These reasons concern whether the Court should adopt the report of a referee in whole or in part and what order should then be made concerning the outstanding claim for relief in the proceedings that was the subject matter of the reference.
[2]
Background
The first plaintiff (Sunnyside Accountants Pty Limited, or SAPL) is in the business of providing accounting, tax and ancillary services.
As at September 2019, the first defendant (Mr Mar) was the sole director of SAPL. The shares in SAPL were owned by Mr Mar and the second defendant (Ms Lam).
Mr Mar, Ms Lam and the second plaintiff (Mr Wasala) entered into a Heads of Agreement setting out "Agreed Terms" for the sale of SAPL to Mr Wasala. It was common ground between the parties that the Heads of Agreement was entered into in late October 2019 and continued to regulate the parties' rights and obligations alongside the Share Sale Agreement that they entered into a short time later, as referred to below.
The "Agreed Terms" set out in the Heads of Agreement included that all of the ordinary shares in SAPL would be transferred to Mr Wasala (referred to as the "purchaser") and that the purchaser would pay a "consultant fee" to Mr Mar and Ms Lam (referred to as the "original owners") for three years thereafter. The "consultant fee" was calculated as a percentage of SAPL's monthly turnover, subject to the fee being a minimum annual monetary amount. Those provisions were also included in the Share Sale Agreement referred to below.
The "Agreed Terms" in the Heads of Agreement also included the following:
"Original owners have absolute rights to collect any accounts receivable outstanding to the company as at 31st October 2019.
Purchaser is assumed responsibility to manage, operate and take liabilities of running the company, including managing clients and recruitment of employee of the company.
Original owners has responsibility to introduce existing clients to the purchaser (a list of clients is provided to the purchaser) for the 3 years period (i.e. 1st November 2019 to 31st October 2022)
Original owners has liability for event(s) happened prior to 1st November 2019.
Purchaser pledges the ordinary shares as security to the original owners. In the events of default, the purchaser is obliged to return 100% ordinary shares to the original owners and to re-appoint Keith Mar as a director of the company and the purchaser is to resign as a director of the company"
The Share Sale Agreement between Mr Mar and Ms Lam (as the "Sellers") and Mr Wasala (as the "Buyer") is dated October 2019 and provides for the sale of all of the issued shares in SAPL to Mr Wasala in consideration for $1.00 on the completion date of 1 November 2019.
Clause 5.5 of the Share Sale Agreement set out certain obligations of Mr Wasala as the Buyer, including:
"5.5B On and after Completion Date, the Buyer and [SAPL] jointly and severally guarantee to:
(a) pay to the Sellers 35% of [SAPL's] Monthly Turnover each month for the corresponding month (inclusive of GST) for the first 24 months from the Completion Date within 14 days of the end date of each corresponding month, such payment being the higher of:
(i) a minimum amount equal to 35% of an turnover amount which is $1.25 million per annum which is a guaranteed minimum payment irrespective of the actual turnover amount;
(ii) an amount which is 35% of an actual turnover amount which is higher than $1.25 million per annum.
(b) pay to the Sellers 40% of [SAPL's] Monthly Turnover each month for the corresponding month (inclusive of GST) for the 12 months of the third year from the Completion Date within 14 days of the end date of each corresponding month until the End Date, such payment being the higher of:
(iii) a minimum amount equal to 40% of an turnover amount which is $1.25 million per annum which is a guaranteed minimum payment irrespective of the actual turnover amount;
(iv) an amount which is 40% of an actual turnover amount which is higher than $1.25 million per annum
(c) not cause or permit any transfer of shares by the Buyer to any third party without the Seller's prior written consent.
5.5C The obligations in 5.5B above together are referred to as Monthly Consulting Fees in the agreement."
There are two clauses in the Share Sale Agreement numbered 7.3. Pursuant to the first clause 7.3, the Sellers were entitled to terminate the agreement by notice in writing to the Buyer if the Buyer and SAPL failed to pay the Sellers' Monthly Consulting Fees under clause 5.5B and that default persisted for more than seven days. The second clause 7.3 set out the consequences of termination, which included that the Buyer covenanted to transfer all of his shares in SAPL back to the Sellers for $1.00 and was obliged to do all things necessary to cause the resignation of the Buyer as a director of SAPL and the appointment of the Sellers as directors of SAPL.
Ms Lam transferred all of the shares in SAPL to Mr Wasala's nominee, Wasala Family Pty Limited (WFPL) and Mr Wasala was appointed as a director of SAPL on 1 November 2019.
Thereafter, a dispute arose between the parties. These proceedings were commenced on 4 March 2021, shortly after Mr Mar and Ms Lam had written to Mr Wasala alleging that Mr Wasala had defaulted in the performance of his obligations under clause 5.5B of the Share Sale Agreement since June 2020 and stating that they terminated the Share Sale Agreement pursuant to clause 7.3, with the consequence that all of the shares in SAPL held by WFPL were transferred back to Ms Lam. The letter demanded that Mr Wasala resign as a director of SAPL and facilitate the appointment of Mr Mar and Ms Lam as directors of SAPL.
The originating process filed by SAPL and Mr Wasala (as first and second plaintiffs) on 4 March 2021 sought declarations to the effect that Mr Wasala was and remained the sole director and WFPL and was and remained the sole shareholder of SAPL. The plaintiffs also sought an order under s 1322(4)(b) of the Corporations Act 2001 (Cth) that the Australian Securities and Investments Commission (ASIC) withdraw from its registers the Form 484 documents lodged by Mr Mar recording a transfer of the shares in SAPL back to Ms Lam, the appointment of Mr Mar as a director of SAPL and the cessation of Mr Wasala's office as a director of WAPL.
