Shanahan v Jatese Pty Ltd

[2019] NSWCA 113

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Dr Shanahan v Jatese Pty Ltd [2019] NSWCA 113
Hearing dates:	21 March 2019
Date of orders:	20 May 2019
Decision date:	20 May 2019
Before:	Bathurst CJ at [1]; Bell P at [113]; Emmett AJA at [143]
Decision:	(1)   Appeal dismissed. (2)   Appellants to pay the respondents’ costs of the appeal.
Catchwords:	CORPORATIONS – Members’ rights and remedies – Oppression – Where conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory - primary judge found affairs of Canberra Eye Hospital Pty Ltd carried on in a manner oppressive to and unfairly prejudicial to appellants. VALUATION – Types of property – Shares – Oppression –– primary judge found oppressive conduct - primary judge dismissed claim for relief under s 233 Corporations Act 2001 (Cth) – appellants claimed that as a consequence of oppressive conduct, appellants sold their shares to interests associated with respondents at less than their fair value – appellants sought order that respondents pay the appellants compensation, representing difference between the fair value of shares and sale price – whether primary judge erred in method of valuation of shares sold by the appellants - whether primary judge erred in failure to include hypothetical income in valuation of shares – whether primary judge erred in taking into account death of surgeon in valuation of shares.
Legislation Cited:	Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth)
Cases Cited:	Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358; [1947] HCA 10 Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33 Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 Foody v Horewood [2007] VSCA 130 Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547; [1971] HCA 2 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153 Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3 Rankine v Rankine (1995) 124 FLR 340; 18 ACSR 725 Re Bird Precision Bellows Ltd [1986] Ch 658 Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514; [2003] NSWSC 910 Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 Whisprun Pty Ltd v Dixon [2003] HCA 48; 200 ALR 447
Texts Cited:	The Hon AM Gleeson AC QC, “Finality” Bar News (2013, Winter Edition) 33 Wayne Lonergan, The Valuation of Business, Shares and Other Equity (4th ed, 2003, Allen & Unwin)
Category:	Principal judgment
Parties:	Dr Leo Shanahan (First Appellant) Michael Shanahan (Second Appellant) Joan Shanahan (Third Appellant) Dr Stuart Saunders (Fourth Appellant) Christine Saunders (Fifth Appellant) Jatese Pty Ltd ACN 105079436 (First Respondent) Optident Pty Ltd ACN 108697150 (Second Respondent) Canberra Eye Services Pty Ltd ACN 084921862(Third Respondent) Dr Iain Dunlop (Fourth Respondent) Dr Martin Duncan (Fifth Respondent) Dr Gagan Khannah (Sixth Respondent)
Representation:	Counsel: D Williams SC with S Goodman SC (Appellants) M Ashhurst SC with D Villa SC (Respondents)   Solicitors: Thomson Geer (Appellants) Snedden Hall & Gallop (Respondents)
File Number(s):	2018/245265
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of NSW Jurisdiction: Equity – Commercial List Citation: [2018] NSWSC 1088 Date of Decision: 16 July 2018 Before: Hammerschlag J File Number(s): 2014/317132

HEADNOTE

[This headnote is not to be read as part of the judgment]

The Court of Appeal has dismissed an appeal from a decision of a judge of the New South Wales Supreme Court dismissing a claim made by the appellants for relief under s 233 of the Corporations Act 2001 (Cth) as a consequence of the affairs of Canberra Eye Hospital Pty Ltd (CEH) being carried on in a manner oppressive to and unfairly prejudicial to the appellants. Despite finding that the affairs of CEH had been carried on in a manner oppressive to the appellants, the primary judge concluded that the fair value of the shares that the appellants sold in CEH was less than what they had received for the shares and thus, the appellants had suffered no loss.

Two of the appellants, Drs Shanahan and Saunders were ophthalmologists and the remaining appellants were associated with Dr Shanahan and Dr Saunders. Three of the respondents, Drs Dunlop, Duncan and Khannah were also ophthalmologists and the remaining respondents were associated with them. The appellants formerly held 43% of the shares in CEH, whilst the respondents held the remaining 57% of the shares in CEH.

In mid-2005, CEH commenced to operate as “Canberra Eye Hospital” (the hospital). Surgery at CEH was undertaken by two groups of surgeons: surgeons who held shares in CEH, and surgeons who did not hold shares in CEH. CEH was profitable at least up to June 2013. The majority shareholders were discontented that after Dr Shanahan and Dr Saunders stopped performing surgery in 2001, their entitlement as shareholders to share in the profits remained unchanged. Drs Dunlop, Duncan and Khannah resolved to establish a new hospital, Canberra Micro-Surgery Pty Ltd (CMS) in which they became shareholders and directors. In November 2010, Drs Duncan and Khannah resigned as directors of CEH.

On 6 February 2013, the majority gave written notice to CEH that from 1 July 2013 they intended to perform the majority of their cataract surgery at CMS. Dr Saunders unsuccessfully attempted to find new doctors to perform cataract surgery at the hospital. In August 2013, Drs Dunlop, Duncan and Khannah and other non-shareholder surgeons stopped performing surgery at the hospital.

On 29 November 2013, Dr Burt, an ophthalmologist who proposed to practice predominantly in extraocular surgery applied to CEH for accreditation. Dr Burt’s appointment was confirmed on 6 February 2014. In February 2014, Dr Frumar submitted an application to the company for appointment as a Visiting Medical Officer. Dr Dunlop with the assistance of two directors whose appointment the majority had procured, actively frustrated the accreditation of Dr Frumar.

On 11 June 2015, the appellants sold their shares in CEH to the respondents for a sum of $1.776 million on 11 June 2015. Dr Frumar died on 10 April 2016.

The appellants claimed that as a consequence of the oppressive conduct, they were forced to sell their shares in CEH to interests associated with the respondents at less than their fair value. The appellants sought an order that the respondents pay them compensation, representing the difference between the fair value of the shares and what they had received for them. The primary judge applying a capitalised maintainable earnings method of valuation concluded that the value of the appellants’ shares, absent the oppressive conduct, was less than the amount for which they were sold.

On appeal, the appellants contended that the appropriate method of valuation was a method described as the “simple method” of valuation, rather than the application of the capitalised maintainable earnings method. The simple method involved first, assuming that the sale price received by the appellants for their shares reflected the value of their shares as affected by the oppressive conduct, and second, adding to that price an amount said to represent the contribution that Dr Frumar and possibly other doctors would have made to the profits and underlying assets of CEH, had the oppressive conduct not occurred, together with the administration costs which would not have been incurred but for the oppressive conduct.

The three main issues on appeal were:

1.  Whether the primary judge erred in failing to apply the “simple method” of valuation?

2.  Whether the primary judge erred by failing to make any allowance in his valuation for the possibility that had the oppressive conduct not occurred, the non-shareholder directors may have returned to the hospital, or that the presence of Dr Frumar would have attracted other doctors to carry out their practice at the hospital premises?

3.  Whether the primary judge erred in taking into account the death of Dr Frumar in his assessment of capitalised maintainable earnings?

The Court (Bathurst CJ, Bell P and Emmett AJA) held, dismissing the appeal:

1 Failure to apply the “simple method” of valuation

The primary judge did not err in failing to apply the “simple method” of valuation. It was not appropriate for the “simple method” to be raised on appeal as the parties and their experts should have been able to consider any methodology proposed at the trial and to the extent necessary, lead evidence or cross-examine in relation to it. Given that the methodology was not raised “squarely before the Court at first instance”, the primary judge did not err in failing to apply it. Furthermore, there were “significant problems” with this method of valuation: [61]-[76] (Bathurst CJ); [131]-[142] (Bell P); [153] (Emmett AJA).

Suttor v Gondowa Pty Ltd (1950) 81 CLR 418; [1950] HCA 35; Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33; Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12; Whisprun Pty Ltd v Dixon [2003] HCA 48; 200 ALR 447 referred to.

2 Failure to include an amount referable to income received as a result of the activities of Dr Burt, other surgeons and the non-shareholder surgeons

The primary judge did not err in not including in his assessment of capitalised maintainable earnings an amount referable to income from cataract surgery conducted by Dr Burt or other surgeons, or from the possible return of some or all of the non-shareholder surgeons. The primary judge was correct in only including hypothetical income from Dr Burt and the non-shareholder surgeons, if he was satisfied, on the balance of probabilities, that it would be achieved: [93]-[101] (Bathurst CJ); [130] (Bell P); [153] (Emmett AJA).

Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358; [1947] HCA 10; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 at 565; [1971] HCA 2 referred to.

3 Error in taking into account the death of Dr Frumar

The primary judge did not err in taking into account the death of Dr Frumar in his assessment of capitalised maintainable earnings. Even if the death of Dr Frumar had not been taken into account, the capitalised maintainable earnings achieved through Dr Frumar would not have resulted in a valuation which had the effect of valuing the appellants’ shares in a greater amount than what they received for them. The primary judge was correct in his conclusion that the appellants suffered no loss as a result of the oppressive conduct of the respondents: [102]-[110] (Bathurst CJ); [118]-[129] (Bell P); [153] (Emmett AJA).

Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4; HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54; Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153 considered.

Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; 207 ALR 136; Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549; Rankine v Rankine (1995) 124 FLR 340; ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536; Dynasty Pty Ltd v Coombs (1995) 59 FCR 122; Foody v Horewood [2007] VSCA 130 referred to.

.

Judgment

1. BATHURST CJ: This is an appeal from a decision of a judge of the Equity Division of the Supreme Court (the primary judge) dismissing a claim made by the appellants for relief under s 233 of the Corporations Act 2001 (Cth) (the Act), as a consequence of the affairs of a company, Canberra Eye Hospital Pty Ltd (the company or CEH), being carried on in a manner oppressive to and unfairly prejudicial to them.

2. The appellants claimed that as a consequence of the oppressive conduct, they were forced to sell their shares in the company to interests associated with the respondents at less than their fair value. They sought an order that the respondents pay them compensation, representing the difference between the fair value of the shares and what they had in fact received for them.

3. The primary judge found that the affairs of the company had been carried on in a manner oppressive to the appellants. However, he concluded that the fair value of the appellants’ former shareholding in the company was less than they had received for the shares and thus, the appellants had suffered no loss. As a consequence, the appellants’ claim was dismissed.

4. The appellants have appealed against that decision.

5. The factual circumstances giving rise to the claim are adequately set out in the judgment of the primary judge, to which I have referred below. It is not necessary to refer to the evidence of the oppressive conduct in great detail, as there is no challenge to the primary judge’s finding that oppressive conduct in fact occurred.

The primary judgment

6. The primary judge noted that two of the appellants, Dr Leo Shanahan and Dr Stuart Saunders, were ophthalmologists, the other appellants being associated with them. The appellants held 43% of the shares in the company which operated an eye hospital.

7. The respondents, Dr Iain Dunlop, Dr Martin Duncan and Dr Gagan Khannah, were also ophthalmologists and in particular, cataract specialists. The other respondents were associated with them. Together, the respondents held 57% of the shares in the company.

