was sympathetic to Lakin’s position and wanted to preserve their working relationship as best as possible, so proposed that Lakin’s equity be increased to 40%.
The defendants say that Lazzaro gifted the shares on condition that there would be no further equity in Lendly provided to L&K and that Lazzaro, through Madison and Menlo, would remain the majority owner. Lakin says that there were no conditions attached to the gift.
In summary, while some facts surrounding the change in equity are disputed, it is common ground that in around April 2019 Lakin and Lazzaro agreed that Menlo would transfer at no cost a further 10% of shares in Lendly to L&K (such that L&K would hold 40% of the shares in Lendly). This change in equity was formally recorded in June 2020.
B.4 Events from October 2019
Upon CharterNet becoming the accountants for Lendly, and for the purposes of preparing Lendly’s financial statements and tax return for FY2019, CharterNet raised a number of queries and circulated draft financial statements, including in relation to the Menlo Loan.
On 22 October 2019, Lazzaro provided CharterNet with a copy of Lendly’s FY2018 financial statements and the next day also provided a copy of a handover brief regarding Lendly’s finances.
In a further email dated 23 October 2019, Lazzaro referred to an unallocated profit distribution from FY2018 of ‘circa $200K’. The handover brief attached to the further email did not refer to the Menlo Loan or the retained earnings. One document provided to CharterNet at this time was a note from Lazzaro which stated: ‘Kit purchased shares in Lendly on 01/07/2018. As a shareholder, he is entitled to profits from the execution date’. Lakin says he does not agree with this description of the transaction.
Higgs agreed that it was appropriate to reduce the multiple where there is a risk to FME, but only when comparing against a transaction that doesn't feature the same risk. According to Higgs, when comparing against a transaction that already contains a similar risk, due to similarities in business scale and operations, a further reduction to account for something such as key personnel risk is not necessary. However, Higgs conceded that if half of Lendly’s sales team has left the company, resulting in falling sales performance, it may affect the earnings multiple.
M.6.3.2 Parties’ submissions on the earnings multiple
In terms of the earnings multiple that the Court ought to adopt, L&K notes that the ABM Transaction:
(a)was agreed by the Experts to be the most relevant to Lendly and should form the basis for the valuation of the shares;
(b)had a multiple of 5.2x historical earnings;
(c)occurred prior to the change in electric vehicle legislation that provides an FBT exemption in respect of eligible electric vehicles; and
(d)was a novated leasing company, where other comparable transactions had other diversified parts to their business.
L&K submits that Malcolm’s proposed multiple of between 3.0x to 4.0x should be rejected for the following reasons:
(a)None of the comparable transactions relating to small novated leasing companies referred to by either of the Experts adopted a multiple in the range proposed by Malcolm. They were in the range suggested by Higgs, with an EBITDA multiple of at least 5.2x.
(b)Higgs has experience in corporate finance, doing advisory and valuation work, and has been involved in the sale of novated leasing businesses over the past 15 – 20 years.
(c)Even if one was to speculate about changes to FBT, this would not justify a reducing the earnings multiple below 5.2x, especially where the ABM Transaction occurred before the beneficial changes to FBT regime.
(d)There is no evidence, other than an unsupported instruction, regarding any key sales staff member generating 57% of new sales in FY2023. Speculation that Lendly might suffer sales and expertise loss based on unverified client instruction is not a proper basis to significantly depart from the ABM Transaction multiple.
(e)While Lendly did recently lose Macquarie Bank as one of its finance partners, 99% of its finance deals were done with the remaining financier, Pepper Finance, who was Lendly’s principal novating lease finance partner.
Instead, L&K submits that the correct approach to be taken is the one summarised by Higgs during the Expert Conclave (emphasis added):
(a)First, start with a base average multiple of 5.1x – 5.2x historical earnings (based on historical transactions most comparable to Lendly).