By interlocutory process filed on 5 March 2021, Mr Mar and Ms Lam sought an order to the effect that those forms lodged with ASIC were not invalid, declarations that they had validly terminated the Share Sale Agreement and were entitled to have the shares in SAPL transferred to them in accordance with clause 7.3 of the Share Sale Agreement and an order for specific performance of clause 7.3 of the Share Sale Agreement.
In addition, Mr Mar and Ms Lam sought the following relief in prayers 8, 9 and 10 of the interlocutory process:
"8. Judgment against the Second Respondent [Mr Wasala] for the amount of $282,049.86, being the unpaid amount of Monthly Consulting Fee due to the Applicants [Mr Mar and Ms Lam] under clause 5.5 of the Agreement up to its termination on 25 February 2021.
9. Interest pursuant to s 100 of the Civil Procedure Act.
10. Costs."
On 11 March 2021, orders were made by consent dismissing the originating process and all claims for relief in the interlocutory process, with the exception of prayers 8-10 above, with no order as to costs. At the same time, the Court noted the terms of an agreement entered into on that date by Mr Mar (referred to by his first name "Keith"), Ms Lam (referred to by her first name "Nancy"), Mr Wasala (referred to by his name "Charitha"), SAPL (referred to as "Sunnyside") and WFPL (referred to as "WF") (the Settlement Agreement).
The Settlement Agreement relevantly provided:
"1. The parties agree that the Share Sale Agreement ('the Agreement') dated October 2019 and completed on 1 November 2019 has been validly terminated by Keith and Nancy under clause 7.3 of that Agreement.
…
3. The parties agree to co-operate in seeking orders for the reference of the issue in prayer 8 of the interlocutory process to an independent expert accountant to act as a referee and to report to the Court his findings.
4. The parties agree that the issue to be referred to the expert accountant is the amount, if any, of the debt due by Charitha to Keith and/or Nancy pursuant to the Agreement, the preceding Heads of Agreement or otherwise relating to the business of Sunnyside, taking into account any debt Charitha is entitled to raise by way of set-off, being a liquidated amount owing by Keith and/or Nancy to Charitha.
…
6. The parties agree that Charitha is free to take with him the files of Sunnyside with respect to the clients listed in Annexure 'R' of Charitha's affidavit of 10/3/21 ('Charitha's Clients').
7. Keith, Nancy and Sunnyside agree that they will not accept work from any of Charitha's Clients within the period of 24 months from the date of this agreement.
8. Keith, Nancy and Sunnyside agree that in the event that any money is paid in future to Sunnyside by any of Charitha's Clients in relation to invoices issued by Sunnyside prior to this Agreement, then those monies will be promptly paid to Charitha.
…"
Consistently with the parties' agreement that the Share Sale Agreement had been validly terminated, the effect of the orders made on 11 March 2021 dismissing the proceedings but for prayers 8-10 of the interlocutory process was that Mr Wasala's removal and Mr Mar's appointment as sole director of SAPL and the registration of the transfer of all the shares in SAPL to Ms Lam in early March 2021 were undisturbed.
The matter was stood over to allow the parties time to identify an appropriate referee and formulate the terms of the referral.
On 13 April 2021, the Court made an order by consent1 referring the following matter to Mr David Watt for enquiry and report pursuant to Uniform Civil Procedure Rules 2005 (NSW), r 20.14:
"The amount, if any, of the debt due by [Mr Wasala] to [Mr Mar and/or Ms Lam] pursuant to the Share Sale Agreement dated October 2019 and completed on 1 November 2019, the Heads of Agreement or otherwise relating to the business of Sunnyside Accountants Pty Ltd, taking into account any debt [Mr Wasala] is entitled to raise by way of set-off, being a liquidated amount owing by [Mr Mar and/or Ms Lam] to [Mr Wasala]."
[3]
The referee's report
The referee has produced a report dated 23 August 2021.
The referee determined that:
1. total Monthly Consulting Fees of $624,276.63 were payable by SAPL and Mr Wasala (jointly and severally) to Mr Mar and Ms Lam pursuant to clause 5.5B of the Share Sale Agreement in respect of the period from November 2019 to February 2021 during which the Share Sale Agreement was on foot;
2. during that period, SAPL received a total amount of $141,117.84 from clients in respect of accounts receivable outstanding to SAPL as at 31 October 2019 and the "original owners" had an "absolute right to collect" that amount under the Heads of Agreement; and
3. the total amount payable by Mr Wasala to Mr Mar and Ms Lam before deducting any amount for Mr Wasala's offsetting claims was $765,394.47 (being the total of the sums of $624,276.63 and $141,117.81 referred to above).
The parties do not take issue with these aspects of the referee's report, save as recorded at [73] below. The parties' dispute about which parts of the report should be adopted relates principally to the alternative ways in which the referee addressed Mr Wasala's offsetting claims.
Mr Wasala presented offsetting claims totalling $1,077,477 and submitted to the referee that Mr Mar and Ms Lam were therefore indebted to him in the net amount of $270,706.
Mr Mar and Ms Lam submitted to the referee that Mr Wasala's offsetting claims were misconceived because they conflated the rights of SAPL with the rights of Mr Wasala, and also conflated the rights and obligations of Mr Mar and Ms Lam with the rights and obligations of SAPL. Mr Mar and Ms Lam submitted that the amount owing by Mr Mar and/or Ms Lam to Mr Wasala under relevant offsetting claims was negative $93,303 with the result that the amount owed to them by Mr Wasala was increased from $806,771 to $900,074.
