Libra Developments Limited v Clark

[2013] NZHC 1578

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2002-412-000039 [2013] NZHC 1578

BETWEEN  LIBRA DEVELOPMENTS LIMITED First Plaintiff

ANDRUSSELL ERNEST HYSLOP Second Plaintiff

ANDLINDSAY ALLAN CLARK Defendant

Hearing:                   7 June 2013

Appearances:           P Churchman QC for Plaintiffs

L A Andersen for Defendant

Judgment:                27 June 2013

JUDGMENT OF CHISHOLM J

[1]      This  hearing  was  convened  to  enable  several  outstanding  matters  to  be resolved so that the account taker can proceed with his task:  see minute of 23 April

2013.    All the issues concern matters arising out of the interest of the partnership in Cargill Hotel 2002 Limited (CH2002).  It has been agreed that the value of the hotel, excluding stock and vehicles, is $17,475,000.

[2]      The background has been traversed in numerous previous judgments and minutes, and does not need to be repeated.   Suffice to say that in its most recent judgment1 the Court of Appeal accepted that Mr Clark owed fiduciary obligations to

the plaintiffs and that the duty of good faith extended beyond dissolution of the

1      Clark v Libra Developments Limited & Ors [2011] NZCA 493.

LIBRA DEVELOPMENTS LIMITED v CLARK [2013] NZHC 1578 [27 June 2013]

partnership until the completion of winding up.2     For the purposes of this litigation the partnership is deemed to have been wound up on 30 June 2010.

[3]      The Court of Appeal also explained that the appropriate remedy in this case:3

...was to order Mr Clark to account to Libra for any profit achieved by him which was properly attributable to his breach of duty in appropriating the business opportunity of the partnership to himself...The advantage Mr Clark had wrongly obtained was realised and expressed in the shares he or his interests held in CH 2002.

Thus the value of the shareholding held by Mr Clark’s interests in CH2002 is to form part of the accounting exercise to be undertaken.4

[4]      The following issues remain to be determined:  FF& E (furniture, fit out and equipment);  tax liability for depreciation recovered; a GST issue; interest on vendor finance and the B shares; further information concerning taxation; the ledgers; and costs.   At the hearing the plaintiffs adduced expert evidence which was primarily directed to the first two issues.  Mr Hyslop also gave evidence.  Expert evidence was also adduced by the defendant.

FF & E

[5]      For the year ended 30 June 2010 the accounts of CH2002 include a current liability of $864,240 for “FF & E replacement fund”.  A liability in relation to that fund also appeared in earlier accounts from 2006.

[6]      According  to  the  plaintiffs  these  entries  for  FF  &  E  represent  double accounting and should be reversed for the purpose of taking accounts.   While the defendant accepts that these entries should not be regarded as a liability, he maintains

that FF & E is nevertheless an item that needs to be considered by the account taker.

2 At [55].

3 At [62].

4 At [64].

A brief history

[7]      Having earlier raised the issue of FF & E5, Mr Churchman QC claimed that the liability of $864,240 had been incorrectly recorded in the balance sheet as at

30 June 2010.6      In support of this view a copy of a detailed report from Horwath

HTL Limited, a consultancy firm specialising in the hotel and tourism industry, was provided to the defendant, and the defendant was called upon to advise whether he accepted that report.

[8]      Mr Andersen  wrote  to  Mr  Churchman  on  20  March  2013  rejecting  the Horwath contention that there had been double accounting.  Later, in a memorandum dated 22 April 2013, Mr Andersen indicated that there was no agreement between the parties as to the correctness of the accounting treatment of FF & E.  He suggested that rather than being an accounting matter, this was a legal matter that needed to be argued.

[9]      A minute dated 23 April 2013 records that the FF & E issue had not been resolved and would be argued on 7 June 2013. A timetable for synopsis of argument and briefs of evidence was set.

[10]     Mr McLauchlan, a chartered accountant and a director of CH2002, provided a brief of evidence in which he stated:

Even though the FF & E has not been put into a bank account, the entry in the  accounts...does  represent  the  liability  that  CH2002  has  to  carry  out capital upgrading the SCHD7 considers necessary or desirable.   This is important because it is SCHD and not CH2002 that dictates the spending of this money.

