Hungerford (by his tutor Ahadizadeh) v Richardson and Ors

Hungerford (by his tutor Ahadizadeh) v Richardson and Ors - [2017] NSWSC 297 - NSWSC 2017 case summary — Zoe

INTRODUCTION

Two former partners agree upon the existence and duration of their partnership, and upon a need for partnership accounts to be taken under the supervision of the Court in the course of winding up the partnership, but they disagree about the character of the business of the partnership and, critically, ownership of property used by the partnership in the course of its business.
There is no written partnership agreement. The agreement to establish a partnership was entirely oral, confirmed in large measure by a course of dealing characterised by a consistent division of profits during the currency of the partnership, but, to put the point neutrally, arguably silent about the division of property upon dissolution of the partnership.
A determination of the terms of the partners' agreement determines the outcome of their present contest. Conceptually, the starting point is what they said to one another, placing their conversations in context. However, where (as here) one of the partners is available to give evidence and the other is not, it is convenient to examine context first, not forgetting either the importance of what was said (no less than what was done) or a need to consider the evidence as a whole.
Expressed neutrally, the core question for determination is whether, at the time of dissolution of the partnership, the rent roll of the real estate business operated from premises in Kirribilli, between early 2001 and October 2011 or thereabouts, under the trading name "Deborah Richardson Real Estate, was beneficially owned: 1. as contended by the plaintiff (who sues in these proceedings by a tutor), by the plaintiff and the first defendant as partners; or 2. as the defendants contend, by the second defendant (the corporate vehicle of the first defendant), the holder of the corporation licence under the Property, Stock and Business Agents Act 2002 NSW pursuant to which the real estate business was then conducted.
I do not understand there to be any dispute between the parties about the partners' respective shares of partnership property and income. I understand them, rather, to accept that both profits and losses (on the income account) and property (on the capital account) of the partnership are to be shared, 40% to the plaintiff and 60% to the first defendant. That is not an issue. What is at issue is whether the rent roll is presently to be brought to account as part of the property of the partnership, divisible in those shares, or retained by the first defendant without division.

[5]

THE PROPERTY, STOCK AND BUSINESS AGENTS ACT 2002 NSW, Sections 8(5), 33, 213 and 215(4)

During the course of the hearing, I raised with the parties a question (not found in the pleadings) whether section 33 of the Property, Stock and Business Agents Act 2002 (formerly section 39A of the Property, Stock and Business Agents Act 1941 NSW) operates as an impediment to the respective cases of the parties.
Headed "Licensee not to share commission with certain persons", section 33 (with emphasis added) provides that "[a] licensee must not enter into an arrangement with or act in conjunction with a person that the licensee knows to be an unlicensed person (other than an employee in the licensee's business as a licensee) whereby the unlicensed person is entitled to a share of the commission, fee, gain or reward payable to the licensee in respect of any transaction by or with him or her as a licensee or generally". The section provides penalties for its contravention.
The defendants submit that section 33 necessitates a finding that, as an unlicensed person, the plaintiff could not share commission (more broadly, remuneration) to which the first and second defendants were entitled and, accordingly, the partnership between the plaintiff and the first defendant was not able to own a share of the rent roll of the business operated under the second defendant's licence.
With the benefit of research (including a review of the legislative history of section 33 of the 2002 Act and section 39A of the 1941 Act, enacted in 1957 and amended in 1967, 1980 and 1992), the plaintiff, in my opinion correctly, submits that the legislative proscription for which section 33 currently provides was enacted to address a concern about licensed agents acting in conjunction with unlicensed persons (in particular, persons unlicensed because of unfitness), not (as section 8(5) of the 2002 Act now confirms) a concern about the participation in profits of a real estate agent's business by an unlicensed, silent partner: cf, NSW Parliamentary Debate (Hansard), Legislative Council, 28 March 1957, page 4180.
A contravention of the section might give rise to prosecution of a licensee but not, in terms, an unlicensed person with whom the licensee shares commission. An unlicensed person knowingly involved in a contravention might also be prosecuted (section 213), but the principal offender is the licensee.
The short answer to the defendants' section 33 submission is found in section 215(4) of the 2002 Act. It provides that "[despite] any proceedings against a person for an offence against this Act or the regulations (whether resulting in a conviction or otherwise) the person remains liable to civil proceedings in the same manner as if the proceedings for an offence had not been taken.
I take this to evidence a legislative intention that a contravention of section 33 does not render an inter partes arrangement void, unenforceable or illegal: Yango Pastoral Co. Pty Limited v First Chicago Australia Limited (1978) 139 CLR 410 at 423; Equuscorp Pty Limited v Hoxton (2012) 246 CLR 498 at [23], [96] and [122].
Section 8(5) of the 2002 Act points in the same direction. It qualifies a prohibition, found in section 8(1)(a), on a natural person acting as or carrying on the business of a real estate agent unless the holder of a real estate agent's licence. It provides that "[for] the purposes of this section, a person is not considered to carry on the business merely because the person is a member of a partnership that carries on that business". It is accompanied by a formal notation: "Subsection (5) makes it clear that 'silent' partners are not required to be licensed".
Section 8(5) was inserted in the 2002 Act in order to overcome earlier uncertainty on the topic: cf, AG Lang, Estate Agency Law and Practice in NSW (5th ed, Law Book Co. 1994), paragraph [3205]. By virtue of transitional provisions in the 2002 Act, its effective operation is "retrospective": Sims v Gawne [2005] NSWSC 750 at [16]-[18]. Conventional wisdom is now that, by virtue of section 8(5), "only one partner in a licensed partnership is required to hold a licence": AG Lang and P Morgan, NSW Estate Agency Law and Practice (6th ed, Law Book Co, 2008), paragraph [30.60].
In my opinion, section 33 of the 2002 Act does not operate as an impediment to either of the cases advanced in these proceedings. The core question, earlier identified, is the focus of attention.