The question whether Mr Wasala's offsetting claims conflated his rights with the rights of SAPL and conflated the rights and obligations of Mr Mar and Ms Lam with the rights and obligations of SAPL became known as the conflation issue.
The referee dealt with the conflation issue in the following manner:
"11. I disagree with the Defendants on the 'conflation of rights and entitlements of Sunnyside Accounts Pty Ltd' submission.
[4]
I disagree with the Defendants' submission because:
(a) based on my understanding of the facts presented to me, SA has passed through 3 phases of ownership during the relevant period as follows:
(i) period 1, being the period up to 1 November 2019 when SA was owned by the Defendants (SA Version 1);
(ii) period 2, being the period between 1 November 2019 and 28 February 2021 when SA was owned by CW (SA Version 2); and
(iii) period 3, being the period subsequent to 28 February 2021
when SA was returned to the ownership of the Defendants (SA Version 3);
(b) the Title of the Proceedings in Case Number 2021/00062300 (Current Proceedings) names the following as parties to the litigation:
[5]
(i) as plaintiffs:
• SA as First Plaintiff, which I assume is a reference to SA Version 2
• CW as Second Plaintiff
• SA and CW (collectively, the Plaintiffs)
(ii) as defendants:
• KM as First Defendant
• NL as Second Defendant
(c) in the Current Proceedings, the Plaintiffs (CW and SA) seek to assert their rights as against the Defendants and, conversely, the Defendants seek to assert their rights (to receive Consulting Fees) as against the Plaintiffs (including SA);
(d) if the debt due to the Defendants, if any, is a debt due by the Plaintiffs (including SA).
13. For the reasons noted in the preceding paragraph, I am of the view that the rights of CW and SA Version 2 cannot be disaggregated, as submitted by the Defendants. For this reason I am of the opinion that I should put the Defendants' submission regarding the 'conflation of rights' to one side."
However, the referee continued:
"14. I accept that the submissions of the Defendants on the 'conflation of rights' issue and the impact this has on the scope and parameters of this reference is a legal matter that is outside the scope of my expertise and is, therefore, a matter to be resolved by the Court.
15. To assist the Court, I have undertaken 2 calculations of the debt due as described as follows:
(a) under Approach 1, I have disregarded the Defendants' submissions on the conflation of rights; and in the alternative,
(b) under Approach 2, I have had regard to the Defendants' submission on the conflation of rights issue.
16. Resolution of which of the 2 approaches is[sic-as] appropriate is a matter for the court."
The referee concluded that the amount of the debt due by Mr Wasala to Mr Mar and Ms Lam after taking into account debts that Mr Wasala was entitled to raise by way of set-off was:
1. $175,705.83 under Approach 1 (after allowing for Mr Wasala's offsetting claims quantified by the referee in the amount of $589,688.54); or
2. $251,388.95 under Approach 2 (after allowing for Mr Wasala's offsetting claims quantified by the referee in the amount of $514,005.52).
The difference of $75,683.12 between the referee's determinations of the debt due by Mr Wasala under Approach 1 and Approach 2 is attributable to:
1. an offsetting claim by Mr Wasala in relation to an adjustment to SAPL's rent that the referee allowed in the amount of $39,573.40 under Approach 1 and disallowed under Approach 2 (the rent offset claim);
2. an offsetting claim by Mr Wasala in relation to unused leave entitlements of SAPL's overseas employees that the referee allowed in the amount of $19,521.10 under Approach 1 and disallowed under Approach 2 (the overseas leave entitlements claim); and
3. various offsetting claims made by Mr Wasala that the referee allowed in a total amount of $16,588.67 under Approach 1 and disallowed under Approach 2. Mr Wasala no longer presses these claims. I understand that to mean that Mr Wasala accepts that, if the Court adopts the referee's report insofar as it applied to Approach 1, the Court should not adopt the report insofar as it determined those miscellaneous claims in his favour.
The referee continued:
"23. Whilst I have concluded the debt due by CW to KM and/ or NL amounts to $175,705.93 under Approach 1 or $251,388.95 under Approach 2, I note that I have also concluded that CW has, in my opinion, an absolute right to the accounts receivable of SA as at 1 March 2021 that relate to invoices or bills issued to accounting and tax clients of SA for services that were provided to those clients during the 16 Month Period."
24. As at March 2021, the accounts receivable of SA in relation to invoices or bills issued to accounting and tax clients of SA for services that were provided to those clients during the 16 Month Period amounts to $249,819.18. Further, as of 18 June 2021, the cash collected by SA from those debtors amounted to $104,798.08."
The referee rejected the submission made by Mr Mar and Ms Lam that the debtors were assets of SAPL and not Mr Wasala and could therefore not be set off against amounts owing by Mr Wasala to Mr Mar and Ms Lam as described in the terms of the referral.
The referee stated:
"156. My determination, however, does not mean that this issue is closed. For the reasons that I set out in the following paragraphs, I am of the opinion that the Defendants ought to provide the Plaintiffs with an undertaking to the effect that all cash collections from clients of SA that owed money to SA as at 1 March 2021 for services provided by SA during the period November 2019 to February 2021 be accounted for by SA and transferred to the nominated account of the Second Plaintiff on a timely basis, for example, monthly or quarterly, until such time as all accounts receivable as at 1 March 2021 have been collected. In the event payment by the clients of SA of the accounts receivable by SA as at March 2021 are doubtful of [sic-or] have the appearance of becoming doubtful, the Plaintiffs and the Defendants should take all reasonable steps to ensure the collection of payments. If the accounts receivable remain doubtful they ought to be written-off as bad debts in the books and records of SA but only after the consent of the Second Plaintiff has been obtained to do so.
