Daniels & Anor v Smith

LEGISLATION CITED : Partnership Act 1892 (NSW), ss 33(1), 39

Cuming v Hennessy [2005] NSWSC 1219 (28 November 2005) Davey v Donnelly (Supreme Court of New South Wales, McLelland J, unreported, 16 May 1991 - BC9101992) CASES CITED : Fitz-Gibbon v Khoury, (Supreme Court of New South Wales, Powell J, unreported, 1 March 1985) Hamer v Giles [1879] 11 Ch D 942 Rowlands v MacDonald [2002] NSWSC 282 Tate v Barry (1928) 28 SR (NSW) 380

Michelle Daniels (first plaintiff) PARTIES : David Duarte (second plaintiff) Lynette Smith (defendant)

COUNSEL : Mr A J Bulley (plaintiffs) Ms E C Kennedy (defendant)

SOLICITORS : Toomey Pegg Drevikovsky (plaintiffs) Maurice Harrison & Associates (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST

04559/06 Michelle Daniels & Anor v Lynette Smith JUDGMENT 1 HIS HONOUR: The plaintiffs Michelle Daniels and David Duante are the administrators with the will annexed of the estate of their late mother Pamela Joyce Duante, who died on 11 June 2005. The defendant Lynette Smith lived in a close personal relationship with the deceased, and they operated in partnership a business, called "House of Dreams", which designed, made, sold and hired bridal and formal wear from a property at 120 Cameron Street, Rockdale, of which the deceased and Ms Smith were the proprietors, as tenants in common in equal shares.

2 The deceased was also the sole proprietor of land at 60 Harrow Road, Bexley, and Ms Smith was the sole proprietor of land at 128 Bay Street, Rockdale. The Bay Street property was apparently purchased for $180,000, of which $40,000 was provided from an account of the partnership business, and the balance was borrowed by Ms Smith from the National Australia Bank. The partnership borrowed funds from Citibank, on the security of the partners' Cameron Street property and the deceased's Harrow Road property.

3 It seems that even before the deceased's death the partnership business had declined and was trading badly, if at all. Default was made in respect of the Citibank loan, and Citibank instituted proceedings for possession of both the Cameron Street and the Harrow Road properties. Daniel Richards, a sibling of the plaintiffs, who is one of the five beneficiaries of the deceased's estate, has since paid the arrears under those mortgages, and Citibank has deferred taking possession of the properties, although it has already obtained judgment for possession of the Cameron Street property.

4 In the absence of any agreement between the partners to the contrary - and there is no evidence of any such agreement - their partnership was dissolved by the death of the deceased [Partnership Act 1892 (NSW), s 33(1)]. In those circumstances, each partner was entitled against the other to have the property of the partnership applied in payment of the partnership debts and liabilities, and thereafter in payment of such moneys as were due to the partners respectively, after deducting what may be due from them as partners to the firm; for that purpose, each partner was entitled to apply to the court to wind up the business and affairs of the firm [Partnership Act, s 39].

5 By summons filed on 31 August 2006 the plaintiffs claim declarations that the partnership was dissolved on 11 June 2005, an order that its business be wound up under the direction of the court, an order for the appointment of a receiver, and consequential orders relating to the appointment of the receiver.

6 It appears, from the transcript of proceedings before Palmer J on 7 September 2006, and from the arguments today, that the real issues in dispute have been, first, whether some means of realising the partnership assets short of appointment of a receiver could be found, so as to avoid the costs of a receivership, and, secondly, if a receiver were to be appointed, whether the receiver should be empowered not only to perform the usual functions of a receiver, but also to perform the functions normally conducted on an inquiry and taking of accounts before an Associate Judge. 7 In Tate v Barry (1928) 28 SR (NSW) 380, Long Innes J said: It must now, I think, be regarded as settled that in a suit instituted in Equity for the winding up of a partnership already dissolved, or for the dissolution of an admitted partnership in which it is clear that dissolution will be granted at the hearing, the plaintiff is entitled as a general rule, and practically as a matter of course, to the appointment of an interim receiver: Baxter v West (28 L.J.Ch. 169).