8. From about 1992, Dr Shanahan, Dr Saunders and Dr Dunlop carried on practice at premises which they jointly owned. In 1999 it was decided the day surgery should be incorporated and named Canberra Eye Hospital. The company was formed in May 1999, with each of Drs Shanahan, Saunders and Dunlop holding equal shares.

9. In 2001, Dr Shanahan stopped performing surgery, although he continued to consult until about 2005. In December 2001, Dr Saunders stopped performing surgery. He continued to consult until December 2015, when he too retired from practice.

10. On 30 October 2002, the respondent Dr Khannah bought 19% of the shares in the company, whilst on 1 July 2003 Dr Duncan bought 19% of the shares. On 1 July 2004 the shareholding structure of the company was altered so as to compromise issued capital of 300 shares, 43% of which were held by Dr Shanahan, Dr Saunders, their wives and Mr Michael Shanahan, Dr Shanahan’s son, whilst as I have pointed out, Dr Dunlop, Dr Duncan, Dr Khannah and companies associated with them, held 57% of the shares.

11. In mid-2005, the company commenced to operate as “Canberra Eye Hospital” (the hospital) at premises at North Symonston, Canberra. The hospital consisted of a day surgery, consulting rooms and a laser centre. On 18 July 2005, the company took a lease of the hospital which with options, extended to 2027. The primary judge recorded that about 60% of the lease area of the hospital was taken up by consulting rooms, 30% by the day surgery and 10% by the laser centre. The company derived income from charging patients for services associated with the preparation of patients for surgery, for provision of an operating theatre and nursing and support staff, and from providing after surgery care and medication.

12. The surgery performed at the hospital fell into three categories, cataract surgery, ocular plastic surgery and intravitreal injections. It was common ground that cataract surgery was the most profitable to the company.

13. In addition to the shareholder doctors, other ophthalmologists used the consulting space in the hospital. They included Dr Rohan Essex, Dr Phil Larkin, Dr Salim Okera, Dr Christiane Lawin-Bruessel and Dr Andrew Chang.

14. It should be noted, although it ultimately did not loom large in the proceedings, that a shelf company, Canberra Eye Hospital Management Pty Ltd (CEHM) was acquired to be the management company for CEH. CEHM provided rooms, office staff, orthoptists, a practice manager, furniture and some equipment to doctors who consulted and performed surgery at the hospital. CEHM paid rent monthly in arrears to CEH for the use of the consulting rooms under an undocumented arrangement.

15. The company was profitable at least up to June 2013. The financial statements for the year ended 30 June 2013 showed that for that year the company earned income of $5,489,418 and incurred expenses of $3,743,603, resulting in an operating profit of $1,745,815. The financial statements showed that it had retained profits at the end of that year of $1,650,145 and net assets of $1,650,742.

16. In contrast, the financial statements for the year ended 30 June 2014 disclosed total income of $1,167,802 and total expenses of $1,356,625, resulting in an operating loss of $188,823. Its retained profits at the end of the year were $978,974.

17. The genesis of the dispute between the parties arose from the fact that after Dr Shanahan ceased to practice and Dr Saunders was no longer doing surgery and had reduced his consulting time significantly, the appellants were contributing little to the income of the hospital, but their entitlement as shareholders to share in the profits remained unchanged.

18. The majority shareholders were discontented with the position and in 2006 and 2007 proposed various exit strategies.

19. In 2009, the majority shareholders sought to pass resolutions which would have the effect of requiring profits to be distributed in a manner favourable to the majority shareholders. That led to the minority shareholders instituting proceedings in the Federal Court of Australia alleging oppressive conduct and claiming certain relief. Those proceedings ultimately were resolved.

20. As the primary judge recorded, notwithstanding the resolution of those proceedings, the underlying grievance remained. As a consequence, Drs Dunlop, Duncan and Khannah resolved to establish a new hospital. They established Canberra Micro-Surgery Pty Ltd (CMS) in which they became shareholders and directors. In early November 2010, Drs Duncan and Khannah resigned as directors of CEH.

21. The primary judge noted that by the end of 2012 it was anticipated that the hospital operated by CMS would be ready to start in July 2013. Dr Dunlop offered employment at CMS to the company’s hospital manager who accepted, resigning from the company with effect from 21 December 2012.

22. On 6 February 2013, the majority gave written notice to the company that from 1 July 2013 they intended to perform the majority of their cataract surgery at CMS and that they expected that their other surgery and intravitreal injections would be performed for the foreseeable future at both the hospitals operated by the company and CMS.

23. The primary judge recorded that from that time Dr Saunders attempted to find new doctors to perform cataract surgery at the hospital. In that context he made the following finding:

“[88]   From about this time, Dr Saunders started trying to find new doctors to perform cataract surgery at the hospital. He spoke to Drs David Tridgell, David Dickson and Kate Reid but they declined. He also spoke to Dr Maciek Kuzniarz who was working at the Calvary Clinic in the ACT. Ultimately, Dr Kuzniarz did operations at CMS. Dr Saunders spoke to Dr Kerrie Meades, but this went no further. He had conversations with Drs Okera, Lawin-Bruessel, Larkin and Essex, all of whom ultimately moved to CMS or Calvary hospital.”

24. In June 2013, the majority procured the appointment of a Ms Tegen and Mr Chynoweth as directors of the company. The primary judge found that the motivation for Dr Dunlop selecting them was that “he anticipated they would favour the interests of the majority over the minority”. He found that that was what in fact they did. It is not necessary to deal with their activities as directors save to say that the evidence recorded by his Honour amply justified his conclusion.

25. In August 2013, Drs Dunlop, Duncan and Khannah ceased cataract surgery at the hospital. At the same time Drs Okera, Lawin-Bruessel, Larkin and Essex also stopped surgery at the hospital and started doing it at CMS or Calvary Clinic.

26. The primary judge recorded that on about 29 November 2013, Dr Benjamin Burt, an ophthalmologist based in Bendigo, Victoria, specialising in ocular plastic surgery, applied to CEH for accreditation. Dr Burt who was identified by Dr Saunders, did have experience in cataract surgery but proposed to practice predominately in extraocular surgery at CEH. His appointment was confirmed in writing on 6 February 2014.

27. On about 21 February 2014, a Dr Angelo Tsirbas applied to the company for accreditation as a Visiting Medical Officer. The primary judge noted that he was not a cataract surgeon, his predominant interest being ocular plastic surgery.

28. On 1 February 2014, a Dr Kim Frumar submitted an application to the company for appointment as a Visiting Medical Officer. It is not disputed that Dr Frumar was a highly qualified and a highly regarded ophthalmic surgeon who had had over 30 years of experience in various aspects of eye surgery.

29. It is unnecessary to go through the detail, but the evidence established, as his Honour found, that Dr Dunlop with the assistance of Ms Tegen and Mr Chynoweth actively frustrated the accreditation of Dr Frumar.

30. On 18 August 2014, the majority doctors gave notice to the company of their intention to relocate their intravitreal injections procedures to CMS with effect from 20 October 2014.

31. Thereafter, without the knowledge of Dr Saunders or any other members of the minority, Ms Tegen and Mr Chynoweth and their solicitor discussed with Dr Dunlop and the other members of the majority options for the company including the transfer of the Head Lease from the company to CEHM and the appointment of an administrator to the company.

32. On 16 October 2014, the Medical Advisory Credential Committee of the hospital recommended delaying Dr Frumar’s appointment because of current workplace shortages at the hospital. On 19 October 2014, Dr Frumar wrote to Ms Carruthers, the then hospital manager, and the majority requesting that his application be dealt with as a matter of urgency. On 21 October 2014, Dr Saunders called for an immediate meeting of the board to approve the credentialing of Dr Frumar and on 30 October 2014, Dr Frumar was informed that he had been appointed a Visiting Medical Officer to the hospital. However, he did not commence work at the hospital as the directors of the company, against the wishes of the minority, resolved to put the company into voluntary administration. The company was solvent at that particular point of time.

33. On 23 February 2015, the administrator published its report to creditors which revealed the company had an estimated surplus of $359,625. The administrator indicated that “he intended to sell the business as a going concern”. Ultimately the minority entered into the Share Sale Agreement under which they sold their shares in CEH to the majority for $1,776,000 plus 43% of the value of the stock. The primary judge accepted the evidence of Dr Saunders that the minority were essentially forced into this action on the basis that they had received no clarification from either the administrator or the majority as to how the proceeds of the sale of the assets would be distributed to the shareholders of CEH, there was no certainty that the minority would receive any of the sale proceeds and the minority had an obligation to mitigate their loss.

34. Dr Frumar died on 10 April 2016.

35. In those circumstances, the primary judge reached the following conclusions on the oppression claim:

“[305]   From no later than the time of the appointment of Ms Tegen and Mr Chynoweth as directors of CEH, its affairs were conducted in a sustained and deliberate way both contrary to the interests of the members as a whole and oppressive to, unfairly prejudicial to, and unfairly discriminatory against the minority.

[306]   In the case of Dr Saunders, he was oppressed, prejudiced and discriminated against both as a member and in his capacity as a director.

[307]   Throughout, Ms Tegen and Mr Chynoweth, in concert with the majority, acted so as to prefer the interests of the majority over those of the minority.

[308]   The underlying grievance of the majority was the entitlement of the minority to share in the profits of CEH. For so long as this was the case, the majority had no intention of furthering the interests of CEH. Their primary intention was, as the objective material establishes, to achieve a restructure of the shareholding arrangements. As history reveals, if this could not be achieved, they had no intention that CEH should be kept alive. After all, CEH was CMS’ competitor in the cataract surgery market. An entitlement on their part to a passive income from CEH was, in my opinion, a minor, if not irrelevant consideration. If it had been important, they would have acted entirely differently. They made no attempt to attract other surgeons. They frustrated Dr Frumar. They took CEH’s valuable employees. They failed to provide funding for CEH. They sought to take CEH’s Head Lease. After they purchased the minority’s shares, CEH closed down. CEH was in fact worth more to them dead than alive.

[309]   The majority’s need and desire for a restructuring was understood by Ms Tegen and Mr Chynoweth from the start, as is revealed from their 24 September 2013 exchange. Changing the Shareholders’ Agreement is, amongst others, referred to in Mr Della Marta’s Executive Summary of 13 November 2013, Ms Tegen’s letter to the majority and Mr Chynoweth on 11 December 2013, Mr Chynoweth’s letter to Dr Dunlop on 14 December 2013, Mr Chynoweth’s exchanges with Ms Tegen on 3 December 2013 and Ms Tegen’s letter to the majority and Mr Chynoweth on 2 September 2014. It is clearly included in the plan referred to in Mr Chynoweth’s letter to Ms Tegen on 26 September 2014.

[310]   Voluntary administration as an alternative was under consideration from an early stage. As early as 17 October 2013 there was contact with Mr Louttit and discussion of voluntary administration. Documents for achieving this objective were prepared, without the knowledge or participation of Dr Saunders, as early as 26 August 2014. Mr Della Marta’s fee note of 29 August 2014 reveals that such an appointment was intended but should not be made ‘just yet.’ Steps were taken, when there was no agreement from the minority, to transfer the Head Lease to CEHM. Mr Chynoweth described the process as part of a ‘strategic negotiation’. The most probable explanation for the transfer is, I find, to protect the majority’s tenure with respect to the consulting rooms at the hospital.

