Rozenblit v Vainer
[2019] VSCA 283
•3 December 2019
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2019 0067
| ILANA MELNIKOV AND ANNA SIROTA (AS EXECUTORS OF THE ESTATE OF BORIS ROZENBLIT, DECEASED) | Applicants |
| v | |
| MICHAEL VAINER & ANOR | Respondents |
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| JUDGES: | BEACH, NIALL and OSBORN JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 21 October 2019 |
| DATE OF JUDGMENT: | 3 December 2019 |
| MEDIUM NEUTRAL CITATION: | [2019] VSCA 283 |
| JUDGMENT APPEALED FROM: | Rozenblit v Vainer [2019] VSC 316 (Sifris J) |
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REMEDIES – Appeal – Damages – Transfer of shares induced by misleading and deceptive conduct and unconscionable conduct – Restitution – Company subsequently wound up – Measure of damages – Quantum – Valuation evidence to determine value of shares at date of transfer – Methods of valuation – Discounted cash flow – Net asset value – Future maintainable earnings – Trial judge found shares worthless – Applicant awarded nominal damages – Whether trial judge correct to reject applicant’s valuation evidence – Whether trial judge erred in adopting respondent’s expert valuer’s opinion – Whether bottom end of range of respondent’s valuation should have been adopted – Appeal allowed in part – Applicant entitled to damages representing proportionate market value of shares at relevant date.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr J Korman | P Henenberg Lawyers |
| For the Respondents | Mr R Moore | Aptum Legal |
BEACH JA:
nIALL JA:
OSBORN JA:
Introduction
Boris Rozenblit (‘Rozenblit’) was an inventor who entered into arrangements with Michael Vainer (‘Vainer’) to establish a joint venture for the purpose of developing and utilising technology which enabled waste tyres to be processed to produce a form of commercially useful rubber.[1]
[1]Rozenblit gave evidence on the trial of this proceeding but died shortly prior to the hearing of his application for leave to appeal. The applicants for leave to appeal are the executors of his will, however for the purposes of this judgment we will continue to refer to ‘the applicant’
After a series of initial agreements,[2] a company called VR Tek Global Pty Ltd (‘VRT Global’) was established in 2009 to develop and conduct commercial operations.
[2]Their first agreement was an oral agreement later reduced to written heads of agreement (‘implementation agreement’).
In November 2011, Vainer induced Rozenblit to transfer a parcel of shares in VRT Global to Vainer’s father, Dr Alexander Vainer (‘Dr Vainer’).
The trial judge in this proceeding found that in breach of the Australian Consumer Law[3] the transfer was induced by misleading or deceptive conduct by Vainer and that the conduct of both Vainer and Dr Vainer was unconscionable.
[3]Competition and Consumer Act 2010 (Cth), sch 2.
Despite these findings his Honour was not persuaded that Rozenblit’s shares were of any value.
Accordingly, he awarded nominal damages of $100 only. Rozenblit now seeks leave to appeal his Honour’s conclusions with respect to the value of the shares.
For the reasons set out below, the primary challenge to his Honour’s conclusions must fail. In our view, the trial judge was correct to reject the valuation opinion upon which Rozenblit relied for the purposes of quantifying his claim.
Conversely, we take the view that on the evidence before him his Honour was entitled to accept the valuation evidence put forward on behalf of the respondents which adopted a value between $nil and $180,740 for VRT Global at the relevant date.
Contrary to his Honour however, we take the view that the bottom end of this range should not have been adopted. Having regard to the basis of the valuation, we would assess the value of the company at the relevant date as $125,087. In turn, Rozenblit’s shares had a value proportionate to his 13.6 per cent shareholding of the total share capital namely $17,011.
We have further concluded that such sum should not be regarded as negligible and the respondents should be required to compensate the applicant in respect of this value.
Background facts
The rubber used to manufacture motor vehicle tyres is subjected to a hardening process known as vulcanisation. In order to recycle such rubber it must be devulcanised. From 2006 on, Rozenblit and Vainer worked together to develop and commercialise technology which could be used for the recycling of tyre rubber.
Three international patent applications were filed:
(a) on 12 November 2007, for a method of segmenting rubber tyres. This invention was intended to break down the tyres into segments, for further processing using the second and third patented methods detailed below;
(b) on 3 May 2010, for a method, process and device for treating recycled rubber tyres with ozone; and
(c) on 15 March 2010, for an improved extruder for devulcanising recycled rubber. This extruder was invented by Rozenblit in conjunction with Russian inventors, Dimitry Shtak and Sergey Azarenkov, who later built and supplied the machine.[4]
[4]While Rozenblit and Vainer applied for, and were granted the patents, as co-inventors, Rozenblit subsequently successfully applied to have Vainer removed as co-inventor. See Rozenblit v Vainer [2019] VSC 316 [32]-[33].
Once VRT Global was established it took advantage of funding in excess of $1 million through the Advanced Manufacturing Co-operative Research Centre (‘AMCRC’), to engage the Commonwealth Scientific and and Industrial Research Organisation (‘CSIRO’) and later Deakin University (‘Deakin’) to develop its technology to the point where it was hoped that it could be commercialised. Amongst other things, the research institutions were to attempt to prove the viability of the technology and commission a pilot recycling plant.
CSIRO produced the tyre segmenting device.
Deakin’s research and development, conducted in and between 2009 and June 2012, focussed on the ozone treatment process and the extruder.
The initial ideas for an ozone agitation chamber were developed by Deakin, then refined in conjunction with Chinese suppliers, who ultimately fabricated an agitation chamber according to a blueprint prepared by Deakin.
An extruder was shipped from Russia, produced by Shtak and Azarenkov’s company. Deakin took delivery of both the ozone agitation chamber and the extruder machine and established a pilot plant (‘the pilot plant’) where it determined their optimum operating conditions.
During the September quarter of 2011, 20 kilograms of devulcanised rubber was produced from the pilot plant. Progress reports with respect to Deakin’s research were contained in 11 quarterly reports authored by Deakin’s chief researcher.
Rozenblit’s patents envisaged tyre pieces first being subjected to ozone, in order to break down the rubber, and then fed into the extruder in crumbed form. Deakin’s later research on behalf of VRT Global showed it was more effective to mechanically shred the tyres and then pulverise them in the extruder before exposing the resultant powder to ozone.
Deakin treated the extruded devulcanised rubber with ozone by feeding the rubber into an agitation chamber containing ozone gas. Deakin’s research revealed that this process performed two valuable functions. It produced finer and more readily usable polymeric powder, and the corrosive effect of the ozone on the rubber particles gave them a more reactive surface area.
Deakin’s research also included an examination of the potential of devulcanised rubber/polyethylene composites.
Deakin’s research concluded in June 2012. By that point in time, it had developed a pilot plant enabling the production of devulcanised rubber. It had not fully resolved the optimal operation of the proposed ozone process. It had also not resolved the potential for production of composite materials using the recycled rubber.