(b)Then, if the positive impact on Lendly of changes to the FBT legislation is not reflected in the company’s FME, the earnings multiple should be increased to 5.8x to account for this impact. However, if this is reflected in Lendly’s FME, then the earnings multiple should remain at 5.1x – 5.2x historical earnings.
The defendants submit that the Court should adopt Malcolm’s multiple of 3.0x – 4.0x historical earnings.
The defendants submit that little to no weight should be afforded to Higgs’ view as to the appropriate earning multiple. According to the defendants, Higgs accepted during the Expert Conclave that his use of confidential client data to inform the appropriate earning multiple was contrary to his ethical obligation of confidentiality owed pursuant to APES 110 Code of Ethics for Professional Accountants. The defendants say that the Court should condemn, and not sanction, an admitted breach by an expert of his ethical obligations to former clients. The Court should attribute no weight (or very little weight) to Higgs’ evidence about transactions informed by confidential information. That means that Higgs’ opinion as to the appropriate multiplier must be regarded as being based upon only a single transaction (that being the ABM Corporation). The defendants submit that an opinion supported by only a single transaction must be regarded as very weak and of extremely limited evidentiary value.
M.6.3.3Consideration regarding the earnings multiple
In arriving at their suggested multiple, each Expert assessed a number of transactions that were said by one or the other to be comparable to Lendly in terms of size and business operations. As stated in the Higgs Report:
The selection of a multiple takes into account the unique features of the Company including its business profile, assessed risks and the industry within which it operates.
However, there is significant disagreement between the Experts as to the comparability of the transactions referred to in their respective reports. Malcolm is of the view that five of the six transactions relied on by Higgs do not consider the size of the businesses in question and have no public information available to support or verify the comparability of the operations, financial data or implied multiples. The defendants also submit that little to no weight should be given to Higgs’ evidence about transactions informed by confidential information. Meanwhile, Higgs criticises three of the four transactions relied on by Malcolm as having either low relevance to the novated leasing industry, or an understated earnings multiple.
However, the Experts agree that the ABM Transaction is relevant to Lendly due to the size of the company and the nature of its operations, and should form part of the basis of the valuation of the shares in Lendly. As outlined earlier, the ABM Transaction involved the purchase of a dedicated novated leasing company by a publicly listed company, with publicly available purchase data, and an earnings multiple of 5.2x.
Given the disagreement between the Experts on every transaction referred to bar one, I see no good reason why I should not use the one common transaction (being the ABM Transaction) as a useful starting point for my consideration. The defendants submit that an opinion supported by only a single transaction must be regarded as very weak and of extremely limited evidentiary value. However, I disagree. Each Expert conducted rigorous research to identify and assess those transactions they deemed most comparable to Lendly. After writing their individual reports, each Expert then had an opportunity to critique the transactions relied upon by the other. By a robust process of elimination, one transaction remains as the best metric by which the Court can determine the appropriate earnings multiple in this case. I consider this sufficient for the present purposes. That being the case, any concerns as to Higgs’ use of confidential client data for some of his comparable transactions do not arise. I found the defendants’ submissions and attack on Higgs in this respect, accusing him of breaching his obligations of confidentiality to former clients and his obligations under the various professional valuations standards to be overblown and I do not need to make any findings in that regard.
Higgs is of the view that the earnings multiple should be increased from 5.2x to 5.8x if Lendly’s increased earnings after November 2022 are not included in the FME assessment. Given that I have included those increased earnings in the FME assessment, there is no justification for adopting Higgs’ 5.8x as the earnings multiple.
Malcolm is of the view that various factors inhibit Lendly’s potential earning multiple namely exposure to legislative changes, key staff risks, dysfunctional management, the recent loss of a finance partner, and historically-weak earnings performance.
I will address each of Malcolm’s concerns in turn below, when considering whether a discount ought to be applied to the 5.2x earnings multiple.
In my view, the 5.2x earnings multiple, being the starting point as referred to in paragraph 838 above, should be reduced for the following six reasons. Based on this, I consider it appropriate that a multiple of 4.6x be applied to Lendly’s historical earnings for the purpose of valuation.