[311]   On 31 October 2014, Ms Tegen and Mr Chynoweth spoke with Mr Della Marta concerning the appointment of a voluntary administrator to CEH. Mr Della Marta also spoke with Mr Louttit, who provided him with appointment documents.

[312]   The proposal to appoint an administrator was kept from, and then sprung on, Dr Saunders, amongst others, to avoid giving the minority an opportunity to make an appropriate injunction application to the court, as foreshadowed in the Holding Redlich letter of 19 December 2014, and in a manner which precluded appropriate discussion on the subject and in the knowledge that Dr Saunders opposed it.

[313]   The appointment was made after the accreditation of Dr Frumar and just before he intended to commence surgery at CEH, which would have significantly, improved its prospects. The appointment was made at a time when CEH was solvent and understood by Ms Tegen and Mr Chynoweth to be solvent.

…

[316]   I find that the appointment of the administrator was in bad faith and for improper purposes.

…

[322]   The conduct of the majority in the manner in which they dealt with Dr Frumar was not in the interests of the shareholders as a whole and oppressive and unfairly prejudicial to, and unfairly discriminatory against, the minority.

[323]   By 17 April 2014, Dr Frumar had nominated Dr Saunders as his emergency back up and had provided the references from Dr Moshegov and Dr Cottee. On the assumption that the requirement for that nomination was a necessary prerequisite for his accreditation, from then, at the latest, there was no legitimate basis to deny or delay Dr Frumar’s accreditation. In my view, it is probable that Dr Frumar could and would have started generating revenue for CEH by 1 March 2014.”

36. So far as relief was concerned, the primary judge found that the exercise required was to ascertain, ignoring the oppressive conduct, the extent, if any, to which the value of the shares which the minority sold to the majority on 11 June 2015 under the Share Sale Agreement exceeded the amount of $1,776,000 paid for those shares. In that context, he described the oppressive conduct as “the unjustified delay in accrediting Dr Frumar and the appointment of the voluntary administrator”. He stated that the minority shares were “to be valued on the footing that Dr Frumar had started when he could and would have, and the voluntary administrator had not been appointed”.

37. His Honour noted that the experts called by each party agreed that the appropriate manner to value the shares was by the application of the capitalised maintainable earnings (CME) method. He described this correctly as entailing an assessment, as at the appropriate date, of what the maintainable annual earnings before interest and tax (EBIT) was and applying to the figure a capitalisation multiple to which was added the value of surplus net assets. He stated that the application of the method required “a determination of the annual maintainable earnings of CEH on the basis that Dr Frumar would have started when he could and would have, in other words, a determination of the profits that would have been earned directly and indirectly as a result of Dr Frumar’s work at the hospital”. However, the primary judge considered that the Court must take account of the fact that the direct benefit of Dr Frumar’s exertions would not have extended past 10 April 2016. He said that was consistent with the approach in Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 at 293 and HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [40]. He concluded that irrespective of those cases, it was an appropriate exercise of his discretion to take into account the death of Dr Frumar.

38. The primary judge also rejected the proposition that the Court should take into account the potential profit that might have emanated from other surgeons, in circumstances where proof of such hypothetical events was necessarily unattainable. He stated that “[t]his approach would entail taking the full amount of revenue which each notional additional surgeon would earn and discounting it to reflect the degree of probability” that the surgeon would have generated the income.

39. The primary judge rejected this approach. He stated that the Court was “not assessing damages or a lost opportunity, but the value of shares in CEH derived on a maintainable earnings basis”. He stated that “[e]arnings were not earnings, let alone maintainable earnings, if on the probabilities they would not have been earned.

40. He stated that in any event he was not satisfied that the evidence extended to establishing any meaningful likelihood that Dr Frumar’s presence would have attracted other surgeons who would have contributed to the revenue of the hospital. He pointed to the fact that efforts to attract other surgeons by Dr Saunders had very limited success. He stated that he was not satisfied that Dr Burt was likely to start doing any significant cataract work, or that there was any realistic possibility that the non-shareholder surgeons, who formerly operated at the company’s hospital, would have returned. As a consequence he concluded that he was “not satisfied that any revenue equivalent to that which Dr Frumar (or some replacement doctor) would have generated would have continued, in effect, in perpetuity that is maintainable for the conventional application of the CME method”.

41. In those circumstances he noted that the experts agreed that the business would become unprofitable after Dr Frumar’s death and the appropriate valuation method was therefore, to assume that the business would operate for two years until Dr Frumar’s death and then be liquidated and the proceeds distributed to shareholders. He noted that the experts agreed that given Dr Frumar’s death, the proposed capitalisation rate should be adjusted from the multiple of 4x for an annuity in perpetuity to a multiple of 1.62x to take account of his death after a limited period.

42. The primary judge also expressed the view that he was satisfied that Dr Frumar would have been likely to have a list once a week in Canberra but that there was not a sound evidentiary basis for finding that he would have operated more than two lists per week. He stated that “[t]wo (perhaps a little generously)” is the number that he considered should be adopted.

43. His Honour concluded that the valuation which resulted from those findings was as follows:

“VALUATION USING MODIFIED CME METHOD

1. Assumptions
(a) Valuation date 1 April 2014
(b) Revenue based on annualised actual revenue for 8 months to Dec 2014
(c) Revenue from associated doctors (Drs Essex, Lawin-Bruessel, Larkin and Okera):
▪ excluded except Okera for plastics
▪ Dr Okera plastics equal to Okera actual annualised revenue for 8 months to Dec 2014
(d) EBIT Multiple	4.0x
(e) Dr Frumar:
Dies in April 2016 (hence EBIT multiple of 4x)	01-Apr-16
Number of Dr Frumar's surgeries per year:
▪ at 10 surgeries per list and 2 lists per week for 40 weeks	800
Revenue from each of Dr Frumar's surgeries	2,150
(f) Variable expenses as percentage of additional revenue	46.9%
(g) Revenue from Dr Burt	12,516
(h) Revenue from Dr Tsirbas	0
(i) Surplus net assets
Cash	628,768
+ Taxation refund receivable	113,805
– Trade creditors	5,225
– Tax liabilities	6,402
730,900
(j) Minority discount	0%
(k) Valuation rounding factor	$1,000
2. Valuation
Amended EBIT
Operating EBIT (Annualised 8 months Mar to Dec 2014)	-321,903
+ EBIT changes
Additional Dr Frumar	1,720,000
Drs Essex, Lawin-Bruessel, Larkin and Okera (associated doctors)	-44,381
Dr Okera plastics	43,085
Variable costs associated with above revenue	-806,072
Total EBIT changes	912,632
= Amended EBIT	590,729
EBIT multiple	4.0x
Implied capitalisation rate (r)	25%
Number of years to Dr Frumar's death in April 2016 (n)	2.00
Annuity factor in advance [formula =(1-(1+r)^-n)/r*(1+r) ]	1.800
Annuity factor in arrears [ formula =(1-(1+r)^-n)/r ]	1.440
Annuity factor mid-point (average of above) = Adjusted multiple	1.620
Maintainable EBIT based on amended EBIT	590,729
x Adjusted multiple	1.62x
= Business value	956,981
+ Surplus net assets	730,900
= Value of 100% interest (A)	1,687,881
+ Net assets (other than those in the surplus net assets) in April 2016
Assets
Trade debtors	101,619
+ Plant and equipment	150,005
= Total other assets	251,624
– Liabilities
Blackwall Property Funds - lease liability	293,384
+ Blackwall Property Funds - contra for mitigation	Unknown
= Blackwall Property Funds - net liability	293,384
+ Loans payable	3,000
+ Employee entitlements including superannuation	0
= Total other liabilities	296,384
= Other net assets in April 2016 (i.e. excluding those in surplus net assets) (rounded)	-44,800
x PV factor	0.6400
= PV of other net assets/ (liabilities) (B)	-28,672
– Liquidation costs after Dr Frumar's death
Cost of realising plant and equipment	30,000
+ Cost of liquidator	20,000
= Total liquidation costs	50,000
x PV factor	0.6400
= PV of liquidation costs (C)	32,000
= Value of 100% interest after notional realisation of assets in April 2016 (A+B+C)	1,627,209
x Pro-rata interest	43%
= Pro-rata value of 43% interest	699,700
– Minority discount	0
= Value of 43% minority interest (rounded)	$700,000
VALUATION USING NRA METHOD
Assets
Cash	628,768
Trade debtors	101,619
Taxation refund receivable	113,805
Plant and equipment	150,005
Rounding	1
Total Assets	994,198
– Liabilities
Blackwall Property Funds - lease liability	293,384
Blackwall Property Funds - contra for mitigation	Unknown
Blackwall Property Funds - net liability	293,384
Trade creditors	5,225
Tax liabilities	6,402
Loans payable	3,000
Employee entitlements including superannuation
Total liabilities	308,011
= Net assets	686,187
– Liquidation costs
Cost of realising plant and equipment	30,000
Cost of liquidator	20,000
Total liquidation costs	50,000
= Value of 100% of shares	636,187
x Pro-rata interest	43%
= Pro-rata value of 43% shareholding	273,560
– Minority discount	N.A.
= Value of 43% minority interest (rounded)	$274,000
Notes:
(a) Assets realised and liabilities paid before formal members' voluntary liquidation
(b) Liquidator returns surplus capital to shareholders
(c) Assets and liabilities at 1/3/14 per balance sheet at 30 June 2014
(c) Assets and liabilities at 27/1/15 as per Report as to Affairs (CB 6152 to 6159)
Assumptions
(a) Plant and equipment is realised for book value less 20% realisation costs	30,000
(b) Costs of liquidator	20,000
(c) No capital gains tax payable on liquidation”

44. He therefore concluded that the CME method resulted in the valuation of the minority shares of $700,000, stating that even if it was assumed that Dr Frumar’s earnings would have lasted in perpetuity (derived from another practitioner after his passing), the value of the company based on the CME method plus the value of surplus net assets, was $3,093,816 of which the minority share would be $1,330,341, which was less than the amount that they were paid.

45. In those circumstances, the primary judge concluded that the appellants did not suffer any loss and the claim should be dismissed.

The principles to be applied in the assessment of compensation

46. It was not in dispute between the parties that the appellants were to be compensated for the loss (if any) caused by the oppressive conduct. In determining that question in the present case, the method of compensation is arrived at by comparing the value of the shares at the time that they were disposed of and the value that they would have had at that date had the oppressive conduct not taken place: Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369; Rankine v Rankine (1995) 18 ACSR 725 at 727; Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153 at [70]-[74].

47. Further, the requirement to assess a fair price is not constrained by ordinary valuation principles, nor does it require the price to be the market value of the shares: United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514; [2003] NSWSC 910 at [34]-[38]. The Court has a wide discretion in fixing a fair price. In Re Bird Precision Bellows Ltd [1986] Ch 658, Oliver LJ at 669, described “the ‘proper’ price” as “the price which the court in its discretion determines to be proper having regard to all the circumstances of the case”.