The share transfer and subsequent dealings
Fifty per cent of the share capital of VRT Global was held by VR Tek Operations Pty Ltd (‘VRT Operations’), a wholly-owned subsidiary of VR Tek Pty Ltd (‘VRT’). VRT acted as the trustee of a unit trust. Until November 2011, Vainer, Rozenblit, Dr Vainer and David Freeman, the directors of VRT Global, directly held the remaining 50 per cent of VRT Global share capital.
Rozenblit, Vainer and Dr Vainer each held units in the unit trust, and through them, an indirect interest in VRT Global.
In late 2011, Vainer induced Rozenblit to transfer Rozenblit’s shares in VRT Global to Dr Vainer. Rozenblit was told that VRT Global was on the brink of financial collapse and that if the shares were transferred to Dr Vainer he would provide security for a bank loan of between $400,000 and $600,000 to VRT Global. It was proposed that the security would comprise the title to Dr Vainer’s medical consulting rooms.
Initial enquiries had been made with the Commonwealth Bank of Australia (‘CBA’) in relation to borrowing funds against the identified security. In order to facilitate a loan, VRT Global prepared a business plan for the CBA, dated December 2011.
In the event, however, no application was ever presented to the CBA and Dr Vainer did not offer his medical consulting room premises as collateral for any loan. No funds were ever borrowed from the CBA or any other lender.
On 1 February 2012, Vainer obtained director’s approval for VRT Global not to proceed with any application for debt finance.
The result was that Rozenblit had transferred some 108,800 shares, equivalent to 13.6 per cent of the share capital, to Dr Vainer for illusory consideration in the sense that there was a total failure of the state of affairs contemplated as the basis or reason for the transfer.[5]
[5]David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 382 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ) quoting Peter Birks, Introduction to the Law of Restitution (Clarendon Press, 1989) 223; Mann v Paterson Constructions Pty Ltd [2019] HCA 32 [168] (Nettle, Gordon and Edelman JJ).
Following continuing financial difficulties, a general meeting of members of VRT Global resolved on 27 November 2012 that the company be voluntarily wound up. On 29 November 2012, Vainer registered Polymeric Powders Company Pty Ltd (‘Polymeric’). On 21 December 2012, Polymeric purchased the pilot plant and equipment of VRT Global for $30,600 after a public sale conducted by the liquidator of VRT Global.
In September 2013, Vainer engaged Australian Engineering Solutions Pty Ltd to commission equipment for, and build, a production line to enable production of devulcanised and activated rubber powder. Substantial work was undertaken on the production line.
Nonetheless, Vainer gave evidence at trial that Polymeric required at least a further $1 million to establish an initial commercial operation for manufacturing plastic-rubber composite material pellets. He said that until further research work had been successfully completed, he would not know if Polymeric would be able to raise the funds necessary to produce a commercially viable product.
As at the trial in May 2019, Polymeric had still not produced a commercially viable product. The trial judge found that on the evidence Polymeric derived no income and was not yet commercially viable.
The proceeding
In December 2013, Rozenblit instituted proceedings in this Court against Vainer and Dr Vainer. After a series of interlocutory delays,[6] the trial of the proceeding took place in March 2019 before Sifris J. His Honour delivered judgment on 20 May 2019.[7] Final orders and further reasons in respect of those orders were delivered on 7 June 2019.[8]
[6]See Rosenblit v Vainer (2018) 262 CLR 478.
[7][2019] VSC 316 (‘Reasons’).
[8]Rosenblit v Vainer (No 2) [2019] VSC 366 (‘Costs Reasons’).
Rozenblit made two primary claims against the respondents. The first related to the transfer of his shares to Dr Vainer in late 2011 and sought damages equivalent to the value of those shares at the date of transfer. The claim was put on a number of bases and the following were ultimately upheld:
(a) Vainer engaged in misleading or deceptive conduct and was liable as a primary wrongdoer pursuant to s 18 of the Australian Consumer Law[9] but Dr Vainer was not involved in Vainer’s contravention;[10]
(b) Vainer engaged in unconscionable conduct and was liable as a primary wrongdoer pursuant to s 21 of the Australian Consumer Law.[11] Dr Vainer also engaged in unconscionable conduct as a primary wrongdoer pursuant to s 21;[12]
(c) Dr Vainer was liable in respect of unjust enrichment to make restitution to Rozenblit. Retention of the benefit of the transaction would be unconscionable.[13]
[9]Reasons [89] following.
[10]Reasons [99].
[11]Reasons [100] following.
[12]Reasons [116] following.
[13]Reasons [121] following.
In so finding, his Honour found in part:
I am satisfied that the Share Transfer was vitiated by a mistake on the part of Rozenblit and accompanied by a total failure of consideration.
Clearly Rozenblit transferred the shares expecting VRT Global to raise much needed funds to continue in operation and indeed, for its very survival. He did not intend to transfer the shares absolutely and for no consideration or the other ‘consideration’ as asserted by Vainer. He made a mistake, based entirely on what he was told and more particularly, on what he was not told. Noting that it has not been pleaded or argued that Dr Vainer changed his position, it does not matter whether he had notice of Rozenblit’s mistake at the time of the Share Transfer. Rozenblit later demanded the return of the shares, yet Dr Vainer retained them.
Further and in the circumstances, there was self-evidently, a total failure of consideration. The loan funds were not procured and security was not provided. In this sense, the ‘failure of consideration’ refers to the transfer of shares ‘for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared.’ There is no question about the failure being anything other than ‘total’. [14]
[14]Reasons [133]-[135] (citations omitted).
However, his Honour also found that at the time of the share transfer, VRT Global was effectively insolvent and, in any event, its shares had negligible value.[15] In turn, his Honour found that Rozenblit was entitled to nominal damages only, which were fixed at $100.[16] It is from these findings that Rozenblit now seeks leave to appeal.
[15]Reasons [144], [174], [178].
[16]Costs Reasons [3].
The trial judge found in favour of the respondents in relation to the second claim, finding in summary:
The voluntary winding up of VRT Global – an inevitable and entirely logical consequence of the lack of much needed funding – is not the end of the matter. As previously noted, Rozenblit claims an entitlement to damages consequent upon Polymeric, in essence, continuing the business of VRT Global to his exclusion. He contends that this was part of the acquisition plan. The suggested damages are the value of Vainer’s shareholding in Polymeric. The shareholding that should have been held equally. The basis of the claim is breach of fiduciary duty and breach of the Implementation Agreement.
For the reasons that follow, the claim fails at every level. First, there was no fiduciary duty as alleged. Second, the Oral Agreement and Implementation Agreement were superseded by the Shareholders Agreements with different rights and obligations arising as a result of the agreed corporate structures. Thirdly, in any event, and in so far as it may be relevant, it has not been demonstrated that Polymeric is relevantly a continuation of VRT Global. Further, and finally, to the extent that it is a continuation of the business and operation of VRT Global, and there are available causes of action, these causes of action can only properly be made by VRT Global.[17]
[17]Reasons [201]–[202].
The applicant does not seek to challenge the trial judge’s decision with respect to the claim relating to the liquidation of VRT Global. He seeks to challenge his Honour’s decision with respect to quantum in relation to the share transfer claim.