157. In the negotiations prior to the execution of the SSA, it was made abundantly clear by the Defendants that they considered the 'original owners have absolute rights to collect any accounts receivable outstanding to the company as at 31st October 2019'.
158. The actions of the Defendants during the period November 2019 to February 2021 confirm they were entitled to the accounts receivable as at 31 October 2019. This is evident from a review of the Monthly Consulting Fee Calculations that were prepared, as I understand it, by the First Defendant and / or the Second Defendant.
159. Further, in submissions dated 26 April 2021 the Defendants' calculation of Monthly Consulting Fees payable are supplemented with the amounts collected each month from accounts receivable outstanding to SA as at 31 October 2019.
160. Whilst the SSA is silent on what the Parties intended would happen with accounts receivable outstanding to SA at the date the Defendants invoked their rights under clause 7.2 SSA, it is, in my opinion, reasonable to assume the Second Plaintiff, as the exiting shareholder, would be entitled and would have expected to have an absolute right to collect any accounts receivable outstanding to SA as at the date of exit.
161. The practical difficulty with enforcing this right is that the Defendants now control the books and records of SA, including the accounts receivable ledger, the client database with the various contact points for each client and the bank account of SA. To deal with these issues I propose the Defendants provide an undertaking to the Plaintiffs to the effect that the Defendants will account for collections of any accounts receivable outstanding to SA as at 28 February 2021.
162. I note that the Plaintiffs claim 100% of the accounts receivable outstanding to SA as at 28 February 2021 as an offset to the Monthly Consulting Fees payable. In my opinion, it is not appropriate nor is it reasonable to include 100% of the accounts receivable outstanding to SA as at 28 February 2021 as an offset. The reason being that it is likely that not all of the accounts receivable outstanding to SA as at 28 February 2021 will be collected in cash payments by the Defendants subsequent to 28 February 2021. As a solution to this issue, I propose the Defendants account for collections of accounts receivable outstanding to SA as at 28 February 2021 on a periodic and ongoing basis. An alternative solution might be a commercial settlement between the Plaintiffs and the Defendants in which the Defendants pay a mutually agreed proportion (for example, 80%) of the balance of $229,582. This option provides the Parties with the benefits of a once-and-for-all solution to the dispute."
It is convenient to refer to the issue identified by the referee as summarised at [29]-[32] above as the accounts receivable offset claim. As will be apparent from the referee's report extracted above, the referee did not determine any amount in favour of Mr Wasala in respect of SAPL's November 2019 to February 2021 accounts receivable to which the referee found that Mr Wasala had "an absolute right". That is to say, the referee's Approach 1 and Approach 2 calculations did not incorporate any amount in respect of the accounts receivable offset claim. The referee instead proposed that Mr Mar and Ms Lam give the undertakings referred to in the report above.
[6]
The parties' contentions
Both Mr Wasala on the one hand and Mr Mar and Ms Lam on the other hand seek orders under UCPR r 20.24(1) that the referee's report be adopted in part.
Mr Wasala's contentions are set out in a notice of motion filed on 18 October 2021, points of claim filed on 8 November 2021 and written submissions dated 16 March 2022 as supplemented by oral submissions at the hearing on 24 March 2022.
Mr Mar and Ms Lam's contentions are set out in an interlocutory process filed on 18 October 2021, points of claim filed on 5 November 2021 and written submissions dated 7 March 2022 as supplemented by oral submissions at the hearing on 24 March 2022.
I have considered all of the parties' submissions, irrespective of whether they are expressly referred to in these reasons.
In summary, Mr Wasala contends that the Court should adopt the referee's report insofar as the report:
1. applies Approach 1 to the calculation of the net amount owing by Mr Wasala to Mr Mar and Ms Lam, save for Mr Wasala's offsetting claims totalling $16,588.67 that are no longer pressed as referred to at [29(3)] above; and
2. determines or expresses the opinion that Mr Wasala has a right to the accounts receivable by SAPL as at 1 March 2021 in respect of bills and invoices issued by SAPL to its accounting and tax clients during the period from November 2019 to February 2021.
Mr Mar and Ms Lam contend that the Court should:
1. adopt the referee's report insofar as the report applies Approach 2 to the calculation of the debt owing by Mr Wasala to Mr Mar and Ms Lam;
2. reject the referee's determination or opinion that Mr Wasala has a right to SAPL's accounts receivable as at 1 March 2021 because that determination or opinion falls outside the scope of the reference; and
3. on that basis, enter judgment in their favour in respect of prayer 8 of their interlocutory process filed on 5 March 2021 in the sum of $251,388.95 (being the net amount of the debt owed to them by Mr Wasala as determined by the parts of the referee's report that they contend should be adopted by the Court) plus pre-judgment interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW).
There was no dispute about the applicable principles, which were summarised by reference to authority by McDougall J in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [7]:
"(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing.
[7]
(2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.
[8]
(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.
[9]
(4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.
[10]
(5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report.
[11]
(6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory".
[12]
(7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.
[13]
(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.
[14]
(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.
[15]
(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.
[16]
(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.
[17]
(12) The right to be heard does not involve the right to be heard twice.
[18]
(13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The real question is far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence".
[19]
(14) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence.
[20]
(15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified."
[21]
Consideration and determination
The conflation issue
The referee's Approach 1 of treating SAPL differently according to the identity of the shareholders of SAPL at different times ("SA Version 1", "SA Version 2" and "SA Version 3"), and thereby conflating SAPL with its shareholder(s) at any particular time rather than treating SAPL as a separate legal entity, involves an error of law. The referee properly identified that it was a matter for the Court to determine whether this Approach 1 or the alternative Approach 2 was correct. The Court will reject those parts of the referee's report that have quantified or determined offsetting claims made by Mr Wasala in accordance with the erroneous Approach 1.