46. However, as McPherson JA pointed out in Rankine v Rankine at 727, the price is not to be determined in a manner which provides punitive or exemplary damages. Nor, in my opinion, is it to be determined by making allowances in favour of the oppressed party for conduct carried on by the other shareholders which, whilst resulting in a diminution of the value of the shares, was conduct which they were entitled to undertake irrespective of whether it resulted in such a diminution.

47. There was some debate between the parties as to what precisely constituted the oppressive conduct. The appellants contended that the oppressive conduct was that summarised in those passages of the judgment of the primary judge which I have set out at [35] above, in particular that referred to in [308] of the judgment. The respondents, by contrast, submitted that it was the conduct summarised at [327] of the judgment, namely the delay in the accreditation of Dr Frumar and the appointment of the voluntary administrator.

48. It seems to me that the relevant oppressive conduct found by the trial judge was that referred to in [327] of his judgment. Paragraph [308] of the judgment set out what the respondents sought to achieve by that conduct. Whatever their motivation, the question is whether the conduct was oppressive. In particular, it was not suggested that the respondents had an obligation to fund the business, or for that matter to attract other surgeons. There was no finding that the offering of employment to the hospital manager to work for CMS constituted oppressive conduct, whilst the respondents’ attempt to seek an assignment of the company’s Head Lease was unsuccessful. The primary judge recognised this in his more limited finding of oppressive conduct.

49. Importantly, it was not suggested that the establishment of CMS, the decision of the respondent directors to carry on their practice at that hospital, or the decision of the non-shareholder doctors to move from the hospital to CMS or other hospitals, in any way constituted oppressive conduct.

50. In that context it was an important element of the appellants’ case that one matter the Court should take into account in determining a fair price for the shares was the prospect of further surgeons, in particular cataract surgeons, being attracted to the hospital along with Dr Frumar. The appellants submitted that in considering that issue the Court should adopt what senior counsel for the appellant described as “a robust approach”, citing Giles JA in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 at [159] (Macfarlan and Young JJA agreeing) referring to the principle derived from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664. The principle was stated by Handley JA in Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 in the following terms (at 59), (Mason P and Beazley JA agreeing):

“At this stage the Court should only remit the matter to a master as a last resort, if no other course is fairly open. The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff; compare Armory v Delamirie (1722) 1 Stra 505; 93 ER 662. In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party ‘whose actions have made an accurate determination so problematic’: see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508.”

53. That passage was cited with approval by the High Court in Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3 at [74]; see also LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 at 508.

54. An analogous approach has been taken in oppression cases. Thus, in ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536, Young J stated at 540, that “[t]he flavour of the judgments in the company oppression cases is that in looking to the fair value one must look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppressive conduct, erring, if there is to be any erring, on the side of the oppressed”.

55. Whilst the principle is well established, it cannot be taken too far. It does not permit findings to be made which are contrary to the evidence before the court. Nor does it, in my view, entitle the court to engage in speculation. What it can do is to enable the court, where there is a doubt as to what can be concluded from the evidence before it, and where that doubt is a consequence of the conduct of the defaulting party, to be robust in resolving the doubt in favour of the non-defaulting party. I do not think that the principle extends any further.

The grounds of appeal

56. The appellants relied upon the following grounds of appeal:

1.   The Court below, having found that:

a.   the affairs of Canberra Eye Hospital (CEH) had been conducted from at least 24 July 2013 until 24 June 2015 in a manner that was:

i.   contrary to the interests of its members as a whole; and

ii.   oppressive to, unfairly prejudicial to, or unfairly discriminatory against the appellants;

b.   the appellants sold their shares in CEH to the respondents on 24 June 2015 as a result of such conduct;

erred, in holding that the appellants had not suffered any loss.

2.   The Court below mistook the facts and/or failed to take into account material considerations in:

a.   failing to approach the assessment of damages on the basis that the shares that the oppressed minority sold to the majority oppressors were worth the $1,776,000 paid for those shares as at the date of sale;

b.   failing to assess damages as being the greater amount that would have been paid for those shares as at that date (by either of the parties or by a third party) had it not been for the oppressive conduct;

c.   ignoring the effect of the oppressive conduct from 24 July 2013 to 24 June 2015 when assessing damages.

3.   The Court below when, assessing the value that the appellants [sic] shares in CEH would have had as at 24 June 2015 absent the oppressive conduct, mistook the facts and/or failed to take into account material considerations, by not taking into account that the oppressive conduct caused CEH:

a.   to pay fees to the improperly appointed voluntary administrator;

b.   to forego the income that would have been generated between 24 July 2013 and 24 June 2015 by:

i.   Dr Kim Frumar; and

ii.   other surgeons.

4.   The Court below erred at law and/or failed to take into account a material consideration in failing to:

a.   apply the principle in Armory v Delamirie (1722) 1 Stra 505, LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 and Houghton v Immer (No 155) (1997) 44 NSWLR 46; and

b.   resolve doubtful questions against the wrongdoer respondents;

and in particular in failing to infer that surgeons additional to Dr Frumar would have operated at CEH.

5.   The Court below erred in law in taking into account, in the calculation of the value of the appellant’s shares in CEH as at 24 June 2015, the fact of the death of Dr Frumar in April 2016.”

57. By Notice of Contention, the respondents contended that the primary judge should have concluded that Dr Frumar would have operated for no more than one day per week at the hospital, which would have resulted in the value of the appellants’ shares, on the assumption that Dr Frumar ceased operating on 1 April 2016, of $381,591 (not $700,000) and if the valuation was carried out on the assumption that Dr Frumar’s income would have lasted in perpetuity, $544,886 (not $1,330,341).

58. As the submissions developed, the appellants essentially raised three issues. First, the primary judge erred in failing to apply what was described at the hearing as the “simple method” of valuation (the simple method). The simple method essentially involved first, assuming that the sale price received by the appellants for their shares reflected the value of their shares as affected by the oppressive conduct, and second, adding to that price an amount said to represent the contribution that Dr Frumar and possibly other doctors would have made to the profits and underlying assets of the company, had the oppressive conduct not occurred, together with the funds expended by the company consequent upon the appointment of the administrator which would not have been incurred but for the oppressive conduct.

59. The second issue was the contention that the primary judge erred by failing to make any allowance in his valuation for the possibility that had the oppressive conduct not occurred, the non-shareholder directors may have returned to the hospital, or that the presence of Dr Frumar would have attracted other doctors to carry out their practice at the hospital premises.

60. The third issue essentially was that the primary judge erred in taking into account the untimely death of Dr Frumar in his assessment of capitalised maintainable earnings.

The first issue – the simple method

61. I have summarised the approach adopted in the simple method (see [58] above). During the course of the hearing, senior counsel for the appellants handed-up a document which set out the methodology and the result of applying the simple method. I have attached it as a Schedule to the judgment.

62. It will be seen that the approach calculates the net amount of income derived from Dr Frumar’s practice at the hospital over a period of 15.3 months on the assumptions set out in steps 1 and 2. Although that is assumed to be income derived by the company, the methodology proceeds on the basis that the whole of the net income derived from the activities of Dr Frumar would lead to an equivalent increase in the value of the company’s shares. To this is added revenue from an additional surgeon (step 6) and revenue from non-shareholder surgeons (step 7).

63. Step B of the analysis simply adds to the value of the shares 43% of the administration costs.

64. The net result is that, excluding any additional surgeons, it is assumed that the increase in the value of the appellants’ shares from the activities of Dr Frumar and the saving of administration costs amounted to $650,981.28, whilst making the robust assumptions as to the likelihood of other surgeons, the increase in value was $1,569,267.46.

65. With respect, there are a number of significant difficulties with this analysis. The first is that it was not the subject of any consideration at the trial.

66. Senior counsel for the appellants, whilst submitting that it was open to agitate this approach on appeal, accepted that it was not the focus in the Court below whose focus “primarily was to do with the CME (Capitalised Maintainable Earnings) method and whether or not one took into account Dr Frumar’s death and the Armory v Delamirie principle insofar as it related to other surgeons” (T 20).

67. Senior counsel for the appellants submitted that the submission was adequately put in the appellants’ closing submissions in the Court below. He referred to the following submissions:

“JACKMAN: Now, can I come back and can I suggest that the starting point here, which is the actual sale of 1.776 million, is a useful reference point in a number of respects but, at the very least, it provides an overall check for reasonableness of the approach that we’ve taken. Now, para 2 makes the point that 1.776 – well, it’s the actual transaction, it’s based upon a price that the defendants bid in circumstances where the business had been rundown. So it was in the then condition of the business in the first half of 2015, it wasn’t a bid for a business that had been kept going with Dr Frumar performing work and others performing work at the hospital from April 2014.

…

… So the true value of our 43% shareholding, if one assumes the oppressive conduct didn’t occur, must have been more than that 1.776 million and the question really is, ‘How much?’ That is a question, really of assessing the chance or likelihood of the various things occurring, which we sought to put in place.

HIS HONOUR: The difficulty with this thesis, though, is that your clients were not a willing seller but they weren’t a willing buyer either and so they were staring down the face of litigation, they hate each other’s guts, clearly.

…

HIS HONOUR: Just explain to me again, Mr Jackman, why you say that 1.776 is a good reality check?

JACKMAN: Because it is what was actually paid for the 43% shareholding given the actual condition of the hospital in June 2015 by people more knowledgeable than anybody else in the business.

HIS HONOUR: But how does that help you?

JACKMAN: It helps us because figures are being suggested by the defendants which give a far, far lower value than that and one asks oneself, ‘Well, if this was really worth tuppence ha’penny, why on earth did the defendants pay 1.7 million for 43% of it?’

HIS HONOUR: Well, because one might postulate if they have 100% of the shares, they’ve got two options which they otherwise don’t have. One is they can start working there again at a hospital facility which is entirely their own and the other is that they can close it down, which they apparently did.

JACKMAN: But paying 1.7 million for the pleasure of closing it down sounds economically irrational and –”

68. He also referred to the following closing submissions in reply:

“Your Honour’s calculation of 554,000, I want to say a couple of things about the detail of that a bit later but one can value, as a standalone concept, the opportunity of Dr Frumar coming on board, with its knock-on effect with a further doctor who, in due course, would have been likely to replace him when he died. One can value, very readily, as a standalone matter, the costs incurred by the voluntary administration, which we’ve done in the table attached to our written submissions.

Now, in our submission the Court can and should draw an inference that the share sale agreement did not reflect the value of the lost potential of Dr Frumar coming on board and one can be very confident that it didn’t reflect the losses incurred by the voluntary administration. We’ve always put at the forefront of our argument on compensation the modern cases adopting Armory v Delamirie, particularly, Murphy v Overton Investments in the High Court and the cases referred to in Murphy v Overton to the effect that where the quantification of the plaintiffs’ loss has been made more difficult by the defendants’ wrongful conduct, then the Court should draw inferences in favour of the plaintiffs.”