The proposed grounds of appeal first challenge the rejection of valuation evidence upon which Rozenblit relied, and secondly, challenge the acceptance of evidence upon which the Vainers relied.
Before turning to that evidence and the judge’s consideration of it, it is desirable to shortly state the principles applicable to the evaluation of it.
Relevant legal principles
Section 263(1) of the Australian Consumer Law[18] provides:
[18]See Competition and Consumer Act 2010 (Cth), sch 2, div 3.
(1)If:
(a) a person (the ‘claimant’) suffers loss or damage because of the conduct of another person; and
(b)the conduct contravened a provision of Chapter 2 or 3;
the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.
The principles ordinarily governing the assessment of damages in cases such as the present were recently analysed in Keys Consulting Pty Ltd v Cat Enterprises Pty Ltd.[19] The most appropriate measure of damages in most cases of misleading and deceptive conduct is the measure of damages for the tort of deceit.[20] The general measure of damages in such cases is the sum representing the prejudice or disadvantage suffered in consequence of the plaintiff having altered position under the inducement of the fraudulent representation.[21] In the present case, Rozenblit sought to quantify the value of the shares which he transferred to Dr Vainer.
[19][2019] VSCA 136 [67]–[88] (Maxwell ACJ, Niall JA and Macaulay AJA) (‘Keys Consulting’).
[20]Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 6-7 (Gibbs CJ), 12, 14 (Mason, Wilson and Dawson JJ) (‘Gates’); KizbeauPty Ltd v W G & B Pty Ltd (1995) 184 CLR 281, 290 (Brennan, Deane, Dawson, Gaudron and McHugh JJ); HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640, 656 [35].
[21]Potts v Miller (1940) 64 CLR 282, 289 (Starke J), 297 (Dixon J); Toteff v Antonas (1952) 87 CLR 647, 650–1 (Dixon J), 654 (Williams J).
As the Court emphasised in Keys Consulting, it is well-established that a mere difficulty in quantifying damages does not necessarily defeat a plaintiff’s entitlement to a remedy against the wrongdoer.[22] In appropriate circumstances, where some sort of actual loss has been established, the Court must estimate the damages as best it can.[23] In Longden v Kenalda Nominees Pty Ltd, Chernov JA (with whom Buchanan JA agreed) said:
Thus, it is for the plaintiff to prove both the fact of loss arising from the defendant’s breach and the amount of the loss. Moreover, the plaintiff is required to establish both matters with as much certainty and particularity as is reasonable in the circumstances. Consequently, where a plaintiff could have produced evidence of loss but has simply failed to do so, it ordinarily means that it has failed to prove its case on damages (so that, where the claim is based on breach of contract, the plaintiff would only recover nominal damages). There are, of course, situations where a plaintiff cannot adduce precise evidence of the amount of loss, in which case the court will do its best in that regard and will estimate the damages and, where appropriate, will engage in a certain amount of guesswork.[24]
[22][2019] VSCA 136 [69].
[23]Chaplin v Hicks [1911] 2 KB 786, 792 (Vaughan Williams LJ); Howe v Teefy [1927] 27 SR(NSW) 301, 305–6 (Street CJ); Fink v Fink (1946) 74 CLR 127, 143 (Dixon and McTiernan JJ); McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, 411–12 (Dixon and Fullagar JJ); Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422, 438 (Devlin J); JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237, 241 (Brooking J); Placer (Granny Smith) Pty Ltd v Theiss Contractors Pty Ltd (2003) 196 ALR 257, 266 [37]-[38] (Hayne J, with Gleeson CJ, McHugh and Kirby JJ agreeing).
[24][2003] VSCA 128 [33] (emphasis in original) (citations omitted), a passage recently cited with approval in MA & JA Tripodi Pty Ltd v Swan Hill Chemicals Pty Ltd [2019] VSCA 46 [73] (Kyrou, Kaye and Emerton JJA).
In assessing the true value of the loss to a plaintiff it is permissible to have regard to events subsequent to the date at which the loss crystallised. In Kizbeau Pty Ltd v W G & B Pty Ltd, the High Court stated:
In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, ‘subject to due allowance being made for any differences in relevant conditions’. But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business.[25]
[25](1995) 184 CLR 281, 291 (Brennan, Deane, Dawson, Gaudron and McHugh JJ) (citations omitted).
In the present case, the respondents also fell liable to compensate Rozenblit for unconscionable conduct.
Insofar as Dr Vainer was found liable for restitution of the shares, the purpose of the remedy was to compel him to disgorge the benefits of unjust enrichment.[26]
[26]Commissioner of State Revenue Victoria v Royal Insurance Australia (1994) 182 CLR 51, 75 (Mason CJ).
As the applicant submits, the primary focus of the concept of unjust enrichment is the moment of enrichment. As was said by the plurality in David Securities Pty Ltd v Commonwealth Bank of Australia:
From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched.[27]
[27](1992) 175 CLR 353, 385 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ).
The plaintiff’s case as to quantum at trial
Rozenblit called valuation evidence from Shane Rose (‘Rose’), a business valuer. Rose prepared a written valuation report and gave oral evidence in support of the opinion expressed in that report. His opinion was based upon the business plan prepared for the purpose of attempting to obtain bank finance for VRT Global in December 2011.
Amongst other things, Rose’s report makes clear that he made the following critical assumptions:
[VRT Global] was a startup business engaged in research and development for the purpose of developing a prototype necessary to meet its business objectives. In doing so, [VRT Global] was funded by way of a mix of funds invested as well as $1m in grants provided by the Advanced Manufacturing Cooperative Research Centre. Deakin University provided research and development services to [VRT Global] between 2010 and July 2012.
…
The business financial statements provided are reflective of startup activity of the business and not a reliable information source for the purpose of determining the business enterprise value.
The cash flow projections contained in the 2011 Business Plan provide a 5 year estimate of trading once the business is to commence production including sales.
I have formed my approach on the basis that the projections contained in the 2011 Business Plan … are accurate, based on reasonable grounds, and achievable. I have also assumed that [VRT Global] had access or would have access to sufficient capital to implement the 2011 Business Plan …[28]
[28]These assumptions reflect specific instructions given to Rose by Rozenblit’s solicitors.
In turn, Rose adopted a discounted cash flow method (‘DCF method’). He expressed the opinion that this method was applicable to start-up businesses with irregular cash flow, businesses in a high growth phase and/or limited life ventures. Rose further adopted a capitalisation of future maintainable earnings (‘FME method’). He stated that ‘this method is normally applied in valuing an entity as a whole where that entity exhibits a profit history and expects to trade profitably into the future. It is particularly relevant where future earnings are not contingent upon unusual transactions.’
We interpolate that whatever else might be said about VRT Global it did not exhibit a profit history and its proposed business was novel, but in fairness to Rose he adopted the FME method only as a check upon his primary valuation which utilised a DCF method.
Bearing in mind the nature of the business which is in start up phase, I have adopted the Discounted Cash Flow method approach. The Financial Statements for VRTG and Polymeric are further evidence that the business is not currently in production and generating sales and the costs are capital in nature.