[6]

THE PARTIES' COMPETING CONTENTIONS AND POINTS OF AGREEMENT

The plaintiff contends that the business of a real estate agency conducted under the name "Deborah Richardson Real Estate" was the business of the partnership of himself (as a "silent partner" whose contribution to the partnership was limited to the provision of finance, without active participation in the management or sale of real estate) and the first defendant, whose contribution to the partnership was the real estate licences of the second defendant and herself and, pursuant to those licences, day-to-day management of the real estate business.
The defendants contend that the partnership business was limited to the provision of services to the second defendant to enable it to operate the real estate business, the assets of which were owned by the second defendant.
The defendants' case is put with greater precision, in paragraph 5(a) of their Defence, from which the following is an extract: "(a) the First Defendant and Second Defendant say: (i) in or around 2001, the Plaintiff and First Defendant entered into a partnership ('Richardson & Hungerford Partnership'); (ii) the Second Defendant: (A) owned the assets of the business operating under the name 'Endjade Pty Limited [the name of the second defendant] trading as Deborah Richardson Real Estate' ('Real Estate Business'), including the rent roll; and (B) entered into contracts with third parties in respect of real estate agency for the management of rental properties and the sale of properties; and (iii) there was an agreement between the Second Defendant and the Richardson & Hungerford Partnership whereby the Richardson & Hungerford Partnership provided services to the Second Defendant to enable the Second Defendant to operate the Real Estate Business ('Services Agreement'); Particulars The services provided by the Richardson & Hungerford Partnership to the Second Defendant included undertaking all of the operating expenses of the Real Estate Business such as staff costs, office rent and office expenses ('Services'). (iv) it was a term of the Services Agreement that the Richardson & Hungerford Partnership: (A) was entitled to all of the proceeds due and payable to the Second Defendant in respect of the management of the rent roll; (B) was entitled to the commission payable to the Second Defendant by vendors in respect of the sale of properties; and (C) would incur and be liable for all expenses in providing the Services to the Second Defendant, Particulars The expenses incurred by the Richardson & Hungerford Partnership in providing the Services included employee wages, office overheads and other incidental costs of providing the Services."
In other paragraphs of the Defence the following affirmative statements are made in delineation of the defendants' case: 1. it was a term of the Richardson & Hungerford Partnership that the plaintiff and the first defendant would share the profits and bear the losses of providing the Services in the shares of 40% to the plaintiff and 60% to the first defendant (Defence paragraph 6(a)). 2. the second defendant sold the rent roll to Burley Realty Commercial Residential Sales Pty Limited, which did not form any part of the property of the Richardson & Hungerford Partnership (Defence paragraph 9(a)(ii). 3. the plaintiff and the first defendant entered into the Richardson & Hungerford Partnership for a single adventure or undertaking, being the provision of the Services (Defence paragraph 13(a)). 4. the adventure or undertaking was terminated in or about October 2011 by the abandonment of the Richardson & Hungerford Partnership (Defence paragraph 14(a)(ii)). 5. the Richardson & Hungerford Partnership was dissolved in or about October 2011 (Defence paragraph 15(a)). 6. the Richardson & Hungerford Partnership was conducted under the name DA Richardson and DA Hungerford (Defence paragraph 35(a)(ii)). 7. the Real Estate Business conducted its business, and the Richardson & Hungerford Partnership provided the Services, from premises in Kirribilli (Defence paragraph 35(a)(iii).
Whatever the correct characterisation of the partnership business, it is agreed that: the contribution of the plaintiff (an accountant by profession) was financial, he being a "silent partner"; and the contribution of the first defendant, through the second defendant (of which she is and was at all material times the sole shareholder and director), was the provision of licences required (initially, under the Property, Stock And Business Agents Act 1941, subsequently under the Property, Stock And Business Agents Act 2002 which repealed and replaced it) and day-to-day management of the business.
All parties to the proceedings agree that, subject to accounts being taken in due course, the partnership was dissolved upon disposal of the rent roll of the business (in commercial terms, the principal asset of the business) to Burling Realty Commercial Residential Sales Pty Limited (an unrelated purchaser) by the second defendant (under the active control of the first defendant as its controlling mind) pursuant to a contract of sale dated 15 August 2011 entered into between the second defendant as vendor and the purchaser, settled on or about 20 October 2011.
The defendants effected the sale on their own responsibility, and for their own benefit. The first defendant says that she sold the business (including the rent roll) on notice to the plaintiff, albeit after he had suffered a stroke. Although the point was not explored in depth, he may possibly have been incapable of giving any informed consent to the sale, incapacitated as he was (to some extent) from October 2010 or thereabouts. More to the point, however: in the conversation to which the first defendant deposed as evidence that she sold the rent roll on notice to the plaintiff, she did not tell him, and he cannot be taken to have agreed, that she would retain all proceeds of sale without accounting to him for a share as her partner. He cannot be taken to have acquiesced in a claim of entitlement she did not squarely make.