He also disagreed that there was double accounting and maintained that the fact that there had been no separate bank account favoured CH2002 because it was more cost effective to use the money to pay off debt.

[11]     At the beginning of the hearing on 7 June 2013 Mr Andersen submitted that the plaintiffs had misrepresented the defendant’s position.  He said the defendant has

5      See the plaintiffs’ memorandum dated 27 November 2012.

6      See the plaintiffs’ memorandum dated 5 March 2013.

7      The company running the hotel.

never claimed that FF & E is a liability.  This was hotly disputed by Mr Churchman who maintained that there had been a “quantum shift” on the part of the defendant. Mr Churchman said that if he had known that the defendant was conceding that the FF& E item was not a liability he would not have needed to call his expert witnesses.

[12]     In  the  event  two  expert  witnesses  gave  evidence  on  this  issue  for  the plaintiffs:  Mr Ngan, a director of Horwath HTL Limited, and Mr Purcell, a chartered accountant.  Expert evidence for the defendant was given by Mr McLauchlan.

Plaintiffs’ argument

[13]     For the purpose of taking accounts, the liability for FF & E shown in the balance sheets should be reversed by the account taker when arriving at the value of the shares in CH2002.  Under the hotel management agreement the funds were to be paid into a separate account and this never happened.

[14]     Moreover, the approach adopted in the annual accounts represents double accounting:  FF & E has been charged against income and then charged again when there is an actual expense.   There was also double accounting in the sense that depreciation on the assets that were purchased had also been charged against the profit and loss account.   This double accounting directly affects the net profit for each financial year, which in turn results in detriment to the partnership.

[15]     Although Mr Ngan and Mr Purcell took different approaches to the double accounting   allegation,   they   agreed   that   there   had   been   double   accounting. Mr Hyslop summarised what he considered to be actual expenses for FF & E that had been met by the company between 2006 – 2010.

Defendant’s argument

[16]     The FF& E calculation represents provision for future liability in respect of major capital expenditure. Although it is not an existing liability (because it contains provision for a future liability that is not incurred until major capital expenditure is required), it is a matter that may properly be considered by the account taker when he is valuing the shares.

[17]     Mr McLauchlan’s evidence confirms that the provision for FF & E does not include ordinary repairs and maintenance.   It is a potential maximum liability for capital renovations for the hotel.  As such it should be considered by the account taker, along with all other issues relevant to the valuation of the shares.

[18]     Whether or not  there  was  a separate fund  is  not  significant  as  the  fund represents a maximum liability for major capital works, whether or not the money is held in a bank account or has to be otherwise obtained when the capital works are carried out.

Analysis

[19]     It goes without saying that it was for the directors of CH2002 to decide how the company’s accounts should be presented.  But I need to ensure that when valuing the  shares  the  account  taker  proceeds  in  a  manner  that  is  consistent  with  the decisions of the Court of Appeal and this Court thus far, and in a manner that is fair to the parties.

[20]     I therefore keep in mind that until completion of winding up Mr Clark owed fiduciary duties and was obliged to account for any profit achieved by him which was attributable to his breach of duty.   It also needs to be kept in mind that this matter has an extraordinary history (the first decision having been delivered in 2005) with numerous issues having been debated over the years. The time has come for the Court to take a firm hand.

[21]     Obviously the defendant’s concession that the FF & E fund is not a liability as at 30 June 2010 is of key significance.   To give effect to that concession the account taker will need to notionally reverse the liability for the FF & E replacement fund in the relevant years.  Any resulting adjustments to net profit will also have to be made.

[22]     The  next  question  is  whether,  beyond  that,  the  Court  should  direct  the account taker to ignore the FF & E item.  In this respect Mr Andersen submitted:

3.10     The Defendant’s position with regard to the FF & E account is:

(a)       The proper allowance for FF & E must be taken into account before assessing the repayments to be made to the Defendant in accordance with clause 3.2(f)(ii)8  of the Heads of Agreement; and

(b)       That future liability for FF & E under the hotel management agreement is a matter the Account Taker will properly have to consider as a potential future liability in valuing the shares of Cargill Hotel 2002 Ltd.

