Garcia v Delfino

Supreme Court of NSW|2003-11-05|Before: Barrett J, Santow J

CITATION : Garcia v Delfino [2003] NSWSC 1001 HEARING DATE(S) : 09/09/03, 10/09/03, 11/09/03, 24/09/03, 25/09/03 JUDGMENT DATE : 5 November 2003 JURISDICTION: Equity Division JUDGMENT OF : Barrett J DECISION : Plaintiffs' notice of motion dismissed. First defendant's notice of motion dismissed.

CATCHWORDS : PROCEDURE - Supreme Court procedure - reference under Part 72 rule 13 - whether orders previously made were orders under Part 72 rule 13 - whether reports of accountant are capable of adoption by court - whether court may subject parties to regime in accountant's reports in exercise of inherent jurisdiction - PARTNERSHIP - dissolution - application by one partner for order that others account - whether grounds for account on wilful default bases shown - whether the particular order to account should be made LEGISLATION CITED : Supreme Court Rules, Part 72 rules 2, 13 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 Buckley v Bennell Design & Constructions Pty Ltd (1978) 140 CLR 1 Gava v Grljusich [1999] WASC 13 CASES CITED : Landsal Pty Ltd v REI Building Society (1993) 113 ALR 643 Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146 Najjar v Haines (1991) 25 NSWLR 224 Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 Daniel Garcia - First Plaintiff Rubens Locaputo - Second Plaintiff PARTIES : Locaputo-Garcia & Co Pty Ltd - Third Plaintiff Daniel Delfino - First Defendant D&D Property Investments Pty Limited - Second Defendant FILE NUMBER(S) : SC 3167/01 COUNSEL : Mr T A Hall - Plaintiffs Mr A T McInnes QC/Mr H W D Stowe - Defendants SOLICITORS : Norman Waterhouse Lawyers - Plaintiffs Acuiti Legal - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3167/01 - DANIEL GARCIA & 2 ORS v DANIEL DELFINO & ANOR JUDGMENT 1 On 10, 11, 24 and 25 September 2003, I heard two notices of motion, one filed by the plaintiffs and the other filed by the first defendant. The relief sought in the notices of motion will be better understood in the context of a description of the substantive proceedings. 2 The proceedings were commenced by summons filed on 20 June 2001. By that summons, the plaintiffs sought the appointment of a receiver and manager of the partnership business of Delfino & Delfino, solicitors, situated at Suit 1, 2 William Street, Fairfield, together with ancillary orders, including the usual order that an account be taken and inquiry held as to the dealings and transactions of the partners and the partnership and the assets and liabilities of the firm The first and second plaintiffs, Mr Garcia and Mr Locaputo, and the first defendant, Mr Delfino, had entered into partnership on 1 January 1999. Mr Delfino and his brother, both solicitors, had previously conducted a practice in partnership. Upon the withdrawal of the brother, Mr Delfino, Mr Garcia and Mr Locaputo became partners. Mr Garcia and Mr Locaputo are not solicitors. They are accountants. The partnership was thus of a multi-disciplinary kind, although conducting a legal practice. Mr Locaputo was in the process of qualifying as a conveyancer. It was agreed, for the purposes of the hearing of the two notices of motion, that the partnership was dissolved on 8 June 2001. 3 The summons to which I have referred was filed in court twelve days after the dissolution when the matter came before Santow J as Duty Judge. The summons was returnable on 26 June 2001. On that occasion, Santow J directed that the matter return to the Duty List on 28 June 2001 if the parties' best endeavours had not produced a resolution in the meantime. On 29 June 2001, his Honour made orders which it is necessary to set out in full: "By consent or without opposition and without admissions, I make the following orders and directions, such to be without prejudice to the Plaintiffs' capacity to pursue their summons to the extent and for the period that these orders do not preclude that and without prejudice to the Defendants' capacity to file a cross-claim, and their capacity to pursue it to the extent and for the period that these orders do not preclude that: 1. By consent, the Plaintiffs and the Defendants appoint Mr Andrew Fraser of Fraser Hall, Chartered Accountant, 7th Floor 105 Pitt Street, Sydney, to report to the parties and to the Court as soon as possible and in any event not later than 27 July 2001 with a report as to the matter in (a) below first, as to the following; (a) how the existing partnership known as Delfino & Delfino may be carried out during a transition period for the beneficial dissolution of that partnership and how best that dissolution may be effected; (b) the respective assets and liabilities, income and expenditures and their respective values including of goodwill of the said partnership and on the basis that the said Accountant may seek the assistance of the Law Society of New South Wales or as it may nominate, as to such valuation and as to the best means of effecting a beneficial dissolution so that all legal professional requirements are complied with; Reference to the 'said partnership' shall include the service company Delogar Pty Limited. 2. The foregoing order is made noting the undertaking by the Plaintiffs and the Defendants to provide to the said Accountant all necessary assistance and information including books and records and records and data in electronic form and without limiting the foregoing the Plaintiffs undertake to provide to the said Accountant all information, books and records as aforesaid as may be necessary to verify whether the Third Plaintiff is in recept of fees or other assets attributable to the said partnership and the amount, value and identity of such. 3. The Plaintiff and the Defendants do pay the remuneration of the said Accountant on a 50-50 basis. 4. The Defendants are to permit the Plaintiffs to occupy three offices of the suite of offices currently situated at 2 William Street, Fairfield, being the offices outlined in yellow on the Plaintiffs' undertaking that it will make available one of those offices if requested by the said Accountant for that Accountant's use exclusively during the undertaking of the Accountant's referred tasks the subject of the earlier orders. 5. Occupation as in para 4 above shall be facilitated by the Defendants providing a key both for the entrance to the relevant suites of offices and a separate key to the actual offices themselves, such to be done by 2 pm Monday 2 July 2001 at the latest. 