Rose estimated the relevant cash flow by extracting the appropriate projection information from the business plan and adjusting it to take account of a projected charge by Deakin of two per cent of gross profit together with a consequential recalculation of company tax.
The business plan contained the following financial summary:
After a six month period to fit out the recycling facility, manufacture and commission equipment, the Company will begin a quick turnaround of product. Sales will begin in July 2012, and with expected sales of over $4 million in the first year we expect to see a first year net profit of nearly $2 million.
The Company is seeking start-up capital of $1.15 million in order to begin its first commercial operation in Melbourne. These funds will be used for the purchase of new major capital items for utilisation together with existing equipment currently situated at the company’s pilot facility at the Geelong Technology Precinct as well as to enable the necessary operating expenses in order to set up and operate a recycling plant with the capacity to recycle approximately 200,000 end-of-life car tyres per annum. This will enable the commercial operation to produce approximately 1,150 tonnes of devulcanised/activated rubber powder.
At the end of a three year period, we will consider a public offering of stock.
A company summary further stated in part:
The Company will capitalise on the opportunities for demand of ‘green’ recycled ingredients in the Rubber and Elastomer product markets through our two main recycling/manufacturing process outputs: Devulcanised rubber powder and Activated rubber powder. Our recycling/manufacturing processes utilise end-of-life tyres as the input and produce high-quality high-value outputs from a commercially viable environmentally sustainable tyre recycling. In this way, we are also capitalising on the need for recycling of end-of-life tyres in Australia, as set out in the Federal Government's National Tyre Recycling Framework...
Using our patented processes, the Company will create a manufacturing facility in Australia, Victoria located in the south eastern Melbourne suburb of Dandenong South in Victoria; we have chosen this location due to its direct access to the newly built EastLink Freeway which connects with the Monash, Eastern and Frankston Freeways, making it ideal for our logistics requirements in relation to receiving tyres and sending out our manufactured product lines. The annual capacity of the first facility will be the recycling of approx. 200,000 used passenger car tyres, being equivalent to producing approximately 1,150 tonnes of devulcanised reclaimed rubber. This capacity will be reached utlising existing equipment from the the current pilot facility at the Geelong Technology Precinct as well as debt finance for additional equipment. The requisite used tyres will be supplied from tyre retailers by contractual arrangement with CEVA Logistics who have expertise in tyre transport.
Devulcanised Rubber Powder
Specifically segmented metal-free tyre sections from our patented process will be devulcanised by an extrusion/pulverisation process, enabling the production of devulcanised metal-free rubber powder and separated reinforcement fibre.
Activated Rubber Powder
Specifically segmented metal-containing tyre segments from our patented process will be chemically activated by an aggressive medium such as ozone, enabling the production of activated metal-free rubber powder with functional molecular groups and separated metal scrap.
The Devulcanised and Activated rubber powders produced will be sold as high quality ingredients to manufacturers of high quality rubber and elastomer products, including manufacturers of new tyres. Any surplus metal and fibre byproduct materials obtained from the manufacturing process will be sold as scrap to outside companies.
The manufacturing facility will utilise our patented state-of-the-art technology specifically developed in conjunction with Australia's CSIRO and Deakin University with the support of the Advanced Manufacturing Cooperative Research Centre and the Victorian Centre for Advanced Materials Manufacturing.
The Company currently has expressions of interest from customers to purchase our products.[29]
[29]Emphasis in original.
Start-up expenses were budgeted at $1,060,000.
A market analysis identified a series of potential customers (although no contractual arrangements had been entered into). Start-up milestones which it was anticipated would be fulfilled by July 2012 were as follows:
Important assumptions were said to be:
The initial facility’s productivity is based on the assumption that throughput in the first year will be at a level of 300 kilograms per hour of reclaimed rubber resulting in 80% Devulcanised output and 20% Activated output, with an annual productivity increase of 10% due to efficiencies.
It is expected that ensuring this level of productivity will require 1 Segmenting device, 2 Devulcanisation devices and 1 Activation device, these being the major items of equipment to be purchased.
The projected profit and loss for the financial year ending 2013 assumed sales of $4,467,840 and total operating expenses of $960,972. Profit before interest and taxes was $2,782,283. The net cashflow was calculated to be:
It is this latter figure which was adopted by Rose as the basis of his DCF calculation. He projected three years’ cash flow with a growth rate of 10 per cent per annum and discounted this figure by utilising a factor representing a weighted average cost of capital (‘WACC’) of 15.49 per cent. His DCF calculation of net present value (‘NPV’) was summarised in the following table:
The sum of the future discounted cash flows at which he arrived was $4,221,229 which he adopted as the net present value of the goodwill of VRT Global. Rose then undertook a check by capitalising estimated FME. Using this methodology, he arrived at a value of $4,360,00 but observed that it was not his intention to utilise this result for the purpose of determining market value of the goodwill of the business.
He then calculated the market value of VRT Global as at 2 November 2011 (the date of the directors’ meeting at which the share transfer was agreed) and as at 7 December 2011 (the date of the share transfer). In each case he used the goodwill figure derived from his DCF calculation. We shall treat 7 December 2011 as the relevant date for the purpose of valuation (‘the relevant date’). This was the date upon which Rozenblit was deprived of his shares. The calculation for this date was as follows:
The trial judge rejected Rose’s valuation because it depended upon key assumptions which in his view were unsustainable.
The entire predicate of the business plan, upon which Rose based his valuation, was first ‘sufficient capital to implement the [Business Plan]’ and secondly the commencement of ‘production including sales’. Neither of these events transpired and were never likely to transpire. Further, the uncertainty, unpredictability and in this case, the unreasonableness supports the view that a future maintainable earnings (FME) basis of valuation is problematic, inappropriate and undesirable.
Accordingly, I do not accept Rose’s valuation. It is speculative, entirely hypothetical and unreliable. It is based on figures that are at best aspirational and are without any reasonable foundation.[30]
[30]Reasons [164]–[165].
Ground 1
The applicant’s proposed first ground of appeal is directed to these conclusions:
The primary judge erred in rejecting the applicant’s expert valuation of VRT Global at the time of the Share Transfer because his Honour failed to consider, or adequately consider evidence before him establishing that:
(a)VRT Global’s Business Plan was predicated on events that had either transpired or were, on the evidence, likely to transpire;
(b)the applicant’s expert valuation did not rely upon the Future Maintainable Earnings method of valuation;
(c)the figures in the Business Plan were externally verified, and the plan itself was authored by the first respondent who did not challenge its accuracy; and
(d) VRT Global was plainly not insolvent at the time of the share transfer.
In part these criticisms are well-founded. Rose’s primary valuation adopted a DCF not an FME methodology. Further, whilst the figures in the business plan were plainly aspirational it may be going too far to say that the business was never likely to go into production and make sales.
Moreover, as the applicant’s counsel submits, some substantial progress had been made in developing the proposed business at the date in issue and many of the hypothetical figures adopted had a factual basis.