69. These submissions were all made at the conclusion of the hearing. To the extent that they could be said to suggest the simple method should be adopted, it was not put to the experts who were called, nor was a calculation of the nature set out in the simple method document (see Schedule) ever suggested to be an appropriate method of valuing the shares either to the primary judge or the experts.

70. For this reason alone it is not open to the appellants to now rely on the simple method particularly where, as I point out below, there are a number of significant problems with it which, unsurprisingly, were not advanced at the hearing.

71. The first and most fundamental difficulty is that the simple method assumes that the appellants were prepared to sell their shares for the sum of $1.776 million on the basis that that represented 43% of the value of the business or the company (it is unclear which) without the income derived from Dr Frumar, the non-shareholder doctors, or any doctors who may in future practice at the surgery. It is not going too far to say that that involved the proposition that the value of the remaining 12 years in a lease of a loss-making hospital without any doctors using it was approximately $4.1 million (of which $1.776 million is 43%), a proposition which on its face seems absurd and was a matter that was not investigated during the hearing.

72. Senior counsel for the appellants, in fairness, did not advance that proposition. Rather, he stated that the appellants in bidding $3.5 million for the business recognised that it had the lease, the prospect of attracting doctors to operate at the hospital and the potential for other uses, which had been discussed by Ms Tegen and Mr Chynoweth during the period they were directors. However, once it is accepted that these potentialities were taken into account, it undermines the assumption on which the simple method is based because the appointment of Dr Frumar was simply a realisation of these possibilities.

73. The evidence of Dr Saunders clearly demonstrated that the amount that the appellants offered for the business ($3.55 million) was made in recognition of these potentials. He gave the following answers in cross-examination:

“Q. If you had acquired the business assets of this company you would have been free of any effect of the conduct of the defendants, wouldn’t you?

A. I’m sorry, I don’t quite understand that.

Q. If you had acquired the business assets of Canberra Eye Hospital you would have been free to have run the hospital in any way you liked?

A. Yes.

Q. You would have been free to have started a campaign to seek to bring ophthalmologists to practice at Canberra Eye Hospital to carry out cataract surgery?

A. Yes.

…

Q. I want to suggest to you that when you made this bid you made it in the understanding of what you could conceivably increase the earnings of that company to?

A. It may have taken – yes.

Q. You knew that you wouldn’t have the income of all the defendant surgeons; you knew that when you made this bid?

A. Yes.

Q. You knew that it’s most unlikely that you would have the income of the non-shareholder surgeons who had followed the shareholder surgeons to CMS?

A. Yes.

Q. You knew you would have the income of Dr Frumar –

A. Yes.

Q. – and any other ophthalmologist who you thought you could attract to Canberra Eye Hospital?

A. Yes.”

74. There also appears to be what might be described as further technical difficulties in the approach. It assumes that the net gain to the company from the activities of Dr Frumar and the other hypothetical surgeons would automatically lead to an increase in the value of the shares of the company, without giving any consideration of the tax payable in respect of such income or on distribution. Senior counsel for the appellants acknowledged that the calculation had to be adjusted to take into account the fact that the company would be liable to pay tax at the rate of 30% on the net income received from the activities of Dr Frumar. This would reduce the net gain from $1,164,483 to $815,138.10 and the appellants’ share to $350,509.38.

75. None of these issues were explored at the trial or raised with the experts who each agreed that the appropriate valuation methodology was the capitalisation of maintainable earnings method. Whilst it is correct that the task of the trial judge was to fix a fair price for the shares and that he or she is not constrained by any particular valuation methodology, the parties and their experts should have been able to consider any methodology proposed at the trial and to the extent necessary, lead evidence or cross-examine in respect to it. In these circumstances, it is not appropriate for the approach to be raised on appeal: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; [1950] HCA 35; Coulton v Holcombe (1986) 162 CLR 1 at 7-9; [1986] HCA 33. Further, given that the methodology was not raised before the primary judge, he could not be said to have fallen into error in not applying it.

76. It follows that there was no error in the primary judge failing to adopt the “simple method” of valuation.

Second issue – Should the possibility of Dr Burt and other surgeons operating from the hospital have been taken into account in the calculation of maintainable earnings?

77. It was common ground in the Court below that the appropriate method of valuation was the use of the capitalisation of maintainable earnings methodology. Apart from the simple method with which I have dealt above, the appellants did not contend for any other method of valuation either in the Court below or on appeal. Further, the capitalisation rates used by the experts and adopted by the primary judge were not said to be erroneous.

78. Rather, the issue was whether the primary judge erred in his assessment of future maintainable earnings, by failing to include in the estimate monies received from practitioners other than Dr Frumar using the facilities of the hospital.

79. Future maintainable earnings (or profits) are the level of profits which, on average, the business being valued can be expected to maintain in real terms, notwithstanding the vagaries of the economic cycle: Wayne Lonergan, The Valuation of Business, Shares and Other Equity (4th ed, 2003, Allen & Unwin) at 34; Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358 at 362; [1947] HCA 10; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 at 565; [1971] HCA 2.

80. The primary judge correctly adopted this approach in concluding at [388] that “[e]arnings are not earnings” for the purpose of the methodology if, as a matter of probability, they would not have been made. In particular, he was correct to reject the approach taken to the assessment of damages for a loss of a commercial opportunity.

The submissions

81. The appellants submitted that the primary judge erred in failing to take into account earnings which could have been derived from the activities of Dr Burt and other non-shareholder surgeons who might have used the premises.

82. In senior counsel for the appellant’s simple method calculation, it was assumed that other surgeons, “Burt etc”, would generate the same income for the company as Dr Frumar (simple method step 6) and that revenue from non-shareholder surgeons based on 2013 revenue, discounted by 50% being “the assumed percentage of non-shareholder surgeon revenue staying with CEH” (simple method step 7) should also be taken into account.

83. In their written submissions, the appellants contended that the correct context in which the matter was to be considered was that if there was no oppression, the members of the board of the company would be working together to attract replacement cataract surgeons, and that Dr Frumar was accredited and had commenced cataract surgery.

84. The written submissions also stated that in dealing with Dr Burt, the primary judge erred in taking into account the fact that “the respondents were never going to assist Dr Saunders in his quest to find replacement surgeons”. It was submitted that “[t]heir assistance was not necessary” and that absent the oppression, the other directors would have been seeking to encourage other doctors to operate at the hospital.

85. In relation to Dr Burt, it was contended that he was “an experienced cataract surgeon, having undertaken over 4,000 cataract cases”. This was shown on his CV which, however, described him as an ophthalmologist specialising in oculoplastic surgery.

86. The appellants also referred to the evidence of Dr Saunders and Mr Michael Shanahan to the effect that Dr Burt told them that if there were other surgeons performing cataract surgery, he would consider doing so but he would not do so until Dr Frumar commenced practice at the hospital.

87. The appellants referred to the evidence of the hospital manager, Ms Carruthers that Drs Burt and Tsirbas had indicated that they would not perform cataract surgery at the hospital, but stated that this was contrary to what Drs Burt and Tsirbas had told Dr Saunders.

88. The appellants also referred to the evidence of Mr Michael Shanahan, that Dr Burt had commenced cataract surgery at Barton Private Hospital. The evidence from Mr Shanahan was that sometime in early 2015 Dr Burt said to him, “I conducted my first cataract in Canberra at Barton Private Hospital”. The appellants also pointed to the website of Barton Private Hospital, which they stated said Dr Burt had a special interest in cataract surgery. Whilst it is true that the website stated that Dr Burt had that special interest in cataract surgery, along with special interests in 11 other procedures ranging from orbital fractures to liposuction, it stated that he practiced oculoplastics in Canberra and Victoria, This hardly provides significant support for the appellants’ contentions.

89. In relation to the non-shareholder surgeons, the appellants in their written submissions referred to the evidence of Dr Khannah to the effect that Dr Okera had told him that he did not want to be involved in any dispute, whilst Dr Lawin-Bruessel had told him that she did not want to be “the only surgeon left behind with no support from colleagues, in an aged facility”. It should be noted that Dr Khannah also pointed out that “the CMS facilities were significantly newer and more advanced” than the facility at the company’s hospital.

90. Senior counsel for the respondents emphasised the unsuccessful attempts by Dr Saunders and Ms Carruthers, the hospital manager, to obtain alternative surgeons. He referred to the evidence of Dr Saunders of his unsuccessful attempts to attract Canberra surgeons and a Sydney based group of surgeons to the hospital and to his cross-examination to the following effect:

“Q. Throughout 2012, 2013 and indeed even into 2014, you remained on the alert from any resident ophthalmologist in Canberra who might be willing to perform surgeries at Canberra Eye Hospital, correct?

A. No, I don’t think so. I think I’d abandoned thoughts of encouraging local surgeons to come to join us.

Q. Why do you say you abandoned –

A. Because I stopped ringing – I, I wasn’t going to pester them and say, ‘Look please come.’ I, I thought they don’t want to come, they’ve got established practices, they’re comfortable where they are.

…

Q. There was still hope but you thought you’d be wasting your time?

A. No. No, no I - there was a hope that we could attract some fly-in, fly-out surgeons.

Q. We’ll come to those in a moment, but as far as attracting anybody who was resident in Canberra, you’d pretty much given up hope?

A. Yes.

Q. When did you first start making inquiries with fly-in, fly-out surgeons about whether or not they’d be willing to come and practise in Canberra Eye Hospital?

A. I didn’t personally go out and search for fly-in, fly-outs but Dr Benjamin Burt for instance, who was a – who was functioning in Canberra as an oculoplastic surgeon, was also prepared to do cataract surgery of which he did a great deal in Bendigo and around, once Dr Frumar had been credentialled [sic] and the dust was settling.

…

Q. That’s why you said yesterday you firstly contacted each of the non-shareholder doctors to see if you could persuade them to stay?

A. That’s right.

Q. Then you also made inquiries with all of the resident ophthalmologists who you thought might be able to be persuaded to carry out cataract surgery at CEH?

A. Yes. I – yes.

Q. In short you had conducted an active campaign to locate and identify surgeons who were prepared to conduct eye surgery at CEH?

A. I’d inquired, yes.

Q. Did you have any reason to believe that the defendants’ active campaign to locate and identify surgeons was likely to be any more successful than your campaign had been?

A. I don’t think it would have been.

…

Q. By that date, that is, by the time the administrator was appointed, was it your understanding that the only conduct that you complained of by defendants that could possibly have affected the earnings of Canberra Eye Hospital was due to the delay in credentialing Dr Frumar?

A. Yes.

Q. Would you agree that the effect of that, at its highest, could have been that Canberra Eye Hospital lost that opportunity for Dr Frumar to carry out a list once a month in, say, about mid 2013?

A. Yes.”

91. Ms Carruthers gave unchallenged evidence of her unsuccessful attempts to attract other doctors to the hospital and her conversation with Dr Burt in which he told her he did not come to Canberra to perform cataract surgery.

