On 28 May 2024, I presented at a seminar for CA ANZ Business Valuation and Forensic Accounting Specialists covering lessons learnt from recent commercial law and family law cases involving competing expert evidence on damages and other compensation, and business valuations.
Two cases were discussed:
- Gare & Farlow [2023] FedCFamC2F109 (Gare & Farlow) – a decision of Judge Forbes of the Melbourne Registry of Division 2 of the Federal Circuit and Family Court of Australia, dated 17 February 2023 relating to property and parenting matters. The primary unresolved property issue was the value of the business carried on by the Wife.
- Porter & Anor v Mulcahy & Co Accounting Services Pty Ltd and & Ors (No 5) – a decision of Delany J of the Supreme Court of Victoria published in January 2024 which follows Delany J’s Liability findings in [2021] VSC 572.
Both cases featured situations where the expert evidence was in conflict – providing insights on how judges navigate and decide when experts disagree.
Gare & Farlow [2023] FedCFamC2F109 (Gare & Farlow)
In, Gare & Farlow, expert evidence was provided on the value of the business carried on by the Wife.
Significantly, the premises from which the Wife’s allied health business was carried on were owned by the Wife’s father, there was no documented lease, and it was unlikely a lease would ever be granted. On the other hand, it was unlikely that the Wife would be denied ongoing access to the property.
The valuation experts engaged by the parties agreed that absent a commercial lease, the business had no commercial goodwill, because no such goodwill could be transferred to a prospective new owner. Hence, the case was all about value to the owner.
The judgement provides clear and referable expressions of business valuation principles for family law purposes and refers to a decision in Taylor & Taylor & Taylor [2000] FamCA 308 the Full Court (Finn, Kay and Barlow JJ), which surveyed reported cases that established the manner in which a trial judge should approach the task of valuing property of the parties.
At [24] the Full Court extracted, inter alia, the following principles which provide guidance to approach adopted by the Court:
- 24.6: Whilst the primary test is that of a hypothetical prudent purchaser (Gamer and Gamer (1988) FLC 91-932 at 76.743), it is the case that for the purposes of Family law, “…the present commercial or capital value of share in a proprietary company may not reflect their value to the spouse, who either has control after divorce, or who stands ultimately to benefit from them, or control them after the death of generous parents” (Reynolds and Reynolds (1985) FLC 91-632 at 80,111).
- 24.7: In proceedings under the Family Law Act, “…the value to be ascribed to shares in a family Company must be a realistic one, based upon the worth of the shares to the party himself or herself” (Harrison and Harrison (1996) FLC 92-682 at 83,087; see also Turnbull and Turnbull and Others (1991) FLC 92-258 at 78,738).
The Court found, inter alia, that:
- Value to owner might reasonably assume a notional sale of the business to the existing owner at its highest realistic value [181]; and
- An instructive working definition of value to owner was posited by Trevor Vella as [182]: “what a reasonable, prudent businessperson, in the position of the holder [husband or wife], willing but not anxious to exchange the asset for cash, and reasonably informed of the relevant facts, would see as the cash equivalent of the relevant asset to him/her”.
The judgement states that this definition begs what the Court considered to be highly relevant inquiries [183]:
- If a business is said to be worth nothing or only its net asset value, why would a proprietor want to hold it and have no intention of selling it?
- What realistically would the proprietor have to be paid to relinquish the business and the benefits derived from it?
I commonly simplify this expression to: What would the owner be prepared to pay so as to not be without it [the asset]?
The Court found that the critical criteria which engages the value to owner approach are [185]:
- the absence of a market for the party’s interest in a business (for whatever reason); and
- evidence of circumstances which satisfy the Court that even in the absence of a market the party is likely to retain the interest because he or she derives real value and benefits from it, of the type described in Harrison .
The Court found that notwithstanding the commercial unsaleability of the business and the minimal value attributed to it by the valuation expert for the Wife, ‘the wife clearly wants to keep it, has no intention of walking away from it and her father/landlord has no intention of pulling the rug from under her’.