Insofar as insolvency is concerned, his Honour relevantly found that VRT Global and the companies related to it were reliant on directors’ loans to continue its operation and exploration and commercialisation of the technology.
He further found that whether or not VRT Global was insolvent at the time of winding up may not strictly matter[31] but to the extent that it was relevant he accepted the evidence of the Vainers’ expert witness, valuer Gary Fettes (Fettes) that at 27 November 2012 the company would have met the statutory definition of insolvency and appeared to have been balance sheet insolvent.[32] These matters were contextually relevant to the assessment of the company’s value at the relevant date, but did not establish that it had no or negligible value at that date. The evidence showed that VRT Global paid its debts up until 30 June 2012 utilising incremental payments made by Vainer.
[31]Reasons [178].
[32]Reasons [176], [178].
Nonetheless the trial judge was in our view plainly correct to identify two fundamental difficulties with the basis of Rose’s valuation. These fundamental problems involve assumptions underpinning both the DCF and FME evaluations.
The first was the assumption that funding could be obtained in accordance with the business plan.
In cross-examination it was put to Rose that in the absence of proving that VRT Global had access or would have had access to sufficient capital to implement the 2011 business plan his projections of cash flow and, in turn, his valuation would be unreliable. He agreed that this was the case.
The risk that the company would not obtain any substantial funding was overwhelmingly real as at the relevant date. The circumstantial evidence as a whole pointed to this fact.
·The project had reached the stage which it had only with the aid of a government grant.
·The whole purpose of the share transfer was to facilitate financing which the company desperately needed.
·The business plan was expressed to be dependent upon obtaining funding and the steps it identified as pre-conditions to business production required substantial funding.
·No substantial source of funding was in fact obtained within the time frame contemplated by the business plan.
·No evidence was called supporting the view that external finance was available to the company at the relevant date.
·VRT Global failed and was wound up in the absence of such funding.
·Upon winding up the business was found to have negligible value.
It follows that there was no reason for the trial judge to reject the concession made by Rose that unless funding was available his valuation was not reliable. Theoretically at least his valuation might have been discounted on the basis that as at the relevant date there was say a five or 10 per cent chance that funding would be obtained in accordance with the business plan, but no evidence was adduced enabling this or any other order of chance to be substantiated or satisfactorily evaluated.[33]
[33]Cf Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 335 (Mason CJ, Dawson, Toohey and Gaudron JJ), 364-5 (Brennan J).
In the written submissions filed on behalf of Rozenblit in support of his application for leave to appeal it was contended that VRT Global would have been regarded by a hypothetical purchaser at the relevant date as a company which would obtain funding in accordance with the business plan. In particular, the following submission was made:
During 2009 and 2010, Dr Vainer had invested $400,000 in VRT Global, and Mr Vainer had loaned it some $30,000. The Vainers were invested in the success of the company. Predictably, they went on to fund the procurement and commissioning of the production facility during 2012 and 2013.
VRT Global’s primary source of funds up to the end of 2011 was the Advanced Manufacturing Co-operative Research Centre. But there were plenty more likely sources of funding available to the company. Tyre Stewardship Australia and the Victorian Government (Sustainability Victoria) were later to provide $367,000 for acquisition of further plant and equipment for use in the further processing of devulcanised rubber powder. The Victorian Department of State Development also provided research funds.[34]
[34]Applicant’s Written Submissions [22]–[23].
In our view, the true position was that the hypothetical purchaser would have recognised there were possible future sources of funding available to the company and, in particular, funding by way of government grants. But no objective analysis could have arrived at the conclusion that the Vainers were bound to invest further in VRT Global nor that there were ‘plenty more likely sources of funding available to the company’.
On appeal it was also submitted by the applicant that Rose had taken account of the risk that VRT Global’s plans may not materialise by conservatively adopting a calculation based on three years’ cashflow only. This factor was not relied on by Rose in his oral evidence as meeting the proposition that if funding did not materialise (as he was instructed to assume that it would) his valuation was unreliable. We do not accept that the generalised discount he made with respect to risk was sufficient to provide for the specific risk identified in cross-examination.
As we have said, Rozenblit could have mounted a case at trial asserting that there was a chance at the relevant date that VRT Global would continue to be funded and sought to quantify the value of that chance. Both at trial and on appeal however, he and the executors of his estate have sought to rely on a valuation which treated the existence of funding in accordance with the business plan as a fundamental premise, in circumstances where such funding plainly was not certain and did not in fact eventuate. Accordingly, the applicant’s submissions with respect to funds do not establish error on the part of the trial judge.
The second fundamental assumption upon which Rose based his valuation and which was identified as such by the trial judge, was the commencement of production resulting in substantial sales in July 2012. Although we would not, with respect, necessarily express ourselves as forcefully as his Honour, we share his view that this factor also rendered Rose’s valuation fundamentally problematic and unreliable.
First, as at the date of preparation of the valuation report in December 2018 and at the date of the trial, the business (which Rose was instructed was now being conducted by Polymeric) had still not commenced commercial production. Nevertheless the DCF calculations adopted by him assumed that it would commence full production with total sales of its production in 2012/2013. It had in fact totally failed to proceed in accordance with the timeline adopted by the business plan which Rose assumed was ‘accurate, based on reasonable grounds and achievable’. Further, there was no rational basis on which to conclude that if the share transfer had not taken place the business plan would have been implemented enabling production to commence in July 2012.
Secondly, whatever may have been the long term prospects of the business, the evidence compels the conclusion that the assumption made in the business plan concerning start-up within six months was hopelessly unrealistic. The last project operations report produced by Deakin prior to the valuation date was the quarterly report for July–September 2011. This indicated that the aim of the project was to develop and then optimise a pilot scale facility based on VRT Global’s patented concepts of ‘Ozone based Reclaiming and Activation of Rubber and Rubber Devulcanisation’. A number of project milestones were said to have been achieved:
•The rubber shredding machine has been commissioned and tested.
•The cause of the fibre blockage in the fibre separator has been identified.
•The tyre tread stripper, de-beader and amputator have been commissioned and tested.
•A Carbon Life Cycle Analysis has been conducted by external consultants – paid for directly by VR TEK Global, not by the Project.
•Emissions testing of the fumes from the extruder has been conducted by external consultants – paid for directly by VR TEK Global, not by the Project.
•20kg devulcanised rubber sample was supplied to Ormiston Rubber.
•A manual sidewall cutting machine has been purchased.
•Rubber crumb from the milling machine was produced and samples supplied to Ormiston Rubber for testing.
On the other hand, the work proposed for September–December 2011 demonstrated that the design and commissioning of the pilot plant was not yet complete. It was proposed to:
•Commission manual sidewall cutting machine.
•Produce rubber and polymer composites and determine their properties.
•Present data on ASTM tests for levels of devulcanisation of the various rubber crumb samples.
•Present Carbon Life Cycle Analysis and Emissions Testing consultant’s reports.
The September–December 2011 quarterly report confirmed that progress continued and recorded the following milestones:
•The manual tyre sidewall cutting machine has been commissioned and tested.