First, as I have concluded in section M.5.3 above, recent changes to the FBT regime have been a boon for Lendly. To say, as Malcolm does, that the boost to Lendly’s earnings should not be accounted for in the company’s FME but should then also be considered a risk to the company were the new tax incentives to be removed is, to my mind, a hard sell. It is akin to not counting it at all. Malcolm conceded during the Expert Conclave that she could not verify the expected duration of the tax incentives. As such, I see no reason why the earnings multiple should be heavily reduced to account for the risk posed by exposure to legislative changes.
Second, in terms of the risk posed to Lendly by the departure of key staff, I consider that:
(a)no evidence was adduced which would indicate the immediate or even likely departure of the particular staff member in question;
(b)if that person was to leave the business, Lendly could look towards hiring new staff. I accept, however, that some allowance would need to be made for new staff to reach similar levels of sales to that of existing key staff; and
(c)regard must be had to Lakin’s role in the business and the fact that he will no longer be involved. Given his key sales role, his departure is highly likely to have at least a short-term impact on the financial performance of the business.
Third, true it is that dysfunctional management has hamstrung decision making at Lendly since as early as April 2021. This has undermined the company’s ability to deal with, for example, its tax obligations or the subleasing of its excess office space. It is likely that the freeze on executive decision-making will thaw with the conclusion of this proceeding and the subsequent making of orders by the Court. Nonetheless, I consider it appropriate that a small discount to the earning multiple be made to account for the damage already done by Lakin and Lazzaro’s inability to work together since the breakdown of the relationship.
Fourth, Malcolm notes that Lendly made a loss of $100,000 in FY2021, which is something that a potential purchaser may regard as indicative of risk. It should be noted that Lendly’s reported net profit was $576,000 in FY2022 and $991,000 in FY2023. Given the changes to the FBT regime and the resulting boost to Lendly’s sales performance and revenue, it is possible that the company’s net profit for FY2024 may go up once more. However, I do consider Malcolm’s concern to be valid. Despite Lendly’s recent success, it was in the red only three years ago. This is indeed something that a potential purchaser may regard as indicating risk. As such, I consider it appropriate that a small discount to the earning multiple be made to account for the inconsistency of Lendly’s past financial performance. Further, given the level of dysfunction within Lendly for FY2024, Lakin’s resignation, and other employee resignations who have not been replaced due to the directors’ inability to agree on anything, a discount on the earnings multiple used in the ABN Transaction is justified.
Fifth, none of these risks or uncertainties have been taken into account when calculating the Assessed FME. It is appropriate, therefore, that any such risks or uncertainties are factored into the earnings multiple.
Sixth, while the ABM Transaction is the closest to the situation pertaining here, it is not completely equivalent, including the acquisition being by a public company. Higgs stated, and I agree, that it is appropriate to reduce the multiple where there is a risk to FME when comparing against a transaction that does not feature the same risk. Here, I have found that certain risks exist in respect of Lendly’s FME but do not have evidence as to whether those risks were present in the ABM Transaction. In my view, the appropriate course in those circumstances is to reduce the multiple.
On this basis, the Enterprise Value of Lendly is to be calculated by multiplying $1,129,000 (the Assessed FME, see paragraph 817 above) by 4.6 (the earnings multiple, see paragraph 842 above). Thus, the Enterprise Value of Lendly is $5,193,400.
M.7 Calculation of Net Surplus Assets so as to be able to calculate the Equity Value of Lendly
It was common ground that the Net Surplus Assets were to be added to the Enterprise Value so as to arrive at the Equity Value for Lendly.
The components which may make up the Net Surplus Assets were also common ground. These components were as follows, noting however, that the amount of them was not necessarily agreed and it was also not agreed that all of the components should be taken into account:
(a)surplus cash;
(b)add amount of First Withdrawal;
(c)add Second Withdrawal in the amount of $80,000;[173]
(d)add related party loans; and
(e)subtract tax liability.