8 In Cuming v Hennessy [2005] NSWSC 1219 (28 November 2005) Young CJ in Eq described to the substantial cost of installing a receiver in a partnership with only modest assets and to the development of the law since 1928. His Honour referred to Davey v Donnelly (NSWSC, unreported, 16 May 1991 - BC9101992), in which McLelland J, as he then was, having acknowledged the rule that where there were proceedings for the winding up of a partnership, the existence and dissolution of which were not in contest, the plaintiff was entitled to have an interim receiver appointed almost as a matter of course - the rationale being that no partner had any greater right than the others to wind up the partnership affairs to the exclusion of the others - added that the court had an over-riding discretion in the matter, and for substantial cause shown would refuse, or limit the terms of, the appointment of a receiver. 9 Young CJ in Eq, in Cuming v Hennessy, also referred to Rowlands v MacDonald [2002] NSWSC 282, in which, after referring to Tate v Barry, Barrett J observed that though the case was one in which the conditions for the application of the general principles were satisfied, the remedy remained discretionary, and that, in the words of Powell J in Fitz-Gibbon v Khoury (NSWSC, unreported, 1 March 1985), the court must pay attention to the surrounding circumstances: This general rule notwithstanding, it is equally well established that it is not inevitable that, in any such case, an interim receiver and manager will be appointed, and that the Court retains a residual discretion as to whether any appointment should be made; one of the bases upon which, in an appropriate case, an appointment will be refused, is that the consequences of such an appointment will be 'ruinous' (see, for example, Walters v Taylor (1807)15 Ves 16; 33 ER 658; Tate v Barry (1928) 28 SR (NSW) 380; Sobel v Boston [1975] 2 All ER 282).

10 Barrett J went on to explain that despite such concerns, circumstances might justify the appointment of a receiver: [29] The "ruinous" concern manifests itself principally in cases where, following the dissolution which is the occasion for the application for appointment of a receiver, some or all of the partners will conduct business with the aid of the existing goodwill. In Henry v Stewart (unreported, NSWSC, 9 June 1995), a case involving dissolution of a partnership of solicitors where two groups intended to continue practising separately, Cohen J recognised as a factor material to the exercise of the court's discretion the "fact that the appointment of a receiver may cause unjustified concern to those who have dealings with the partners or their new firms". His Honour referred to Floydd v Cheney [1970] Ch 602 and Sobell v Boston [1975] 1 WLR 1587. These concerns play no part where, as here, the enterprise in which the partners have been involved will not be continued by any of them.

[30] In the present case, two particular factors point strongly towards the appointment of a receiver. The first is that the parties are in what can properly be regarded as a state of serious dispute making resolution through co-operation sufficiently problematic to warrant the introduction of a third party. The relevance of that factor to the exercise of the court's discretion is recognised in Wedge v Wedge (1994) 12 WAR 489. The second matter is the evidence suggesting that there may have been irregularities in the partnership's financial affairs, with accounting records misdescribing entries and the intermingling of partnership moneys with those of individuals. Possibilities of that kind were material to the decision to appoint a receiver in The Anderson Group Pty Ltd v Davies (2001) 19 ACLC 1112. The factors in both these categories to which I have referred must very seriously call into question the ability of the partners themselves to reach an accounting.

11 In Cuming v Hennessy, Young CJ in Eq concluded that these more recent cases revealed a modification of the approach enunciated in Tate v Barry and Davey v Donnelly, pointing out that in the current edition of Lindley & Banks on Partnership (London: Sweet & Maxwell 18th Edn, 2002) the rule was now expressed in these terms: Lord Lindley's use of the expression "almost as a matter of course" in relation to appointments following a general dissolution should not be taken too literally: there is nothing approaching a presumption that a receiver will be appointed in such a case and sufficient ground will always have to be shown, as the Court of Appeal made clear in Toker v Akgul (2 November 1995, unreported).

12 In the present case, the conditions for application of the ordinary principles are satisfied. Although the net assets are modest, factors similar to those which influenced Barrett J in Rowlands are present here. The evidence suggests that the partnership assets comprise little, if anything, more than the Cameron Street property (which might be worth between $550,000 and $750,000), and stock (which might be worth $35,000). The liabilities include the debt to Citibank (said to be at least $433,000), plus the amount which has been paid by David Richards in reduction of the Citibank loan (in excess of $50,000). It may be that the debts to Citibank are as much as $540,000. On any view there may be little, if any, assets left after the partnership assets have been realised and the liabilities paid. The amount of any surplus will no doubt be reduced further by the costs of a receivership. Nonetheless, one way or another, the partners or either of them are entitled to have the assets of the partnership applied to the partnership liabilities, and their respective entitlements to the balance, such as it is, worked out. Ultimately, I do not think that, in the absence of agreement, there is a practical alternative to the appointment of a receiver.

13 The ordinary course is for a receiver to be appointed to sell the assets and pay the debts, and for accounts to be taken and an inquiry held before an Associate Judge as to the assets, liabilities and respective interests of the partners.

14 Prima facie, there is much to be said for the view that it is preferable that the taking of those accounts be referred to the receiver - not only because it saves the resources of the court, but because despite the costs of a receiver, it is still likely to be less expensive a course than the taking of accounts before an Associate Judge. But the matter is complicated by the circumstance that it seems at least arguable that the partnership may have an interest in the defendant's Bay Street property, arising from the application of $40,000 of partnership moneys towards its purchase. There are separate proceedings in which the plaintiffs apparently assert that the defendant holds the Bay Street property on trust for them as beneficiaries of the deceased's estate. Ascertainment of the beneficial entitlements to the Bay Street property is inevitably intertwined with the taking of accounts in the partnership.