6. Each of parties undertake to each other and to the Court that (a) they will facilitate the respective shared occupation of the premises including any common facilities without interfering with that occupation; (b) they will respect the confidentiality of each other's books and records but on the basis that until the said partnership is dissolved the said books and records of the said partnership shall be made available to each partner on request but on the basis that such requests and making available will be done in a co-operative manner. 7. During the period to the expiry of 27 July 2001 neither party shall, without leave of the Court, take any further step with respect to the Plaintiffs' Summons and the Defendants' Cross-claim including any Defence other than the filing and service of affidavits and in the case of the Defendants, their Cross-claim and any Defence. 8. Leave to apply on short notice. 9. Rent and outgoings shall be paid by the Plaintiffs and Defendants so that it is paid in the ratio of their respective occupations to the total area occupied, subject to any different equitable apportionment or adjustment in the said partnership books as may be required by the said Accountant taking into account the terms of the existing partnership and the fact that it is to be dissolved. Such rent and outgoings are to be paid by both parties by cheque in favour of the said Accountant or as he directs. 10. In relation to telephone lines and facsimile transmission lines the Plaintiffs will co-operate with the Defendants and vice versa for the Plaintiffs to have, to the extent practicable, reconnection directly to the Plaintiffs and to the extent that that is not practicable the Defendants will facilitate access via any central facility, with the cost of such reconnection being borne by the Plaintiffs and the cost of such facilitation being borne by the Defendants. 11. Costs reserved. It is noted in relation to the foregoing orders and undertakings that: (a) the orders contained in paras 4 and 5 are opposed by the Defendant but they submit to those orders; (b) the orders including the matters the subject of the said Accountant's reporting are without prejudice to the submission of the Plaintiffs that the said partnership has not been dissolved and the submission of the Defendants that the said partnership has been dissolved, it being understood that the said Accountant is reporting as to the bests means of effectuating a beneficial dissolution in the sense of carrying it to completion for the best advantage of both Plaintiffs and Defendants." 4 Mr Frazer, the accountant named in the orders of 29 June 2001, in due course produced two letters. The first, dated 3 September 2001, was addressed to the Associate to Santow J, to the plaintiffs' solicitor and to the defendants' solicitor. The second, dated 5 September 2001, was addressed to his Honour's Associate and copied to the parties' solicitors and counsel. 5 On 7 September 2001, Santow J made further orders. Again, it is appropriate to set out the orders in full: "By consent and without admissions: 1. Direct the accountant appointed by the Court on 29 June 2001, Mr Andrew Frazer, to undertake the tasks identified in his letter to the Court dated 5 September 2001 and to report to the Court in relation to those issues by no later than 5 November 2001. 2. Note the agreement of the parties that Mr Frazer's reasonable remuneration may be paid in the first instance out of the assets of the former partnership known as Delfino & Delfino (as defined in paragraph 7) but without prejudice to the right of any party to claim at the final hearing that Mr Frazer's fees should be borne by some other entity or in some other manner. 3. Note the agreement of the parties that Mr Frazer is authorised on their behalf to request and obtain any documents or records relating to any of the parties or of Delogar Pty Limited from any third party and to issue an effectual receipt on behalf of any of the parties or Delogar Pty ltd for any such document or record. 4. Order that orders 4, 5, 6(a) and 10 made by the Court in these proceedings on 29 June 2001 be revoked. 5. Note the undertaking of Mr Daniel Delfino to the other parties to make such office space and facilities available to Mr Frazer as he may reasonably require for the purpose of finalising his report referred to in Order 1 at the offices of Delfino and Delfino at 2 William Street Fairfield (the 'premises'). 6. Order the plaintiffs to deliver to the second defendant by no later than 4 pm on 14 September 2001 all remote control units and keys to the security gate to the parking area at the premises in the possession or control of either of them. 7. Note the undertaking of each of the first, second and third plaintiffs and the first defendant to the Court not to dissipate the asserts of the former partnership which existed between the first and second plaintiff and the first defendant and which was known as 'Delfino and Delfino' (the 'former partnership') except in the ordinary course of business of that partnership. 8. With respect to the Notice to Produce issued by the first defendant to the plaintiffs and returnable on 13 September 2001, note the undertakings of the plaintiffs to the Court as follows: a) to produce to the offices of the plaintiffs' solicitors for the inspection of the first defendant's solicitors on a confidential basis the documents referred to in paragraph 2 of the Notice to Produce on or before 13 September 2001; and b) to produce to the first defendant's solicitors the documents referred to in paragraphs 3, 5, 7(a) and (f), 8 and 9 of the Notice to Produce on or before 13 September 2001. 9. Declare that the plaintiffs have no rights to occupation of the premises, but without prejudice to the rights of the plaintiffs to claim at the final hearing that they are entitled to damages for the wrongful termination of the lease over the premises dated 8 January 1999 between the first plaintiff, second plaintiff and first defendant as lessees and the second plaintiff as lessor. 10. Direct that the matter be stood over to 14 November 2001 at 9.30 am before Santow J. 11. Order that the notice of motion filed in Court by the second defendant on 7 September 2001 be stood over to 14 March 2001 [sic]. 12. Costs reserved." 