Nuttall v S4U Pty Ltd[2010] QSC 191

SUPREME COURT OF QUEENSLAND

Introduction

[1] CHIEF JUSTICE: The applicants seek declarations bearing on the calculation of an amount owing to Mr Nuttall for his share of the accounting, taxation, financial planning, investment and real estate venture from which he “departed” in 2009.  The valuation of that share has been committed to an accountant, who is to carry out the task as an independent expert.  The instant interlocutory application was provoked by the expert valuer’s request of the parties that they resolve for him aspects of the construction of the subject contract on which he is uncertain.

[2] Since the filing of the application on 9 March 2010, the parties have agreed on six of 11 declarations/orders sought (numbers 2, 3, 4, 6, 9, 10 and 11).  Of the balance, Mr Tucker, who appeared for the respondents, seeks a determination in relation to paragraph 1 of the application, because he submitted that if the expert erred in that area, his determination would be vulnerable to challenge on the basis that he had not carried out the task committed to him (cf. Wickham Properties Pty Ltd v Astor Motel Pty Ltd [1994] 1 Qd R 211, 214).  Mr Tucker opposed the making of declarations numbers 5 and 8 on the basis that they should be left with the expert:  court intrusion would be unwarranted (cf. Ross Cook and Brett Cook Pty Ltd v Australian Sugar Cane Feeds Pty Ltd [2009] QSC 178 paras 16-18).  On the other hand, Dr Monks, for the applicants, urged the making of the declarations to assist the parties out of their impasse and to delineate the path to be followed by the expert.

[3] The parties have filed a welter of affidavit material, and they have gone to a lot of trouble and expense collating the relevant documentation.  Counsel acknowledged that much of it, if relevant to the issues before me, is only marginally so.  Mr Tucker was content that while I noted his objections to much of that material, I need not presently rule on them.

[4] It is fair to say that as the matter was argued, no material factual dispute on the critical points became apparent.  I was therefore prepared to consider whether the declarations still in issue should be made on an essentially summary basis. 

[5] As will emerge, I am not prepared to make those declarations, because it would be wrong in law, or an inappropriate exercise of discretion, to do so.  That the parties will go away dissatisfied cannot, I am afraid, be helped.  I hope that the material which has been filed to this point may be salvageable and useable in the course of the valuation exercise or any further necessary court proceeding.

Background

[6] From July 2007, Messrs Nuttall, Seymour, Norbury and Solly carried on a merged professional services practice which provided the services mentioned through various corporate entities.  Through his company, Mr Nuttall owned a 25 per cent share in the venture.  At the beginning of 2009, Mr Solly was replaced in the venture by Mr Tuton.

[7] A breakdown of relationships led to Mr Nuttall’s exclusion from the business in 2009.  The requisite contracts did not provide for the purchase of his share by the others.  He commenced an oppression proceeding in this court.  That proceeding was compromised by a settlement agreement under which Mr Nuttall would leave the firm, taking his clients with him, to be paid for his share less the value of his clients. 

[8] The parties appointed Mr Paul Vincent of Vincents Chartered Accountants to carry out the valuation exercise, and he deputed the task to Mr John Thynne.

[9] The major issue before me was the valuation of the goodwill.  That is governed by cl 8.1 of the Unitholders Deed, which provides:

“The value of each unit, for the purpose of calculating the value of Share Interests shall be the value determined on the following basis:

8.1.1The value of goodwill in the Business shall be based on the Count Wealth Accountants’ model and will be based upon the current Count Wealth Accountants’ model which is:

8.1.1.1 Value of Accounting fee base if 100%, i.e. Multiple is 1 x Accounting Revenue; plus

8.1.1.2 Value of Financial Planning fee base is 250%, i.e. the Multiple is 2.5 x Financial Planning Revenue.

In the event that the Count Wealth Accountants’ model is amended or updated (‘New Model’), the value of the goodwill of the Business will be based on the New Model.

The terms ‘Accounting Revenue’ and ‘Financial Planning Revenue’ are not defined, although ‘Revenue’ is defined, as follows:

‘Revenue’ refers to the fees invoiced by the business for the twelve (12) months prior to the quarter ending immediately prior to the time of sale.”

