Glandon v Tilmunda [2008] NSWSC 218 | Case summary

4593/05 GLANDON PTY LTD & ORS V TILMUNDA PASTORAL CO PTY LTD & ANOR JUDGMENT Introduction 1 A partnership was formed in about 1978. The individuals involved in that process were Peter Stewart Graham, the second defendant, Paul Edward Lewis, the second plaintiff and the late James Hassall Liddle. 2 Mr Graham controlled a company, Tilmunda Pastoral Co Pty Ltd, the first defendant. Dr Lewis is an orthodontist. He controlled a company called Glandon Pty Ltd, the first plaintiff. The partnership accounts and tax returns identified the partners as Tilmunda, Glandon and Mr Liddle. Notwithstanding that Mr Graham thought the individuals were the partners, counsel for all parties submitted that I should find that the partnership was constituted by the companies and Mr Liddle. I accept that submission. 3 Glandon paid $40,000 for a two-fifths share in the partnership. For a one-fifth share, Mr Liddle paid $20,000. Mr Graham made no payment. It is not clear whether the payments by Glandon and Mr Liddle were contributed to the partnership or, as Mr Graham claimed, paid to him for admission to the partnership. 4 The principal asset of the partnership was a property at Yarramundi in New South Wales containing an alluvial topsoil deposit and access to deposits of sand in the Nepean River. The purpose of the partnership was to extract the soil and sand and, at the conclusion of that operation, to subdivide the property and sell residential lots. The partnership conducted business with respect to an established orange orchard on the property before requisite permission for the extractive operations was received. 5 Undated articles of partnership in the name of the individuals were executed by them approximately two years after the commencement of the partnership. Mr Graham was the manager. He or his companies drew management fees, rent, administration fees and motor vehicle expenses from the partnership. Mr Graham also conducted his own surveying practice for the duration of the partnership. 6 The partnership entered into foreign currency loans and, as a result, paid significant amounts of interest over a number of years when the loans were brought on-shore. Glandon, Dr Lewis and his wife, Lesley Joan Lewis, the third plaintiff, claim that the fees and foreign currency loans were not authorised by the partners. 7 By deed of assignment of 26 August 1999, Glandon transferred its interest in the partnership, including its right to receive a share of the profits for the year ended 30 June 1999 and any balance standing to the credit of any loan or capital account, to Tilmunda for $55,000 together with indemnities in favour of Glandon and Dr Lewis with respect to any claims, demands, costs, suits or other expenses with respect to the liabilities, debts, outgoings and the obligations of the partnership and Dr Lewis's guarantee with respect to the affairs of the partnership. The issues 8 It is claimed that Mr Graham made misrepresentations both overtly and by silence that induced Glandon to execute the deed of assignment. It is claimed that this conduct was in breach of Tilmunda's fiduciary duties as a partner and Mr Graham was a knowing participant in the fiduciary's breach of duty. It is claimed that the misrepresentations were misleading or deceptive, or likely to mislead or deceive, in contravention of the Trade Practices Act 1974 (Cth), s 52 and in contravention of the Fair Trading Act 1987, s 42. It is claimed that Tilmunda's conduct was unconscionable both in general terms and in terms of the Trade Practices Act, s 51AA. 9 With respect to the breaches of fiduciary duty, an election was made to claim an account of profits rather than equitable compensation. It was claimed that the Trade Practices Act, s 87 was sufficiently broad to encompass either form of relief for breaches of its provisions. 10 The deed of assignment contained a provision that Tilmunda should be responsible for any income tax payable in respect of Glandon's share of the net profit of the partnership for the year ended 30 June 1999. A claim is made in breach of contract with respect to this provision. Representations as to profits 11 Dr Lewis suffered a heart attack in August 1997 and a brain aneurism in January 1998. Following the latter event, Mrs Lewis became the decision maker on behalf of Glandon and her husband. 12 In a letter of 23 February 1998, a copy of which was sent to Mrs Lewis, Mr Graham said that the partnership business had run at a loss for many years and had survived as he had not drawn management fees, secretarial fees, rent, survey fees and dragline excavation fees indicated as incurred in the annual profit and loss statements. 13 The profit and loss statement for the year ended 30 June 1997, included in the tax return of the partnership for that year, however, showed a small profit of $3,875 which improved to $11,800 in the year ended 30 June 1998. 