92. Senior counsel for the respondents also pointed to the fact that the estimated income that the simple method said would be derived from the assumed activity of Dr Frumar and Dr Burt, was well in excess of any income derived from the activity of any of the individual respondents or non-shareholding surgeons during the period that they operated at the hospital.

Consideration

93. I have already indicated my opinion that it was appropriate for the primary judge to only include hypothetical income from Dr Burt and the non-shareholder surgeons, if he was satisfied, on the balance of probabilities, that it would be achieved. I also concluded that it was not an appropriate application of the methodology to include in the capitalised maintainable earnings, income which it was possible that the company might receive but discounting the amount to take account of the fact that it was merely a possibility.

94. I am prepared to accept in the present case that if it could be established that the difficulty in proving the future maintainable earnings was due to the oppressive conduct, the Court would be justified in taking a robust approach to the issue. However, as I have indicated, that approach does not permit mere speculation.

95. In the present case it was asserted in step 6 of the simple method, that either Dr Burt or some other unidentified surgeon would generate revenue equivalent to that of Dr Frumar, presumably by performing 20 cataract operations per week over 40 weeks of the year. There was not the slightest evidence to support that assertion.

96. Dr Burt, as I have pointed out, was a specialist in oculoplastic surgery. Whilst he was plainly capable of performing cataract surgery and said to Dr Shanahan and Mr Michael Shanahan that he would consider performing it but would not do so until Dr Frumar commenced practice, there was no evidence to suggest that he had determined to do so and even if he had, there was no evidence to suggest the extent to which he would undertake that surgery or for that matter, the number of referrals he would have received to enable him to do so.

97. The most that can be said was that Dr Burt, following his accreditation with the hospital and the arrival of Dr Frumar, might have performed some indeterminate amount of cataract surgery which might have produced some income. In my view this does not provide any basis for including some arbitrary additional amount in the estimate of maintainable earnings, particularly having regard to the evidence of Ms Carruthers that Dr Burt told her that he would not perform cataract surgery at the hospital.

98. Further, there is no evidence to suggest that any unidentified surgeon would come to the hospital and perform 20 cataract surgeries per week, or for that matter, any such surgery at all. I have referred to the evidence of the unsuccessful attempts of Dr Saunders and Ms Carruthers to obtain further surgeons at the hospital, and in light of that evidence, it would be quite erroneous to increase maintainable earnings based on the projected revenue from an unknown practitioner.

99. The appellants submitted that the presence of Dr Frumar, a world-renowned ophthalmic surgeon as a Visiting Medical Officer, would have attracted additional surgeons to the hospital. Accepting that this was a possibility, there was no material from which the primary judge could conclude on the balance of probabilities that this would occur, much less make an estimate of the amount of income that would result from this occurrence.

100. So far as the non-shareholder surgeons were concerned, whilst it may be correct that they left the hospital because of the disputes which had occurred between the shareholders in circumstances where they had found alternative premises at which to carry out their practices, there was no evidence from which the primary judge could infer that upon resolution of the dispute, they would return.

101. It follows that the primary judge was correct in not including in his assessment of capitalised maintainable earnings an amount referable to income from cataract surgery conducted by Dr Burt or some other surgeon, or from the possible return of some or all of the non-shareholder surgeons.

The third issue – Did the primary judge err in taking into account the death of Dr Frumar

102. Dr Frumar died on 10 April 2016. As I pointed out, the primary judge concluded that this should be taken into account and the appropriate methodology was to assume that the hospital would “operate for two years until Dr Frumar’s death and then be liquidated and the proceeds distributed to shareholders”.

103. The appellants contended that Dr Frumar’s death should not be taken into account.

104. The difficulty with this submission is that having regard to the conclusion I have reached concerning the inclusion of income received as a result of the activities of Dr Burt and the non-shareholder surgeons, the capitalised maintainable earnings achieved through Dr Frumar, even ignoring his death, would not result in a valuation which had the effect of valuing the appellants’ shares in a greater amount than what they were paid for them.

105. The experts retained by each of the parties in the Court below produced a model which valued the shares on the basis of 12 scenarios, some of them having the valuation date of 1 March 2014 and the others the valuation date of 27 January 2015. The date of 1 March 2014 is the date most favourable to the appellants. The scenarios took the annualised operating EBIT of -$321,903 being the annualised EBIT for the 8 months from March to December 2014, and assuming an income received from Dr Frumar in perpetuity after some relatively minor adjustments arrived at an amended EBIT of $590,729. This was capitalised by a multiple of 4 providing a business value of $2,362,914 to which was added surplus net assets of $730,900, producing a business value of $3,093,816. The experts concluded that a pro rata value of a 43% interest without any application of a minority discount amounted to $1,330,341 which is some $400,000 less than the appellants received for the shares. The primary judge accepted this analysis at [358].

106. Thus, ignoring the fact of Dr Frumar’s death makes no difference to the ultimate result in the proceedings. However, in my opinion the primary judge was correct in the approach which he took to this issue.

107. In Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4, a case involving a claim for damages for a contravention of s 52 of the then Trade Practices Act 1974 (Cth), the Court summarised the relevant principles in the following terms:

“A similar approach to that taken in damages cases has been taken in valuation cases. Thus, in Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co, the House of Lords held that, in determining the compensation payable to mine owners who had been given notice not to work their mine, evidence was admissible that the price of coal rose after the notice was given. The Earl of Halsbury LC said:

‘[T]he person who had to make the calculation of what was the compensation ought to have arrived at the sum which experience has now shewn to be the correct amount.

It is true that he probably would not have been able to arrive at that sum accurately, but he ought to have contemplated upon such material as he had what would be the true sum. He ought to have considered the possible rise or fall of prices; but, as I have said, he probably would have made a mistake. We now know what would have been the true sum, and the proposition baldly stated appears to be that, because you could not arrive at the true sum when the notice was given, you should shut your eyes to the true sum now you do know it, because you could not have guessed it then.’

Lord Macnaghten said:

‘[T]he arbitrator’s duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?’”

108. Similarly, in HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54, the principle was stated as follows:

“[39]   In the same way, in Kizbeau Pty Ltd v W G & B Pty Ltd this Court pointed out that, in many fields of law, assessments of compensation or value at one date are commonly made taking account of all matters known by the later date when the court’s assessment is being carried out. This has been so in relation to the remarriage of widows, the termination of a dependency by early death after the date from which damages were to be assessed, the death of a person having a claim for personal injuries which was unexpectedly early and unrelated to those injuries, rises in wage rates, assessing the value of reversionary life interests which never came into possession, valuing annuities, and assessing compensation for the acquisition or destruction of property rights. The limpid words of Lord Macnaghten about the duty of an arbitrator in determining compensation are far too well known to escape repetition:

‘Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?’

The significance of Kizbeau Pty Ltd v W G & B Pty Ltd is that it endorsed that approach in relation to s 82 of the Act when the court is assessing damages by comparing the price and the real value of the asset at the date of the acquisition.

[40]   Finally, although the court is entitled to take into account events after the date of acquisition, it must distinguish among possible causes of the decline in value of what has been bought. ‘If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be 'independent', 'extrinsic', 'supervening' or 'accidental', then the additional loss is not the consequence of the inducement’.”

109. Once it is established that the sole basis of the claim for compensation is based on the loss of income which could have been derived from the activities of Dr Frumar personally, as distinct from the activities of a hypothetical surgeon performing cataract surgery, then the death of Dr Frumar, without any disrespect, was inherent in that which produced the income and was a matter which the primary judge properly took into account in reaching his conclusion on the value of the shares.

110. In these circumstances, the primary judge was correct in his conclusion that the appellants suffered no loss as a result of the oppressive conduct of the respondents. The appeal should be dismissed.

The Notice of Contention

111. In these circumstances it is unnecessary to deal with the Notice of Contention.

Conclusion

112. I would make the following orders:

1. Appeal dismissed.

2. Appellants to pay the respondents’ costs of the appeal.

113. BELL P: I, too, would dismiss the appeal with costs and agree with the reasons of the Chief Justice.

114. These short, supplementary reasons adopt the Chief Justice’s description of the background to and nature of the various issues in dispute between the parties.

115. This case was a somewhat unusual oppression case in that the Appellants (the minority) had sold their shares to the Respondents (the majority) after the commencement of proceedings but before the hearing. In the Share Sale Agreement (SSA), both groups of shareholders were astute to preserve their forensic positions. In the case of the minority, cl 3.9(c) of the SSA recorded that:

“Nothing in this agreement constitutes an admission or waiver by the Sellers in respect of Proceedings No. 2014/317132, and in particular:

(1)   this agreement does not constitute an admission by the Sellers    that the Purchase Price represents the fair value of the Sale    Shares after taking into account the conduct of the Company’s    affairs as alleged, or to be alleged, related to or arising out of    the matters pleaded in Proceedings No. 2014/317132 or the    conduct of the affairs of the Company or Canberra Eye    Hospital Management Pty Ltd.”

116. In the case of the majority, cl 3.9(e) recorded that they were:

“… not prevented by this agreement from contending that value of the Sale Shares is a fair value or from raising any other argument that they wish to raise arising out of this agreement.”

117. As the Chief Justice has recorded at [33], the SSA resulted in the majority acquiring the shares of the minority for a sum of $1.776 million plus 43% of the value of their stock. Accordingly, by the time the case came on for trial, the minority needed to establish not only oppression but also that the value of their shares exceeded that for which they sold them to the majority pursuant to the SSA. Otherwise, the oppressive conduct could not be said to have caused any loss or damage.

118. Both sides called expert forensic accountants and, as the primary judge recorded (at [330]), there was “consensus as to the appropriate valuation methodology for th[e] case.” At [334], his Honour went on to record that:

“Conventionally, the business (if it would have been profitable) is to be valued using the capitalised maintainable earnings (or CME) method which entails an assessment, as at the appropriate date, of what the maintainable annual earnings before interest and tax (EBIT) were and applying to the figure a capitalisation multiple. There is added to this the value of surplus net assets, that is, the assets owned but not necessary to generate the maintainable earnings.”

119. The minority’s principal complaint as to the use of this methodology was not that the methodology was wrong or inappropriate but rather that, in factoring in the earnings that it was assumed that Dr Frumar would have earned for the business from 1 March 2014 when it was assumed he would have started conducting cataract surgery at the hospital, the primary judge erred in taking into account that Dr Frumar died unexpectedly in April 2016. The judge had held that:

“331   I consider that the Court must take account of the fact, now known, that the direct benefit of Dr Frumar’s exertions would not have extended past 10 April 2016: KizbeauPty Ltd v WG&B Pty Ltd (1995) 184 CLR 281 at 293; HTWValuers(Central Queensland) Pty Ltd vAstonlandPty Ltd (2004) 217 CLR 640 at [40].