No party contends that the partnership came to an end when the plaintiff suffered an incapacitating stroke in October 2010. All parties accept that it continued until the defendants arranged for the business to be sold in 2011. Nothing of substance appears to turn on this point in any event, apart from assessment of the quality of any "consent" the plaintiff may have given to the sale of business in 2011. The business apparently continued to be conducted, in the ordinary course, in the year following the plaintiff's stroke. There is no suggestion of a breach by the first defendant of her ongoing fiduciary obligations to the plaintiff until the defendants sold the business on terms designed to allow them to appropriate the whole of the sale proceeds to themselves, to the exclusion of the plaintiff.
I refer, here, to "the defendants" collectively, including the third defendant, who is and was at all material times the domestic partner of the first defendant. He was actively involved, with the first defendant, in carrying forward the second defendant's entry into the sale contract and in appropriating proceeds of sale received, upon completion of the contract, in the acquisition of a residential property at Broke, near Singleton (the land contained in Folio identifier 41/830744), in the names of the first and third defendants as joint tenants.
The plaintiff claims that, although the legal title to the rent roll may have resided in the second defendant as licensee, it was held by the second defendant on trust for the partnership between the plaintiff and the first defendant. He contends, further, that the sale of the rent roll by the second defendant on terms that expressly provided for proceeds of the sale to be applied for the personal benefit of the first and third defendants, to the exclusion of the plaintiff, constituted a breach of trust obligations owed by the second defendant to the partnership, and a breach by the first defendant of fiduciary obligations owed by her as a partner to the plaintiff, and a knowing receipt by the first and third defendants of trust property required to be accounted for to the partnership on the taking of accounts.
As a consequence of the stroke he suffered in October 2010 the plaintiff, at some indeterminate time, became (and he has since continued to be) a person incapable of managing his affairs within the meaning of the Guardianship Act 1987 NSW. He sues in these proceedings (commenced on 30 October 2015) by a tutor (governed by the Uniform Civil Procedure Rules 2005 NSW, Part 7 Division 4) who was, on 18 February 2013, appointed financial manager of the plaintiff by the Guardianship Tribunal (the statutory predecessor of the Guardianship Division of the Civil And Administrative Tribunal of NSW, "NCAT") upon an exercise of jurisdiction under the Guardianship Act 1987. His commencement of the proceedings was authorised by the NSW Trustee, pursuant to the NSW Trustee and Guardian Act 2009 NSW.
In his capacity as financial manager of the plaintiff, on or about 2 November 2015 the tutor caused a caveat (registered dealing number AJ955820E) to be entered against the title of the Broke property, of which the first and third defendants are registered proprietors.
With editorial adaptations, the allegations of fact upon which the plaintiff claims, in the caveat, that "the registered proprietors hold their interests in the land on trust for him" are described in terms to the following effect: "The caveator [the plaintiff] claims that he was in partnership with [the first defendant]; that the partnership conducted the business "Deborah Anne Richardson Real Estate" at…Kirribilli; that, without his consent, [the first defendant] sold the property of the partnership and used the proceeds to purchase the land [the subject of the caveat]; [and] that [the third defendant] is a volunteer and was aware of the source of the funds used to acquire the land".
At the time of the final hearing of the proceedings the defendants were self represented. The first and third defendants appeared in person. The second defendant (without any objection on the part of the plaintiff and with a grant of such, if any, leave as may have been required) appeared by the first defendant as its sole shareholder and director.
Although the defendants were self represented at the final hearing, their Defence (filed 14 January 2016) to the plaintiff's Amended Statement of Claim (filed 18 November 2015) was prepared by a solicitor who then acted for all three defendants, and the sole affidavit relied upon by the defendants (an affidavit affirmed by the first defendant on 19 July 2016) was prepared by a second solicitor who, at that time, acted for all three defendants. Each of the first and second defendants is a sophisticated person. They conducted their defence to the proceedings in a manner commensurate with a high degree of business experience, albeit lacking legal qualifications.
It is as well to mention here that, in the course of his final submissions, counsel for the plaintiff invited the Court to draw an inference, of the kind identified in Jones v Dunkel (1959) 101 CLR 298, arising from the deliberate decision of the defendants to adduce no evidence from the third defendant, and their decision, presumably no less deliberate, to adduce no evidence from the accountant (Mr Bruno Ivan) who acted as tax agent for the partnership and prepared accounts for it and the second defendant.
Given the limited basis upon which the defendants defend the plaintiff's claims for relief (including the defendants' acceptance that the third defendant acquired his interest in the Broke property with actual notice of such, if any, breach of equitable obligations as may have been owed to the plaintiff, personally or as a partner, in disposal of the disputed rent roll), there is not much occasion for the operation of a Jones v Dunkel inference arising from the absence of evidence from the third defendant.
Whether there is any occasion for such an inference to be drawn arising from the absence of evidence from Mr Ivan could be the subject of debate. However, in fairness to all parties, it should be noted that Mr Ivan dealt with both the plaintiff and the first defendant in his preparation of partnership accounts, and records of Mr Ivan relating to the partnership have been subpoenaed by the plaintiff.
All parties agree that, by reason of mental incapacity, the plaintiff is and was at all material times unavailable to give evidence in these proceedings.