6 Further work was in due course carried out by Mr Frazer. He reported the result by letter dated 28 November 2001 addressed to the Associate to Santow J and, as previously, copied to the parties' legal representatives. Meanwhile, Santow J ordered on 14 November 2001, on the application of the second defendant, that the proceedings be referred for mediation. A mediation occurred in October 2001 but was unsuccessful. 7 To complete this description of context, I should refer to the cross-claims. By a cross-claim filed on 6 August 2001, Mr Delfino seeks a declaration that the partnership was dissolved on 8 June 2001, an order that the partnership be wound up under the supervision and direction of the court and an order that accounts of the partnership be taken under the supervision and direction of the court, together with ancillary relief. There is also a claim for a declaration that the partners have agreed to divide certain assets in a certain way. The second cross-claim was filed on 24 August 2001 by the second defendant, D & D Property Investments Pty Ltd, a company owned by Mr Delfino and his brother. It seeks a declaration that a lease in favour of the partners of property owned by the company has been validly terminated. 8 That brings me to the two notices of motion that are before me for determination. The plaintiffs' notice of motion was filed on 20 July 2002 and seeks the following order: "Pursuant to Part 72 Rule 13 of the Supreme Court Rules, the Court adopt the whole of the reports of Mr Andrew Frazer, Chartered Accountant, dated 3 and 5 September 2001 and 28 November 2001." 9 The second notice of motion is that of the first defendant, Mr Daniel Delfino. It was filed on 13 August 2002. Mr Delfino seeks: "1. Direction that the First and Second Plaintiffs shall on or before a date to be specified by the Court file and serve on the First Defendant: (a) Both: (i) detailed accounts of all the dealings and transactions of the Partnership and of the Partners and each of them and of Delogar Pty Limited ACN 085 606 222 and of the Third Plaintiff in relation thereto from the commencement of the Partnership up to and including 8 June 2001; (ii) detailed accounts of the dealings and transactions which ought to have been received and/or retained by the Partnership but for the wilful default or neglect by one or other of the Plaintiffs or their servants or agents, up to and including 8 June 2001, on the basis that: (iii) the accounts be verified by the affidavit; (iv) the accounts shall specify in respect of each payment or receipt the date and amount thereof, to whom the amount was (or should have been) paid and the purpose or account for or to which the amount was paid or received (or should have been paid or received) as the case may be; (v) the items in the accounts are to be number consecutively. (b) Their detailed statements of what they claim to be: (i) the assets and liabilities of the Partnership as at 8 June 2001; (ii) the respective interests of the Partners therein having regard to the said liabilities and to all other relevant matters. The said statements of assets and liabilities respectively shall specify in respect of each item its nature and its value or amount and shall clearly identify and describe each item. 2. Direction that the First Defendant be at liberty within 30 days after service upon him of the said accounts and statements to: (a) serve written notice on the Plaintiffs, requiring that specified items in the accounts be vouched; (b) apply to the Master, Equity Division to examine the First Plaintiff and/or Second Plaintiff viva voce or upon interrogatories in respect of the said accounts and statements. 3. Direction that, if the First Defendant serves a notice requiring specified items in the accounts to be vouched, the Plaintiffs must within 14 days file a further affidavit, exhibiting the vouchers relating to the specified item. 4. Direction that the First Defendant within 30 days after service upon him of the said accounts and statements or within 30 days of the conclusion of the examination of the First Plaintiff and/or Second Plaintiff referred to in Direction 4, have liberty to file and serve upon the First Plaintiff and/or Second Plaintiff his surcharges, falsifications and objections (if any) thereto. 5. Liberty to any party to have the matter relisted for the purpose of fixing a date to proceed upon the enquiry after compliance with the foregoing directions upon 7 days' notice. 6. Direction that the evidence to be used on the said enquiry be affidavit evidence. 7. Liberty to apply." 10 It is appropriate to deal first with the plaintiffs' notice of motion since, if the relief they seek is granted, there may be no room or need for the relief the defendants seek. 11 At the heart of the claims in the plaintiffs' notice of motion is the proposition that the three documents produced by Mr Frazer (or some one or more of them) constitute a "report" to which Part 72 rule 13(1) of the Supreme Court Rules applies and which is capable of adoption, variation or rejection. Implicit in that is the further proposition that there were, in terms of Part 72 rule 2(1), "orders for reference to" Mr Frazer, the reference being for "inquiry and report" by Mr Frazer "on the whole of the proceedings or any question or questions arising in the proceedings". The question of the validity of these propositions necessitates an examination of both the orders made by Santow J and the documents produced by Mr Frazer. I deal first with his Honour's orders. 12 Order 1 of 29 June 2001 was an order directed to the parties. It was an order that "the Plaintiffs and the Defendants appoint Mr Andrew Frazer …". The function envisaged for Mr Frazer, as stated in that order (being the function the parties to the litigation were to appoint him to perform) was "to report to the parties and to the Court …". Two matters were specified as matters on which the parties were to instruct Mr Frazer so to report. The first matter was "how the existing partnership … may be carried out during a transition period …". The second consisted of two elements, being "the respective assets and liabilities, income and expenditures and their respective values …" and "the best means of effecting a beneficial dissolution so that all legal professional requirements are complied with". 13 In his letter of 3 September 2001, Mr Frazer made a number of statements under a heading "Conclusions and Observations". He