The relief sought

[10] I set out now the declarations and order sought:

“1.A declaration that the proper construction of clause 8.1 of the Unitholders Deed (a copy of which is at page 1 of exhibit ‘PEB-3’ to the affidavit of Paul Eugene Brennan sworn on 4 March 2010) (Unitholders Deed) is that the ‘value of goodwill of the Business’ within the meaning of clause 8.1.1 is to be calculated only by reference to the formula given in clauses 8.1.1.1 and 8.1.1.2.

2. A declaration that the proper construction of the words ‘time of sale’ in clause 1.10 of the Unitholders Deed is the date of the settlement referred to in clause 4 of the Heads of Agreement (a copy of which is at page 19 of exhibit ‘PEB-3' to the affidavit of Paul Eugene Brennan sworn on 4 March 2010 (Heads of Agreement).
3. A declaration that the proper construction of the time period referred to in clause 1.10 of the Unitholders Deed is that it is the period of 12 consecutive months that ends on whichever of the days 31 March, 30 June, 30 September or 31 December is most immediately prior to the date that is the ‘time of sale’ for the purposes of clause 1.10 of the Unitholders Deed.
4. A declaration that the proper construction of the words ‘Accounting Revenue’ in clause 8.1.1.1 of the Unitholders Deed is that they refer to the amount calculated by applying the definition of ‘Revenue’ in clause 1.10 of the Unitholders Deed to the fees invoiced by the business for all accountancy services, including accounting, tax and audit services.
5. A declaration that the proper construction of the words ‘Financial Planning Revenue’ in clause 8.1.1.2 of the Unitholders Deed is that they refer to the amount calculated by applying the definition of ‘Revenue’ in clause 1.10 of the Unitholders Deed to all of the fees invoiced, the upfront commissions received, and the trailing commissions received for all financial planning services, including financial planning, insurance, and finance.
6. A declaration that the proper construction of clause 1.1 of the Heads of Agreement is that the valuation of the total units in the S4U unit trust must include the revenue associated with the clients that have been transferred to Mr Nuttall.
7. A declaration that the proper construction of clause 8.1 of the Unitholders Deed is that income from property services is not included in the value of goodwill of the Business.
8. A declaration that the proper construction of clause 8.1 of the Unitholders Deed is that the amounts owed by the business to any creditors, including nay money lent to the business, are excluded from the value of the units.
9. A declaration that the ‘agreed list’ of clients transferred to Mr Nuttall for the purposes of clause 1.3 of the Heads of Agreement is the list which is at page 21 of exhibit ‘PEB-3’ to the affidavit of Paul Eugene Brennan sworn on 4 March 2010 (the Agreed List).
10. A declaration that in undertaking the appointment as Valuer pursuant to the Heads of Agreement, the Valuer may undertake all of the tasks specified in Vincents Chartered Accountants’ letter of 15 December 2009 to Brennans Solicitors and Results Legal Solutions, a copy of which at page 24 of exhibit ‘PEB-3’ to the affidavit of Paul Eugene Brennan sworn on 4 March 2010.
11. An order that the respondents forthwith transfer to the applicants any electronic data files in respect of any client named in the Agreed List, such transferred data to be in the manner or format directed by the applicants, in respect of all clients specifically identified by the applicants for this purpose, by way of written notice given by the applicants to the respondents.”

[11] As mentioned, only declarations 1, 5, 7 and 8 remain in issue.  The parties having reached agreement on the others, it was not suggested that declarations in relation them would be necessary.

Valuation of goodwill

[12] Before setting out the respective contentions, I need to cover some further background circumstances.

[13] A company named Count Financial Ltd owns the trading names “Count Wealth Accountants”, “Count” and “Countplus”.  That company franchises accounting and financial advisory practices.  It is listed on the stock exchange.  Since 2006 it has been interested in acquiring accounting and financial advisory practices through its business arm Countplus.  In its acquisitions from December 2007, Countplus used an “EBITAP” valuation model (earnings before interest and tax after principals’ salaries).  As the matter was presented to me, there was not, at any material time, a “Count Wealth Accountants’” model for the valuation of goodwill. 