[7]

The Nature of the Plaintiff's Case

The plaintiff's case depends, in part, upon hearsay statements attributed to the plaintiff (admitted into evidence pursuant to section 64 of the Evidence Act 1995 NSW or not objected to by the defendants) to the effect that he had invested in "Deborah Richardson Real Estate" on the basis that the rent roll was his "retirement fund"; but, to a far greater degree, it depends upon documents. Statements attributed to the plaintiff in his case join issue with the first defendant, insofar as both parties say that they looked to the rent roll as a "retirement fund", but they are not sufficiently elaborate to determine the issue. The plaintiff's case depends, in substance, on contemporaneous documents.
Some of the business records adduced in evidence are, at best, equivocal or liable to be explained by the objective fact that the day-to-day business of "Deborah Richardson Real Estate" was conducted by the first defendant under licences held by the second defendant and herself.
The available tax returns of the partnership commenced, in the 2001 and 2002 financial years, with a description of the partnership's "main activity" as "property management"; but, with a change of tax agent (to Mr Bruno Ivan), various other descriptions were later used: "real estate management service" (2003-2007), "real estate agency service" (2008) and "real estate services" (2009-2010). This change of labels occurred without any change in the character of the business. Insofar as the labels peak of provision of a "service" they are silent as to the recipient, or recipients, of such a service; they are consistent with the provision of a service either to the second defendant or landlord clients.
The available balance sheets of the second defendant do not record the "rent roll" as an asset of the company, although they do record an entry for an "intangible asset" which the first defendant, on reflection, explains as the historical cost ($11,711.36) of the company's acquisition of three managing agent's agreements from an employee at a date (no later than 30 June 2001) not specified in the evidence.
Although the defendants suggest that even those documents specifically relied upon by the plaintiff are at best equivocal, the plaintiff draws substantial support from a succession of documents.
First, available tax returns of the partnership record that the whole of the management fees received by the second defendant were divided between the partners in their agreed proportions; namely, 40% to the plaintiff and 60% to the first defendant. This is consistent with the defendants' pleading that the partnership was entitled to the whole of the income produced by management of the rent roll, and liable for the whole of the expenses of the business conducted by the second defendant.
Secondly, file notes produced by the Australian Tax Office record statements made on 26 October 2006, 5 June 2007 and 20 June 2007 by the first defendant (in relation to the first and third dates) and Mr Ivan (on the second date) which, read literally, suggest that the rent roll was an asset of the partnership.
Thirdly, documentation attached to the contract dated 15 August 2011 for sale of the rent roll includes statements recording that employees employed in the "real estate agency" business sold by the second defendant were employed by the partnership.

[8]