3.11      To the extent that the Plaintiffs seek an order that the FF & E is not a liability in the 2010 accounts then that is common ground as it is a provision for a future liability that is not incurred until major capital expenditure is required.

3.12The total FF & E provision (as included in the 2010 accounts) does need to be considered by the Account Taker in valuing the shares but the  consideration  is  not  that  the  amount  represents  an  existing liability of CH2002 but that it represents the maximum   future liability at that date that CH2002 has for future major capital refurbishment.

Needless to say, with the exception of the common ground recorded at 3.11, the plaintiffs reject these propositions and contend that the FF & E fund should not be taken into account by the account taker.

[23]     Before deciding this issue it is necessary to provide a context.

[24]     Clause 3.2(g)(ii) of the heads of agreement, signed by the parties to the hotel venture  (including  Mr  Clark)  on  12  July  2002,  provided  for  a  shareholders’ agreement to include the following provision:

After  the  end  of  each  financial  year  of  Cargills,  the  Directors  of  the Company shall calculate the net profit which is available for repayment of the CT loan. The Directors shall ensure that all hotel operating expenses and all amounts in relation to Cargills business have been paid and that all allowances and deductions in relation to the operation of the business and full allowance for all requirements of the hotel (including full and proper allowances for depreciation, FF&E, maintenance, capital requirements, tax, contingent liabilities, repairs, replacement and refurbishment of the hotel, working capital and other costs and expenses identified in the hotel budgets) have been made before determining the net amount available for repayment of the CT loan (“the Net Amount”).

In the event no shareholders’ agreement was signed, but for present purposes that is

not a matter of moment.

8      I think that this was intended to be a reference to 3.2(g)(ii).

[25]     On 3 June 2005 the parties entered into a management agreement which

included the following references to FF & E:

“Furniture, Fixtures and Equipment (FF&E)”

means all plant, equipment, furniture, furnishings, fixtures and chattels of the Hotel and includes all floor coverings, decorations  and  other  moveable property  which  is  replaced  or refurbished during the Term.

“FF&E Contribution”                  means three (3) per centum plus GST of the Gross Revenue for the first three (3) years and thereafter five (5) per centum plus GST of the Gross Revenue.  Those amounts shall be paid into the FF&E Reserve Account.

“FF&E Reserve

Account”

means the bank account into which the FF&E Contributions are paid and the credit  amounts  in  that  account  from time to time.   The owner shall be the owner of the fund in that account and shall be entitled to any funds in the account following the expiration or termination of this Agreement.

...

39.3     FF&E Expenditure

39.3.1 The  Owner  shall  keep  and maintain in  good  working order  and condition if necessary replace or repair any of the Furniture Fittings and Equipment as and when that shall be necessary.  The Operator shall undertake such duties on behalf of the Owner and subject to the availability of funds in the FF&E Reserve Account, is irrevocably authorised to undertake such maintenance repair or replacement which the Operator in its sole discretion, considers necessary or desirable from time to time.

It is also provided that the FF & E reserve account is to be used for the purposes specified in clause 39.3 and that the fund will belong to CH2002 on termination of the agreement.

[26]     No separate FF & E reserve account was ever established.   Over the years since the hotel was opened the furniture, fittings and equipment in the hotel have

been maintained and replaced out of the hotel operating account.9    As at 30 June

9      On Mr Hyslop’s analysis of the company’s ledgers (and on his interpretation that all repairs and

maintenance of furniture, fittings and equipment came within FF & E) the company spent
$130,246 on FF & E in 2006, $151,677 in 2007, $183,543 in 2008, $157,549 in 2009 and
$143,581 in 2010.

2010 they were in good condition and there were no immediate major requirements. This also seems to be the current situation.  Although Mr McLauchlan claimed that there would be major requirements in the future, he was not able to say when this might be.

[27]     I am satisfied that the Court should direct the account taker not to take the FF &  E  item  into  account  when  arriving  at  his  valuation  of  the  shares.    This conclusion reflects several matters.

