Tomanovic & Anor v One Australia Pty Limited & Anor

[2015] HCATrans 173

[2015] HCATrans 173

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S39 of 2015

B e t w e e n -

ZOLTAN TOMANOVIC

First Applicant

AUSTRALIAN FINANCIAL SERVICES CORPORATION PTY LIMITED

Second Applicant

and

ONE AUSTRALIA PTY LIMITED

First Respondent

KENNETH SAYER

Second Respondent

Application for special leave to appeal

BELL J
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 7 AUGUST 2015, AT 9.31 AM

Copyright in the High Court of Australia

MR R.J. ELLICOTT, QC:   I appear with MR V.R.W. GRAY for the applicant.  (instructed by Corporate and Civil Legal)

MR M.B.J. LEE, SC:   If the Court pleases, I appear with my learned friend, MR E.B. COWPE, for the respondents.  (instructed by Harris Freidman)

BELL J:   Yes, Mr Ellicott.

MR ELLICOTT:   Your Honours, a fundamental question in this case is whether the Court of Appeal did its duty in rehearing this matter by taking into account the evidence that was in front of it.  That evidence consisted of the financial statements that your Honours have no doubt read and seen and the representation letter that the director wrote and also another document, the Accounting Standard 136 that related to impairment. 

The person who was called on behalf of the applicant was a Mr Meredith and he came in for a lot of criticism but he was a bit of a warrior and he stuck to his guns.  He, of course, was saying I have looked at the financial statements and I think they reflect the value of this company, remembering, of course, that what the court was valuing was 100 per cent of the shares in GMEC.  That is important because it meant that the hypothetical vendor was a person who could put the company into liquidation.  That is a fundamental issue at the start of the hunt to bear that in mind and that the ‑ ‑ ‑

BELL J:   I think both valuers did accept that the market value of GMEC was as a going concern.

MR ELLICOTT:   I am sorry, your Honour.

BELL J:   Was it not common ground between Mr Meredith and Mr McGuiness that it was appropriate to value the shares on the basis the GMEC was a going concern?

MR ELLICOTT:   That is what it was at the time.  That did not mean that you take the next step and say, well, the value of the shares should be on the basis – on the going concern basis.  They are different issues.  So, in this case, what was adopted from the applicant’s point of view was the orderly realisation of assets basis.  If I can take your Honours to 81 of the application book, you will find there a statement of Mr Meredith’s reasons for adopting book value.  At paragraph 52:

(a)The financial reports were prepared in accordance with accepted accounting standards.

Now, it is rather odd in this case because you will not find in the trial judge’s reasoning or the Court of Appeal’s reasoning any assessment of the financial statements.  You would even come to the view that maybe they did not read them.  Nor will you find any assessment or consideration of the impairment standard. 

When you go to those which, needless to say in the time we have here will not be enough to go through them - I can only assume that your Honours have read them, but when you read the AASB, which your Honours will find at 492, and I would just like to indicate what this standard does.  It was a standard which came in and was to operate from 2010 – that was the 2010 year. 

It is very important to understand that it was introducing a new basis for accounting.  It was not just because this company decided to do it.  It was also because this particular standard required that in relation to impairment it be applied because this company had to, as a public proprietary company, apply these standards to its accounting.  So the objective was:

is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount.

That threw up issues of value.  “Recoverable amount” was defined - of an asset – it appears at 496:

is the higher of its fair value less costs to sell and its value in use.

If you go over to section 25 which is at 503, at 27:

If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount that an entity could obtain, at the end of the reporting period, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal.  In determining this amount, an entity considers the outcome of recent transactions –

et cetera.  That clearly enough is almost identical – when I say – the words are different but in substance it is the same as the test in Spencer’s Case.  So, here is the standard that applies.  The trial judge, for some reason which is a bit inexplicable, particularly if he had taken the trouble to read the financial statements, came to the view that the impairment standard had not been applied.  That threw a cloud over the whole ‑ ‑ ‑

BELL J:   I think the Court of Appeal accepted that error.

MR ELLICOTT:   The Court of Appeal accepted it, but what the Court of Appeal did not do was itself go to the point of looking at the standard, analysing how it applied in this case and noting that in the course of the financial statements the management of the company had been at pains to apply the standard and to set the values as the recoverable amount.  That recoverable amount was market value. 