The parties’ contentions

[14] Dr Monks, for the applicants, submitted that in these circumstances, and in the context of some additional considerations I need not repeat, clause 8.1 obliges the expert to value on a “multiple of revenues” methodology.

[15] On the other hand, Mr Tucker, for the respondents, submitted that “Count Wealth” should be read as “Countplus”, and in view of the concluding paragraph of the clause, the latest model of that valuation method should be adopted, being the “EBITAP” model.

[16] Mr Tucker relied substantially on the evidence of the seventh respondent, Mr Seymour, that he used the names “Count Wealth” and “Countplus” “interchangeably” (para 6 affidavit sworn 17 May 2010), and this evidence from Mr Seymour of what transpired at a meeting on 12 October 2007 preceding the finalization of the Unitholders Deed (para 22 of that affidavit):

“22.I recall discussing clause 8.1.1 during the meeting and can recall the attendees unanimously resolving to provide instructions to Merthyr Law to amend the deed by replacing clause 8.1.1 with a clause discussed during the meeting, which reflects the clause in the executed Unitholders Deed.  In relation to those discussions, the ‘New Model’ part of the clause 8.1.1 was agreed to be included:

(a)because of the common goal of an acquisition of the merged business by Count; and

(b)to be consistent with any model that might be adopted by Count for the purposes of valuing the goodwill of the business that it would seek to acquire; and

(c)to achieve fairness in the event that a unit holder might depart before any sale of the merged business to Count.”

Analysis

[17] On the evidence to which I have been referred, the parties have mistakenly described a “current Count Wealth Accountants’ model” which did not exist.  But the last paragraph of cl 8.1.1 aside, they could arguably do that:  they could agree that what they term “the current Count Wealth Accountants’ model” is to be taken to be the “multiple of revenues” model they particularized in cll 8.1.1.1 and 8.1.1.2.  The difficulty rests, however, in the last paragraph of the clause, which assumes the existence, and persistence, of “the Count Wealth Accountants’ model”, akin to a case where the parties agree that something will be regulated by the CPI, and take the precaution of substituting an alternate measure should the publication of the CPI be discontinued.  I consider therefore that Dr Monks’ construction of the provision does not take account of its last paragraph.

[18] By the same token, Mr Tucker’s construction involves a radical rewriting of the provision, such as could only result from a process of rectification, obviously out of the question in this summary, interlocutory proceeding.  Apart from anything else, a claim for rectification would need to be pleaded, and the other parties given the opportunity to respond to and test evidence such as that contained in para 22 of Mr Seymour’s affidavit.

[19] It follows that no declaration should in this proceeding be made in relation to the claim in para 1 of the application. 

Para 5 application:  the meaning of “financial planning revenue”

[20] The arguable difficulty arises from the definition of “revenue” which relates only to “fees invoiced”.  Interpolating that into the definition of “financial planning revenue” excludes the reality that such revenue derives substantially from commissions, as emerges from para 7 of Mr Nuttall’s affidavit filed 19 March 2010:

“7.The multiple of revenues model recognised the significant additional value (2.5 times first year revenue) that Financial planning revenues had on the valuation of the venture.  The reason for this is that for financial planning work, the ‘fees’ received by the firm are often not from an invoice to the client for professional fees, as is the case for accounting work, but rather are in the form of commissions received because of investment products purchased by the client.  These commissions are not just one-off payments, but also take the form of ‘trailing commissions’ which are paid for years afterwards during which the client continues to invest in that product.  It is because of the trailing commissions, that the higher multiple of 2.5 is used for valuing financial planning practices.”

Hence the declaration sought by the applicants in para 5 of the application.

[21] While opposing the making of any declaration on the basis the question of construction should be left to the expert, Mr Tucker submitted that the definition of “revenue” should regulate the matter, because that is what the parties agreed.

[22] Mr Thynne, in his letter of 18 February 2010, has identified this question as an issue to be resolved.  The question, to which I will return, is who should resolve it:  this court or Mr Thynne?