[28]     First, I find it difficult, if not impossible, to reconcile the concession that as at

30 June  2010  FF  &  E  is  not  to  be  taken  into  account  as  a  liability  with  the proposition that the account taker should nevertheless be entitled to take it into account as a future liability.  To say the least, the timing of the future “liability” is speculative  and  I struggle  to  see  how it  could  even  be described  as  a liability (contingent or otherwise), especially when the account taker has to make his assessment as at June 2010.

[29]     Secondly,  while  the  defendant’s  argument  seems  to  be  that  the  amount appearing in the accounts as at 30 June 2010 ($864,240) should represent the maximum “liability”, there has been no attempt to explain how the valuer should arrive at a meaningful figure. Again, there is the speculative element.

[30]     Thirdly, although the management agreement expressly contemplated that the FF & E would be paid into a separate bank account, this never happened.  While that was a decision for those involved in the hotel venture, the Court is entitled to proceed on the basis that the fiduciary duties owed by Mr Clark required the management  agreement  to  be  implemented  according  to  its  terms.    Had  that happened then presumably there would have been a bank account containing the funds (although I accept that this would have impacted on the company in other ways).

[31]     Fourthly, the defendant’s underlying proposition seems to be that the FF & E fund is for “major” expenditure.  Neither the heads of agreement or the marketing agreement support that proposition.  To the contrary, it is arguable that the definition

of FF & E in the marketing agreement, coupled with clause 39.3.1, cover the repair and maintenance of all FF & E items. This leads on to the next point.

[32]     Fifthly,  the  expert  evidence  on  behalf  of  the  plaintiffs,  which  I  accept, indicates that leaving the account taker with a free hand about future requirements for FF & E carries the risk that there will be double accounting.  If the Court allowed this to happen it would be falling short of its responsibility to remedy the defendant’s breach of fiduciary obligations.

[33]     Finally, as I have already said, the history of this matter requires the Court to take a firm hand.  The enquiry as to damages is under its control and it will not be in the interests of either party for issues to be unnecessarily debated before the account taker.  Inevitably there will be further debate if the FF & E item is left on the table. For reasons already given, I am satisfied that it is irrelevant and should not be taken into account.

Taxation for depreciation recovered

[34]     The issue is whether the Court should direct the account taker to ignore the possibility of taxation for depreciation recovered on a notional sale of the hotel.  The plaintiffs seek such a direction. The defendant opposes.

Plaintiffs’ argument

[35]     The valuer should value the shares on the basis that there is a willing buyer and a willing seller, not on the basis that there is a liquidation (notional or otherwise) of the company involving sale of the hotel.  Any suggestion of a notional liquidation flies in the face of this Court’s decision delivered on 21 March 2011.10    It is also inconsistent with the long term management agreement which has an initial term of

25 years from 2004 and a right of renewal for another 25 years.

[36]     On Mr Purcell’s analysis that the shares should be valued on a willing seller and willing buyer basis; there was no likelihood of the property being sold as part of

the transaction;  there was  every likelihood  that  the existing shareholders would continue to enjoy the benefits of the hotel management agreement going forward in the same manner as they had in the past; given  those circumstances a notional liquidation method of valuation would be inappropriate, as would inclusion of the allowance for taxation on depreciation recovered.

Defendant’s argument

[37]     Although  the synopsis  of submissions  and  Mr Hellyer’s  “will  say” brief proceeded on the basis that one of the valuation methods that would be available to the valuer was the “notional liquidation”  method, Mr Andersen acknowledged at the beginning of hearing that the defendant was not suggesting that such method would be appropriate.  But he argued that the account taker could still take into account any contingent liability for depreciation recovered and that any direction to ignore this “contingent liability” would restrict the ability of the account taker to properly value the  shares.    In  support  of  that  interpretation  the  defendant  refers  to  Hatrick  v

Commissioner of Inland Revenue11 and M Yovich & Sons Ltd v Yovich.12

[38]     Mr Hellyer supported the proposition that in arriving at a value of the shares on a “fair value” approach, the valuer should take into account a future tax liability for depreciation recovered.  This would recognise what the seller gives up and what the buyer acquires in the transaction.  Any direction from the Court that actual or contingent taxation liabilities were to be ignored would present an impediment to the account taker determining the fair value of the shares.