15 The pendency of the proceedings concerning the Bay Street property makes it premature to decide, at this stage, whether the taking of accounts should proceed in Court or be referred to a referee, rather than proceeding before an Associate Judge. 16 My orders are:- 1. Declaration in accordance in terms of para 1 of the Summons.

3. Order in terms of para 3 of the Summons, omitting "or some other fit or proper person".

5. Order in accordance with para 5a of the Summons.

(a) to sell the assets of the partnership including the land at 122 Cameron Street, Rockdale, upon the following terms and conditions: (1) that the sale be under the control and under the direction of the Receiver; (2) that the sale be by public auction; (3) liberty to any party to bid at the auction; (4) there be liberty to apply in the event of any difficulty or question arising in the conduct of the sale. (b) to invest the nett proceeds of sale of the partnership assets, following repayment to Citigroup Pty Limited of all amounts due to it on accounts 767260284 and 810807107 and payment of any other liabilities of the partnership (including the reimbursement to David Richards of all amounts which he has paid (said to be $50,020) and any further amounts which he might pay, until completion of the sale of Cameron Street, in respect of the partnership's liability to Citibank, but excluding liabilities of the partnership to either partner), in any mode of investment permitted by law for the investment of trust funds, pending the determination of the parties' respective entitlements to such proceeds.

8. Order that an account be taken and an inquiry be held as to: (a) all the dealings and transactions of the said partnership and of each of the partners in relation to the said partnership; (b) what are the assets and liabilities of the said partnership, and in particular the application of partnership moneys towards the purchase of the property situate at and known as 128 Bay Street, Rockdale, in the State of New South Wales; and (c) what are the respective interests of the partners in the said assets.

9. Reserve further consideration of whether the accounts should be taken and inquiry held before an Associate Judge or should be referred to the Receiver, or some other and if so what referee.

10. Order that the costs of the plaintiff and defendant be paid out of the assets of the partnership.

11. Direct that these orders be entered forthwith. ********** 17 The plaintiffs seek, in lieu of the costs order I have just pronounced, an order that the defendant pay the plaintiff's costs. 18 As Lindley points out [EH Scamell & RC I'Anson Bank (Eds), Lindley on the Law of Partnership (London: Sweet & Maxwell, 15th Edn, 1984), p645], in actions for an account of partnership dealings and transactions, the ordinary rule once was to give no costs to either party up to the decree directing the account, a rule which was not departed from except in cases of gross misconduct on the part of the defendants. The modern rule is that the costs of an action for dissolution from its commencement are paid out of the partnership assets, unless there is some good reason to the contrary [Hamer v Giles [1879] 11 Ch D 942], except where the action was really instituted to try some disputed right, in which case costs will follow the event.

19 On the question of costs an amount of correspondence has now been put before me. In a letter of 6 September 2006, the day before the matter was last before Palmer J, the defendant proposed placing responsibility for the sale of partnership assets in the hands of real estate agents and stock auctioneers, conceding that, if agreement could not be reached on any of those proposals, resort would have to be had to the appointment of a receiver to sell the property and stock. That proposal was rejected by the plaintiff by letter dated 6 September 2006, who insisted upon the appointment of a receiver, whilst acknowledging the importance of keeping the costs of the receivership to a minimum.

20 By letter dated 11 September 2006, the solicitors for the defendant reiterated that the net assets of the business were insubstantial, and proposed that the real property be placed on the market for sale, providing four market appraisals and offering to agree to the appointment of any one of the four agents who had provided them. The same solicitors wrote again on 12 September 2006, yet again reiterating that it was in the interests of the parties to sell the property and stock by agreement rather than incurring the costs of appointment of a receiver, and observing that, failing such agreement, they proposed the appointment of a receiver limited to selling the property and the stock, with the proceeds to be placed in trust to allow the court to make the final determination as to how they should be applied.

21 The result which has been achieved today substantially accords with the fall back position proposed in the defendant's solicitors' letter of 6 September 2006, reiterated on 11 September 2006 and reiterated again on 12 September 2006.

22 On the issue which has been substantially argued before me today - namely, whether the proceeds should be invested to abide determination through the court's ordinary process of ascertaining the parties' respective entitlements, or whether the receiver should be effectively made a liquidator and empowered to determine the competing claims of the parties - the plaintiff has failed, and the defendant has succeeded.

23 It is only because I do not see any signs of sufficient "misconduct" to justify departing from the ordinary rule - that the costs of the action in a partnership matter are paid out of the partnership assets - that I do not make an order that the plaintiff pay the defendant's costs of the proceedings today.

24 Accordingly, the order which I have already pronounced - that the costs of the proceedings to date be paid out of the partnership assets - will stand. **********

12/03/2007 - Change to cover page - Paragraph(s) Legislation & Cases amended

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