332   Relief is discretionary and I would approach the matter in this way as a matter of discretion in any event. It accords with fairness in this case. Had the oppressive conduct not occurred, the minority would not have sold. Their attitude was always that they wanted to hold their shares and earn revenue from them. It would not be fair to compensate them on the footing that they would not have sold their shares, but Dr Frumar would have survived beyond the date of his passing.” (Emphasis added)

120. I agree both with the primary judge’s analysis and the Chief Justice’s reasons for rejecting this aspect of the attack on the primary judge’s approach. The relevant discretion is a wide one, both as to the appropriate remedy and, if a compulsory acquisition of shares is ordered, as to the mode of valuation of those shares: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; 207 ALR 136 at [7]. In the present case, of course, there was no need to order a compulsory acquisition of shares as they had already been acquired as a consequence of the SSA. The primary judge applied the CME method as a means of assessing whether or not the minority was entitled to any compensation additional to that which they had secured for the sale of their shares pursuant to the SSA.

121. Dr Frumar’s death was an important integer in “all of the circumstances” of the case, which authorities in this area of discourse insist must be taken into account: see, for example, Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 at 562; Rankine v Rankine (1995) 124 FLR 340 at 345; ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540.

122. The fact that it would, on the authorities identified below, have been open to the primary judge to make an assessment of the value of the minority’s shareholding as at the date of the hearing, which was well after Dr Frumar’s death (and which would necessarily have taken his death into account) also lends support to the approach taken by the primary judge.

123. In this context, there is no hard rule as to when valuation of shares in an oppression case must occur: see Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 144 where the Full Court of the Federal Court said that “[t]he date at which shares are to be valued in oppression cases varies having regard to all the relevant circumstances.” The court has a “wide and absolute” discretion, subject to the requirement that the valuation date chosen effect “fairness and justice to both parties in all the relevant circumstances of the case”: Foody v Horewood [2007] VSCA 130 at [35] and [37].

124. In Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153, the relevant company had lost a significant profit outlet as at the date of the order. This loss was beyond the control of the company, and would have occurred regardless of the oppressive conduct. As a result, Brereton J (as his Honour then was) rejected the minority shareholders’ submission that the shares should be valued at the date on which the oppressive conduct occurred. His Honour noted that, just as the minority shareholders should be no worse off by reason of the oppressive conduct, they also should be no better off: at [96]. In the circumstances of the case it was held that justice was best achieved by adopting a valuation “as close to the present as possible”: at [96].

125. A similar concern not to undertake an assessment of the value of a shareholding on a basis that did not accord with the facts as they had emerged also underpinned the reasoning of the primary judge in the present case, as illustrated by [332] of his Honour’s reasons which I have reproduced in [119] above.

126. In any event, as the primary judge recorded (at [358]):

“Even if one were to adopt the assumption that Dr Frumar’s earnings would have lasted in perpetuity (derived from another practitioner after his passing), the value of CEH based on the CME method, plus the value of surplus net assets, is $3,093,816 of which the minority share would be $1,330,341, still below the amount they were paid [pursuant to the SSA].”

127. This figure of $1,330,341 was based upon a joint calculation by both forensic experts based upon the Court’s instructed assumptions. That particular figure involved assumptions highly favourable to the minority including no minority discount, and an assumption that, even though he had no prior presence in Canberra, Dr Frumar would have conducted two days of surgery per week for 40 weeks of the year with each surgical list comprising 10 surgeries, from the very first day of his association with the business which was taken, for the purposes of the case, as 1 March 2014.

128. For the reasons advanced in support of the majority’s Notice of Contention to which the Chief Justice refers at [57] of his reasons, those assumptions were extremely favourable to the minority and the evidence, carefully analysed in the course of oral submissions by senior counsel for the majority, demonstrated that, in all likelihood, Dr Frumar would have conducted far fewer operations and, moreover, would only have been able to build up a practice over time as opposed to starting with a sufficient complement of patients (and referrals) to allow the business to produce an income figure of $3,093,816. All of this points to a capitalised maintainable earnings figure of significantly less than that figure, and a lower pro rata figure than $1,330,341 as the minority share of that amount.

129. The key point for present purposes is that, even on the assumptions most favourable to the minority and even assuming that Dr Frumar’s death should not have been taken into account, the pro-rated agreed value of the shares in the business which the figure of $1,330,341 represents was considerably less than that which the minority in fact received pursuant to the SSA.

130. I also agree with the Chief Justice’s reasons at [93]–[101] for rejecting the attack on the primary judge’s finding (at [339]) that:

“In any event, I am not satisfied that the evidence extends to establishing any meaningful likelihood that Dr Frumar’s presence would have attracted any other surgeons who would have contributed to the revenue of the hospital. Efforts to attract other surgeons by Dr Saunders had very limited success. Realistically, the majority were never going to help in this quest. I am not satisfied that Dr Burt, who was an oculoplastic sub-specialist, was likely to start doing any significant cataract work. Even if the oppressive conduct had not occurred, the majority and the minority would still most probably have remained at loggerheads. Drs Burt and Tsirbas were not willing to commit to hospital lists of any type whilst the dispute between shareholders remained. Even if I were to adopt the loss of opportunity analysis, the percentage reduction would be so great as to make the lost benefit of no real value.”

131. No doubt in partial anticipation of the weakness of the arguments in relation to the primary judge’s assessment of the value of the minority’s shares, senior counsel for the minority advanced an alternative argument based upon what he described as a “simple method” of assessment. As the Chief Justice has noted at [58] of his reasons, this involved taking the price paid to the minority by the majority for the minority’s shares, namely $1,776,000, assuming that that figure was what those shares were worth in the company’s oppressed state, and then submitting that that amount represented a valuation “floor” to which needed to be added a series of figures for the actual costs of the company’s administration, the fact that Dr Frumar had been prevented from commencing work from 1 March 2014 until the time at which the company went into administration, and that other doctors may have commenced working at the hospital in that period and thus earned revenue for the business.

132. There were a number of difficulties with the “simple method” approach, as has been pointed out in the Chief Justice’s reasons. The starting point, namely that the price paid for the minority shares was a true or reliable indication of their value, is highly debatable in my view (and was not the subject of any debate or consideration by the experts or the primary judge). Given the prolonged and fraught relationship between the minority and majority, which had manifested itself in the commencement of the litigation in this Court and which followed earlier Federal Court proceedings between the parties, I do not consider that either the minority or the majority could be described as willing but not anxious vendors and purchasers. Indeed, at various points in his argument, senior counsel for the minority said that the sale was “induced by” the oppressive conduct, and implied, if not expressly stating, that the majority’s intention was to “kill the company at all costs". In other words, the “floor” or platform on which the “simple method” calculation rested could not, in my opinion, be treated as a valid or reliable base for a larger valuation exercise.

133. More fundamental than this, however, was that this method of assessing compensation had simply not been advanced at first instance in any meaningful way. Senior counsel for the minority (who had not appeared at the trial) sought to identify what at best could be described as germs of such an argument in his predecessor’s oral submissions in reply on the 11th and final day of the trial. In that portion of the transcript to which he referred, this argument was said to constitute an “alternative approach” which “wouldn’t require your Honour to go into the intricacies of valuing the business as a whole or dealing with all of the other hypotheses that we put forward”.

134. No submission was made at the time that this alternative approach was superior to or should be preferred to the CME method or that it would be erroneous to follow the CME method which had, after all, been the focal point of the experts’ various reports and joint reports, and cross-examination by the parties and questioning by the primary judge.

135. Senior counsel for the majority protested at the time the so-called “alternative approach” was first raised in the Court below that it was neither in reply nor the subject of written submissions nor of any pleading. These complaints were entirely justified and could not be gainsaid. That senior counsel for the majority sought to deal with the “alternative approach” in the Court below on the run and briefly in the context of his opposition to it being raised at all did not, in my opinion, carry the consequence that the argument should be treated as having been squarely before the Court at first instance.

136. It seems to me to be extremely difficult, not to say most unfair (both to the primary judge and the majority), to criticise the primary judge’s decision not to assess the compensation on the basis of an alternative approach that had been sought to be introduced at the heel of the hunt, over the protest of the majority and which was not pressed as either the correct or a superior way of assessing damages or compensation.

137. It is equally problematic and unfair to seek to mount an appeal by reference to such an argument which, at its highest, was raised for the first time in oral reply submissions, and had not been explored either in the evidence nor considered by the experts when it is quite clear that it would have been, had it featured in any meaningful way in the minority’s case at first instance. From an appellate court’s perspective, there is little if any difference in my opinion between such an argument sought to be raised so belatedly at trial and one not raised at all, at least in circumstances where a protest has been properly made in response to its attempted introduction.

138. From the broader perspective of the administration of justice, this course is also most unsatisfactory and should be deprecated in emphatic terms. Subject to the well-known and narrow qualifications associated with cases such as Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 at 497 (Water Board v Moustakas) and Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33 (Coulton v Holcombe) involving pure questions of law, or the construction of a document, or where all the facts have been established beyond controversy, an appeal is not the occasion to mount for the first time an argument that either did not form or had not formed any meaningful part of the case presented at trial.

139. Seeking to advance such an argument would almost inevitably be bound to fail on procedural fairness grounds but also entails a waste of valuable court time and of clients’ resources. The value of finality of litigation upon which cases such as Water Board v Moustakas and Coulton v Holcombe are ultimately predicated has both public and private interests underpinning it, as Chief Justice Gleeson observed in his 2013 Sir Maurice Byers Lecture on the topic of finality: see “Finality” Bar News (2013, Winter Edition) 33 at 35.

140. Nor is it an appropriate course to suggest, as was done in the present case, that the matter could, if necessary, be remitted to the primary judge for an assessment of damages or compensation or value on a basis that had not been advanced or explored in any meaningful way at trial. Trials at first instance do not constitute a “preliminary skirmish”: Coulton v Holcombe at 7.

141. Nothing I have said in the previous paragraphs has the least bit of novelty to it. Appellate and intermediate appellate courts have been making the same point with great clarity for many years, nowhere perhaps more eloquently than in the majority judgment of the High Court in Whisprun Pty Ltd v Dixon [2003] HCA 48; 200 ALR 447 at [51] (Whisprun) in which it was observed that:

“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 and party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs.” (Footnotes omitted)

142. The course which this appeal took with its principal focus on the so-called “simple method” of assessment illustrates that clear statements such as that made in Whisprun bear repeating, and it is to be expected that practitioners advising and appearing in appeals not only be acutely aware of these statements but abide by them when settling grounds of appeal and formulating and making appeal submissions.

143. EMMETT AJA:

Introduction

144. The question in this appeal is whether the appellants, as shareholders in Canberra Eye Hospital Pty Ltd (CEH) and Canberra Eye Hospital Management (CEHM), suffered loss or damage as a consequence of conduct engaged in by the respondents in relation to the affairs of CEH and CEHM. In proceedings brought in the Commercial List of the Equity Division by the appellants (the Minority Shareholders) against the respondents (the Majority Shareholders), a judge of the Equity Division (the primary judge) concluded that identified conduct of the Majority Shareholders was not in the interest of the shareholders as a whole and was oppressive and unfairly prejudicial to and unfairly discriminate against the Minority Shareholders. However, the primary judge also concluded that the Minority Shareholders had failed to establish that, had that conduct not occurred, they would have been in a better position than they are now. His Honour therefore ordered that the proceedings be dismissed and ordered the Minority Shareholders to pay the costs of the Majority Shareholders.