Analysis

[39]     With reference to the valuation of the shares in CH2002 there was a direction in the judgment delivered on 21 March 2011 that:13

...It will be for the valuer, and ultimately the account taker, to determine the appropriate method or methods.  The underlying purpose will be, however, to arrive at a fair value based on a willing seller and a willing purchaser...

11     Hatrick v Commissioner of Inland Revenue [1963] NZLR 641 (CA).

12     M Yovich & Sons Ltd v Yovich CA187/00, 22 February 2001.

13     Libra Developments Limited v Clark, above n 10, at [196].

At that time I contemplated that the shares would be valued on the basis that the hotel venture was a going concern.  There was no suggestion that this would require the hotel to be sold, notionally or otherwise.

[40]     Initially  the  defendant’s  stance  that  the  account  taker  should  be  able  to consider the possibility of taxation on depreciation recovered seems to have been based on the proposition that he might adopt an “assets-based” approach to the valuation using a methodology known as a “notional liquidation”.     However, as already recorded, it was conceded at the hearing that this methodology would not be appropriate.

[41]     Given that concession, the possibility of taxation on depreciation recovered arising is remote in the extreme, especially given the duration of the management agreement.   In other words, it would be an irrelevant distraction in the valuation exercise and, as Mr Purcell noted, if it was taken into account by the account taker the matter would almost certainly return to the Court.  I cannot accept Mr Hellyer’s proposition that the likelihood of the contingent liability crystallising is a matter for the professional judgment of the account taker rather than the Court.  Indeed, given the history of the matter, I suspect the Court is much better placed to make the judgment.

[42]     I also keep in mind that the defendant is effectively seeking a deduction that will be to his benefit.  In Maruha Corporation and Maruha (NZ) Limited v Amaltal Corporation Limited14 the Supreme Court commented:

[30]     In a context like the present it would be wrong to make the party which has suffered from a fiduciary breach allow the errant fiduciary a deduction unless  it is for a  clear  and  manifest benefit conferred by the fiduciary.  And when the fiduciary alleges that it has conferred such a countervailing benefit, it should be for the fiduciary to establish that this is so.

In my view the defendant has fallen well short of establishing that the possibility of taxation for depreciation recovered should form part of the valuation exercise in this case.

[43]     Mr Andersen relied on two authorities.  However, I do not consider that either requires a different approach to be adopted in this case.

[44]     Hatrick involved a challenge to a valuation of the shares in four companies by the Commissioner of Inland Revenue.  The valuers on both sides had adopted a notional liquidation methodology.   Although at first instance Barrowclough CJ thought a different methodology would have been preferable, he considered that he was confined to the methodology used by the valuers, and that the actual or possible liability for taxation on undistributed profits that would arise in a liquidation should be taken into account.

[45]     The Court of Appeal did not feel constrained in the same way.  It considered that the method to be adopted depended on the particular circumstances of each case. If an assets-value method was adopted, this would necessarily involve liquidation and it would be unreal to ignore the taxation implications.   This method was appropriate  for  two  of  the  companies  because  “it  is  more  probable  that  [the purchasers of the shares] would be located amongst persons wishing to put them into

liquidation”.15   However, in the case of another company it considered that the assets

method would be inappropriate because “it seems to us extremely unlikely that a purchaser would  have in  mind  liquidation;  rather,  he would  have  regard to  the income in the past, anticipated income in the future and possible capital growth”.16

[46]     Yovich concerned the fixing of the price at which a company was to acquire the shares of a minority shareholder under s 174 of the Companies Act 1993.   A notional liquidation method of valuation was utilised.  One of the issues was whether Laurenson J had erred by declining to make a deduction for the costs that would be incurred in the liquidation on the basis that actual liquidation was neither intended nor likely.

[47]     Mr Andersen relied on the response of the Court of Appeal:17

We  however  accept  that  there  is  a  strong  argument  that  in  a  notional liquidation valuation whether liquidation is actually proposed or likely is

15     Hatrick v Commissioner of Inland Revenue, above n 11, at 663.

16     At 663 – 664.

17     M Yovich & Sons Ltd v Yovich, above n 12, at [37].

irrelevant.   On this view to recognise that there would be costs on a liquidation and to allow for them in making a valuation is simply to carry through the valuation concept to its logical conclusion and to do otherwise is to give it only partial application.