14 In a letter to Mr Liddle and Dr Lewis of 1 October 1998, Mr Graham referred to the partnership making a relatively small profit in the 1998 year notwithstanding that it was a strong year for sales. He said that sales were expected to be lower in 1999 compensated for by a reduction of $40,000 -$50,000 in interest payments but producing a result of not more than $20,000. He went on to say that profitability of the extraction business would come under increasing pressure in the coming years. He said it might take some time to complete a sale of the property and ongoing holding costs on the land would continue to drain cash flow from the business deferring any partner distribution in the short term. 15 The land had been subdivided into two lots of 10 hectares and the remaining portion of the land of 20 hectares. The 10 hectare lots were sold to the Department of Urban Affairs and Planning for $700,000 in the year ended 30 June 1999. 16 The profit and loss statement for the 1999 year disclosed an operating profit of $743,565.60. That included a profit on sale of the two 10 hectare lots of $599,534. That means that the profit from the ordinary activities of the partnership was $144,031.60. At no time before the execution of the deed of assignment did Mr Graham inform his partners of the dramatic change in fortune of the partnership. His prediction of a profit of not more than $20,000 was not withdrawn. 17 Mrs Lewis said that in a telephone conversation in November 1998, Mr Graham told her that the partnership was still not doing well and was running at a loss. In cross-examination Mr Graham said: "I could have told her that, yes." I find that he did. 18 A meeting was held at Mr Graham's office in Beecroft on 21 December 1998. As well as Mr Graham, Mr Liddle and Dr and Mrs Lewis were present. Dr Lewis was recovering from his aneurism and remembers nothing of the meeting. This was the first partners' meeting that Mrs Lewis attended. The partnership accountant, Mervyn John Jones, was also present. 19 Mr Graham had obtained a valuation from Peter K Dallimore & Associates and forwarded copies to Dr Lewis and Mr Liddle prior to the meeting. The purpose of obtaining the valuation was to assist in arriving at a proper value of the partnership. The Dallimore valuation put a figure of $425,000 on the land. 20 Mrs Lewis said Mr Graham painted a grim picture of the partnership at the December meeting, saying the business was still running at a loss and losing money and it continued to suffer from serious financial difficulties with continuing lease payments, bank payments and fees due to him. He had not drawn wages for some time and the partnership owed him $150,000. 21 Mr Graham said he had turned the business around with small profits in 1997 and 1998. He said he thought he told Mrs Lewis that at the meeting. He agreed that the partnership was having financial difficulties and had for many years. He agreed that the question whether the partnership was making profits or losses was discussed. He said he did not need to say the partnership was having financial difficulty. The accountant had the details. They were before the meeting. He agreed that in terms of actual knowledge of what was going on in the partnership as, for example, how the soil sales were going and things like that, he was the person who was best placed to know. 22 Mr Graham wrote to Dr Lewis on 11 January 1999 offering to acquire Glandon's two-fifths interest in the partnership for $45,000. Upon receipt of the letter, Mrs Lewis telephoned Mr Graham and said the share was worth a lot more than that. Mrs Lewis said Mr Graham told her that the business was not making a profit and was continuing to make a loss. Soil sales were down; the Council would not let them subdivide; the contract to pull soil out was almost over; the partnership owed him money; there were leases to be paid out and money to be paid on the property; by the time the partnership had paid out the bank and the leases, there would be nothing left. 23 Mr Graham agreed that in his discussion with Mrs Lewis about the financial position of the partnership he indicated no changed position from that discussed at the meeting of 21 December 1998. 24 By 31 December 1998, however, the partnership had sold $375,976.70 worth of sand, soil and rock. Total sales for the 1998 year were $482,279. In a letter to his partners of 1 October 1998, Mr Graham had said that in a normal year soil extraction would deliver sales in the region of $420,000 - $450,000. Furthermore, the sale of the two 10 hectare lots meant that the partnership interest burden was very much reduced. 25 It must have been obvious to Mr Graham when he spoke with Mrs Lewis in January 1999 that the 1999 year would deliver sales well in excess of the sales in the previous year and well in excess of his estimate of the sales of a normal year and that the partnership was on track to make a substantial profit for the year. Yet no mention of this change in fortune was mentioned to Mrs Lewis. Mr Graham said it did not occur to him that if his prediction of profit of not more than $20,000 for the year changed, he should inform his partners. 