The Nature of the Defendants' Case

The case of the defendants is based essentially, squarely upon undocumented conversations alleged by the first defendant to have taken place between the plaintiff and herself in late 2000 or early 2001 when, the first defendant deposes, the plaintiff proposed that they together, as partners, conduct a new business, based upon the real estate business then conducted by the first and second defendants. The first defendant emphasises the commercial importance to her personally of the rent roll as her retirement fund, a capital asset more valuable to her than any income it might generate before sale upon retirement.
The defendants rely upon the fact that the first and second defendants held real estate licences, whereas the plaintiff never did.
They also seek to explain away, on two bases, what might be thought to be admissions in the ATO file notes. First, they contend that, read in commercial context, the notes do not distinguish between competing claims to ownership of the rent roll as between the plaintiff, the first defendant and the second defendant. Secondly, they point out, not unfairly, that insofar as statements are attributed to Mr Ivan, his instructions might have come from the plaintiff rather than the first defendant.
It is common ground that, during the life of the partnership, the rent roll of "Deborah Richardson Real Estate" grew with the benefit of financial assistance from the plaintiff and professional expertise in day-to-day management contributed by the first defendant.
The critical conversations on which the defendants rely (and which the plaintiff contends should not be accepted) are found in paragraphs 19-21 of the first defendant's affidavit. Those paragraphs are in the following terms (with emphasis added): "19. In around late 2000, I received a phone call from Mr Hungerford [the plaintiff] and we had a conversation in words to the following effect: Mr Hungerford: "I was walking past your old shop on Broughton Street and it looks like it's up for lease". Me: "Ok". Mr Hungerford: "I have a proposition for you. Come and meet me so that we can discuss it". 20. A short time after the conversation referred to in the preceding paragraph, Mr Hungerford picked me up in his car and we drove to a coffee shop. While in his car and in the coffee shop, Mr Hungerford and I had a conversation in words to the following effect: Mr Hungerford: "When I saw that your old shop was up for lease, I started thinking that we could set up a business together". Me: "A real estate business?" Mr Hungerford: "Yes, of course a real estate business. We can be partners in it". Me: "I'm not sure. I like working from my home. I have around 20 properties on the rent roll and it's easy to manage them from home. I don't have to pay rent for the office space and I don't have any employees to pay. I have a good and quiet life. I also don't have the capital to set up a new business". Mr Hungerford: "You don't have to put in any money initially. I'll loan the start up capital to the business. You'll keep growing your existing rent roll and the profits will be used to pay the expenses of the business. Whatever profit is left can be split by us in the partnership - 60% to you and 40% to me. The start up capital will be my contribution and the rent roll will be your contribution and we'll both get back what we put in". Me: "The rent roll is in Endjade's name [that is, the name of the second defendant]. Endjade is the entity that holds the corporate real estate licence. The rent roll is what I'm going to use in my retirement. The plan has always been to build it up and sell it. That's the only time you ever really make any money from a rent roll. I haven't had any superannuation for years so I need to be able to eventually sell my rent roll and use that money to retire." Mr Hungerford: "The rent roll is yours. As I said, we'll both get back what we initially put into the business - I'll get repaid the start up capital and any other capital that I loan to the business and you'll keep ownership of your rent roll. It'll be the profits of the rent roll and the losses of the partnership that get split." Me: "We could put the profits of the rent roll into the partnership but there won't be much. The real profits in the industry come from property sales commissions". Mr Hungerford: "The rent roll will be the primary focus and once you've got more properties on the rent roll, we'll expand the business to sell property". Me: "I stopped selling properties for a reason. The business just got too big and difficult. I don't want that again. I've limited my business to managing rental properties and I enjoy it. Let me think about this more". Mr Hungerford: "Let's chat again soon. But think about it". 21. Over the course of around 3 months, between late 2000 and early 2001, Mr Hungerford and I had a number of conversations in various coffee shops and while driving in Mr Hungerford's car and my car to discuss the details for the partnership proposal. These conversations took place in words to the following effect. Mr Hungerford: "Have you put some more thought into this idea? You'll be the one working in the business so you'll get paid a wage. I would just be a silent partner in the business". Me: "What were you thinking? I'll be taking on the day to day running of this business by myself - I'll have to fill the role of property manager, office manager, sales manager, compliance manager, licensee in charge…". Mr Hungerford: $1,000 per week. Like I said, I'll put in the start up capital for the partnership and inject money into it as it's needed to pay for things like office expenses. When the partnership is making enough money, it will pay me back". Me: "OK, so Endjade will keep ownership of the rent roll but all management fees and commissions that are generated from the rent roll and property sales will be paid into the partnership. When we start making enough money from the rent roll and property sales, you'll be repaid the money that you put in and we'll split the profits - 40% to you, 60% to me. Is that right?" Mr Hungerford: "Yes. And the losses of the partnership will be split in the same way too". Me: $1,000 per week isn't much. I'm getting a lot more than that through Endjade's operations at the moment but I'll take the drop in income if I can rely on the sale of the rent roll for my retirement. I'll give up long serve leave entitlements and superannuation but I'll need to keep the rent roll as it'll be my superannuation if we ever sell the business". Mr Hungerford: "Great. Let's see how you go. We can keep discussing it".

[9]