Unlike that case where the notional liquidation method was fundamental to the Court’s reasoning, it is now common ground that that method of valuation would be inappropriate in this case.

[48]     I therefore direct, first, that the account taker is not to utilise the notional liquidation method of valuation and, secondly, he is not to take into account the possibility of taxation on depreciation recovered when arriving at his valuation of the shares.

GST

[49]     According to the plaintiffs the CH2002 annual accounts for the years ended

30 June 2006 – 2009 show a liability for GST that exceeds the GST actually paid. On that basis it is claimed that expenses have been overstated by approximately

$112,000. The defendant denies that there has been any overstatement.

[50]     It will be for the defendant to explain the discrepancy to the account taker.  If he is unable to do so to the satisfaction of the account taker, the account taker will need  to  reduce  the GST expense to  whatever  level  the account  taker considers properly represents the actual expense.

Deferred depreciation

[51]     It  is  alleged  by  the  plaintiffs  that  the  net  profits  of  CH2002  have  been affected by a failure to correctly account for depreciation in the correct financial years,  and  the  net  profits  have been  affected  accordingly.   They seek  an  order adjusting depreciation for the 2005, 2006 and 2007 years.  The details are set out in paragraph 28 of Mr Churchman’s submissions dated 4 June 2013.  There is also an issue about “pre-opening expenses” referred to the in the following paragraph.

[52]     These are matters for the account taker.  However, I would have thought that it should be possible for the parties to present an agreed position to the account taker.

Interest on vendor finance and B shares

Vendor finance

[53]     The issue is whether interest on the vendor finance is to be treated as an operating expense, before net profit is calculated, and whether interest must take priority to other uses of the surplus cash.  It is not disputed that clause 4.4(c) of the heads of agreement required the mandatory amount to be paid to BNZ.

[54]     In response the defendant notes that the Court has already determined in its decision delivered on 21 March 2011 that the payment of interest is to be in accordance with the heads of agreement.

[55]     It is true that the issue of interest was considered at [198] of the decision delivered on 21 March 2011 and, at least indirectly, at [25] – [43] of the judgment delivered on 6 July 2012.18   However, it did not specifically deal with the issue now raised, and I accept that the plaintiffs are entitled to a ruling.

[56]     Clause 4.4 of the heads of agreement provides:

The CT loan shall be on the following terms:

(a)       interest rate:   (subject to Clause 4.4(c)) 6 per centum per annum;

(b)      the principal sum shall be repaid in accordance with Clause

3.2(g);

(c)       interest shall be paid to CT when the Directors of Cargills determine  that  surplus  cash  is  available  and  only  to  the extent of the surplus cash available.  Any interest which has not  been  paid  at  the  end  of  Cargills  financial  year  shall accrue and will be paid in priority to other interest payments under this loan (but not in priority to any Bank or other secured loans of Cargills) when surplus cash (as determined by the Directors) is available.   Interest and unpaid interest shall not compound.

...

[57]     It seems to me that when clause 4.4 and clause 3.2(g)(ii) of the heads of agreement19  are read together the intention was that interest would be treated as an operating expense in the sense that it was to be paid before net profit was calculated. This would be consistent with the requirement in clause 3.2(g)(ii) for costs and expenses, including expenses identified in the hotel budgets to be allowed, before arriving at the net amount available for repayment of the vendor loan.  Presumably

interest would be included in the budgets.  Moreover, it would be odd if such things as working capital and depreciation were allowed, but not interest.

[58]     On the other hand, I cannot see anything that would justify the conclusion that interest must take priority over other uses of surplus cash.   Had that been intended I am sure that the agreement would have said so.

B Shares

[59]     The plaintiffs’ position is that the Court has found that interest is to be paid on shareholders’ advances, and, on the basis that the B shares are effectively a loan, they should also attract interest at 6%.  The defendant denies that the B shares are a loan and claims that the basis of valuation of the B shares has already been determined by the decision issued on 21 March 2011.