(a) said that subject to "ongoing verification by or on behalf of the parties the processes in place for winding down the partnership affairs are appropriate";

(b) expressed an opinion as to the value of goodwill;

(c) commented on the impact on the goodwill calculation of any reimbursement of expenses or contribution to income by the plaintiffs;

(d) said that he had not considered the tax consequences of any purchase and sale of goodwill or work in progress;

(e) listed matters that needed to be dealt with to finalise the books and records of the partnership and the associated company Delogar Pty Ltd, including six requiring "agreement of the parties";

(f) made observations on the effect of the departure of Mr Delfino's brother in 1999 and his appearing "to have taken up where he left off" some two and a half years later. 14 The purpose of Mr Frazer's letter of 5 September 2001 is stated in its second paragraph where, after referring to the letter of 3 September 2001, he said: "With respect to the matters raised in my report and the statements contained in the conclusions and observations section of the document, I wanted to set out in this document a commercial manner in which I believe that the dispute between the parties may be progressed." 15 After discussing particular issues, Mr Frazer said: "Should there remain matters of disagreement between the parties it will be necessary to seek further guidance from the Court. It is respectfully my view that it would assist the Court and the parties were the Court to make orders addressing the finalisation of these accounts as described herein." 16 The orders made by Santow J when the matter came back before the court on 7 September 2001 have been set out in full. Order 1 was expressed as a direction that Mr Frazer do two things, viz, "undertake the tasks identified in his letter to the Court dated 5 September 2001" and "report to the Court in relation to those issues by no later than 5 November 2001". Mr Frazer's further report was conveyed in his letter of 25 November 2001. In that letter Mr Frazer commented on a number of specific matters. Having done so he continued: "There are significant and numerous differences between the claims of the parties, most of which impact on the accounting records. As described herein there remain for resolution a few major items whilst others have been adjusted. It is my view that the financial statements attached are appropriate to support a distinction being made between a few major items for further consideration and common ground provided by the updated financial statements. Subject to the Court's determination and/or the outcome of negotiations between the parties as to amounts excluded by me in my preparation of the financial statements and similar fates to any appropriation of mine which is unacceptable to any party. I submit the attached financial statements as the basis for progressing the negotiations between the parties."