[173]This was L&K’s position by closing submissions, as they were no longer pursuing the return of the rest of the Second Withdrawal.
In respect of these components:
(a)the parties agreed that as at 1 May 2024, the surplus cash was $2,464,108. This amount consists of Lendly’s bank account balance of $2,707,107.63 less the amount of $244,000 agreed between the Experts as being necessary to cover working capital requirements;
(b)the amount of the related party loans in the Joint Statement was $252,000; and
(c)Lendly’s tax liability as at 30 June 2023 was agreed in the Joint Statement to be $555,000.
While the parties had differed on most of these components, by the conclusion of closing submissions a significant amount of common ground had been reached. In this regard:
(a)the defendants acknowledged, in oral closing submissions, L&K’s point that if Lazzaro was entitled to the $80,000 component of the Second Withdrawal, then the related party loans should have been adjusted by that amount in the accounts, but had not been. The defendants submit that, if the parties are separating and there is a buy-out, then the related party loans should be treated as extinguished but the $80,000 should be credited to the accounts as it had been paid. Counsel for the plaintiffs said they would accept that approach. Accordingly, an amount of $80,000 will need to be added when calculating the Net Surplus Assets; and
(b)in respect of Lendly’s tax liability, L&K submits that as well as the $555,000 referred to in the Joint Statement, a further provision of $244,777 should be included so as to provide for estimated tax based on the additional surplus cash in Lendly’s bank account since the Joint Statement was prepared. The defendants adopted an amount of $800,000 for Lendly’s tax liability. No explanation was provided by the defendants for this amount. However, I note that both parties figures for Lendly’s tax liability are very similar: L&K’s figure comes to $799,777; the defendants’ figure is $800,000. Accordingly, I will use the figure of $800,000 as Lendly’s tax liability.
Therefore, it was really only whether the First Withdrawal should be added which was in dispute. L&K submits that it should be; the defendants submit that it should not.
Given that I have already found that the defendants were not entitled to the amount of the First Withdrawal, Lendly is to be valued on the basis that $530,000 is an asset of Lendly. Therefore, it must factor into the calculation of the Net Surplus Assets.
My calculation of the Net Surplus Assets is set out in the below table:
Item
Outcome
Basis
Surplus cash
$2,463,108
Agreed by the parties
Add First Withdrawal
$530,000
Found by the Court: see paragraph 855 above
Add Second Withdrawal
$0
Agreed by the parties: see paragraph 853(a) above
Add related party loans
$80,000
Agreed by the parties: see paragraph 853(a) above
Subtract tax liability
$800,000
Found by the Court: see paragraph 853(b) above
Net Surplus Assets
$2,273,108
Thus, the Equity Value of Lendly is $7,466,508, comprising the Enterprise Value of $5,193,400 plus the Net Surplus Assets of $2,273,108.
M.8 Conclusion regarding valuation and the price to be paid for L&K’s shares
It was conceded by L&K that it was appropriate that the Vendor Loan should be factored into the price to be paid for L&K’s shares if a buy-out was ordered.
The Vendor Loan as at 1 May 2024 is $806,052. This is the same date used to calculate the surplus cash. L&K submits that these numbers should be updated to reflect the situation as at the date orders are made, however I will not do so. I will use the 1 May 2024 amounts for the surplus cash and Vendor Loan when calculating the price to be paid.
L&K submits that the net amount payable to L&K is $3,670,960, being L&K’s 40% of Lendly’s Equity Value (which they calculate to be $3,477,012),[174] less the Vendor Loan as at 1 May 2024. It says that a fair value in all the circumstances, taking into account the early repayment of the Vendor Loan, would be an amount of $3 million.
[174]Based on L&K’s calculation of total Equity Value of $8,692,531.
I do not accept this. No evidence was led as to the appropriate calculation for early repayment of the Vendor Loan and this submission was made very late in the piece.
In my view, the fair price to be paid by the defendants for L&K’s shares in Lendly is $2,180,551, calculated in the manner set out in the below table. This fairly reflects the value of L&K’s shareholding in the company, adjusted so as to ameliorate or remedy the effects of the oppression.