The terms of the reference required the referee to determine the amount (if any) of the debt due by Mr Wasala to Mr Mar and/or Ms Lam pursuant to the Share Sale Agreement, the Heads of Agreement or otherwise relating to the business of SAPL, taking into account any debt that Mr Wasala is entitled to raise by way of set-off, being a liquidated amount owing by Mr Mar and/or Ms Lam to Mr Wasala. Approach 1 strays beyond the referee's jurisdiction to the extent that the referee purported to determine that Mr Mar and/or Ms Lam owed liquidated amounts to SAPL and treated those amounts as owing to Mr Wasala.
[22]
The rent offset claim
The referee recorded that Mr Wasala claimed as an offset an amount in respect of "additional rent paid by [SAPL] in respect of the period from 1 May 2020 to 2 March 2021" for the lease of SAPL's business premises at 45 Chandos Street, St Leonards. The referee recorded that the premises were owned by Mr Mar and Ms Lam until about May 2020, when they were sold to a new owner which then became SAPL's landlord under the lease.
The referee summarised Mr Wasala's submissions about the rent offset in the following terms:
"142. The Plaintiffs submit the First Defendant [Mr Mar] made representations to the Second Plaintiff [Mr Wasala] prior to signing the SSA in relation to the rent payable by the Plaintiffs after 1 November 2019. The email from the First Defendant to the Second Plaintiff dated 19 September 2019 states, inter alia:
'Lease Agreement for the purpose of sale of property (please kindly ignore the annual lease amount of $120,000. This is only for the purpose of selling. As you are aware, the rent payable by Sunnyside Accountants is $5,500 per month plus GST plus outgoings. I will take care of the different in rent)'
143. The Plaintiffs' submission on this point implies the Plaintiffs understood the email from the First Defendant to mean that the rent payable by SA would be $5,500 per month plus GST plus outgoings to, at least, June 2021 and possibly up to the End Date."
The referee then noted that the submissions made by Mr Mar and Ms Lam had initially offset the sum of $4,000 per month as a "Credit Adjustment for Monthly Rent" against Mr Wasala's liability to Mr Mar and Ms Lam for Monthly Consulting Fees for the period from November 2019 to February 2021. The referee noted that those submissions appeared to be consistent with contemporaneous correspondence between the parties during the period from May to December 2020 and stated:
"146. The contemporaneous actions of the Defendants in providing the Plaintiffs with credit adjustments for rent foregone against the consulting fees payable indicates the Defendants interpreted the email dated 19 September 2019 … in the same terms as the Second Plaintiff. That is, in respect of the period May 2020 to, at least, January 2021, the Monthly Consulting Fees levied by the Defendants and the Plaintiffs were to be reduced by the Defendants by $4,000 per month."
The referee stated that Mr Mar and Ms Lam had subsequently altered their position, submitting that the issue of rent was a matter relating to SAPL's rights and obligations and was not related to the question referred to the referee.
The referee determined that "a credit adjustment for monthly rent in the amount of $32,275.42 plus GST should be allowed for as an offset against the total of the Monthly Consulting Fees and collections from debtors as at 31 October 2019."
The referee's reasons for that determination were expressed as follows:
"149. The reasons for this determination include:
(a) the explicit reference to the proposed rental arrangements pertaining to [SAPL's] use of 45 Chandos Street St Leonards that were:
(i) open-ended, that is, no duration for the period over which the First Defendant would 'take care of the difference in rent' was sated [sic] in the First Defendant email dated 19 September 2019;
(ii) not specific in terms of the impact of events, such as a change in the ownership of the property, may have on the rental arrangements. Since negotiations between the Defendants and the Plaintiff (as documented in the Heads of Agreement and the SSA) did not contemplate a change of ownership in the property, I am of the opinion the Second Plaintiff was entitled to assume the First Defendant and/or the Second Defendant would have remained as owners of the property until the End Date;
(b) the actions of the Defendants in providing credit adjustments to [SAPL] between May 2020 and January 2021 indicate in the strongest possible terms they were of the view the plaintiffs were entitled to the credit adjustments.
150. I calculate the total credit adjustments for monthly rent to be $39,573 (including GST), which is demonstrated by the calculations in the table below."
On one reading of paragraph 146 and paragraph 149(b) of the referee's report extracted above, the report suggests that Mr Mar and Ms Lam had in fact made adjustments as between themselves and SAPL and/or Mr Wasala for monthly rent in excess of $5,500 plus GST during the period from May 2020 to January 2021. It was common ground between the parties that no such adjustments were made, as is apparent from the referee's calculation of the amount that he allowed for the rent offset claim referred to immediately below. As I understand paragraphs 146 and 149(b) read in the context of the report as a whole, the referee was referring to contemporaneous correspondence between the parties which referred to adjustments in respect of rent during that period albeit that the adjustments were not in fact made.
The amount of $39,573 is calculated as the difference between $6,050 (being the rent of $5,500 plus GST referred to in the 19 September 2019 email) and the rent actually paid by SAPL by the new landlord for the months of May 2020 to January 2021. The referee excluded the month of February 2021 because there was no evidence that SAPL had in fact paid rent in that month.