26 Mr Jones wrote to the partners on 22 January 1999 enclosing an adjusted balance sheet as at 31 August 1998. It showed partners' equity of $266,866 but Mr Jones warned that this was likely to be an overstatement. Mr Jones said that no allowance had been made for trading since August 1998. Mr Graham did not disabuse Mr Jones by providing trading results to December 1998 or soil, sand and rock sales to that date. He took no step to alert Mr Jones or Mrs Lewis to the high sales results for the half year to 31 December 1998. 27 Mr Graham wrote to his partners again on 23 February 1999. He analysed the figures for the 1997 and the 1998 years. Of the 1999 year, all Mr Graham said was that the partnership finished 1998 on a high, but weather conditions had drastically affected January and February 1999 production. 28 Sales for January and February 1999 were low: $27,328 and $13,528.70 as against $65,863.40 for December 1998. The fact that Mr Graham knew by 23 February 1999 that sales were down indicates his contemporaneous and detailed knowledge of the way in which the partnership was performing. 29 Sales picked up in March 1999 to $39,780.86 and total sales to June 1999 were $558,759. In his letter of 23 February 1999, Mr Graham did not explain how high the figures to December 1998 were. Nor did he make any attempt to reassess his $20,000 profit figure for that year. Nor did he write to his partners to tell them that the March sales figures showed an improvement from the earlier months of the year. 30 On 23 April 1999, Mr Graham wrote to Dr and Mrs Lewis offering to purchase Glandon's interest in the partnership for $55,000. No mention was made of any change in the financial position of the partnership from that represented at the December 1998 meeting and in the letters and conversations that followed. This was notwithstanding that total sales of soil, sand and stone to the end of March 1999 totalled $456,614.27. 31 Mr Graham did not write again discussing the financial position of the partnership before Glandon transferred its interest on 26 August 1999. The picture that he had painted in his letter of 1 October 1998 of a profit of no more than $20,000, reinforced at the meeting of 21 December 1998 and in the discussions and letters that followed was never corrected. Mr Graham left his partner Glandon, through Mrs Lewis, "in the dark" as to the true financial position of the partnership during the year ended 30 June 1999. 32 The partnership maintained profitability after Glandon and Mr Liddle assigned their interests in it. In 2000 the profit was $78,338. In 2001 it was $177,066. Profits would have been achieved in those years even if Mr Graham had charged the fees he had between 1996 and 1999. In 2002 the net profit was $29,650.11. But that was due to a profit on sale of plant and equipment. In 2003 the profit was $586,078, again due to the profit on sale of fixed assets. And, finally, in 2004 the profit was $765,867 due to profit on sale of fixed assets and other operations, there being in that year no sales of soil, sand or rock. 33 The accepted categories of fiduciary relationship sometimes referred to as relationships of trust and confidence, include partners (Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-97). A partner cannot in acting in partnership concerns secure to himself an individual benefit (Cassels v Stewart (1881) 6 App Cas 64 at 77). The relationship is based upon the mutual confidence that the partners will engage in some particular activity for joint advantage only (Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-408). 34 If the articles of partnership applied, there is no inconsistency with these obligations in its terms. Clause 13 included the following: "Each partner shall - … (c) Be just and faithful to the other partner or partners and at all times give to such other full information and truthful explanations of all matters relating to the affairs of the partnership and afford every assistance in his power in carrying on the business for their mutual advantage." 35 The obligation to disclose information to a partner was enforced by the Partnership Act 1892, s 28(1). It provided that partners were bound to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representatives. 36 In failing to correct the assertion that the partnership would make a profit no greater than $20,000 in the year ended 30 June 1999, Tilmunda, through Mr Graham, was in breach of its fiduciary duty to Glandon. 37 Generally, fiduciary obligations do not survive the end of the fiduciary relationship (Attorney-General v Blake [1998] Ch 439 at 453-455). Further, parties may be fiduciaries while at the same time being entitled to act in their own interests with respect to some aspects of the venture (Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1). 38 It was submitted that a partner seeking to purchase another's share in the partnership is not engaged in the business of the partnership and no fiduciary duty is owed. 39 But the information as to the improved financial position of the partnership in 1999 had come to Mr Graham in his fiduciary capacity and Tilmuda owed a fiduciary's duty to disclose that information to the other partners (Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89). 