ATO File Notes

The ATO file notes upon which the plaintiff relies (relating expressly to the tax affairs of the partnership between the plaintiff and the first defendant, not the tax affairs of the second defendant) arose in circumstances in which the partnership was struggling to meet its tax liabilities, and endeavouring to keep the ATO at bay.
The file note for 26 October 2006 reads as follows (with emphasis added and minor editorial adaptation): "Client information: How did the debt arise? The business in the 2001/2002 year expanded its sales force to try to build up its sales listings employing a number of sales representatives on large retainers. The promise almost sent the Partners into liquidation with large losses that were funded from resources outside the business. What are the reasons why you cannot pay in full? All available resources were committed to funding the losses. No funds were available to pay the ATO or other creditors. What efforts have you made to pay the debt in full? Partners have refinanced investment property to release equity of this asset to debt repayment. Business has been brought back to core business of rent roll to fund Partner working capital debts and generate cashflow to repay all monies owing. Are the business financial difficulties temporary? If yes, when is it expected that the financial situation will improve? The business has reduced its workforce and now concentrates on core business rent roll. It also employs administration staff and any sales of property contribute 100% back to the business. Do you have any other creditors? YES/No - how many? YES How are you paying your other creditors? Debt programmes in place and borrowing from family to keep the business going to allow it to be rebuilt into a significant Rental Agent. Small number of large dollar sales do contribute to bottom line with minimal cost. How can you pay your other creditors and keep up with current and future tax obligations, as well as, making payments towards the payment arrangement by the due date? Budgets are being prepared to show the business can trade its way out of it's [sic] problems and non-business assets are being reviewed for additional working capital loans. You have defaulted on previous arrangements - what steps have you taken to ensure that you will be able to sustain this payment arrangement? The principle [sic] of the business has accepted a consultancy with a legal firm that brings in an additional $35,000.00 in income. The carry forward losses of Ms Richardson mean that all income after debt service and living expenses can be used to repay. Who have you approached to obtain finance? Refer application lodged on 19/09/2006. Do you have assets you can sell? The rent roll itself is a valuation [sic] asset but No. The remaining non-business assets are either mortgaged to already service the business losses or are held in joint ownership with current Partner (de facto) who is servicing the loan until the business can pay Ms Richardson more income. The sale of the business itself is a last resort only and would result in a fire-sale that would damage its value. The Partners believe that the right mix of staff and costs will result in bringing the business into profit and allow past debts to be paid…."
Counsel for the plaintiff submits, and the defendants do not contest, that the description of the rent roll as a "valuation asset" should be notionally corrected to be read as if it said "valuable asset".
With emphasis added and minor editorial adaptations, the file note for 5 June 2007 reads as follows: "Rang Tax agent Bruno Ivan at 10.30am…regarding this client. POI done. Advised Mr Ivan the arrangement has defaulted and the Mar 07 BAS has been lodged and not paid. He was surprised the BAS wasn't paid as he lodged it and was assured by the client the payment will be made. He said the clients have been concentrating on selling the rental role [sic] and have probably forgotten about the arrangement. Advised him the debt balance is now $60,266.67. He said he will call the client and contact by Tue 12/6/07…."
The file note for 20 June 2007 reads as follows (with emphasis added and minor editorial adaptations): "As per previous RMS note, I have late Monday afternoon 18.6.07 received a call from Ms Deborah Richardson (partner, ph: ...) - poi check satisfied and contact details confirmed. I was unable to finish this note as was instructed to work call-call. The cac debt of $60554.29 cannot be paid in full she advised, nor can she enter into any form of payment arrangement though either. Ms Richardson explained that this partnership is a real estate agency business and simply has not been performing well due to the downturn in the housing market in NSW. She advised that is intending to sell this business if she can. Ms Richardson is aware that she has had 6 defaulted arrangements already for this cac debt. Ms Richardson asked if the office could refrain from commencing recovery action for a couple of months but I explained to her that as she is not offering any payment plan I cannot agree to this. There are no outstanding lodgements other than the '06 partnership return. FTL warnings given. I explained to Ms Richardson that as I cannot enter her partnership into an arrangement the case will need to be referred for recovery action…."
The defendants' submission that these file notes can be read without attribution of ownership of the rent roll to the partnership, as distinct from the second defendant, is not without force. However, in the context of the parties' agreement that all income and expenses of the business be on the account of the partnership, in my assessment the better reading is that references to the rent roll are an admission (so far as they can be attributed to the first defendant), and more generally evidence (admissible via business records), that the rent roll was partnership property.

[10]