So right from the beginning of the analysis one finds that this is the course not taken by the Court of Appeal.  In not doing that what it overlooked was the evidence that was in front of it because section 1305 of the Corporations Act says that the matters – that the accounts are prima facie evidence of the matter stated therein or recorded therein.

BELL J:   Mr Ellicott, can I just raise this with you?  One of the respondent’s answers to this aspect of your argument is that even if one commences with section 1305 having the effect for which you contend, there was a deal of material which is summarised at application book 293 in paragraph 22 as to why that prima facie position was displaced by the evidence.  That evidence, of course, includes the auditor, Mr Stephenson, giving the evidence that the primary judge recorded - in essence, if I may summarise it, that his audit did not purport to constitute evaluation of assets at market value.

MR ELLICOTT:   That is not the point, with respect, your Honour.  The point is the Act says it is evidence.  It is prima facie evidence.  That is to say it is proof of the matters stated therein.

BELL J:   Prima facie is the point that the respondents take.

MR ELLICOTT:   Yes, prima facie and if anybody wants to – if the other party wants to dislodge that presumption then they have to produce evidence to do so. 

BELL J:   It is paragraph 22 of their submissions in which it is suggested they do just that.

MR ELLICOTT:   With respect, your Honours, if you look at what they rely on you will find that it is not a – I think the Chief Justice agreed with this that they had not made a valuation on an orderly realisation of assets basis.  That is what the Chief Justice said.  He said that, in effect, what they had adopted for the purposes of their valuation was not an itemised valuation of each of the assets but simply put in their own assessment of the value of the business, be it the mortgage broking business or the origination business. 

There was no evidence to counter the effect of section 1305, namely, that it brought about a situation where the evidence was there and had to be dislodged.  You will not find anywhere in the Court of Appeal’s judgment any assessment of that evidence.  All you get is the rejection by the Chief Justice of it.  If you go to page 116 of the application book, paragraph 199 about line 21:

As I indicated, senior counsel for the appellants referred to s 1305 of the Corporations Act, pointing out that the effect of that section was that the value of assets set out in the statement of financial performance was prima facie evidence of their value.

Now, he does not contest that.  He does not say that is not right.  He says -

He also pointed to the fact that the Director’s statement accompanying the accounts said that they presented a true and fair view of the company.

That is a concession by his Honour but it stops there.  One would have thought he would then go on and that the Court of Appeal would have said, well, let us have a look at them and see if they – that would be, in our submission, the way in which a court dealing with this matter in accordance with Fox v Percy would behave at that stage but you do not get that.  He says -

However, in considering the accounts it must be borne in mind that they had been prepared on a going concern basis in circumstances where there was material uncertainty as to the ability of the company to continue as such.  Both the notes to the accounts and the auditor’s report expressed a concern –

and he goes on in that vein.  I will not read it all but that is the reason he does not want to go ahead with this prima facie evidence.  He says look at this other part of the accounts.  But when you look at those other parts of the accounts they indicate material that came into existence after the event and would not have been available to the purchaser for a start.  But, secondly, they are matters that on analysis show that this company should be wound up.  That is a reason why it should have been wound up as at 30 June in this hypothetical sense that we are discussing it. 

So the reasoning there is an excuse for not going into the facts before them and therefore they failed in their duty to consider the evidence before them.  That is just one issue that needs to be taken into account in determining whether we get leave.  Another important matter appears if you go back to 111.  At 179 it had been said:

Both valuers accepted that an earnings based method of valuing a company as a going concern is the methodology most commonly adopted.