40 It was submitted that Mrs Lewis had determined that Glandon would sell its interest in the partnership, she placed no reliance upon any lack of information and she refrained from seeking the advice of Mr Jones or an independent accountant. 41 But the letter of 1 October 1998 preceded Glandon's determination to sell; there was no point in seeking further advice from Mr Jones after he had compiled the August 1998 figures as they lacked the essential information as to the improved financial position of the partnership; and Mrs Lewis said they could not afford to retain an accountant. 42 An account of profits is an appropriate remedy where a fiduciary gains a profit by breach of fiduciary duty (Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134). It strips the defaulting fiduciary of the profit, whether or not the principal has suffered loss. The necessary connection that grounds the relief is contained in the question whether the profit was obtained by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge derived from the fiduciary position (Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557). 43 The taking of an account is not dependent upon the principal establishing that it has suffered loss. The principles by which liability to account for profits is assessed against errant fiduciaries express the policy of the law in holding fiduciaries to their duty (Maguire v Makaronis (1996-1997) 188 CLR 449 at 468). 44 Nor is the grant of relief dependent upon proof that the principal, if aware of the information in question, could have, or would have, acted differently: in this case by Glandon establishing that it would have remained in the partnership or negotiated a higher price for the sale of its share. 45 In my view, Glandon is entitled to relief for Tilmunda's breach of fiduciary duty if it establishes that Tilmuda profited from Mr Graham's withholding of information of the improved financial position of the partnership during the year ended 30 June 1999. 46 It is unnecessary for me to determine whether the withholding of the information also constituted misleading or deceptive conduct for the purposes of the Trade Practices Act and the Fair Trading Act or unconscionable conduct generally or for the purposes of those Acts and I refrain from doing so. Representations as to soil levels 47 During the meeting of 21 December 1998, it was Mrs Lewis's evidence that Mr Graham said the soil was running out and the business would come to an end soon. In the telephone conversation of January 1999, Mrs Lewis said Mr Graham told her that soil sales were way down and the partnership's contract to pull the soil out was almost over. 48 It was submitted that these representations were false. I do not accept that submission. It was the fact that the soil at the property was running out. The question was one of timing. It had always been the intention of the partners when the soil ran out to subdivide and sell the property. And in January 1999 soil sales were down. The partnership's permission to extract material expired in November 1998. Mr Graham was not informed of the extension to November 1999 until 28 January 1999, well after the conversation with Mrs Lewis that followed the first offer in the letter of 11 January 1999. 49 There is no evidence that Mr Graham informed his partners of the extension of permission to extract material prior to the execution of the deed in August 1999. 50 Mr Graham said in his letter of 11 January 1999 that he expected to be out of topsoil by May 1999. Soil continued to be extracted until September 2001. 51 I am not satisfied that the former omission constituted a breach of fiduciary duty. I do not think that Mr Graham was under a duty to advise his partners that the extension had been obtained. To obtain the extension was a matter within Mr Graham's delegated duties as manager. He was duty bound not to mislead his partners as to the position of the partnership. He was not bound to advise them of every action he had taken in their interests. 52 The Trade Practices Act, s 52 provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. 53 In my view, Mr Graham's failure to inform his partners that he had obtained an extension of extractive rights until November 1999 was neither misleading nor deceptive. It was in the interests of the partnership and the partners that Mr Graham obtain the permission. He did so. The partners were not disadvantaged by not being told about it. 54 The Trade Practices Act, s 51A facilitates proof of misrepresentations. It provides that where a representation is made as to any future matter, and the corporation does not have reasonable grounds for making the representation, it shall be taken to be misleading. It is further provided that the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation. 55 Tilmunda did not adduce evidence that Mr Graham had reasonable grounds for making the statement that he expected to run out of soil by May 1999. 