Farrow-Pryke v Johnson

File Number(s): 2023/207069

Publication restriction: Nil

JUDGMENT

Introduction

1. These reasons record a sad breakdown between the relationship of two sisters following their mutual involvement in a business at Avalon, involving two commercial transactions and their subsequent inability to agree following those transactions as to their respective financial entitlements.

2. The amount in issue is extremely small in the context of what is effectively commercial litigation. However, as the parties have been unable to come to any agreement, it is the Court's duty to resolve the matter on a final basis.

3. The Plaintiff (“Natasha”) and the First Defendant (“Elyse”) are the children of the Second Defendant – Mr Farrow-Pryke. I will refer to Natasha and Elyse by their first names without intending any disrespect to either.

4. Prior to July 2014, Elyse owned and conducted a business known as ‘Freckles For Kids.’

5. In July 2014, there was a transaction, described by Natasha as a “sale of business” and by Elyse as a “financial agreement,” concerning the business. After that transaction, for all intents and purposes, the business previously conducted by Elyse was conducted by Natasha. There is a large issue between them as to whether the transaction is properly described as a sale of business or a financial agreement. I do not think what the agreement is called matters. The fact is there was an agreement, and its terms and effect are what they are.

6. After the transaction was completed, because there was a trading overdraft account in place in Elyse's name with the National Australia Bank (“NAB”) and because Natasha did not want to, or was not able to, obtain credit herself, that account remained in Elyse's name. The “ownership" of the business name itself – “Freckles For Kids" – was in Mr Farrow-Pryke’s name and, if this is a legal possibility, the “ownership” of the Australian Business Number (“ABN”) remained in Elyse’s name.

7. Thereafter, the business name remained registered in the name of Mr Farrow-Pryke, and for the purpose of taxation, the taxation affairs of the business were returned as if the taxable income of the business formed part of the affairs of Elyse. This had the consequence that tax assessment notices were issued to Elyse but paid by the business from the NAB account, and from time to time she received tax refunds. As between Elyse and Natasha, those taxation liabilities and assets were treated as if they were Natasha’s and were expected to be paid from and into the trading account. Banking with the NAB also remained in the name of Elyse but was operated by Natasha.

8. The terms of the agreement between Natasha and Elyse were commendably brief, but unfortunately not complete. The agreement was styled as a “financial agreement" and was in the following terms:

“Financial Agreement made between Elyse Johnson and Natasha Farrow-Pryke on the 30****th of June 2014, in relation to Freckles for Kids, Avalon.

On the 30th of June 2014, the value of the stock on hand at the shop was $85,000. Therefore Natasha took over the payments on the two accounts that equal this amount in total.

1. Firstly the Loan on the business, which was $33 300DR and secondly the Trading Account, which was $51 700DR (both values are approximates however the two accounts equal $85 000 in total.) Natasha now pays off these two accounts rather than paying for the stock that she has inherited.

2. Elyse has also given Natasha permission to use the Business Mastercard ending in 7668. which was made to have a nil balance on the of July.

3. Natasha paid Elyse $6000 (in July 2014) towards the Bond on the Tenancy Agreement. The remaining $3000 will be paid to Elyse before the end of November 2014. Therefore if Elyse receives the Bond back from the Landlord (totalling $9000), she will owe this to Natasha. This will be either in April 2016 when we decide to renew the Option on the Lease, or on a date that we terminate the Lease after this time.

4)Natasha has agreed to make all payments relating to the Tenancy Agreement on the premises. (ie rent).

5)Because the business (Freckles for Kids) should make a profit, Natasha has agreed to pay any tax bill issued to Elyse since the business is still in her name. This includes any tax payable if the business is sold in the future.

6)The Goodwill on the business can be paid over five years at a total of $5000 per year, if the business Is profitable, at the end of each financial year.”

9. From June 2014, the business was conducted by Natasha for about 4 years and various payments made by her to Elyse. In August 2018, the business was sold to a third-party by Natasha. However, that sale was also nominally by Elyse and Mr Farrow-Pryke, as the business name, the ABN, and the NAB account all remained in their names.

10. The net proceeds of that sale, after payment of all external costs, was $64,454.26. It is the competing claims of Natasha and Elyse to that amount that is the issue for determination.

11. That money has been placed by the parties into a solicitors’, (“E&A Lawyers”), trust account upon the following terms:

“B. SCOPE OF WORK

What is the Scope of the Work that We Will Do for You?

The work that We have been instructed by You to do is as follows:

- Holding funds in Our Trust Account following settlement of the business sale

- Holding funds in Our Trust Account until consistent instructions are received from all of You as to the distribution of funds

- Addressing requests as to the distribution of funds held in Trust based on consistent instructions being received from all of You

- Distributing the fund held in Our Trust Account once we receive consistent instructions from All of You

- Arranging to pay the funds held in Our Trust Account into Court if We reasonably believe that We are unable to receive consistent instructions from all of You within a reasonable time

(collectively referred to as the “Work”)”

12. As Natasha and Elyse have been unable to agree as to the distribution of that fund and E&A Lawyers have received no unanimous instructions as to distribution, the monies remain with E&A Lawyers.