Mr Frazer went on to express certain opinion as to partners' balances based on the financial statements attached to his letter, as well as commenting further on goodwill. 17 The defendants submit that none of the orders made by Santow J was an order of the kind referred to in Part 72 rule 2. That submission is put on the basis that the orders did not contemplate "inquiry and report" by Mr Frazer on either the "whole of the proceedings" (that is, the proceedings delineated by the plaintiffs' summons filed on 20 June 2001 and the cross-claims of 6 and 24 August 2001) or on any "question" (as defined in Part 72 rule 1) arising in those proceedings. I must say at once that I consider those submissions to be correct. The history of what is now Part 72 of the Supreme Court Rules is referred to in the judgment of Gleeson CJ in Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 and traced in greater detail in judgments of members of the High Court in Buckley v Bennell Design & Constructions Pty Ltd (1978) 140 CLR 1. It is clear from both the history and the terms of Part 72 itself that the function of a referee is as described by Clarke JA in Najjar v Haines (1991) 25 NSWLR 224 at 246: "The referee simply reports to the Court. The report is neither final nor binding although it may be the basis of a court judgment." 18 The way in which a report may become "the basis of a court judgment" is found in Part 72 rule 13: "(1) Where a report is made, the Court may, of its own motion, after notice to the parties, or on application by any party, on a matter of fact or law or both: (a) adopt, vary or reject the report in whole or in part, (b) require an explanation by way of report from the referee, (c) on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report, (d) decide any matter on the evidence taken before the referee, with or without additional evidence, and shall give such judgment or make such order as the Court thinks fit.

(2) Evidence additional to the evidence taken before the referee may not be adduced before the Court except with the leave of the Court." 19 What might be termed the "absolute" possibilities under Part 72 rule 13 are adoption and rejection. Intermediate possibilities include variation of the report and use of evidence taken before the referee as a basis, in whole or in part, for a decision by the court itself. In the present case, it is the "absolute" course of adoption of Mr Frazer's report by the court for which the plaintiffs contend. 20 It is clear from the orders of Santow J and from Mr Frazer's reports that they were not intended to be, and are not, the medium for arriving at any definition of any part of the respective rights and obligations of the parties at issue in the proceedings. The principal questions raised by the summons filed on 20 June 2001 and the two cross-claims are whether a receiver and manager of the partnership business should be appointed, whether an account should be taken of the dealings and transactions and assets and liabilities of the partnership and the respective interests of the partners in the assets, whether the partnership should be wound up and accounts be taken under the supervision and direction of the court and whether a lease has been validly terminated. 21 Mr Frazer's reports do not purport to determine any of these matters or to settle any question or issue relevant to such a determination. The order of 29 June 2001 defining Mr Frazer's function required that he report "as to" partnership assets and liabilities, income and expenditures and respective values and "as to the best method of effecting a beneficial dissolution so that all legal professional requirements are complied with". The emphasis here is upon a search for the "best means" of "beneficial dissolution" or, more precisely, winding up and distribution. Discovery of such "best means", if achieved, does nothing towards a decision whether rights exist to any of the relief sought in the summons and cross-claims. It might well assist the parties to reach a voluntary compromise of their respective claims, but that is a possibility quite distinct from determination of the claims arising upon the pleadings or any question arising from or in relation to them. 22 The nature of Mr Frazer's endeavours is further reflected in his own statements. His second letter concentrates on setting out "a commercial manner in which I believe that the dispute between the parties may be progressed". Both that letter and the letter of 28 November 2001 showed themselves to be concerned with identification of a basis on which the parties might resolve their differences. The process is seen by Mr Frazer as one of "progressing the negotiations between the parties"; and that, in my view, is precisely what the orders of Santow J contemplated that Mr Frazer should do. The aim of the orders was, quite clearly, to construct for the parties a framework within which they might be assisted to find a mutually acceptable solution to their disputes, not to create a mechanism for determining any question or issue in contention between them in the proceedings. That being so, there is no basis on which it may be seen as either open or appropriate to make the order pursuant to Part 72 rule 13 sought in the plaintiffs' notice of motion filed on 20 July 2002. 23 The plaintiffs submitted that, even if Part 72 rule 13 could not be used to cause Mr Frazer's reports to achieve some binding operation in relation to the parties' disputes, the court should nevertheless produce such a result by exercise of its inherent jurisdiction. The submission is, in effect, that the court should simply order the parties to wind up the partnership business and settle their financial relationship in accordance with Mr Frazer's reports on the footing that those reports represent, in some abstract sense, a fair and reasonable basis for resolving the parties' differences and allowing them to go their respective ways. 24 There are, in my opinion, two reasons why such an approach should not be taken. The first is that Mr Frazer's reports do not purport to settle all issues relevant to final resolution of the parties' relations as partners and therefore cannot finally resolve the position. There are matters still to be quantified or otherwise settled. They are referred to in the letter of 25 November 2001. The second reason is more fundamental, namely, that there is no aspect of the court's inherent jurisdiction which enables it to force upon non-assenting parties to disputes regularly and properly submitted for the court's adjudication a resolution that proceeds otherwise than from due trial of proceedings according to law. That the court might, in a particular case, consider that it would be fair or reasonable for the parties to be subjected to a particular outcome is entirely irrelevant unless that view is the distilled product of considered judicial determination after a hearing on the merits by reference to evidence properly adduced and admitted and by application of principles of law to facts duly found. These propositions need no elaboration or explanation. I nevertheless quote two passages from the judgments in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199. Gleeson CJ said (at 219): "The scales of justice are a powerful image in the judicial process. But the imagery should not lead to the misapprehension that the essential function of a court is to decide every case by a discretionary preference for one possible outcome over another."