56 It was submitted that the statement was not as to a future matter but the expression of a current opinion or belief. In Jacques v Cut Price Deli Pty Ltd (1993) ATPR (Digest) 46-102 a distinction was drawn between a representation as to the gross profit that could be made, that was held to be a representation as to a future matter; and a statement of what the representor believed the gross profit would be, that was said not to be a representation as to a future matter, but a representation as to a present state of mind. 57 That view was, however, questioned in Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 at 536. 58 If the representation was with respect to a future matter, and is deemed to be misleading, I am not satisfied that Glandon suffered loss or damage as a result of the statement and relief under the Trade Practices Act, s 82 and s 87 is predicated upon the fact that the representee has suffered loss or damage by conduct in contravention of the Act. 59 Dr Lewis knew that the soil would run out at some time and if the date had any significance with respect to Dr Lewis' attitude to the offer of $45,000, that offer was rejected. 60 Nor am I satisfied that the statement played any operative part in the gaining of a benefit by Mr Graham so as to entitle Glandon to an account of profits or other relief for breach of fiduciary duty or unconscionable conduct. Mr Graham's stated expectation as to the soil supply was of far less significance than his stated expectation as to the low profit of the partnership in the 1999 year that he knew by the end of 1998 could not be sustained. 61 In my view, Glandon has failed to establish any entitlement to relief with respect to the representations or lack thereof in relation to soil levels. Representations as to land value 62 Mr Graham obtained a valuation of the two 10 hectare blocks from Mr Dallimore in January 1998. Mr Dallimore placed a value of $700,000 on the lots as a conservative figure. Mr Graham conceded that he might not have sent the valuation to Dr Lewis. 63 Mr Graham put a value of $1.2 million on the land in a letter to Mr Jones in May 1998. Mr Graham knew by the time he wrote the letter that the sale of the two 10 hectare lots for $700,000 would take place. Hence he valued the remaining portion of the property at $500,000. That was the figure at which Tilmunda's interest in the partnership was shown in its accounts. 64 In the 1997 accounts of the partnership the land was valued at $4,507,185. That figure was based upon a valuation of the land in 1994 at $4,311,000 by Egan National Valuers. In the 1998 accounts the land was entered on the balance sheet at cost in the amount of $198,883. Mr Jones said that he took instructions from Mr Graham in relation to that entry. When the sale of the two 10 hectare lots to the Department of Urban Affairs and Planning was completed, the figure of $198,883 was halved and the land was shown at cost of $99,441.25 in the 1999 accounts. 65 Mr Graham wrote to his partners on 1 October 1998 telling them he had asked Mr Jones to draw up accounts as at 31 August 1998 to crystallize discussion on the future direction of the partnership. He said the property was recorded in the balance sheet at the $99,441 figure. He said that in light of the sale of the two 10 hectare lots to the government, a sale of the remaining portion of the property should achieve a higher figure than cost. But he said the sale of the adjoining land was a negotiated settlement with the government and as such he did not expect a market sale to achieve a similar value. He expected the sale to achieve a "net of site costs" figure of $250,000. His estimate of site costs was $50,000. 66 Mr Graham made no mention of the $700,000 Dallimore valuation of January 1998. Nor did he mention his instructions to Mr Jones to value the entire property at $1.2 million. Mr Graham conceded that at the time he wrote the letter he thought the land was, or ought to be, worth more than $300,000. 67 One of the options put forward by Mr Graham in his letter of 1 October 1998 was for Tilmunda to take over the partnership. He suggested that there be a meeting as soon as possible to discuss the matter. 68 In my view, Mr Graham believed the land to be worth substantially more than $300,000 when he wrote the letter of 1 October 1998 and his intention in attributing a lower value to it was to further the option for Tilmunda to take over the partnership at the least possible amount. Mr Graham allowed Tilmunda to act for its own benefit in conflict with its duty to its partners. Tilmunda, through Mr Graham, was in breach of its fiduciary duty in making the assertion that the land was expected to sell for $300,000. 69 Mr Dallimore supplied a valuation of $425,000 for the property in November 1998. In his market evidence, he failed to mention the sale of the adjoining lots for $700,000. Mr Graham agreed that the valuation was provided at mates' rates. If I had to have regard to this valuation in determining the value of Glandon's interest in the partnership, I would have some difficulty. However, I do not have to value Glandon's interest. 