The Partnership Act 1892 NSW and Partnership Law

The plaintiff supports this conclusion, as a matter of law, in two complementary ways.
First, he relies upon section 20(1) of the Partnership Act 1892 NSW, which (with emphasis added) provides as follows: "All property, and rights and interests in property, originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement."
Section 20(1) is to be read with sections 1(1), 19, 21, 29, 38 and 39 of the Partnership Act 1892. So far as presently material, those sections are in the following terms: "Definition of partnership (1) Partnership is the relation which exists between persons carrying on a business in common with a view to profit …. 19 Variation by consent of terms of partnership The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing… 21 Property bought with partnership money Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm… 29 Accountability of partners for private profits (1) Every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership, or for any use by the partner of the partnership property, name, or business connexion…. 38 Continuing authority of partners for purposes of winding-up After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise: Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this proviso does not affect the liability of any person who has, after the bankruptcy, represented himself or herself or knowingly suffered himself or herself to be represented as a partner of the bankrupt…. 39 Rights of partners to application of partnership property On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or the partner's representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm."
The facts that legal title to the rent roll resided in the second defendant, the second defendant was all material times owned and controlled by the first defendant and that the real estate business was conducted via the first and second defendants as licensees are not, jointly or severally, determinative of the issue of ownership of the rent roll in favour of the defendants.
In an inquiry into the ownership of property used by a partnership, little regard is paid to legal title; the questions to be determined generally are: (a) whether the original owner retains both the legal and beneficial interest in the property or whether the title holder has, expressly or by implication, transferred the beneficial interest in favour of the partners collectively; and/or (b) whether the property was acquired using resources of the partnership. As an unincorporated partnership of several persons cannot hold property in its own name because it is not a distinct legal entity, some person or persons must hold title for the benefit of the partners. Partnership law is primarily concerned with those beneficial interests. Equity modifies the common law not by affecting its procedures but by imposing obligations upon the persons, who, originally or by transfer, are possessed of legal title to the property. So we are instructed by KL Fletcher, The law of partnership in Australia (9th ed, Law Book Co, 2007) chapter 5, especially pages 141-142 and 147.
As Lord Eldon put it in Crawshay v Collins (1808) 15 Ves. Jun. 218 at 226; 33 ER 736 at 740: "The obligation implied among partners, is, that they use the joint property for the benefit of all, whose property it is."
The classic work, Lindley on Partnership, also instructs us that "[whatever] at the commencement of a partnership is thrown into the common stock, and whatever has from time to time during the continuance of the partnership been added thereto or obtained by means thereof, whether directly, by purchase or circuitously by employment in trade, belongs to the firm, unless the contrary can be shown": RI Banks, Lindley and Banks on Partnership (19th ed, Thomson Reuters, 2010; second cumulative supplement, 2013), [18-06].
The same text, citing Barber v Rasco International Limited [2012] EWHC 269 at [90]-[91], is authority for the proposition that "where the partnership business is run through a company owned by one of the partners, any contract entered into by the company for the purposes and in the course of the business will be partnership property".
Secondly, the plaintiff also contends that the partners' admitted entitlement to all income produced by management of the rent roll (reinforced by an obligation to pay all expenses which generated that income) carried with it ownership of the rent roll itself, the property which produced the income; in classic phraseology, the entitlement to the fruit produced by the tree carried with it ownership of the tree.
There is force in each of these contentions, but each of them ultimately depends upon the terms of the partnership agreement.

[11]

The Partnership Agreement Re-examined

In the absence of a written partnership agreement, the terms of the parties' agreement are to be found in their conversations and conduct, and inferred from their course of dealing.
Lindley and Banks on Partnership (19th ed, 2010), at paragraph [18-03] provides the following elaboration: "… it is up to the partners to agree between themselves what assets are to be treated as partnership property. In the absence of an express agreement, the relevant factors will generally be: (1) the circumstances of the acquisition, with particular reference to the source from which it was financed, (2) the purpose of the acquisition, and (3) the manner in which the asset has subsequently been dealt with. The importance of these factors, which are illustrated in many of the earlier cases, is firmly established by [the equivalent of sections 20 and 21 of the Partnership Act 1892 NSW]."
Consideration of those factors suggests (as I find) that, subject to any contrary intention of the partners, the rent roll was partnership property. It was dedicated to the partnership business, as an essential component of the business, with equally important contributions to its existence, maintenance and development by the plaintiff (as financier) and the first defendant (as licensee and manager). The very purpose of its acquisition, maintenance and development was to advance the business of the partnership, the income generated by which was uncontroversially to be shared between the plaintiff and the first defendant in agreed shares. Throughout the duration of the partnership, which was contemplated as indefinite in time, it was treated as available for the joint benefit of the partners, as is illustrated by their routine division of the net profits it generated.
Prima facie, the rent roll was partnership property. That being so, attention must turn with greater concentration of focus, to what are alleged by the defendants to be the express, oral terms of the partnership, evidenced by the alleged conversations between the plaintiff and the first defendant in in 2000-2001.
Although convenience has dictated that context be examined before the content of those conversations, I remain mindful of a need to view context from the perspective of a provisional acceptance of evidence of the conversations in the process of weighing all the evidence in reaching a decision.
The plaintiff contends that, having regard to the terms of section 20(1) of the Partnership Act (and the fact, disputed by the defendants, that the rent roll was "originally brought into the partnership" or "acquired on account of" the partnership or "for the purposes and in the course of" the partnership business), the defendants bear an onus of proving that the rent roll was not partnership property.
I do not accept this contention. It assumes too much about the terms upon which, to use a neutral expression, the rent roll was brought into the picture and used. It passes over a need to prove the terms of the partners' agreement. In an environment in which the parties are agreed that there was an agreement, but they differ about its terms, it is not helpful simply to take refuge in the incidence of an onus of proof. Recognising that an evidentiary onus might shift from time to time, I proceed on the basis that the plaintiff bears the onus of proving what he alleges to be the case, that the rent roll was partnership property.
Upon an assessment of oral statements attributed to the plaintiff, I proceed with caution (similar to that urged in Plunkett v Bull (1915) 19 CLR 544 at 548-549 in the assessment of statements attributed to a deceased person) knowing that, by reason of his present incapacity, the plaintiff is unable to contradict or confirm evidence of any statement attributed to him. This applies equally to evidence adduced from witnesses called on behalf of the plaintiff as it does to evidence given by the defendant.
The cautionary observations of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319 are also apt: "… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience."
In my assessment, viewed in the context of the whole of the evidence, the first defendant's attribution of a presently convenient oral agreement to the plaintiff, first documented, with an appearance of precision, in the preparation of an affidavit sworn approximately 16 years after the event is susceptible to criticism in these terms. I do not accept her evidence of seminal conversations with the plaintiff. Paraphrasing McLelland CJ in Eq: time, interest and human frailty tell against acceptance of her evidence as reliable. Having persuaded herself of the propriety of her cause, she rationalised the facts as she remembered them and stuck to the script.
In my opinion, the better guide to the terms of the parties' partnership agreement is found in their course of dealing (imperfect although evidence about that may be) and in the nature of the property, and business, under review, bearing in mind particularly the objective fact of an admitted entitlement in the partnership to all income derived from the rent roll, coupled with an obligation to pay all expenses incurred in deriving that income.
By nature and design, the rent roll was destined to grow (as it did) through the combined inputs of the partners over a term indefinite in duration, apparently without any discussion about how it was that the plaintiff could recover on his investment, otherwise than by a share of the rent roll, if the first defendant were to terminate the partnership on short notice.
The partnership carried on the business of management of the rent roll, to which the first defendant (personally and through the second defendant) contributed real estate licences. The partnership was not a mere, unincorporated service entity subordinated to the second defendant as licensee. To embrace that characterisation would be to reverse the reality of the parties' business arrangement.