145. By notice of appeal filed on 15 October 2018, the Minority Shareholders appealed from the orders made by the primary judge. The Majority Shareholders filed a notice of contention on 14 November 2018 seeking to uphold the orders made by his Honour on grounds other than those relied upon by his Honour.

Background

146. From about 1 July 2004, the Minority Shareholders held 43% of the issued share capital of CEH and the Majority Shareholders held the remaining 57%. CEH conducted an eye hospital in Canberra and derived its income from services associated with the preparation of patients for surgery, from the provision of an operating theatre and nursing and support staff during the surgery, and for providing after surgery care and medication.

147. Surgery at CEH was undertaken by two groups of surgeons. The first (the Respondent Surgeons) held shares in CEH. The second (the Non-Shareholder Surgeons) did not hold shares in CEH. Two of the Minority Shareholders, Drs Shanahan and Saunders, who had founded the practice from which CEH evolved, ceased to perform surgery by about 2001. The Respondent Surgeons resented the fact that Drs Shanahan and Saunders and the other Minority Shareholders enjoyed a passive dividend income from their shareholdings in CEH, to which the Respondent Surgeons contributed through their surgery at CEH. That resentment lead to various attempts by the Majority Shareholders between 2006 and 2010 to restructure the distribution of income generated by CEH.

146. The Respondent Surgeons resigned as directors of CEH in late 2010 with the result that Drs Shanahan and Saunders were the only directors of CEH. In February 2013, the Respondent Surgeons notified CEH that from 1 July 2013 they would perform the majority of their surgery at another hospital. As a result, it became necessary for CEH to find replacement surgeons. In June 2013, the Majority Shareholders voted to remove Drs Shanahan and Saunders as the directors of CEH and to replace them with Ms Tegen and Mr Chynoweth. There was no rational or legitimate reason for the removal of Dr Saunders and the purported removal of Dr Saunders was ineffective. From July 2013, the directors of CEH were Ms Tegen, Mr Chynoweth and Dr Saunders, with Dr Shanahan appointed as his alternative.

147. From no later than the time that Ms Tegen and Mr Chynoweth were directors of CEH, its affairs were conducted in a sustained and deliberate way both contrary to the interests of the members as a whole and oppressive to, unfairly prejudicial to and unfairly discriminatory against, the Minority Shareholders. They acted in concert with the Majority Shareholders first to prefer the interests of the Majority Shareholders over those of the Minority Shareholders. The Minority Shareholders complained about three matters in particular. The first was the appointment by the directors of an administrator of CEH. The primary judge found that the appointment of the administrator was in bad faith and for improper purposes. The second matter concerned the manner in which the directors dealt with the accreditation of Dr Frumar, a world-renowned eye surgeon. Dr Saunders proposed that Dr Frumar undertake surgery at CEH’s hospital. However, Ms Tegen and Mr Chynoweth frustrated the accrediting of Dr Frumar, who would have been in a position to commence in generating revenue for CEH by 1 March 2014. It is relevant that Dr Frumar in fact died in April 2016.

148. The primary judge held that the conduct of the Majority Shareholders, in the manner in which they dealt with Dr Frumar, was not in the interests of the shareholders as a whole and was oppressive and unfairly prejudicial to and unfairly discriminatory against the Minority Shareholders. The third matter about which the Minority Shareholders complained, which was not accepted by the primary judge, was that, but for the conduct of the Majority Shareholders about which complaint was made, other surgeons would have commenced working at CEH’s hospital. Thus, they say, the unexpected death of Dr Frumar would not have frustrated the carrying on of the business of CEH’s hospital on as profitable a basis as prior to the departure of the Respondent Surgeons and other Non-Shareholder Surgeons to a competing hospital.

149. The Minority Shareholders formulated their claim on the basis that on 11 June 2015 they sold their shares in CEH to the Majority Shareholders for $1,776,000. They contended that that was the value of their shares at that time but that, but for the conduct complained of, their shares would have been worth substantially more than that sum.

The Appeal

152. The grounds of appeal upon which the Minority Shareholders rely may be stated as follows:

1. Having found that the affairs of CEH had been conducted in a manner that was contrary to the interests of its members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against the Minority Shareholders, and that the Minority Shareholders sold their shares in CEH to the Majority Shareholders as a result of such conduct, the primary judge erred in holding that the Minority Shareholders had not suffered any loss.

2. The primary judge mistook the facts or failed to take into account material considerations in:

1. failure to approach the assessment of damages on the basis that the shares sold were worth the sum of $1,776,000 as at the date of sale;

2. failure to assess damages as being the greater amount that would have been paid for those shares had it not been for the oppressive conduct; and

3. ignoring the effect of the oppressive conduct when assessing damages;

3. The primary judge mistook the facts or failed to take into account material considerations, by not taking into account that the oppressive conduct caused CEH to pay fees to the improperly appointed voluntary administrator, and caused CEH to forego the income that would have been generated by Dr Frumar and other surgeons.

4. The primary judge erred at law or failed to take into account a material consideration in failing to resolve doubtful questions against the Majority Shareholders in favour of the Minority Shareholders and in failing to infer that surgeons in addition to Dr Frumar would have operated at CEH.

5. The primary judge erred in taking into account in the calculation of the value of the Minority Shareholders shares in CEH as at the date of sale the fact of the death of Dr Frumar in April 2016.

By their notice of contention, the Majority Shareholders assert that the primary judge erred in finding that Dr Frumar would have operated at CEH’s hospital on two days per week, and should have found that he would have operated for no more than one day per week.

153. In the course of address, it became apparent that the contentions of the Minority Shareholders could be summarised as follows:

1. The primary judge erred in failing to apply a “simple method” of assessing loss, involving the assumption that the sale price received by the Minority Shareholders for their shares reflected the value of their shares as effected by the oppressive conduct, and adding to that price an amount representing the contribution that Dr Frumar and possibly other doctors would have made to the profits and underlying assets of CEH had the oppressive conduct not occurred, together with the funds expended by CEH consequent upon the appointment of the administrator which would not have occurred but for the oppressive conduct.

2. The primary judge erred by failing to make any allowance in his valuation for the possibility that had the oppressive conduct not occurred the non-shareholder directors may have returned to the hospital, or the presence of Dr Frumar would have attracted other doctors to carry out their practice at the hospital premises.

3. The primary judge erred in taking into account the untimely death of Dr Frumar in his Honour’s assessment of damages.

154. I have had the advantage of reading in draft form the proposed reasons of the Chief Justice and the President for concluding that the appeal should be dismissed with costs. I agree with their Honours’ reasons. In particular, there was no error on the part of the primary judge in failing to adopt the “simple method” outlined above, and the primary judge made no error in failing to include in the assessment an amount referrable to income from other surgeons. I also agree that the death of Dr Frumar was a matter that the primary judge properly took into account in reaching a conclusion as to the value of the shares. It follows that the appeal must be dismissed with costs.

**********

SCHEDULE

SHANAHAN & ORS V JATESE PTY LTD & ORS

SIMPLE METHOD

A.   Additional income from Dr Frumar (1 March 2014 – 11 June 2015) and an equivalent to Dr Frumar (1 March 2014 – 11 June 2015) and from non-shareholder surgeons (August 2013 – 11 June 2015)

STEP	CALCULATION	RESULT
1. Calculate Dr Frumar’s gross annual income	Gross Annual Income [1] : (a) 10 surgeries per list x (b) 2 lists per week x (c) 40 weeks per annum x (d) $2,150 per surgery 10 x 2 x 40 x $2,150 = $1,720,000	$1,720,000
2. Calculate the annual variable expenses attributable to Dr Frumar’s income	Annual variable expenses = Gross annual income x 46.9% [2] $1,720,000 x 46.9% = $806,680	$806,680
3. Calculate Dr Frumar’s net annual income	Net annual income = Gross annual income less variable expenses $1,720,000 less $806,680 = $913,320	$913,320
4. Calculate Dr Frumar’s net revenue for 15.3 months from 1 March 2014 to 11 June 2015	Revenue (1 March 2014 – 11 June 2015) = Annual net revenue x 15.3 months [3] 12 months $913,320 x 15.3/12 = $1,164,483	$1,164,483
5. Calculate the increase in value to the appellant’s shares	Net revenue (1 March 2014 – 11 June 2015) x 43% $1,164,383 x 43/100 = $500,727.69	$500,727.69
6. Add equivalent of another surgeon (Burt etc)	$500,727.69
7. Add back 43% x 50% of the net revenue from non-shareholder surgeons	43% (shareholding) x 50% (assumed percentage of non-shareholder surgeon revenue staying with CEH) x $1,995,000 [4] (2013 annual revenue from non-shareholder surgeons) x .531 (1 less .469 variable expenses) x 22/12 (22 months from August 2013 when the non-shareholder surgeons left until June 2015) = $417,558.49 [5]	$417,558.49
8. Add steps 5-7	$500,727.69 + $500,727.69 + $417,558.49 = $1,419,013.87	$1,419,013.87

1. Red 142 D-R; 143C-F

2. Red 143F

3. 15.3 months = 1 March 2014 (when Dr Frumar should have started at CEH) and 11 June 2015 (Share Sale Agreement)

4. Orange 51Q (Blue 2/984-986)

5. This calculation replaces the calculation at Orange 53O-Q [106(c)]

B.   Costs of the Administration

1.   At trial, the costs of the administration were claimed as $467,579.70. See:

(a)   Plaintiff’s Outline Re Compensation (Black 2/720 at 725D and 727-729):

(b)   Plaintiff’s Closing Submissions Re Compensation (Black 2/747 at 7571 and 759-761.

2.   These figures were derived from Blue 4/1990 at 1998-2005.

3.   It appears that the respondents did not address these calculations.

4.   The appellants’ submissions in chief on appeal made the same claim (Orange 45P).

5.   The respondents’ submissions on appeal (Orange 86R) suggest that this amount should be reduced because some of the costs of the administration were borne by:

(a)   a loan from the respondent surgeons of $183,000, of which $59,449 was refunded;

(b)   tax refunds. It is not clear to the appellants as to the basis and effect of this item.

6.   The appellants’ submissions in reply (Orange 61T) contend that the loans and tax refunds occurred after the date of sale (11 June 2015) and thus should be ignored.

7.   However, the original calculation included amounts after that date, so an amendment to the calculation is required. The re-calculation is $349,426.97 (of which 43% is $150,253.59).

C.   INTEREST

8.   Interest at Supreme Court rates on the above amounts, from the date of the Share Sale Agreement, 11 June 2015.

9.   On the base case, i.e. items 1-5 in the above table ($500,727.69) plus the administration costs of $150,253.59 (total $650,981.28), the interest from 11 June 2015 to date is $139,714.

10.   On the extended case, i.e. items 1-5, 6 and 7 in the above table (total $1,419,013.87) plus the administration costs of $150,253.59 (total $1,569,267.46) the interest from 11 June 2015 to date is $336,796.

Endnotes

Decision last updated: 20 May 2019