70 In view of my finding that Tilmunda was in breach of fiduciary duty in asserting that a sale of the property would raise $300,000 it is unnecessary for me to consider the other bases upon which Glandon puts its case and I do not do so. Representations as to subdivision 71 In his telephone conversation with Mrs Lewis following her receipt of the letter of 11 January 1999, it was Mrs Lewis' evidence that Mr Graham told her, amongst other things, that the Council would not let them subdivide the remaining land. 72 In all material respects the remaining land of 20 hectares was identical with the two 10 hectare lots that had been subdivided and sold. Indeed, the partnership subdivided the remaining land into two 10 hectare lots in 2002 and sold them for $700,000 and $830,000 respectively. 73 I accept the evidence of Mrs Lewis on this matter. Mr Graham had no doubt that the land was capable of subdivision into 10 hectare parcels. He said so in cross-examination. He said Mr Liddle had hoped to subdivide into smaller lots but that was not possible. There was no doubt that the zoning limited any subdivision to 10 hectare lots. 74 The assertion made by Mr Graham that the Council would not let the partnership subdivide the land, was false. Tilmunda through Mr Graham was in breach of its fiduciary duty of good faith. It is unnecessary for me to consider whether the assertion constituted unconscionable conduct or misleading or deceptive conduct. Representations as to costs of restoration 75 In the 1 October 1998 letter, Mr Graham estimated the cost of restoration at $50,000. He told Mr Dallimore on 27 October 1998 the cost was $72,600. In July 1999, Mr Graham informed Hawkesbury Shire Council that any restoration work would not exceed $10,000. Mr Graham said that this was a "try-on" by which he meant it was a deliberate attempt to mislead the Council as to the cost. 76 It was submitted that I should find that Mr Graham believed the restoration costs would be approximately $10,000 or, in any event, a figure far below $50,000. I decline to do so. 77 The $50,000 figure seems to me to have been a rough estimate. It was a global figure, whereas the $72,6000 was broken down into seven items and bore the resemblance of precision. 78 I do not find that Mr Graham misrepresented the position with respect to the cost of restoration or that Tilmunda breached its fiduciary duty to its partners. Account of profits 79 It was submitted that no account of profits should be ordered as it involved negating the effect of the deed. It was submitted that no account should be taken because financial results for the year ended 30 June 1999 could have been viewed by Dr and Mrs Lewis had they wished to do so prior to the execution of the deed in August. It was said that to take an account would subvert the bargain by providing Glandon with the benefits it voluntarily relinquished, while leaving Tilmunda with the burdens of the agreement. 80 The deed is not subverted by an order for an account of profits. Glandon executed it by reason of Tilmunda's breach of fiduciary duty. In consequence, Tilmunda became entitled to a two-fifths share of the partnership profits to which Glandon would otherwise have been entitled until the partnership was wound down in 2004. 81 When Glandon transferred its interest in the partnership to Tilmunda, Mr Liddle transferred his one-fifth interest to Stewart Chapman Investments Pty Ltd and it and Tilmunda continued to carry on the same partnership business. 82 It is not a question of denying Stewart Chapman and Tilmunda the profits they lawfully earned. Stewart Chapman's share of profits is unaffected by any order against Tilmunda to account for the profits it made in consequence of its breach of fiduciary duty. Those profits are limited to the two-fifths share of profits Glandon would otherwise have earned that accrued to Tilmunda upon its acquisition of Glandon's share of the partnership. 83 There was a deal of expert accounting evidence from Fiona Bateman and Michelle Jones as to the value of the partnership and a two-fifth interest in it as at 26 August 1999. 84 Mr Dallimore provided a further valuation of the property in November 1998 of $675,000. Ms Bateman reduced that figure to $600,000 taking account of selling costs and subdivision and rehabilitation costs and used that figure as her starting point. Mrs Jones took as her starting point the earlier valuation of Mr Dallimore of $425,000. 85 But these issues do not enter the calculation of an account of profits and I do not need to resolve them. 86 Likewise, there was some evidence that Mr Graham took out a foreign currency loan on behalf of the partnership leading to increased interest payments when the loan was brought on-shore. I do not have to deal with that issue because the figures put forward by the parties do not take that matter into account. 