It was submitted on behalf of Mr Wasala that the referee's allowance of his offsetting claim for the rent adjustment did not involve the referee conflating SAPL and Mr Wasala. It was submitted that the referee found that there was an agreement between Mr Mar and Mr Wasala personally "under which Mr Mar promised to reimburse (or provide a 'credit' to) Mr Wasala (or Sunnyside for the rent payable each month under the Lease such that Mr Wasala (or Sunnyside) would only be obligated to pay $6,050 (including GST) each month for the remained of the term of the Lease, for as long as Mr Wasala remained the sole shareholder of Sunnyside." It was submitted that this finding by the referee was a finding of fact and that there is no basis for the Court to reconsider or alter the finding. It was further submitted that Mr Mar's email of 19 September 2019 was sent to Mr Wasala before he became a director or shareholder in SAPL. Accordingly, it was submitted, Mr Mar's 19 September 2019 email was a promise made by him to Mr Wasala personally to either pay Mr Wasala directly the amount equal to any rent in excess of $6,050 per month or to ensure that, during Mr Wasala's period of ownership of SAPL, SAPL was not required to pay monthly rent in excess of $6,050.
I reject Mr Wasala's submissions for the following reasons.
The referee did not find that Mr Mar and Mr Wasala entered into an agreement in relation to adjustments to the rent payable by SAPL. The referee's reasons for his determination in relation to the rent offset claim set out in paragraph 149 of his report simply summarised the terms of the email, stated (contrary to the terms of the email) that the parties did not contemplate a change in ownership of the leased property (the email expressly referred to the lease being "for the purpose of sale of property"), and expressed an opinion about an assumption that Mr Wasala was entitled to make on the basis of the email. The referee also referred to "the actions of the Defendants in providing credit adjustments to SA between May 2020 and January 2021" which, as I have noted above, must be understood as a reference to correspondence indicating that adjustments would be made in favour of SAPL rather than adjustments actually made. The referee's report is silent about the basis on which he treated adjustments to be made in favour of SAPL as a liquidated amount owing by Mr Mar and/or Ms Lam to Mr Wasala. However, it is plain that, in doing so, the referee erroneously conflated SAPL and Mr Wasala in treating Mr Mar's statement that he would "take care of the difference in rent", which related to a liability of SAPL, as giving rise to a debt owing by Mr Mar and/or Ms Lam to Mr Wasala. That is put beyond doubt by the fact that the referee has included the rent offset claim amount in his Approach 1 calculations but excluded them from his Approach 2 calculations. For those reasons, I accept the submissions made by senior counsel for Mr Mar and Ms Lam that the referee's determination of the rent offset claim is infected by his error of law in relation to the conflation issue.
Counsel for Mr Wasala invited the Court to interpret the referee's report as containing a finding that there was an agreement between Mr Mar and Mr Wasala to the effect referred to at [51] above on the basis of counsel's interpretation of the email and because, it was submitted, the referee was an accountant and not a lawyer and therefore could not be expected to use the term "agreement" when he found that an agreement existed. In my opinion, no such reading of the referee's report is available. Accountants are familiar with the concept of an agreement and it is to be expected that the referee would have used that word (or an equivalent word, such as contract) if he had found that the 19 September 2019 email was an agreement between Mr Mar and Mr Wasala. If the referee had found that such an agreement was made between Mr Mar and Mr Wasala, the rent offset claim amount determined by the referee would have been included in his Approach 1 and Approach 2 calculations. As noted above, it was included in the Approach 1 calculations only, being the calculations in which the referee erroneously conflated SAPL and Mr Wasala during the period that SAPL was under Mr Wasala's ownership and control.
Neither the referee's report nor Mr Wasala's submissions before this Court identified any submission made by Mr Wasala to the referee to the effect that the 19 September 2019 email constituted or evidenced an agreement between Mr Mar and Mr Wasala giving rise to an amount owing by Mr Mar to Mr Wasala personally. That is a contention that Mr Wasala seeks to introduce for the first time in the context of his application for the partial adoption by the Court of the referee's report. The hearing of the parties' applications under UCPR r 20.24(1) is not a hearing de novo. It is not an occasion for the parties to have a second go, putting forward entirely new contentions for the first time in relation to the matters that were the subject of the reference and asking the Court to adopt erroneous elements of the referee's report to the extent that the Court's determination of those new contentions happens to be consistent with the referee's determination made on other grounds. In my opinion, it would frustrate the purpose of UCPR Pt 20 Div 3 if the Court were to entertain such an exercise and I decline to do so in this case.
[23]
The overseas leave entitlements claim
The referee determined under Approach 1 that Mr Wasala was entitled to offset the sum of $19,521.10 against the amounts he owes to Mr Mar and Ms Lam. The sum of $19,521.10 represents leave entitlements accrued as at 1 November 2019 by SAPL employees based in Taiwan and the Philippines. The basis of the referee's determination was that the Heads of Agreement and Share Sale Agreement make it clear that Mr Mar and Ms Lam were liable for leave entitlements accrued by SAPL employees up to 1 November 2019.
In their submissions to the referee, Mr Mar and Ms Lam contended that leave entitlements accrued by SAPL employees as at 1 November 2019 and paid to them while SAPL was under Mr Wasala's ownership were a liability of SAPL and not something for which Mr Mar and Ms Lam were personally liable to reimburse Mr Wasala.
However, during the course of the hearing before me, senior counsel for Mr Mar and Ms Lam referred to the term of the Heads of Agreement that provides: "Original owners has liability for event(s) happened prior to 1st November 2019". Senior counsel conceded that it was arguable that employee leave entitlements accrued prior to 1 November 2019 are "events" that happened prior to that date for which Mr Mar and Ms Lam (the "original owners") are personally liable to make an adjustment in favour of Mr Wasala pursuant to that clause of the Heads of Agreement. If that argument were upheld, then Mr Wasala would be entitled to have the referee's report adopted insofar as it allowed his offsetting claim of $19,521.10 in respect of overseas employee leave entitlements, notwithstanding the referee's error in relation to the conflation issue. Senior counsel did not formally concede the point but informed the Court that he did not make any submission against that argument.