•ASTM levels of devulcanisation on various rubber crumb samples have been determined.
•Composite samples of activated and devulcanised rubber crumb and HDPE polymer have been prepared and tested for tensile strength.
•A report on the Carbon Life Cycle Analysis of the VR TEK process has been completed by Eco Quantum Pty Ltd.
•An Emissions study of the VR TEK process has been completed by NATA Signatory EML Air Pty Ltd.
•A conical mixer reaction vessel and fibre separator have been identified for purchase and trialling in 2012.
•A fibre separator has been identified for purchase and trialling in 2012.
•A method for removing fine fibre contamination from fine rubber crumb has been developed.
It can be seen again however that components of the pilot scale facility still had to be procured and trialled. The process was also undergoing continuing refinement. The objectives for the next reporting period were:
• Commission and trial new 50 litre conical reaction vessel.
• Commission and trial new fibre separator.
• Prepare rubber crumb samples for customer evaluation as required.
Further reports indicate Deakin went on with the development of a pilot scale facility during 2012. The final quarterly report for the period April-June 2012 from Deakin dated 30 June 2012 recorded the following milestones:
•The new conical ozone reaction vessel has been commissioned and tested.
• The new fibre separator has been commissioned and tested.
•A variety of rubber crumb samples have been produced and analysed under Scanning Electron Microscopy.
•Several samples of activated crumb from the conical vessel were analysed using FTIR to record the effect of activation time on surface activation levels.
In turn, a series of recommendations were made for further work.
1.An alternative fibre separator machine needs to be investigated in order to remove short fibre contamination from fine rubber crumb <0.4mm. An electrostatic method is proposed (Figure 6) where the crumb/fibre feed is allowed to fall from a height through vertical walls of plastic sheeting; the short fibre will be attracted to and attach to the sheeting while the rubber will continue to fall and land in a receiving area. The process can be repeated to achieve further reduction in fibre contamination. The process may need to be contained in a temperature and humidity controlled room or cabinet. The plastic sheeting can be continually moving on rollers and the surfaces cleaned using stationary felt brushes. Additional rotating felt brushes on the cleaned surfaces may add to the electrostatic performance of the sheets.
2.A rapid on-site method for analysing or quantifying the level of fibre contamination in the final crumb product needs to be considered for quality control purposes. A colour analyser may be suitable for this.
3.A method for drying the activated rubber crumb inside the activation vessel will probably be required as the short reaction times (½- 1 hour) required in commercial production (using higher ozone gas flow rates) will result in a damp product that may not flow freely out of the vessel. Drying can be achieved by injecting hot air into the vessel just after the reaction is complete. Alternatively, activation may be done overnight over a period of 3-5 hours allowing the crumb to dry on its own while being agitated in the vessel. This method will require more vessels but can save on ozone production costs.
4.A rapid on-site method for analysing the level of activation of the crumb should be investigated for quality control purposes. This can be an indirect method for purposes of comparing samples; eg measuring the flow-ability or stickiness of the crumb under controlled conditions (particle size range, and temperature after removing moisture by drying).
The contemporaneous and subsequent documents thus demonstrate that the start-up program contemplated by the business plan was at odds with the detailed reports concerning the state of the project at the end of 2011 and thereafter. The pilot scale facility was not complete but the business plan contemplated the immediate installation and commissioning of a commercial scale plant in the first half of 2012.
At one point in the hearing of the appeal, counsel for the applicant submitted that the date of commencement of production was immaterial to the outcome of the DCF calculation. It was submitted that what was critical was its anticipated level of commercial output and profitability. We do not accept this submission. The DCF calculation necessarily required a realistic estimate of the period over which costs would be incurred and the point at which full commercial production could be achieved. If the realistic timeframe for the commencement of commercial production was materially other than that assumed then the DCF calculation was fundamentally misconceived.
For completeness, we add that we accept that as a method of valuation the DCF method may allow the exploration of the sensitivity of a project to delay. The respondent’s valuer, Fettes, supported his methodology by reference to a statement of valuation principles prepared by the International Valuation Standards Council. This states in part:
52This method determines the net present value of the underlying cash flow of a business. It recognises the time value of money and risk by discounting future cash flows at an appropriate discount rate.
…
55Advantages of the DCF method include the explicit specification of assumptions for cash flows, growth and risk; the use of empirical models to determine the cost of capital; and the flexibility to accommodate cash flow volatility.
The risk that there would be substantial delays before validating assumptions in the business plan was not realistically modelled despite the fact that at the date of valuation it was known that the timelines in the business plan had not been met. Indeed, even at the date of trial the start of ongoing commercial production remained unachieved and uncertain. There is evidence, as the applicant submits, that a production line was substantially installed by Polymeric in 2013. There is however no evidence justifying the conclusion that any substantial sales of product have been achieved let alone sales of the order contemplated by the business plan.
Moreover, as correspondence between the parties’ solicitors prior to the appeal hearing confirms, at trial Rozenblit relied on the evidence as to Polymeric’s conduct for the purpose of seeking to establish that it continued to conduct VRT Global’s business. It did not rely on this evidence to found an alternative valuation calculation to that put forward by Rose.
Leave to appeal on ground 1 must be refused. The primary judge did not err in rejecting the applicant’s expert valuation of VRT Global at the date of the share transfer.
In summary:
(a) the business plan was predicated on two fundamental assumptions which were not made out;
(b) those assumptions affected both methods of valuation adopted by Rose;
(c) the fact that other figures utilised for the purpose of Rose’s DCF calculation were externally verified does not cure the problem; and
(d) Rose’s opinion must be rejected whether or not the trial judge was correct on the whole of the evidence to ultimately regard VRT Global as effectively insolvent.
Ground 2
Ground 2 of appeal is as follows:
Alternatively, the primary judge:
(a)erred in adopting the respondent’s expert valuation of VRT Global at the time of the Share Transfer, because his Honour failed to consider, or adequately consider, evidence before him establishing the propositions upon which the report was based were unsound; and
(b)was able, and ought to have assessed the value of VRT Global at the time of the Share Transfer for himself on the basis of the evidence that was before him.
At the trial, the respondent called valuation evidence from Fettes who also prepared a written valuation report and gave oral evidence in support of the opinion expressed in it.
He adopted a net asset valuation approach (‘NAV method’).
He also undertook a FME calculation to carry out a check valuation.
The NAV valuation is derived from VRT Global’s balance sheet as at 30 June 2011. This is one of the financial statements declared by both Rozenblit and Vainer to fairly present the company’s financial position as at 30 June 2011.
In his reasons the trial judge set out Fettes’ findings with respect to the financial accounts of VRT Global for the years ending 30 June 2011 and 30 June 2012 and the liquidator’s report dated 26 February 2014.
8.2 A review of the Profit and loss statements reveals:
a) The Company’s primary source of revenue was government grants, although it also recorded revenue of $28,000 as lease income in FY 2011;
b) The Company made no commercial sales of recycled rubber products;
c) The Company made losses of over $150,000 in both FY 2011 and 2012; and
d) The largest costs incurred by the Company were Research and Development costs ($147,472 in FY 2011 and $65,958 in FY 2012) and Patent and Trademark Maintenance Fees ($66,453 in FY 2012).