87 While an account of profits is said to be discretionary, it is granted or withheld according to settled principles. It is defeated by equitable defences such as estoppel, laches, acquiescence and delay. The conduct of the plaintiff may be such as to make it inequitable to order an account (Warman at 559). But the basic principle remains that a principal who elects to have an account of profits rather than equitable compensation is entitled to the account (Warman at 560). 88 Often the taking of an account is a complicated exercise and, in this Division, an order is usually made that an Associate Justice take the account. But if the matter is not so complicated, the Court may perform the exercise itself. 89 In this case the parties have agreed on the figures for the relevant profits for the years ended 30 June 1999 to 30 June 2004 with limited differences of principle. 90 The first difference in approach relates to the question whether Mr Graham was entitled to receive fees from the partnership. In 1999 he drew administration fees of $25,500, management fees of $54,570 and rent of $10,914. 91 As a general principle, a partner is not entitled to remuneration from the partnership. The rule is given statutory force in the Partnership Act, s 24(1)(6). But the rule is subject to agreement, express or implied, between the partners. 92 Mr Graham said that Mr Liddle calculated what Tilmunda should be paid for management, rent and secretarial expenses. In his affidavit, Mr Liddle denied having done so. Dr Lewis denied any such arrangement. The fees charged by Mr Graham were not entirely consistent from year to year. If the articles of partnership applied there was no entitlement to charge the fees as cl 14 was limited to remuneration to a partner working full time in the business of the partnership, and Mr Graham did not do so. It provided: "If it is necessary for the business of the partnership that any one or more of the partners shall devote his whole time and attention to the business of the partnership then a reasonable wage may be paid to such partner or partners by the partnership provided the partners agree to this."

103 I will hear the parties on whether it is appropriate to include an interest charge. 104 In House of Spring Gardens Ltd v Point Blank Ltd [1985] FSR 327 the plaintiffs had received damages for one cause of action and an account of profits for the other causes of action. But since the three causes of action arose out of the same facts, the smaller award of damages was deducted from the greater amount ascertained on the account of profits. I will hear the parties on the question whether the $55,000 received by Glandon under the deed should be deducted from the account. 105 As at 30 June 1999 there was a credit balance in Glandon's loan account of $67,364.64. But since the liabilities of the partnership exceeded its assets, there was a debit balance in Glandon's capital account of $85,872.66. 106 The deed contained a release of Tilmunda by Glandon with respect to any credit balance standing to either account and contained a release of Glandon by Tilmunda with respect to any debit balance standing to either account. 107 I will hear the parties on what, if any, adjustment should be made to the account in respect of the balances in the two accounts. 108 So far as Mr Graham is concerned, he was an accessory. I do not see why an accessory should be required to account for the benefit a fiduciary receives in breach of its duty. The accessory is unlikely to receive the share of profits taken by the fiduciary. It is only to the extent that the accessory shares in the fiduciary's gain that it seems to me that equity should require an amount to be stripped away from the accessory to prevent its profiting from the breach of duty of the fiduciary. 109 In Warman at 569 the Court said that it was arguable that any order for payment of a sum determined by an account should be divided into two orders one against each accessory and by reference to its profits. It was also arguable, the Court said, that any order for equitable compensation should have been made against the defaulting fiduciary alone. Orders against the three jointly were unchallenged in the Courts below. The High Court went on to discuss whether Warman should, at that stage, be given the opportunity to elect between an order for equitable compensation or an order for an account of profits, or whether it had already made that election. 110 I will hear the parties on whether it is appropriate to take an account of profits distributed to, or perhaps appropriated to, Mr Graham or as directed by him from Tilmunda to the extent that they had their source in the two-fifths share of profits received by Tilmunda. Tax liability 111 The deed assigned Glandon's interest in the partnership to Tilmunda including the entitlement to receive Glandon's share of partnership profits for the year ended 30 June 1999. However, there was still an appropriation to Glandon of its share of the net profits of the partnership for that year. 112 Since the two 10 hectare lots sold during the year had been acquired before 20 September 1985, no capital gains tax was payable (Income Tax Assessment Act 1997 (Cth), s 104-10(5)(a)) and the operating profit of $743,566 was reduced by the profit on sale of $599,534. After income tax adjustments as, for example, substituting deductible depreciation for the depreciation claimed in the accounts, the net income for the year was $160,469 of which the share appropriated to Glandon was $64,187.60. 