The objection in subrule 1 is usually referred to as a surcharge and that referred to in subrule 2 as a falsification. Both surcharges and falsifications may be based on matters of fact or law. The onus is on the surcharging party to establish the surcharge. However, with a falsification, the onus is on the accounting party. This flows from the old case of Pit v Cholmondeley (1754) 2 Ves Sen 565; 28 ER 360.
25 I now turn to what might be called the merits. I have already dealt with paragraph A, now that it has been conceded, so I proceed to B to G.
26 B. The dispute is over $80,000 paid in April 1990. Fred says that Frank claimed in his accounts that $80,000 had been transferred from Mick to the State Bank account and then transferred to D'Aroma Concrete Pty Ltd on 20 April 1990 to pay bills. The complaint is that although the learned Associate Judge did not accept Frank to any great extent, and although Mick gave no evidence before the Associate Judge, the Associate Judge appears to have accepted that the $80,000 came from Mick. Mr Carnovale says that this was a falsification; the onus was on the accounting party, and there was just no evidence at all on it.
27 This criticism appears to be unanswerable. Indeed, Mr Raphael's only answer to it was that Mick had told the court in his affidavit that he had paid the $80,000 and there was no other evidence. However, the way the parties approached Mick's affidavit was that it was not material that the Associate Judge was to take into account.
28 Accordingly, I find matter B in favour of Fred.
29 C. This matter concerns $14,000.
30 The learned Associate Judge said that in August 1990, a deposit of $14,000 was made to the State Bank as a term deposit in the names of the three partners. By August 1993 it had grown to $17,250. He found that it was likely that the deposit was in the nature of a bond in favour of a local council. The Associate Judge added $14,000 to the cost of the works and then found that the $17,250 had been split three ways so increased each party's contribution by $5,750.
31 Mr Carnovale says that it is an error in the learned Associate Judge's judgment that he did not seek to work out where the $14,000 came from in the first place. He puts that the only place it could have come from is the contributions of the "partners" in D'Aroma Concrete, namely, Fred and Mick and that they should be credited with the $14,000 equally.
32 This appears to be correct. However, the allegation is that the accounts do not show a credit for Fred and Mick for $7,000 each. This is a falsification. The onus is thus on the accounting party. There is nothing in the accounts to show how the partnership contributed the $14,000 bond. The learned Associate Judge, although he referred to the bond, at no time appears to have directed his mind to who provided it. The evidence fairly clearly was that Frank provided a total sum of a defined amount from Barclays Bank and the balance was contributed by Mick and Fred through D'Aroma. Accordingly, the account should have shown that the $14,000 was provided as to $7,000 by each of Fred and Mick.
33 D. The old red house. When the land was subdivided, there was "left over" a small piece of land with the original house erected thereon. This was known in the enquiry as "the old red house". There is no doubt it was sold in August 1991 and that the proceeds of sale in the amount of $110,195, plus the balance of the deposit of $12,900, was received by Frank.
34 Fred says that the net proceeds of the sale of the old red house went not into the costs of development, but into Frank's own private funds.
35 The Associate Judge said at [49] that:
"If, as Fred asserts, neither he nor D'Aroma received any part of the proceeds of sale of the old red house, then his contribution … would be reduced by that amount. By the same token, if Fred is correct, Frank's contribution would also be reduced by that amount (as also would Michael's contribution). These two figures would then cancel each other out. I do not understand the nature of Fred's complaint."
36 Mr Carnovale says that the learned Associate Judge fell into error here. However, the accounts do show that the proceeds from the sale of the old red house were treated as having been split three ways and being part of the parties' contribution to capital. In my view the learned Associate Judge correctly so treated it.
37 E. Mr Carnovale put the simple proposition that all the construction costs, apart from the money that Frank had borrowed from Barclays Bank, were paid by D'Aroma. Therefore it was quite a simple exercise to calculate the total cost, to take away the $440,000 borrowed by Frank and put into the cost and the balance was contributed by Mick and Fred equally. I must confess that I cannot see any flaw in this logic. The learned Associate Judge does not seem to have considered it in his judgment. It follows that this "balancing factor" must be applied with respect to the matters that I have considered in B and C above.
38 F. As to interest, I said in my judgment of 2001 at [105]:
"Section 24(3) of the Partnership Act 1892 provides that where a person has subscribed more than his fair share of capital he is entitled to interest at the rate of 7% from the date where he subscribes more than the others."
39 That was, of course, quite wrong. However, as is understandable and was appropriate, the learned Associate Judge followed this ruling.
40 Section 24(3) in fact says:
"A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which the partner has agreed to subscribe is entitled to interest at the rate of seven per centum per annum from the date of the payment or advances."
41 One must compare and contrast this provision with s 24(4) which says:
"A partner is not entitled before the ascertainment of profits to interest on the capital subscribed by the partner."
42 It is clear that the focus of s 24(3) is not one partner paying more capital contribution than the others, but a partner making a loan to the partnership.
43 This is reinforced by s 44, which says that on dissolution the following rules should ordinarily be observed. First, losses and deficiencies of capital shall be paid first out of profits, next out of capital and lastly by the partners individually in the proportion in which they were to share profits. The assets of the firm are to be applied in the following manner:
"(1) In paying the debts and liabilities of the firm to persons who are not partners therein.
(2) In paying to each partner ratably what is due by the firm to the partner for advances as distinguished from capital.
(3) In paying to each partner ratably what is due from the firm to the partner in respect of capital.