Item
Amount
Assessed FME
$1,129,000
Earnings Multiple
4.6
Enterprise Value
$5,193,400
Net Surplus Assets
$2,723,108
Equity Value
$7,466,603
L&K’s 40% of Equity Value
$2,986,603
Less Vendor Loan
$806,052
Net amount payable to L&K
$2,180,551
N Winding up
N.1 Evidence
There is manifold evidence that the parties are in a state of dysfunction as it concerns ongoing operations of the business and their relationship with each other. I will not restate all of this evidence here.
N.2 Pleadings
With respect to winding-up relief, L&K alleges that:
(a)Lazzaro has acted in affairs of Lendly in his own interests rather than in the interests of the members as a whole, and, or in a manner that is unfair or unjust to L&K;
(b)Lendly’s affairs are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, L&K; and
(c)Lazzaro, Madison and Menlo have irreparably destroyed the relationship between Lendly’s shareholders, and between Lazzaro and Lakin — in particular the level of mutual co-operation and trust required for the smooth running of Lendly’s business and day-to-day management — and created an irreparable level of distrust and conflict between Lendly’s shareholders and between Lazzaro and Lakin.
The defendants deny these allegations.
N.3 L&K’s submissions
L&K submits that, notwithstanding that L&K is a 40% shareholder of Lendly, the jurisdiction of the Court is clearly enlivened to make an order to wind up the company. The jurisdiction is enlivened where the management and control of Lendly is ‘effectively deadlocked’ as a result of the breakdown and irreparable damage to the working relationship between Lazzaro and Lakin and the now impossible requirement that all decisions affecting Lendly and the business must be unanimous, pursuant to cl 6 of the SHA.
Winding up Lendly is not L&K’s preferred outcome. Nevertheless, if there is no compulsory buy-out they say that Lendly must be wound up because the parties cannot continue to work together going forward.
L&K submits that it is clear on the material that when Lakin joined Lendly, the business was a form of quasi-partnership arrangement, established on the basis of mutual confidence, similar to the business arrangement context of Re Munja Bakehouse. The mutual cooperation and a level of trust and confidence between the parties is destroyed, which are essential for smooth day-to-day management of a company.[175] As a result, L&K says the jurisdiction to wind up the company is clearly engaged.
[175]Re Munja Bakehouse, [22]. See also Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343 (Barrett J) (Nassar).
L&K points to the following matters, identified in Re Admiral Cove Pty Ltd (as trustee for the Admiral Cove Property Trust), as reasons that a just and equitable winding up order is available:[176]
(a)There is a deadlock in the management of the company.[177]
(b)The company is in a state of corporate paralysis.[178]
(c)There is a breakdown in the relationship between the shareholders.[179]
[176][2023] VSC 537, [46].
[177]Ibid citing Re Yenidje Tobacco Company Ltd [1916] 2 Ch 426; Johnny Oceans Restaurant Pty Ltd v Page [2003] NSWSC 952; Clarke v Bridges [2004] FCA 394; Booker v You Run the Business Pty Ltd [2008] FCA 1762; Re Dawning Investments Pty Ltd (2022) 68 VR 226.
[178]Ibid citing Re Vision Image (Aust) Pty Ltd Cheng v Yeo [1998] WASC 38 ; CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 ; Great Australian Resources Pty Ltd; Re Platinum Mining Ventures Ltd [2011] FCA 1472.
[179]Ibid citing Nassar.
L&K says that the breakdown in the relationship is unquestioned, and emphasises Lakin’s evidence of Lazzaro’s asserted:
(a)threats to delete family photos;
(b)attempts to manufacture breach of Vendor Loan;
(c)reducing Drop Box Storage;
(d)cancelling Lakin’s wife’s mobile phone account;
(e)negotiating Lendly’s Lease unilaterally;
(f)agitating and then abandoning allegations concerning FBT; and
(g)threats to deduct pay and remove access.