[60]     The approach that should be adopted to the valuation of the B shares is set out in [179] of the judgment of 21 March 2011.   There is no provision for the payment of interest.   It is not for the Court to re-write the heads of agreement by incorporating such a requirement by analogy with the provisions of the agreement that specifically provide for interest.

Further information from IRD

[61]     In the minute of 23 April 2013 I recorded that the plaintiffs still considered that there was missing information concerning taxation and I directed the Inland Revenue Department to provide copies of all taxation returns, assessments and receipts for Danube Holdings Limited and Cargill Hotel 2002 from 2000 – 2010.

[62]     On 6 June 2013 counsel for the Department filed a memorandum explaining why the Department was unable to comply with the order, and I accept that explanation.  Having received that memorandum Mr Andersen made a direct request for  the  information.    This  should  overcome  the  problem  and  I  am  grateful  to Mr Andersen for taking this step.

[63]     Hopefully no further action on the part of the Court will be required on this issue.

Ledgers

[64]     For a considerable time the plaintiffs have been endeavouring to obtain a full set of ledgers from the defendant. A deadline for this information to be provided was set in my minute of 23 April 2013.  Unfortunately all the ledgers were not provided by that date.

[65]     At  the  hearing  I  required  the  parties  to  find  a  solution  to  this  issue themselves.  After a brief discussion they agreed that the issue should be left to the account taker.   However, Mr Churchman sought costs of $2000 for the time and trouble that had been experienced in attempting to obtain a full set of ledgers.  While Mr Andersen did not accept that there should be any order for costs, his fall-back position was that costs should not exceed $500.

[66]     Over time the plaintiffs have been put to unnecessary expense as a result of the difficulties in obtaining this information.   They are entitled to costs of $1000 accordingly.   This does not relieve the defendant of the obligation to immediately supply any ledgers that are still outstanding.

Costs

[67]     As I understand it, the plaintiffs seek indemnity costs on the basis that at the hearing there was a “huge movement” in the stance of the defendant.  They claim that if the defendant had notified them of this change in a timely manner the hearing might have been unnecessary and it would not have been necessary for the expert witnesses to be called.

[68]     The threshold for indemnity costs is very high and I do not think that it has been surmounted in this case.  While I can understand the plaintiffs’ frustration at the defendant’s change of stance at the hearing, I doubt that the hearing could have been avoided if the concessions made by the defendant had been conveyed to the plaintiffs at an earlier time.  I accept, however, that matters of considerable complexity needed to be argued at the hearing and that an order for 3C costs and disbursements is appropriate.

[69]     In relation to witnesses’ expenses I accept that if the defendant’s concessions had been conveyed to the plaintiffs earlier it would have been unnecessary for the plaintiffs to call the two expert witnesses (Mr Ngan and Mr Purcell).  Under those circumstances it is appropriate that the defendant reimburses the plaintiffs for the reasonable costs and expenses of those two witnesses.  If there is any disagreement as  to  quantum,  the  matter  will  need  to  be  referred  back  to  the  Court  for determination.

Orders

[70]     With reference to FF & E the account taker will need to notionally reverse the liability for the FF & E replacement fund in the relevant  years.   Any resulting adjustments to net profit will also have to be made.  In all other respects the account taker is to ignore the FF & E item when arriving at his valuation of the shares.

[71]     The  account  taker  is  not  to  utilise  the  notional  liquidation  method  of valuation.  Nor is he to take into account the possibility of taxation on depreciation recovered in relation to any notional sale of the hotel.

[72]     The GST issue is to be determined by the account taker in accordance with

[50] above.

[73]     The deferred depreciation issues raised by the plaintiffs are to be determined by the account taker.

[74]     Interest on the vendor finance is to be treated as an operating expense before net profit is calculated.  It will not, however, take priority over other uses of surplus cash. There is not to be any provision for interest on the B shares.

[75]     The plaintiffs are entitled to costs of $1000 on the ledgers issue in accordance with  [66]  above.    In  addition  the  plaintiffs  are  entitled  to  costs  and  witnesses’ expenses in accordance with [68] and [69] above.

Solicitors:

Peter Churchman QC, Wellington

Len Andersen, Dunedin