It is common ground between the parties that the Heads of Agreement continued to apply alongside the Share Sale Agreement after the parties executed the Share Sale Agreement.
The argument identified by senior counsel for Mr Mar and Ms Lam is, with respect, correct.
[24]
Conclusion in relation to the conflation issue and Approach 1 vs Approach 2
The referee erred in conflating SAPL with Mr Wasala during the period from 1 November 2019 to 28 February 2021 when Mr Wasala (or his nominee, WFPL) was the shareholder of SAPL. That error infected the referee's determination of Mr Wasala's rent offset claim and the Court will not adopt the report to the extent that it concerns that determination.
Notwithstanding the referee's error in relation to the conflation issue, the referee's report should be adopted by the Court insofar as it allowed Mr Wasala's offsetting claim of $19,521.10 in relation to overseas employee leave entitlements. That aspect of the referee's determination is consistent with the terms of the Heads of Agreement, without conflating Mr Wasala and SAPL.
As I have noted at [29] above, the remaining offsetting claims affected by the conflation issue (being the miscellaneous claims totalling $16,588.67) were not pressed by Mr Wasala at the hearing concerning the adoption of the referee's report and the report will therefore not be adopted insofar as the referee allowed those claims.
Subject to the accounts receivable offset claim addressed below the Court will adopt the referee's report to the extent that it applies Approach 2 (rejecting Approach 1 and thereby excluding the referee's determination of the rent offset claim and the miscellaneous offsetting claims) and to the extent that it finds that Mr Mar and Ms Lam owe the sum of $19,521.10 to Mr Wasala in respect of the overseas leave entitlements claim.
[25]
The accounts receivable offset claim
The sole basis of the referee's determination that Mr Wasala had "an absolute right" to SAPL's accounts receivable for SAPL's tax and accounting services invoiced to clients during the November 2019 to February 2021 period is identified in paragraph 160 of the referee's report extracted at [32] above. That sole basis is that, notwithstanding that the parties made no provision in the Share Sale Agreement in respect of SAPL's accounts receivable as at the date on which Mr Mar and Ms Lam exercised their rights under clause 7.3 to terminate that agreement for non-payment of the Monthly Consulting Fees, the referee was of the opinion that it was "reasonable to assume" that Mr Wasala, as "the exiting shareholder" "would be entitled and would have expected to have an absolute right to collect any accounts receivable outstanding to SA as at the date of exit".
As senior counsel for Mr Mar and Ms Lam submitted, that opinion erroneously conflates Mr Wasala with SAPL during the November 2019 to February 2021 period and thereby strays beyond the scope of the reference. The referee's recommendations or proposals concerning undertakings is also outside the scope of the reference.
I reject the submissions made by counsel for Mr Wasala to the effect that this part of the referee's report should be read as a finding by the referee that the Share Sale Agreement was subject to an implied term to the effect that, if Mr Mar and Ms Lam exercised their rights of termination under clause 7.3, Mr Wasala had the right to collect any accounts receivable owing to SAPL as at the date of termination in respect of tax and accounting services provided by SAPL during the period from November 2019 to the date of termination. In my opinion, that suggested reading of the report finds no support in the language that the referee used to express his opinions and is untenable. As senior counsel for Mr Mar and Ms Lam submitted, the referee makes no findings about rights or terms, implied or otherwise. The referee simply makes an observation about what, in his opinion, might reasonably have been assumed by Mr Wasala. That is not the legal test for the implication of a term. Contrary to the submissions made by counsel for Mr Wasala, the implied term that he contended the referee found does not satisfy the five requirements of that legal test: Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 at 346-347 (Mason J, as his Honour then was). In particular, far from being necessary to give business efficacy to the Share Sale Agreement, the suggested implied term would have an effect that seems to me to undermine the efficacy of the agreement. The suggested implied term would apply in circumstances where, having received the shares in SAPL for $1.00, Mr Wasala had failed to pay (or cause SAPL to pay) the Monthly Consulting Fees to Mr Mar and Ms Lam (being the critical component of the consideration for their transfer of the shares to him). The effect of the suggested implied term would be to permit Mr Wasala to strip SAPL of all revenue that it generated under his ownership, returning to Mr Mar and Ms Lam the shares in a company that had therefore effectively operated at a loss during the period in which Mr Wasala had owned the shares without paying for them (or without paying for them in full). For the same reasons, the suggested implied term is not so obvious that it goes without saying.
I reject the submission made on behalf of Mr Wasala that the suggested implied term was "conceptually identical" to Mr Mar and Ms Lam's entitlement under the Heads of Agreement to SAPL's accounts receivable as at 31 October 2019. The submission is plainly wrong because Mr Mar and Ms Lam had an express right under the Heads of Agreement and because that express right did not have the "conceptually identical" effect of the suggested implied term described above. The submission is irrelevant in any event because the implication of terms is not an exercise in judicially rewriting contracts so as to redistribute the balance of parties' rights and obligations in a manner that the Court considers "reasonable" or "conceptually identical".
If, contrary to my opinion stated above, the referee did find that the Share Sale Agreement included an implied to term to the effect for which Mr Wasala contends, that finding was wrong as a matter of law for the reasons explained at [67] above.