113 Clause 11(b) of the deed provided for Tilmunda to pay the income tax on Glandon's share of the profits. It was in the following terms: "The Assignee shall be responsible for any income tax payable in respect of the Assignor's share of the net profit referred to in clause 11(a) and shall be entitled to claim as a deduction on any loss attributable thereto." 114 For the year ended 30 June 1999, Glandon paid no tax on the $64,187.60 included in its assessable income because it had the advantage of carry-forward tax losses. They were used up by the year ended 30 June 2004. 115 It was submitted that the clause was drawn restrictively to apply only to the situation when income tax was payable on the distribution in the year of appropriation. 116 I do not accept that submission. The words "in respect of" are of wide import. The commercial purpose of the provision was to indemnify Glandon against a liability to tax as a result of the inclusion of the appropriation of a share of the net profit of the partnership in its assessable income. 117 In the year ended 30 June 1999, Glandon lost the advantage of $64,187.60 of carry-forward tax losses. Ms Bateman and Mrs Jones agreed that the company rate of tax in that year was 36%. Tax payable on that amount included in Glandon's assessable income in the 1999 year was $23,108. 118 Income tax was payable "in respect of" the appropriation in 2004. Those words do not confine the relationship between tax and appropriation to the year of appropriation. It is sufficient if there is some connection, greater than a tenuous one, between the burden of tax and the inclusion of the appropriation in Glandon's assessable income. 119 Here, the burden of tax on the appropriation was delayed until the carry-forward tax losses were used up. When that occurred in 2004, tax was payable by Glandon because of the earlier inclusion of the appropriation in assessable income. Glandon would not have had a tax liability in 2004, or would not have had so great a tax liability, but for the 1999 appropriation of its share of the net profits of the partnership. That is sufficient to constitute the necessary relationship. 120 But the measure of damages for Tilmunda's failure to pay the income tax is $23,108, applying the rate of tax that was current for companies for the year ended 30 June 1999. That marked the extent of the loss sustained by Glandon for Tilmunda's failure to pay any amount towards the tax liability. Had Tilmunda paid Glandon $23,108 towards its prospective tax liability in 1999, Glandon could not have demonstrated any further loss. That was the value of using up in 1999, $64,187.60 of carry-forward tax losses. 121 I find that Glandon is entitled to $23,108 as damages for breach of contract. Conlcusion 122 I find that Glandon is entitled to an account of profits against Tilmunda for breach of fiduciary duty. The account total is $568,531. I will hear the parties on whether it is appropriate to include an interest charge. 123 I will hear the parties on the question whether the $55,000 received by Glandon under the deed should be deducted from the account. 124 As at 30 June 1999 there was a credit balance in Glandon's loan account of $67,364.64. But since the liabilities of the partnership exceeded its assets, there was a debit balance in Glandon's capital account of $85,872.66. I will hear the parties on what, if any, adjustment should be made to the account in respect of the balances in the two accounts. 125 So far as Mr Graham is concerned, he was an accessory. I do not see why an accessory should be required to account for the benefit a fiduciary receives in breach of its duty. The accessory is unlikely to receive the share of profits taken by the fiduciary. It is only to the extent that the accessory shares in the fiduciary's gain that it seems to me that equity should require an amount to be stripped away from the accessory to prevent its profiting from the breach of duty of the fiduciary. 126 I will hear the parties on whether it is appropriate to take an account of profits distributed to, or perhaps appropriated to, Mr Graham or as directed by him from Tilmunda to the extent that they had their source in the two fifths share of profits received by Tilmunda. 127 With respect to the question of income tax under cl 11(b) of the deed, I find that Glandon is entitled to $23,108 as damages for breach of contract. 128 I will hear the parties on any adjustments to the account of profits. I will hear the parties on the terms of orders. I will hear the parties on costs. I direct the parties to bring in short minutes of order reflecting these reasons.

Glandon v Tilmunda

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (7)

Cited By (5)