8.3 A review of the Balance Sheets Reveals:
a) The Company had total assets of $3,710,635 in FY 2011 and $3,610,644 in FY 2012;
b) The largest asset owned by the Company was Intangible Assets which had a book value of $3,502,772 in FY 2011 and $3,501,848 in FY 2012. Of the intangible assets trademarks and patents were valued at $3,500,000. It is not clear on what basis the intellectual property (including trademarks and patents) was valued as no intellectual property appears to have been owned by the Company;
c) The Company also owned Property, Plant and Equipment with a book value of $48,370 in FY 2011 and $33,859 in 2012;
d) The remaining assets consisted of cash and receivables;
e) The Company had total liabilities of $27,123 in FY 2011 and $87,893 in FY 2012; and
f) The Company had net assets of $3,683,512 in FY 2011 and $3,522,751 in FY 2012.
8.4 I have not been provided with any supporting documentation to support the valuation of the patents and trademarks at a value of $3,500,000. The Company Liquidator’s Report dated 26 February 2014 states that the Company did not own any trademarks or patents.[35]
[35]Reasons [167].
Based on these documents Fettes concluded that as at 7 December 2011 the company had a valuation of $nil on an FME basis and between $nil and $180,740 on an NAV basis.
The $180,740 was derived by deducting the intangible assets shown on the balance sheet from the total net assets of $3,683,512 for the financial year ending in 2011.
As his Honour observed, it was not surprising that Fettes arrived at a $nil valuation using the FME method.[36] But given that this was not his preferred method of valuation little turns on this.
[36]Reasons [169].
Insofar as the NAV valuation was concerned Fettes further observed:
8.13Excluding the Intangible Assets listed in the accounts, the Company had Net Assets of $180,740 at 30 June 2011, however this assumes the following:
a)That the intercompany debts totalling $65,653 were collectable; and
b)That the business could cease operations prior to the completion of the CSIRO Research and Development project carried out in conjunction with Deakin University, without penalty.
8.14If the above was assumed to be correct then the NAV value of the Company would be $180,740. If this was not correct then the NAV valuation would need to be adjusted for the cost of any ongoing commitments, or the reduction in the value of the loans.
8.15All of the Intercompany loans owing to the Company were written off as uncollectable by the Liquidator following his appointment in November 2012. It is not clear from the information available whether the loans were uncollectable at 7 December 2011. Given that no companies within what might be considered the VR Tek Group of companies appeared to have any independent source of income, it appears that the recovery of any of these loans would have ultimately been dependent on the development of a viable commercial recycling process.
8.16 It appears that at 7 December 2011, the Company did not have:
a) Any registered trademarks or patents;
b) A commercially viable recycling process;
c) Any commercial sales or customers; and
d)Funding of $1.15 million required to start commercial production.
8.17Therefore it appears reasonable to value the trademarks and patents at $Nil.
After referring to these matters and to Fettes’ reasoning with respect to the value of the company as at 27 November 2012, his Honour concluded:
On either basis (FME or NAV) and at either date (7 December 2[0]11 and 27 November 2012) there was either no or very little value in the company, and as a consequence, the shares. I am not persuaded that anyone would pay anything other than a nominal value for the acquisition of Rozenblit’s minor holding as at the end of 2011 or the beginning of 2012.[37]
[37]Reasons [174].
It can be seen that whilst Fettes himself valued intangibles at $nil at the relevant date he did not value the company at $nil using his preferred valuation method. He simply identified two possible reasons for discounting the figure of $180,740.
Insofar as he discounted the value of intercompany loans, we accept the logic of his reasons. Insofar as the second qualification is concerned, however, there was no evidence justifying conclusions that as at the relevant date:
(a) the business would cease operations prior to completion of the CSIRO project; or
(b) that if the project ceased a penalty would be payable.
Indeed, the evidence shows that the research project continued until completion in mid-2012 and that on the completion of the research project Deakin transferred the project assets to VRT Global for $nil.
Accordingly, Fettes’ NAV methodology supported a net asset value of $180,740 less $65,653 (representing the value of intercompany loans) resulting in a figure of $125,087.
In his reasons, the trial judge expressed a rolled-up conclusion with respect to both the relevant date and the date of the winding up. We do not agree that the evidence of Fettes established that there was either no or very little value in the company as at the relevant date. There was some value in the company albeit modest. Insofar as his Honour placed reliance on the proposition that Rozenblit’s minority holding would not have had more than a negligible market value, we take the view that the finding of unconscionability justifies damages reflecting the market value of Rozenblit’s shares in the hands of the respondents as majority shareholders.
Ground 2(b) of appeal invites the Court to undertake its own valuation of the company. We do not accept that it is open to do this other than by way of evaluation of the opinion evidence presented at trial. As a matter of procedural fairness, the respondents were entitled to test the case put on behalf of Rozenblit and rely upon the evidence of Fettes.
Each element of the case which is now put by way of submission to this Court on behalf of the applicant is contentious in different ways.
43.Sufficient evidence had been tendered to allow a rough assessment, at least, of the profit potential of VRT Global’s business, and thus of Mr Rozenblit’s loss, without reference to the Business Plan or the expert reports, as follows:
a.quantitative evidence from the actual production line built by Austeng, suggesting that VRT Global’s production line had a capacity of 1,040 tonnes of devulcanised rubber per annum;
b.primary evidence from Ormiston Rubber as to a market price of $3.50 - $4.00 per kg for devulcanised rubber outputs;
c.primary evidence from Tyrecycle as to a cost of $700 per ton for shredded tyre inputs; and
d.indicative evidence from Polymeric’s business plans suggesting annual operating costs per assembly line of $910,000 per annum.
44.On the basis of this rough assessment, and the inference that what had transpired by 2013 was foreseeable to an informed purchaser at the end of 2011, Mr Rozenblit’s loss comes to $775,200.[38]
[38]$3.50 per kg income = $3500 per ton. Less $700 per ton cost of inputs = $2,800 per ton. At 1,000 tons pa = $2,800,000 income. Less $900,000 operating expenses = $1,900,000. 13.6% X $1,900,000 X 3 = $775,200.
The extent to which the combination of these matters is contentious is illuminated by the fact that the trial judge did not ultimately resolve the question of the extent to which it could be said Polymeric continued VRT Global’s business.
The extent to which Polymeric continued the business of VRT Global was the subject of much evidence, cross-examination and ultimately submissions. Surprisingly, neither party called any expert evidence. Not surprisingly, the parties were diametrically opposed in their suggested answer to the question. Rozenblit submitted that there was a seamless transition and Polymeric simply picked up where VRT Global left off. Needless to say there was some evidence in support of this contention. The Vainers submitted that Polymeric developed its own technology and patents that had nothing whatsoever to do with any VRT Global technology or intellectual property. Needless to say, there was also some evidence in support of this seemingly extravagant contention. The evidence is technical, scientific and substantial. Although Counsel made detailed submission in support of their respective contentions, and in this regard did the best they could, it is a difficult issue for the Court to resolve.