The pleadings and evidence

13. Natasha was previously self-represented. It is fair to say that her pleading and affidavit evidence was voluminous, repetitive, confusing, and to a large extent misconceived. It included many and varied legal claims against Elyse.

14. Shortly prior to the hearing, Mr Creais, solicitor, accepted a retainer to appear for Natasha on a “pro-bono" basis, as part of the scheme provided by the Law Society of New South Wales.

15. The Court is extremely grateful to Mr Creais for his assistance in the presentation of the claim, which has saved, not just the Court, but both Natasha and Elyse an enormous amount of time and energy. His conduct is in the very best traditions of the legal profession and ought not pass unnoticed or unappreciated.

16. Mr Creais effectively abandoned the pleaded case, and in particular abandoned the claims based on negligence, embezzlement, breach of fiduciary duty, partnership, tortious conspiracy, and/or defamation.

17. What that left was a claim in contract, which boiled down to two issues, one of fact and one of characterisation.

18. Elyse was represented by Mr Gledson of counsel who also did a sterling job in narrowing the issues and conducting the matter in a sensible and efficient way in the best traditions of the Bar. His client was prosecuting a Cross-Claim for $15,000 for alleged unpaid goodwill. Upon proper analysis, this claim itself was probably misconceived, as it formed just one part of the central issue, which is how is the money held by E&A Lawyers to be distributed, effectively the settling of accounts between them.

The real issues in dispute

19. Ultimately, Mr Creais submitted, and Mr Gledson accepted, that the real dispute boiled down to two issues, the first being whether Elyse was entitled to $15,000, being unpaid amounts of goodwill under the original agreement. The second being whether Natasha is entitled to a credit for monies that were paid by Elyse from the NAB account to her accountant – Trumans – for accounting work. Those issues having been identified, I think it best to abandon reference to the Pleadings and simply decide those issues.

20. The alleged unpaid goodwill, amounts to $15,000 and the second issue, being the invoices to Trumans, amounts to $12,870.

21. Leaving aside those two issues, the parties are in agreement that, of the $64,454.26 held by the solicitors, Elyse is entitled to payment of $11,849.76.

22. Finally, there are issues as to what actual orders I should make after I resolve those two questions. The problem is that E&A Lawyers are not joined as a party and, in any event, this Court has limited jurisdiction. I will return to what should happen next at the conclusion of these reasons.

23. Dealing then with the two issues in dispute.

Unpaid goodwill

24. As can be seen from the terms of the 2014 contract, Clause 6 provided that what was described as “goodwill on the business" would be paid by Natasha to Elyse over five years, at $5,000 per year if the business was profitable at the end of each financial year.

25. There is no issue but that the business was profitable during that period. The question of fact is whether Natasha paid to Elyse three amounts of $5,000, being for the years 2017, 2018, and 2019. Natasha asserts that those amounts were paid either by cash payments or an agreed set off (in relation to the 2019 payment).

26. Elyse denies receiving the three payments at all.

27. Both Elyse and Natasha gave evidence and were cross-examined. They each presented as forthright, perhaps strident, and more than a little angry at their sister. All of this is understandable because it is clear to me that they both believe, to a high degree of certainty, in the truth of what they were saying in relation to these contested payments, the accountant’s fees, and all other aspects of their respective evidence.

28. There is some contemporaneous material, although it is confusing and not entirely consistent. Taken as a whole, I consider it is inconsistent with Elyse’s contention that the goodwill payments remain outstanding. In particular, I am referring to an email Elyse wrote in October 2019 to the bookkeeper of the business, asserting with precision why it was that she contended that, as at that date, she was owed $11,849.76.

29. There is no mention in that document, or any other document created contemporaneously, consistent with the proposition that Elyse was also owed, at that date, $15,000 for three outstanding instalments of goodwill payments.

30. Elyse was cross-examined as to this apparent inconsistency. Her explanation was that she had given up on trying to get Natasha to pay her any outstanding amounts due under the contract, but rather was focusing on what she saw as being left out of pocket, being the liability that she actually had to the NAB.

31. Whilst that explanation is perhaps plausible, I consider it unlikely that in circumstances where Elyse was confidently, and I should say assertively, putting forward an amount that she said she was owed, why she would not at that time (in light of the fact that the very topic of the correspondence was how a final distribution of money as between the sisters ought occur) at least point out that she was not asking for and therefore giving up a legitimate claim for $15,000. I think it is much more likely that she would have claimed that amount of money or at least pointed out that she was not claiming it even though it was due and unpaid. The fact that she did not leads me to conclude that it is more probable than not that Natasha's version of events, that is that the $15,000 had been paid either by cash payments or agreed set off prior to the date of that email, is correct.