This opinion is consistent with what has been stated in a number of cases –

and it is used – they use it to bolster the approach that both the trial judge took and the going concern basis that was adopted, but would your Honours go to 111 at the bottom - this is Chief Justice Gibbs:

“It might at first sight seem surprising that the shares in a company whose assets are valued at close to $700,000 should have a total value of only $334,600 –

Now, just stopping there, in this case the valuation on a going concern basis was either 2.9 or, on one view, it could have been much less but whether it is that much less – or 2.9 is another matter – do not have to worry about it now, but that is compared with the 12,515,000 in this valuation‑studded set of financial statements.  So this is like this case that I am just reading.  You get this great diversion between a going concern basis and the assets basis.  They go on -

the value which the judgment of Bell J. would place on them.  In determining the value of shares it is necessary to take into account both the earning power of the company and the value of its capital assets . . . Where, however, the company is merely a convenient means of holding the assets, and the person who owns the shareholding in question is able to put the company into liquidation at will, the real value of the shares will be likely to be the amount which the holder would receive if the company were voluntarily wound up. 

That is moving towards an assets realisation basis.  If I can take you to what Justice Mason said – he dissented but that did not affect the authority of what he said.  At line 30 on 112 he said:

It has been said that a valuation based on earning capacity is generally most appropriate because the hypothetical purchaser of shares in a company which is a going concern is looking, not to a winding up, but to the profits which will ensue from the company continuing to trade . . . But it has been recognized that valuation by reference to assets backing or a liquidation basis will be appropriate where earning capacity provides no real measure of the true share value –

So we are getting to the point.  He goes on -

or where the shareholding is such as to enable the holder to bring about liquidation of the company –

That is this case because we are valuing all the shares in GMEC so these authorities - in the time I have I cannot take this point much further but I submit it is abundantly clear these authorities were misread and that they are authorities that assist the applicant in its case because of the facts – the hypothetical facts that we are considering.  Your Honours, going back to 81 ‑ ‑ ‑

GAGELER J:   Is that paragraph 81 or page 81?

MR ELLICOTT:   Sorry, page 81.  These are the reasons Mr Meredith gave.  I have referred to:

(a)The financial reports were prepared in accordance with accepted accounting standards.

(b)The annual report was prepared on a going concern basis.

That is right.  It was a going concern.

(c)It was audited by one of the largest and most competent auditing firms in the world.

That is a point:

(d)The auditor received a representation letter from management as to the accuracy of the accounts.

As one goes through that, that letter is very strong evidence that the management went to every – in every way attempted to conform with the standard.  In other words – and the words are used “realisable amount” and “fair value” just as they are used in the financial statements themselves.  So these documents – this is what Mr Meredith is talking about there and:

(e)The auditors and management would have been aware –

Well, that is a general issue:

(f)The director’s report stated that the changes in the accounting policies had strengthened the balance sheet.

Now, in relation to the balance sheet there were issues around about whether the trailing commissions should have been shown in the earlier accounts which were changed.  Well, of course, those accounts were prepared on an entirely different basis, namely, that you looked at trailing commissions when they came in as revenue and you treated them for tax purposes but the asset was never shown because it was, as it were, out there and the asset was trailing commissions and trailing commissions and, of course, the initial commissions are the reason why a mortgage broker undertakes the business.  That is the end of the business.  That is why you do mortgage broking.

So, the trailing commissions were there.  They were not recorded in the accounts but they were amounts that had accumulated over an average of 4.7 years and these particular – this particular impairment standard required the asset to be revealed and so it springs into action.  By calculation you can find that it leads to the emergence of an asset which is worth – when everything is netted out against it, including a deferred tax liability, you have got in the balance sheet an amount of about 13 to 14 million which represents the net present value of trailing commissions. 

Now, that is an asset which is immediately realisable in the sense that that stream of income, having a net present value, is available for sale on liquidation.  The MPV is simply a discounted cash flow method of doing that very thing.  Your Honours, I have a red button here and I think it tells me that I have outlived my welcome. 

BELL J:   Yes, Mr Ellicott.  Not that, Mr Ellicott.

MR ELLICOTT:   Your Honours, I do submit that there is – reading these judgments you can become mesmerised by the going concern basis but, your Honours, this is a case in which, in our submission, special leave should be granted because it does raise issues which affect a commercial community and which, in its way, does require explanation because 1305 has been the subject of debate in some of the cases that have come before the Court.

BELL J:   Than you, Mr Ellicott.  We do not need to hear from you, thank you, Mr Lee.

The application does not raise any issue of principle suitable for the grant of special leave.  Special leave is refused with costs.

AT 9.55 AM THE MATTER WAS CONCLUDED