(4) The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible."
44 Because of my previous ruling, at the commencement of the hearing before me, each party assumed that Frank was entitled to interest on his excess capital. The argument was whether that interest should be paid by the partnership (ie one-third each) or by the partners who had not made a full contribution of capital, ie Mick and Fred.
45 Had the excess of Frank's capital contribution over the capital contribution of the others been an "advance", then it would have ranked as a partnership liability and would have been paid out of the partnership funds before anything was distributed between the partners. As a partnership liability, it effectively would have been paid three ways. Whilst there are some logical problems about this, that is the way in which the authorities would treat such an advance; see particularly the decision of the Court of Appeal in British Columbia in Klaue v Bennett (1989) 62 DLR (4th) 367.
46 Furthermore, interest on any such advance would cease as at the date of dissolution; Klaue's case; Watney v Wells (1867) LR 2 Ch App 250 and see Rowella Pty Ltd v Abfam Nominees Pty Ltd (1989) 168 CLR 301.
47 Mr Carnovale in his written submissions referred to the decision of Lord Selborne LC in Barfield v Loughborough (1872) LR 8 Ch App 1. That again is a decision which affirms that, in taking accounts of a partnership, interest after dissolution will not be allowed to the partners.
48 Mr Raphael relies on Popat v Shonchhatra [1997] 1 WLR 1367, 1374 where the English Court of Appeal said that there was no authority for the proposition that rights under the identical English equivalent to s 24 of our Partnership Act ceased on dissolution. It was true that no such authorities were cited to the court, but they do exist.
49 However, it is unnecessary to pursue this matter as the essential difficulty is that Frank did not make an advance to the firm, he made a payment of capital in excess of what the others put in. This came about by agreement between the parties, the basal agreement being that Frank would put in the moneys borrowed from Barclays Bank, $440,000, and the balance of the construction costs would be contributed by D'Aroma, the corporate vehicle of Mick and Fred.
50 If what I had said in 2001 had been a final judgment and orders had been taken out and there had been no appeal, then I would not be able to do anything about my error. However, where the judgment merely orders accounts and the matter has to come back to me to make a final order, in my view, I am entitled to withdraw previous comments, provided, of course, (as happened in this case) counsel are given sufficient opportunity to address the point.
51 Mr Raphael recognises the difference between an advance and a contribution of capital. He submits:
"Once the partnership is dissolved, just as the right to interest by the partnership on advances made by a partner ceases as and from that date, once dissolved the obligation is solely on each of the other partners to pay interest on the money whereby their agreed capital contribution was deficient. It is on this point that the textbook commentaries are silent and there appears to be no case law which deals with the problem. That is to say, there appears to be no case law or commentary which indicates who is to be liable for interest on monies repayable to the party who made an advance over and above his her or its agreed amount of capital contribution."
52 Underhill's Principles of the Law of Partnership, 10th ed, pp 90-1 says:
"It is a corollary of the rule as to the equality of profit and loss (notwithstanding inequality in contribution of capital), that, in the absence of agreement to the contrary, no partner is entitled to receive interest on the capital contributed by him."
53 The author refers to s 24(4) of the Partnership Act 1890 (UK) and notes that in many cases it would be quite unreasonable not to include a clause allowing for interest on capital especially in situations where an older partner has subscribed a considerable sum and a younger partner is introduced to the firm with little by way of capital contribution.
54 This general principle seems to me to preclude the argument that Mr Raphael raises that there should be some quantum meruit type adjustment to prevent unjust enrichment by allowing a partner who has subscribed more capital than the others to interest on his capital or that, in equity, such interest should be payable.
55 Indeed, Mr Raphael cited a number of cases where, despite the general rule that interest is not payable unless expressly agreed, equity has allowed interest. The principal authority relied on was Wood v Scoles (1866) LR 1 Ch App 369, but that was a case where the partnership agreement provided for interest on capital and the real dispute was as to the application of that clause. In view of the general principle stated above, one cannot reason by analogy from the other cases cited by Mr Raphael that interest should be payable.
56 There is no doubt that the excess amount paid by Frank was agreed contribution. There is no authority for the proposition that in the absence of agreement between the parties, a person whose agreed capital contribution exceeds that of the others, is to receive interest before or after the date of dissolution, and indeed, cases such as Watney v Wells supra tend the other way. This is in accordance with the usual policy of the law that no interest is to be paid unless there has been agreement, or unless, in equity, it would be unconscionable for someone to retain moneys without having paid interest. Neither of these apply in the present case.
57 Accordingly, no interest is payable to Frank.
58 G. Costs. It is abundantly clear that the normal rule in partnership suits is that each partner is equally liable to pay the costs associated with the proper winding up of the partnership. Accordingly, whilst nowadays the costs of all litigation is technically in the discretion of the court, one starts with the proposition that the costs should be borne by each of the three partners as to one-third of the total.
59 However, the authorities are clear that the general way of exercising the discretion is that the costs of an action for dissolution of partnership are paid out of the asset, unless there is a good reason to the contrary: Hamer v Giles (1879) 11 Ch D 942; Kraft v Kupferwasser (1991) 23 NSWLR 236, 244; Meekin Enterprises v Gersbach (McLelland CJ in Eq, 6 August 1997, unreported). As Powell J further said in Kraft's case at 244:
"The costs of taking the accounts directed at the hearing are, although disputed, usually paid out of the partnership assets …".