32. Accordingly, I am not satisfied on the balance of probabilities that Elyse is entitled to $15,000 for unpaid goodwill instalments under the 2014 agreement.

Trumans accounting work

33. Turning then to the expenses of the accountant.

34. The invoices are dated 24 October 2018 ($2,200), 29 April 2019 ($5,720), and 26 August 2019 ($4,950). They were all paid by Elyse from the trading account.

35. Natasha's submission is that they were not a proper expense of the business, their payment was made without her authority, and accordingly, there is no obligation on the business to account to Elyse for those monies.

36. This question is difficult to resolve. It is likely that some work, the subject of the invoices, was referable to the business. The lack of specificity of work done in the invoices is, to say the least, unhelpful. The problem arises, because Trumans were both Elyse's accountants herself and also were, according to Elyse, at the time carrying out accountancy work on behalf of the business. There are three objective matters which I think are problematic to Elyse’s claim here. Firstly, there is a history after Elyse had taken over the business where Trumans were carrying out accounting work, which accounting work was not being charged to the business but was being paid for by Elyse’s husband’s company. Secondly, it is quite clear that even if Trumans were doing some work on behalf of the notional “business", they were also carrying out other work on behalf of Elyse. No attempt has been made by Elyse to apportion any of these amounts. The third is that Natasha at the same time was paying her accountant for work, some of which was referable to the business. She has never charged any part of those invoices to the business.

37. I am not satisfied on the balance of probabilities that the various invoices paid to Trumans by Elyse are properly chargeable to the business and therefore, Natasha is entitled to a credit for that amount.

Conclusion

Resolution of respective debt claims

38. For those reasons, I am not satisfied that Natasha did not pay the $15,000 goodwill amount and therefore find that Elyse has failed to prove a liability of Natasha in that amount and secondly, I am not satisfied that the various invoices of Trumans represent proper expenses of the business and therefore they are to the account of Elyse.

39. What this means as a matter of arithmetic is that I am satisfied that, as between Elyse and Natasha from the amount held in trust by E&A Lawyers, Natasha is entitled to the whole amount, and is owed $1,020.24 by Elyse being the difference between the amount paid by Elyse to Trumans, and the amount otherwise agreed to be payable to Elyse.

What orders should be made

40. There are issues here because firstly, E&A Lawyers are not a party to the proceedings. Secondly, it is clear to me that that E&A Lawyers are holding the monies on trust for each of the parties on terms that the monies be held unless and until they receive unanimous instructions from Natasha, Elyse, and Mr Farrow-Pryke as to their distribution.

41. During the course of the hearing, there was some correspondence, effectively from me via Natasha’s solicitor to E&A Lawyers, where I asked them if they had formed the following state of mind:

“Arranging to pay the funds held in Our Trust Account into Court if We reasonably believe that We are unable to receive consistent instructions from all of You within a reasonable time”

42. It seemed to me that, if E&A Lawyers formed that state of mind and took steps to pay the money into Court, then, by reference to the last term of the Arrangement set out at paragraph [11] of these reasons, the intention of the parties was that, at that point, the trust would collapse, the monies would be in the custody of the Court, the Court would then determine any competing claim between Elyse and Natasha as to the proper distribution of those monies.

43. However, perhaps because E&A Lawyers were not actually in Court, I feel that there was some miscommunication. It seems likely that E&A Lawyers have formed the view or understanding that, if I make a finding as to how the monies are to be distributed, then the consequence of that finding will be that Natasha, Elyse, and Mr Farrow-Pryke will give a unanimous direction to E&A Lawyers consistent with that finding.

44. That may be so, but there is a risk that they will not. Perhaps I could make an order in the nature of a mandatory injunction that they do so. If they do not give such an instruction, it would seem to me inevitable that E&A Lawyers ought pay the monies into Court, thus bringing to an end the trust, and I will make orders for the payment out of that money consistent with these reasons.

45. Because of this complexity, I will refrain from making final orders at this time.

Interest and costs

46. I did not hear any argument as to interest and there will obviously be issues as to costs as, unfortunately, the end result of this decision is very close to a proposal that was put forward by Elyse but refused by Natasha, to the effect that, from the monies held, Elyse would receive $10,000 with Natasha to receive the balance.

47. That proposal was rejected by Natasha prior to the litigation commencing. That being said, on the two issues that were ultimately litigated before me, Natasha has been entirely successful.

48. I will say nothing further, other than I will hear the parties on the question of costs.

49. The only order I will make today is to stand the matter over for directions to a date next week for the purpose of either making final orders, or making such directions as appear necessary to enable me to resolve the matter to finality. I will also hear submissions on interest and costs at that time.

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Amendments

02 April 2025

Amendments made, pursuant to the Slip Rule, as consented to by the parties.