Gaudron J observed (at 231): "It is beyond controversy that the role of Australian courts is to do justice according to law - not to do justice according to idiosyncratic notions as to what is just in the circumstances. Hence, the rule of law and not the rule of judges." 25 The course for which the plaintiffs contend runs counter to these principles and is not open. I should add that I do not regard the decision of the Full Federal Court in Landsal Pty Ltd v REI Building Society (1993) 113 ALR 643 on which the plaintiffs relied as indicating in any way that the court's inherent jurisdiction is so broad as to permit what the plaintiffs seek. 26 The result with respect to the plaintiffs' notice of motion filed on 20 July 2002 is that it must be dismissed. 27 I turn now to the first defendant's notice of motion filed on 13 August 2002 by which he seeks orders for the rendering of accounts by the plaintiffs. Mr Hall submitted on behalf of the plaintiffs that lack of success by the plaintiffs upon their motion would not lead automatically to the grant of the orders sought by the first defendant. That is clearly so. 28 Evidence was given and submissions made in relation to a number of matters (some of them descending into detail) going to the due and proper disclosure, preservation and deployment of partnership resources. So far as the first defendant is concerned, it is said by the plaintiffs that he has, as it were, appropriated to his own use the goodwill of the partnership business - to which he responds, in effect, that there never was any partnership goodwill as such. In relation to the plaintiffs (and relevant, therefore, to the claims in the first defendant's notice of motion), it is the contention of the first defendant that the plaintiffs, while partners of the firm, at the same time carried on the business of their own accounting firm in the same premises (not itself a cause for complaint) and that, in so doing, they misapplied partnership resources in aid of their personal interests. Exorbitant time was spent in examining evidence of purchases of postage stamps for the use of the two separate business concerns, evidence pointing to likely postage stamp consumption in each business operation and the allocation of the cost of stamps between the two. 29 The two matters to which I have just referred - which are but examples of a number of complaints on each side - show that there are questions of a kind which, in a general sense, call for the taking of accounts. The first defendant's application, however, is that an account be given by the plaintiffs only. There are, I think, two questions relevant to whether the orders the first defendant seeks should be made and, if so, their precise form. The first is whether, as the plaintiffs maintain, the defendants have been guilty of conduct warranting an order for the taking of accounts on a "wilful default" basis. The second is whether orders should be made at this interlocutory stage or left to play such part as is seen to be appropriate after the substantive proceedings have been heard. 30 The defendants say that the appropriate orders at this stage are, in effect, orders that the plaintiffs account on a wilful default basis. Underlying that is an assumption that the plaintiffs are bound to account because they had responsibility for the accounts of the partnership, having been the external accountants before they became partners and having continued effectively in that role after becoming partners. I consider that assumption to be justified but in saying this I do not suggest that the first defendant is not also bound to account as a partner. 31 The difference between taking accounts on the basis of wilful default and the taking of accounts in common form was explained by Giles JA in Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146 (at 149-150): "Although it had earlier been in contest, in the appeal it was accepted that order 4 was an order for taking accounts in common form. Under such an order the accounting party accounts only for what has actually been received and disposed of. The other party to the accounting can challenge the accounting party's account by asserting that more was received (in the old terminology, surcharging) or by asserting that less was disposed of (in the old terminology, falsifying).

There is an alternative basis for taking accounts. An order may be made for taking accounts on the basis of wilful default (sometimes the words are wilful neglect and default). Under such an order the accounting party must account not only for what has actually been received, but also for what should have been received: that is, for what would have been received if the relevant duties of the accounting party had been properly discharged. Thus in Partington v Reynolds (1858) 4 Drew 253; 62 ER 98 it was said (at 255; 98) that on this basis an executor or administrator must account 'not only for what he has received, but also for what he might, without his wilful neglect or default have received, although he has not received it'. For the present what amounts to wilful default, with consequential enlargement of the accounting, need not be further explored. An accounting on the basis of wilful default is more onerous than an accounting in common form, and can result in the accounting party having to pay more to the other party to the accounting. This no doubt explains the application to vary order 4, and the opposition to it." 32 The concept of "wilful default" was referred to by his Honour as follows (at 163): "It is then necessary to return to what amounts to wilful default, and to ask whether the matters found by Austin J were instances of wilful default. In an accounting by a trustee, the underlying concept is that through breach of trust the trustee has failed to obtain for the trust that which would have been obtained if the trustee's duties had been discharged. There may be simple failure to get in an asset of the trust; sale of a trust asset at an undervalue has been treated as wilful default, presumably because of failure to obtain for the trust the full value of the asset ( re Tebbs ); failure to obtain rent for a stranger's occupation of a trust property has been treated as wilful default ( Bartlett v Barclays Bank Trust Co Ltd (No 2) (1980) 1 Ch 515). The breach of duty need not be conscious wrongdoing ( Bartlett v Barclays Bank Trust Co Ltd (No 2) at 546). But wilful default is not coextensive with breach of trust: there may be a breach of trust which is not wilful default (see in re Wrightson: Wrightson v Cooke (1908) 1 Ch 789 at 799-800; Russell v Russell ( 1891) 17 VLR 729 at 732; In re Wood; Ebert v Union Trustee Company of Australia Ltd (1961) Qd R 375 at 378).