For all of the reasons at [65]-[69] above, the Court will not adopt those parts of the referee's report that contain his opinion or determination that Mr Wasala had a right to collect SAPL's accounts receivable as at 1 March 2021 for tax and accounting services invoiced by SAPL to clients during the period from November 2019 to February 2021. Nor will the Court adopt the referee's recommendations or proposals concerning undertakings to be given by Mr Mar and Ms Lam or commercial settlement between the parties referred to at paragraphs 156 to 162 of the report.
I note that, as senior counsel for Mr Mar and Ms Lam submitted, the Share Sale Agreement (without the suggested implied term) does not leave Mr Wasala with nothing in respect of the period during which SAPL carried on business under his ownership and control. Only 35 per cent of SAPL's monthly turnover was required to be paid to Mr Mar and Ms Lam as the Monthly Consulting Fee. Clause 7.3 of the Share Sale Agreement does not require Mr Wasala to repay to SAPL or to Mr Mar and Ms Lam any distributions or other payments made by SAPL to Mr Wasala from the remaining 65 per cent of its monthly turnover during the period of his ownership of SAPL.
For completeness, I also note that, as senior counsel for Mr Mar and Ms Lam acknowledged, the rejection of the referee's opinion in relation to Mr Wasala's accounts receivable offset claim does not affect Mr Wasala's right to enforce clause 8 of the Settlement Agreement extracted at [16] above.
In the alternative to the submissions that I have rejected at [65]-[69] above, counsel for Mr Wasala submitted that, if the Court does not adopt those parts of the referee's report referred to at [70] above, then the Court should "exercise its discretion also to exclude the cash collected from the November 2019 Accounts Receivable of $141,118 (and therefore reject that part of the Referee's Report as well)". That submission is wholly inconsistent with Mr Wasala's submissions made to the referee. The referee recorded that Mr Wasala agreed with Mr Mar and Ms Lam that SAPL had received the sum of $141,118 from clients in respect of accounts receivable as at 1 November 2019 and that all parties had submitted that the amount of $141,118 should be included in favour of Mr Mar and Ms Lam in the referee's determination of the net amount payable by Mr Wasala to Mr Mar and Ms Lam. [1] I repeat my observations at [55] above.
[26]
Costs
Neither party submitted that they would wish to be heard separately in relation to costs and I am not aware of any reason why costs should not follow the event. Given that the Court will make orders substantially in the terms sought in the interlocutory process filed by Mr Mar and Ms Lam on 18 October 2021, save for the overseas leave entitlements finding in respect of which senior counsel for Mr Mar and Ms Lam drew the Court's attention to the argument in favour of Mr Wasala that the Court has accepted, the appropriate costs order is that Mr Wasala is to pay the costs of Mr Mar and Ms Lam of and incidental to prayers 8-10 of the interlocutory process filed on 5 March 2021, the reference and the parties' competing applications for the partial adoption of the referee's report, on the ordinary basis as agreed or assessed.
[27]
Conclusion and orders
For the foregoing reasons, the orders of the Court are as follows:
1. Order that the report of the referee, Mr David Watt, dated 23 August 2021 (the Report) be adopted, save that:
1. those parts of the Report applying "Approach 1" referred to in paragraphs 15 and 17-19 of the Report be rejected in favour of "Approach 2" described in paragraphs 15 and 20-21 of the Report under which the Referee determined that the amount of the debt due by the Second Plaintiff (Mr Wasala) to the First and Second Defendants (Mr Mar and Ms Lam) (after taking into account any liquidated amount owing by the First and Second Defendants to the Second Plaintiff that the Second Plaintiff is entitled to raise by way of set off) is $251,388.95; and
2. the amount of the debt determined by the Referee under "Approach 2" referred to above is reduced by the sum of $19,521.10 in respect of Mr Wasala's offsetting claim relating to overseas employee leave entitlements, thereby reducing the amount of the debt due by the Second Plaintiff to the First and Second Defendants referred to in order 1(a) above to $231,867.85; and
3. the Referee's determination or opinion in paragraphs 23-25 and 160 of the Report that the Second Plaintiff has "an absolute right to the accounts receivable of [the First Plaintiff] as at 1 March 2021 that relate to invoices or bills issued to accounting and tax clients of [the First Plaintiff] for services that were provided to those clients during the 16 Month Period" from November 2019 to February 2019, is rejected together with the Referee's proposals or recommendations that the First and Second Defendants give the undertakings referred to in paragraphs 161 and 162 of the Report.
1. In respect of prayers 8 and 9 of the interlocutory process filed by the First and Second Defendants (Mr Mar and Ms Lam) on 5 March 2021, order that judgment be entered in favour of the First and Second Defendants (Mr Mar and Ms Lam) against the Second Plaintiff (Mr Wasala) in the sum of $231,867.85 together with interest on that sum pursuant to s 100 of the Civil Procedure Act 2005 (NSW) for the period from 25 February 2021 until the date of this order.
2. Order that the Second Plaintiff (Mr Wasala) pay the costs of the First and Second Defendants (Mr Mar and Ms Lam) of and incidental to:
1. prayers 8, 9 and 10 of the interlocutory process filed by the First and Second Defendants on 5 March 2021;
2. the reference conducted before the Referee pursuant to the orders made by the Court on 13 April 2021;
3. the interlocutory process filed by the First and Second Defendants on 18 October 2021;
4. the notice of motion filed by Mr Wasala on 18 October 2021; and
5. the hearing on 24 March 2022,
on the ordinary basis in such amount as may be agreed or assessed.
[28]
Endnote
Save in relation to the identity of the referee, which was the subject of brief argument.
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Decision last updated: 29 September 2022