L&K relies on Re Munja Bakehouse,[180] where Black J cited the following observations of Stewart J in Haycraft v AF1 Services Pty Ltd:[181]
… it is generally necessary to show that the breakdown is of such a nature and degree that it materially frustrates the commercially viable and sensible operations of the company in accordance with the shareholders’ expectations, that the loss of confidence is justified and that there is a restriction on the transferability of the shares of the party seeking to wind up the company.
[180]At [23].
[181][2023] FCA 774; (2023) 168 ACSR 489, [75], which in turn cited the decision Re of L&B Seafood Pty Ltd [2022] NSWSC 100, [148] (Henry J).
L&K says that there is clear evidence that the relationship breakdown is of such a nature and degree that it materially frustrates the commercially viable and sensible operations of Lendly. L&K points to the failure to hire personnel as one example of the frustration of Lendly’s operations.
L&K submits that there is no absolute rule against winding up a solvent company, although it will be a last resort.[182]
[182]Re Munja Bakehouse, [24].
N.4 Defendants’ submissions
The defendants say that a winding-up would be an extreme step and unnecessary in the event the counterclaim succeeds.[183] A winding-up order is not to be ‘lightly made’.[184] Lendly is a profitable company and it is rare that the Court will wind up a solvent company.[185]
[183]Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914, [76] (Pure Nature).
[184]Re Amazon Pest Control Pty Ltd [2012] NSWSC 1568, [19].
[185]Pure Nature, [76].
In their opening submissions, the defendants had suggested that the relationship breakdown between the parties was not of the nature and degree that materially frustrates the commercially viable and sensible operations of the company and that the evidence at trial would show that the directors have continued to work together.[186]
[186]Argyle HQ, [50].
However, the defendants have since accepted that there is a fundamental breakdown in the relationship. They accept that the trust and confidence between the directors was destroyed and can never be regained or rebuilt.
N.5 Consideration
Lakin and Lazzaro’s relationship has broken down irretrievably. It is tolerably clear that the management of the company is deadlocked, such that even the most fundamental of tasks such as preparation of financial statements and tax returns are not able to be performed. As both parties submit, it is impossible for the two to continue to make decisions for Lendly in line with the SHA requirement that decisions be made unanimously. There is no mechanism in that document or elsewhere for resolving disagreement. It is clear that their involvement in the company was to be on the basis of a relationship of mutual trust and confidence: despite Lazzaro controlling the majority shareholders, decisions affecting the company and its business were to be unanimous. The paralysis of the company in the present circumstances is such that I am of the opinion that it would be just and equitable for Lendly to be wound up, pursuant to s 461(1)(k) of the Act.
The Court’s jurisdiction to wind up Lendly has been established. In the circumstances, and for the reasons expressed, I consider it appropriate that the discretion to wind up Lendly be exercised. It is clear that things cannot go on as they have been.
However, the winding up of a solvent company is a grave step and should only be taken as a last resort. It is not for the Court to interfere in a profitable company to place it into liquidation where there is some alternative available which allows the business to continue to exist, employee staff, service clients, pay wages and tax, and generate profits for its shareholders.
Here, there is an available alternative to winding up Lendly. As set out earlier, I have already determined that the appropriate remedy in respect of the found oppression is an order that the defendants purchase L&K’s shares at the amount determined by the Court to be fair value. The net amount to be paid for those shares is $2,180,551. Nevertheless, it may be that Lazzaro does not comply with an order for the compulsory purchase of L&K’s shares. In that eventuality, I consider it appropriate to order that, in the event that there is non-compliance with the compulsory buy-out order by a designated date, Lendly is to be wound up pursuant to s 461(1)(k) of the Act. For completeness, based on the findings above with respect to oppression, it is evident that this Court could also make such order pursuant to s 461(1)(e) or (f), or s 233(1)(a).