It is not necessary to explore in any more detail what may or may not amount to wilful default. It may be accepted that failure to maintain adequate books and records, to prepare monthly management accounts, and to maintain financial records for that purpose, were breaches of trust. It does not follow from the breaches that something was not received by the Trust or otherwise lost to it, on any reasonable amplitude of the concept of wilful default. Although there was a failing in record keeping, all assets of the Trust may have been got in and properly dealt with. I do not think that the matters found by Austin J were instances of wilful default."

Reference may also be made to the analysis by Kennedy J in Gava v Grljusich [1999] WASC 13. 33 The central concept is one of loss or potential loss through inactivity, inattention or failure to face up to responsibilities. For the "wilful default" basis to be appropriate, at least one instance of delinquent conduct of this kind must be established. 34 The evidence adduced upon the hearing of the two notices of motion ranged over various aspects of the conduct of the parties. A great deal of time and effort were, as I have said, spent on the matter of postage stamps. More was devoted to matters concerning Mr Locoputo's having placed the first defendant's signature on a particular document. In the end, however, the defendants, in their written submissions, referred to two instances or aspects of the plaintiffs' conduct as amounting to wilful default. The submissions say that the two are proffered "by way of example" but, since others are not mentioned or discussed, I confine my consideration to those two. 35 The first of the matters to which the defendants point concerns commissions and referral fees. It is undisputed that the partnership, in conducting its legal practice, entered into arrangements under which financers to which it introduced borrowers paid fees and commissions. After the plaintiffs joined the firm (at the same time continuing their accounting firm in operation), the arrangements were changed so that fees and commissions in respect of business introduced by the firm were instead paid by the lending institutions to the plaintiffs' accounting firm but on the footing that the accounting firm would pass them on to the law firm. There was apparently a fear that the institutions may stop paying fees and commissions to law firms which performed legal services for them, as the partnership did. There was thus an apparent plan to mask the true destination of the payments by making the accounting firm the immediate recipient. The defendants say that the accounting firm failed to pass on these moneys as agreed. The evidence suggests that this is so. But the evidence also shows that the plaintiffs (as the accounting firm) always acknowledged the obligation to account for the moneys. Indeed the first defendant says in his affidavit of 22 August 2001: "Throughout the term of the partnership, I made a number of requests to the plaintiffs to make an adjustment in favour of the legal practice in respect of the said referral fees and trailer payments. I was regularly told by Locaputo that the adjustment would be made soon ….". (emphasis added)

The first defendant also refers to other occasions on which similar assurances were given. 36 This, in my view, does not indicate wilful default. There was, on the first defendant's own evidence, a clear acknowledgment at all material times of the rights of the law firm as against the accounting firm akin to an account stated. The plaintiffs did not neglect to do anything except make the actual adjusting entries in the books to reflect in a formal way what had been clearly acknowledged. A receivable was established from the viewpoint of the partnership and acknowledged by the accounting firm. 37 The second matter on which the defendants rely involves the purchase of a property ("Hinchinbrook property") by the plaintiffs and the first defendant by way of investment. They acquired it in equal one third shares. The Hinchinbrook property was not a partnership asset. Its purchase was a quite separate investment venture of the three individuals, although the property was to be used as a branch office by both the law firm and the accounting firm on the footing that the two firms would bear in equal shares the costs of setting up and running the office. The first defendant, in his affidavit to which I have referred, says there was paid out of the partnership's bank account a sum of $10,133.00 which he claims personally from the plaintiffs as to one-third, being sums that relate to the Hinchinbrook property and, by reason of the reference to one-third, are apparently said to be referable to purchase or maintenance as distinct from setting up and running the branch office. The various items are set out on the seventh and eighth pages of the exhibit DD-1 to the affidavit in question. They cover the cost of blinds and tiling, lawnmowing, signs, water, council rates and several loan repayments. The first defendant also refers to a sum of $1,680.56 paid from the service company Delogar Pty Ltd which he says should be reimbursed, as to one half, by the plaintiffs to the partnership. This appears to be for electricity, water and telephone expenses. 38 Again, it seems to me that there is not and probably never was any real doubt as to the correct treatment of these items and the appropriate adjustments. The correct position does not seem to have been obscured or denied, even though there may not have been punctiliously correct accounting entries on an on-going basis. I do not see the particular events as warranting an order for account on the basis of wilful default. 39 I should say something at this point about the position of the first defendant. He was, of course, a member of the partnership at all material times. Some implications of that were brought out in the following part of his cross-examination: "Q. As such, you were a partner in this legal practice; weren't you? A. Yes.