Para 8 application:  whether under cl 8.1 “revenue” excludes liabilities

[23] Dr Monks urged a literal construction of the provision, which would exclude consideration of liabilities, and he referred also to cl 8.1.4.  Mr Tucker referred to a number of contrary considerations, and emphasized that the declaration sought speaks of “the value of the units”, whereas cl 8.1.1 deals only with the valuation of goodwill.

[24] Mr Thynne did not specifically raise this, as an issue to be resolved, in his letter of 18 February 2010. 

The court’s approach to declarations 5 and 8

[25] Mr Tucker submitted in these terms:

“The court should not intervene to direct the Valuer as to how to undertake his task.  That defeats the very purpose for the parties’ appointing an expert to determine a dispute between them.  Further, this is not a case where the Valuer has approached the court for directions or assistance.  Rather, the Valuer has sought to undertake his role with ongoing input from the parties.  That does not mean it is not inappropriate for him to decide disputed issues.  He may take legal advice if and when he finds that course necessary.  The Court should not entertain a course that may give rise to a multiplicity of actions.  In the present case, there is plainly potential for applications after the Valuer has undertaken his task.  Deciding the present application will not necessarily end disputes between the parties.”

[26] In Ross Cook, supra, paras 16 and 17 I said:

“[16]The cases are replete with cautions against court intrusion into this sort of process.  In Alcatel Australia Ltd v Scarcello [2001] NSWCA 401, for example, there was reference to the comments of Mummery J in British Airways PLC v Heathrow Airport Ltd [1992] 1 EGLR 141 at 144:

‘Mummery J cautioned courts not to trespass into the territory of the valuer.  He said:  “It is not, however, the function of the court to answer questions or give general directions as to how the independent valuer should go about making his valuation, such as the factors to be taken into account or the weight to be attached by him to those factors.’

[17]This is not a case where the valuer has requested assistance from the court.  It is also significant that the first respondent opposes intervention by the court at this stage.  I accept, as pointed out by Mr Logan, that were the valuer to be in doubt as to the proper construction of the clause, having received submissions from both parties, it would be open to him to seek independent legal advice, on the basis of course that he disclosed that advice to the parties and sought their further submissions upon it.  Also, should the valuer err in principle in some serious way in his determination, it may be that that determination would be invalid:  Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 331 and 336.”

[27] I refer also to these observations of Bryson J in Fisons Pty Ltd v Rostinga Pty Ltd (Supreme Court of New South Wales, 3513/1988, 2 August 1989), paras 13 and 15:

“In understanding the rent review provisions I should have in mind throughout that what the parties have agreed to be bound by is not the proper minimum rent referred to in CL141 or CL142, but the proper minimum rent as determined by the process specified in the lease.  If a Judge or a jury were to determine on proper directions on the law and on the construction of the Deed what as an objective fact is the proper minimum rent with the qualifications found in the lease it would not be an enforcement of the parties’ agreement to make the plaintiff pay that and the defendant accept it.  The process for determining the amount of the proper minimum rent is as much a part of the parties’ agreement as the covenant to pay that rent, and the covenant to pay rent and the provisions stating the principles for reviewing rent cannot finally be separated and enforced independently of other provisions of the same lease which contain machinery for its ascertainment.

…What looks like a maze of problems to me might fall readily into place in the mind of an expert.  The obscurities of terminology of the lease which I have mentioned (and there may be others) lend special weight to the perception of the wisdom of the parties in choosing a means for resolving differences which kept them in the hands of an expert who was to do nothing but make a determination as an expert, and kept them out of the judicial system with its lengthy hearings, long statements of reasons and chain of appeals.”

[28] On that basis, I accept, for the reasons advanced by Mr Tucker, that declarations 5 and 8 (and consequently 7 as well) should not be made.

Costs

[29] The filing and listing of the application has led to some benefit for the parties, with the resolution of some of the issues addressed. 

[30] While on the major issue I have refused a declaration, that has resulted from my not accepting the position advanced by any party.

[31] My refusal of declarations 5, 7 and 8 involved accepting the primary position advanced for the respondents.

[32] The possibility of further proceedings in the court regrettably cannot be excluded.

[33] Balancing all of those considerations, I consider that at this stage, the fairest order is that costs should be reserved.

Orders

[34] The application is dismissed.

[35] Costs of and incidental to the application are reserved.