Despite the substantial evidence and time spent on this issue during the course of the trial, it is, in my opinion, not necessary to resolve this question.[39]
[39]Reasons [251]–[252].
In our view, if the submissions set out above were to be relied on by the applicant then they should have been properly articulated at trial, put to Fettes in cross-examination and laid open to challenge by further evidence from the respondents. The applicant cannot now be permitted to manufacture a new case on appeal.
The relevant principle was stated by the High Court in Whisprun Pty Ltd v Dixon:
It would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when no question of further evidence is admissible, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to expense that may not be recoverable on a party/party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs. [40]
[40](2003) 200 ALR 447, 461 [51] (Gleeson CJ, McHugh and Gummow JJ) (citations omitted).
In our view, the only revision of the trial judge’s estimate of the value of VRT Global at the relevant date which is open to us, is a revision by reference to the evidence of Fettes.
In order to ensure that the parties had the opportunity to squarely address submissions to the possibility that a different figure in the range of values adopted by Fettes should be endorsed by the Court, we sought submissions as to whether a specific ground should be added to the proposed notice of appeal raising the question of whether the primary judge erred in not adopting Fettes’ NAV upper valuation.[41]
[41]Proposed ground 2(c) was: The primary judge erred in not adopting the NAV value of $180,740 derived by the respondents’ expert.
The applicant opposed this course on the basis that Fettes’ NAV valuation was flawed ‘because it fails to take account of the value of VRT Global’s principal asset: its technical knowhow.’
The applicant further submitted that if he did not succeed in overturning the trial judge’s decision with respect to Rose’s valuation but succeeded in challenging his acceptance of Fettes’ valuation, the matter should be remitted to the trial division.
The respondents also opposed the addition of a ground specifically agitating the appropriateness of Fettes’ upper NAV valuation. In summary, they submitted:
·No new ground of appeal should be added when the applicant does not support that course.
·Fettes was not cross-examined as to how he would determine where in the range postulated by him the NAV should fall.
·There is no utility in adding a further ground of appeal as it would fail because the trial judge was correct to conclude that he was not persuaded that anyone would pay anything other than a nominal value for the acquisition of Rosenblit’s minor shareholding at the relevant date.
The respondents also joined issue with the proposition that Fettes’ valuation was flawed because he did not ascribe value to non-patented ‘technical knowhow’. The respondents submit:
No evidence was led by the applicants as to the scope of the non-patented technical knowhow nor to any alleged value as at November or December 2011. This is unremarkable as the applicants did not run their case before the learned judge on this basis. Mr Fettes was not cross-examined on this alleged flaw in his opinion. He may have had a lot to say concerning this issue, but he was not afforded the opportunity. The scope and value of the alleged non-patented technical knowhow as at November or December 2011 is an entirely new concept pursuant to which the respondents were taken by complete surprise. It should not be considered as a matter of fairness.
We accept that it is not now open to the applicant to challenge Fettes’ opinion as to VRT Global’s NAV on a basis relating to ‘technical knowhow’ which was not the subject of contention at the trial. It was obvious that the first and most significant step in his valuation was to discount the value ascribed to intangibles in the balance sheet. The applicant did not join issue with him on the basis now suggested.
For completeness, however, we note that the applicant’s supplementary submission that VRT Global had a significant asset by way of technical knowhow at the relevant date was not supported by the evidence:
·The patents which formed the basis of the joint venture and the research project were not held by VRT Global but by a related company.
·The final quarterly report from Deakin of 30 June 2012 stated:
Project Background IP Used (including BIP as stated in the Project Agreement, other BIP and date used)
Design of the Ozone Reactor System was based on VR Tek Global’s Polymeric Waste Disposal Device and Method of Reprocessing Polymeric Waste (Australian Provisional Patent Number 2009902282).
·Upon completion of the project the project assets were assigned by Deakin to VRT Global for $nil.
·The applicant places reliance upon a statement in the 2011/12 annual report of AMCRC (who provided research funds to Deakin):
VR Tek Pty Ltd, working in collaboration with Deakin University, VCAMM and CSIRO, completed its project and is progressing a patent application around tyre recycling technology which underpins its progress towards establishing a tyre recycling facility in Victoria.
In the event however there was no evidence that such a patent was in fact applied for.
·Upon the winding up of the company the liquidator was unable to realise any value in respect of intellectual property.
·No technical evidence was led to identify the nature of the intellectual property contended for nor to establish that it was patentable or that it had a commercial value.
We accept that no new ground of appeal should be added when it is opposed by both parties. Nonetheless ground 2(a) squarely raises the question of whether the trial judge erred in his evaluation of Fettes’ expert opinion. For the reasons we have explained we are of the view that he did. Insofar as the respondents submit that Fettes was not cross-examined as to where in the range between $nil and $180,740 the net asset value of VRT Global fell, it can equally be said that his own opinion did not justify a reduction of the upper figure for any reason other than the first qualifying factor which he identified. Neither the existence of a real risk of liability for a penalty with respect to the research project nor the potential quantum of any such penalty was properly established.
Further, the minority nature of Rozenblit’s shareholding should not prevent him from recovering its value as a proportion of the value of the company as a whole in circumstances where the majority shareholders have deprived him of that value unconscionably. As the applicant submits, there was some value in VRT Global’s physical assets and receivables in late 2011.[42] In our view, the applicant is entitled to recover Rozenblit’s lost share in that value.
[42]Applicant’s Supplementary Submissions [9].
The notice of contention
By notice dated 14 August 2019, the respondents contend in substance that the trial judge should not have adopted the value of the shares in issue assessed at the relevant date. It is submitted that if Rozenblit had retained the shares he would have continued to hold them until the winding up of the company and then suffered the total loss of their value during 2012.
We reject this submission. Rozenblit suffered loss at the point in time at which he was deprived of ownership of the shares. Moreover, even if the claim with respect to unconscionability against Dr Vainer is regarded as crystallising shortly thereafter, the evidence shows the position of VRT Global did not materially change in early 2012.
The respondents refer to the judgment of Mason, Wilson and Dawson JJ in Gates[43] but the wellknown observations relied upon do not support the view that in a case such as the present the plaintiff is only entitled to less than the prima facie measure of damages for the tort of deceit.Rather, they support the view that in some circumstances a plaintiff may also recover consequential losses. Further, their Honours affirmed that in cases of misleading or deceptive conduct there is much to be said for the view that the measure of damages in tort is appropriate in most if not all cases.[44]
[43](1986) 160 CLR 1, 12.
[44]Ibid 14.
Conclusion
Accordingly, we would grant leave to appeal on the proposed ground of appeal 2(a) but otherwise refuse leave to appeal. We would allow ground 2(a) and set aside the trial judge’s conclusion. We would award the applicant damages in the sum of $17,011 representing the proportionate value of his shareholding at the relevant date. We will hear the parties as to consequential orders.
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