Q. That meant, as you would well know, that if the accounts and the books and records weren't up to date then, two things; one, as a partner, it was incumbent upon you to make yourself aware of the state of those records; wasn't it? A. Yes.

Q. And secondly, if there was something wrong prior to the 8 June 2001, then it was incumbent on you to do something about it? A. Yes.

Q. That is why, when the partnership ended on 8 June and the 18 June 2001, you were going to fix this in some respect by getting an audit report of the transaction that had taken place; weren't you? A. Yeah, that was my intention, of course." 40 I refer also in passing to certain entries behind tab 18 in exhibit DD-1 to the first defendant's affidavit in addition to those already mentioned. There are at least five entries labelled "DD's drawing w/o authority", which may indicate that the first defendant withdrew funds from time to time without authority and, it seems to me, may properly be the basis for an inference not only that a certain degree of laxness and informality attended the financial affairs of the partnership but also that the first defendant was an active participant in that laxness and informality. 41 In the whole of the circumstances, I do not consider the first defendant to have shown that, if an order for accounting by the plaintiffs is made, it should be on the basis of wilful default by the plaintiffs. There was not, in my view, reliance by the first defendant upon the plaintiffs as the partners in charge of accounting functions in the way that a beneficiary would be expected to (and entitled) to rely on a trustee. The first defendant acknowledged his own role and responsibility in relation to the integrity of the accounts, although it was the plaintiffs' who were accountants, who played the major role and who had the major responsibility. In addition, I am satisfied that the two instances specifically relied upon should be characterised as examples of the informality that prevailed and, in the particular contexts, did not obscure the true position pertaining as among the partners. Nor do I think that the plaintiffs in any way sought to avoid or observe their financial responsibility in relation to those two instances. 42 There is reference in the eighteenth edition (2002) of "Lindley and Banks on Partnership", at p 611, to the statement of Lord Lindley that: "The right of every partner to have an account from his co-partners of their dealings and transactions is too obvious to require comment."

But as things currently stand, it seems to me that the court should not make an order merely that the plaintiffs give such an account. I do not consider that the first defendant has made out a case for an order imposing upon the plaintiffs alone an obligation to provide an account of their dealings and transactions. Rather, if the matter is to be the subject of any order at all, it should be ordered that accounts be taken of the dealings, assets and liabilities generally. And that is an order sought, in substance, by the plaintiffs in their summons and by the first defendant in his cross-claim upon the final determination of these proceedings. 43 The two notices of motion heard by me will be dismissed. That, of course, does nothing to advance the resolution of the situation in which the parties find themselves. That situation is, if I may say so, a most unfortunate and unsatisfactory one. The parties have invested significant sums in the work done by Mr Frazer only to have reached a position where that work is of no use to them unless they themselves choose to embark on some new course that utilises it in some constructive way. The parties have also sought through mediation to resolve their differences but have failed to do so. They have now spent not inconsiderable sums on a hearing before me that, in the result, has done nothing to advance matters. All that is left to them, it seems to me, is resolution through due determination of the claims in the plaintiffs' summons and the defendants' cross-claims which have been pending for more than two years. 44 The court must, of course, adjudicate those claims and cross-claims in the ordinary course of events. It will, however, be very clear to the parties that that course is likely to be protracted and expensive and may, in the long run, involve a duplication of substantial work carried out by Mr Frazer. The interests of the parties will be well served by some regime that makes some use of that work. But, of course, it is not for me, in determining the claims in the two notices of motion, to attempt somehow to fashion such a regime and to foist it on the parties. The court can now do no more than deal in due course with the summons and the cross-claims which, unless the parties see fit to embrace some other course, will proceed to trial in the normal way. 45 As to costs in relation to the two notices of motion, my inclination is that, in view of the fact that each notice of motion has been dismissed and the hearing dealt with both together, there should be no order as to costs and that the parties should bear their own costs. If, however, any party wishes to be heard on costs I shall arrange for the matter to be relisted. **********

Last Modified: 11/06/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Source

Judgment (22 paragraphs)

Parties

Cases Cited (7)

Cited By (3)