I will not make any order or indication at this time regarding who should be appointed as liquidator in the event of a winding up. Should matters progress such that a winding order must be made, the matter can be listed for the making of a winding-up order and the defendants will have an opportunity at that time to make submissions on the identity of the appointee.
For the sake of completeness, I note that s 467(4) of the Act is met, as L&K has sought an alternative (and preferred) remedy, being a buy-out.
O Conclusion
For the reasons set out above, I have concluded the following:
(a)By undertaking each of the First and Second Withdrawals:
(i)Lazzaro breached the No Funds Agreement; and
(ii)the defendants breached clauses 3.2, 6 and 24(c) of the SHA.
(b)By undertaking the First Withdrawal, Lazzaro breached his duties under s 181(1)(b) and s 182 as a director of Lendly.
(c)By undertaking the First Withdrawal and by breaching the SHA, the defendants have conducted the affairs of Lendly in a manner which is contrary to the interests of members as a whole and oppressive to, unfairly prejudicial to, or unfairly discriminatory against L&K.
(d)The claims made in the defendants’ counterclaim (being rectification of the SHA, estoppel in respect of the First Withdrawal, and allegations that Lakin and/or L&K have acted oppressively) must fail.
(e)The preferred remedy in this case is that the defendants purchase L&K’s shares in Lendly for the net amount of $2,180,551, by a specified date.
(f)The orders should provide for the following, if the defendants do not comply with the order that they purchase L&K’s shares in Lendly for the net amount of $2,180,551:
(i)for Lazzaro to pay Lendly compensation for breaching his directors’ duties in the amount of $530,000; and
(ii)for Lendly to be wound up.
By way of summons filed on 8 August 2024, L&K made an application for:
(a)an order directing that the sum of $2,600,000 (the Preserved Funds) be transferred from Lendly’s bank account into the trust account of the solicitors on record for L&K; and
(b)an order directing the transfer of the Preserved Funds into an interest-bearing controlled money account, to remain in place until further order of the Court or by unanimous agreement of the parties.
This application was heard by me on 16 August 2024, which was after I had reserved my judgment in this trial and prior to handing down the judgment. I note for the parties’ benefit that these reasons had been substantially prepared prior to hearing that application and the application has not played any role in or influenced my reasons.
By 18 September 2024, the parties are to confer to provide my Chambers with a proposed form of orders to give effect to these reasons, including as to costs. If they are unable to reach agreement, then by 18 September 2024, each party should provide my Chambers with their preferred form of order and a written outline of submissions of no more than 5 pages in support of their preferred orders, and the proceeding will be listed for 20 September 2024 for the making of final orders.
SCHEDULE OF PARTIES
| S ECI 2021 02111 | |
| BETWEEN: | |
| L&K THE STORY PTY LTD ACN 608 869 772 in its own capacity and in its capacity as the trustee of the Lakin Family Trust ABN 72 186 936 074 | First Plaintiff |
| LENDLY PTY LTD ACN 108 502 745 | Second Plaintiff |
| - v - | |
| MADISON GROUP PTY LTD ACN 125 462 491 of the Madison Group Trust A.B.N. 44 166 412 212 | First Defendant |
| MENLO PARK PTY LTD ACN 603 922 149 in its own capacity and in its capacity as the trustee of the Menlo Park Trust A.B.N. 65 900 746 177 | Second Defendant |
| BENJAMIN JAMES LAZZARO | Third Defendant |
| AND BETWEEN | |
| MADISON GROUP PTY LTD (ACN 125 462 491) | First Plaintiff by Counterclaim |
| MENLO PARK PTY LTD (ACN 603 922 149) | Second Plaintiff by Counterclaim |
| BENJAMIN JAMES LAZZARO | Third Plaintiff by Counterclaim |
| - v - | |
| L & K THE STORY PTY LTD (ACN 608 869 772) | First Defendant by Counterclaim |
| CHRISTOPHER ANDREW LAKIN | Second Defendant by Counterclaim |
| LENDLY PTY LTD (ACN 108 502 745) | Third Defendant by Counterclaim |
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