In those circumstances, the Court found that ‘Justice and equity demands that the Court look to the reality of the situation and value the owner’s interest accordingly’ [187].
Future Needs
The judgment refers to the Wife’s claim that the orders sought by the Husband would impact her future earning capacity 9s79(4)(d), contending that the Wife would not be able to keep the business if the Husband’s valuation was attributed to it.
The Wife submitted, inter alia, that the Husband’s valuation ‘capitalises’ her only source of income, such that she would not have an effective income for the next seven years [342].
The Court did not accept that submission, finding that capitalisation of future maintainable earnings including the proprietor’s salary is an ‘accounting exercise directed at revealing the true value of the business as a going concern’ which will have no cash flow impact, and that the proposed Orders will not reduce the Wife’s’ earning capacity [343]. Hence, there was no double counting.
Porter & Anor v Mulcahy & Co Accounting Services Pty Ltd and & Ors (No 5)
This case concerns damages for expectation and reliance losses, equitable compensation and an account of profits arising from a transaction whereby the prospective purchasers of a majority stake in a profitable trading company were usurped by a consortium led by their professional accounting advisers for their own advantage. Each of the plaintiffs had relevant retainers with the first plaintiff.
Prominent Chartered Accountants provided expert evidence via multiple reports, a joint report and concurrent evidence. Apart from the detailed calculations, the judgement provided valuable guidance as to the purpose of contractual damages and equitable compensation.
Contractual damages
The primary purpose of contractual damages is to place the plaintiff in the position in which he would have been at the contract been performed. Hence, the plaintiff is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss) [297].
Equitable compensation
Equitable compensation is available to the victim of a breach of fiduciary duty against the fiduciary and against any person who knowingly participated in that breach as a ‘constructive trustee’ [386].
Equitable compensation is aimed at restoring the innocent party, as nearly as possible, to the position he or she would have been in had the breach of fiduciary duty not occurred [391, 182], whereas an account of profits requires the errant fiduciary to account for profits made within the ambit of their duty [391,182].
The judgement also provides valuable guidance concerning the date at which such losses might be calculated.
Contractual damages
Damages for torts or breach of contract are generally assessed at the date of the breach. But the rule is not absolute [302] and is only a guide and should yield to another date if necessary to provide adequate compensation [303]
In this case, due to the effects of COVID-19 and other factors on the company’s trading, the damages for breach of contract were not calculated at the date of the breach, but at a more recent date (the end of the financial year preceding the trial).
Equitable compensation
The normal rule is that equitable compensation is assessed at the time of trial with the full benefit of hindsight [391, 184]. Hence, the fiduciary’s’ duties are presumed to continue until the fiduciary pays appropriate compensation [391, 184].
The judgement refers to the ‘cardinal principle’ of equity, being that the remedy must be fashioned to fit the nature of the case and the particular facts. Hence, the judgement states that equitable compensation is often calculated by reference to the loss suffered by the claimant, or the profits earned, or gains made by the fiduciary who committed the breach [391, 185].
Account of Profits
The object of an account of profits is to require the defendant to disgorge the profits or gains flowing from the breach [261].
Business Valuation
The damages awarded to the plaintiffs included sums based on the value of the business.
Both experts valued the business carried on by the company using a capitalisation of earnings method. However, the experts disagreed about the relevant price earnings multiple to be applied to estimated future earnings. EBITDA was used as the measure of future earnings.
Rejecting a low multiple based on the transaction by which the defendants acquired their shares because it was not at market value (the vendor was ‘anxious’ and, hence, the price paid was not (IVS) market value), the Court preferred a price earnings multiple derived from first principles (using a capital asset pricing model) [157, 169 and 172].
Referring to an adjustment made from a multiple of 10x shown by various local and international evidence to the multiple adopted by the expert for the plaintiffs of 5x showed that the evidence relied on was ‘not sufficiently comparable to be of assistance’ [167].
The Court also found that while evidence of comparable transactions generally provides reliable evidence of value, that will not be the case where the available evidence is [168]:
- limited;
- not sufficiently reliable or comparable; or
- not a reliable indicator of market value.