[12]

CONCLUSION

The rent roll was property of the partnership. It is to be accounted for as such in the process of taking accounts of the partnership.
In the meantime, the plaintiff's caveat over the land at Broke acquired with the proceeds of sale of the rent roll can be maintained.
Although a partner has no title to specific property owned by the partnership, he or she has a beneficial interest in each and every asset of the partnership, and his or her share in the partnership consists of a right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership. That right bears the character of an equitable interest because it is enforceable in equity, not at law: Commissioner of Taxation v Everett (1980) 143 CLR 440 at 446-447.
When the first defendant sold the rent roll and appropriated the proceeds of sale for the personal benefit of herself and the third defendant (without the fully informed consent of the plaintiff or other authority) she not only caused the partnership to be dissolved by termination of the partnership venture (Partnership Act section 32(b)), she also acted in breach of fiduciary obligations she continued to owe the plaintiff as her (former) partner pending winding up of the partnership: Partnership Act, sections 38-39. To her receipt and application of the proceeds of sale a constructive trust attached in aid of her obligation to account to the plaintiff: Chan v Zacharia (1984) 154 CLR 178 at 199 and 204-205.
The land at Broke having been acquired in the names of the first and third defendants, in circumstances in which it was acquired with partnership property in breach of the first defendant's fiduciary obligations to the plaintiff, and the third defendant cannot be characterised as (and does not claim to be) a bona fide purchaser for value without notice of the plaintiff's equitable interest, the land is held on trust for the partners pending the taking of accounts.
A recent search of the title to the Broke land (Exhibit P2) records that the title of the first and third defendants as registered proprietors might be the subject of encumbrances having priority over the plaintiff's caveat. A mortgage to National Australia Bank Limited and two caveats appear to have been entered on the title before lodgement of the plaintiff's caveat. The current judgment is not directed to, and cannot speak of, any disputes as to priorities that might exist.
This judgment is directed primarily towards a resolution of the principal dispute standing in the way of the parties cooperating in the process of partnership accounts being taken; namely, a dispute about beneficial ownership of the rent roll as sold in 2011.
On settlement of the sale the defendants received sufficient money to fund their purchase of the Broke property for $1.45 million. The first and third defendants acquired the Broke property entirely with proceeds of sale of the rent roll, knowing its source and character. The bank cheque dated 20 October 2011 for $1,429,437.39 which they delivered to the vendors of the Broke property, on a simultaneous sale and purchase, was funded entirely from the proceeds of sale of the rent roll.
It is not necessary in this judgment to work out with greater precision the precise amount received, or still receivable, upon sale of the rent roll. Some funds remain in a "retention account" pending a resolution, not only of the current proceedings, but also of disputation between the second defendant and the purchaser of the rent roll.
The nature of the case requires that this judgment determine the principal dispute, and establish a framework for accounts to be taken, reserving liberty to apply for directions or further or consequential relief in the event that the parties do not resolve remaining disputes consensually.
Because the plaintiff's caveat prima facie ranks behind a registered mortgage and other caveats on the title of the Broke land, and the first and third defendants are looking to refinance the mortgage, the partnership interest in the land is in need of protection by an injunction designed to ensure that the defendants do not act to the prejudice of the partnership interest without the leave of the Court or the prior written consent of the plaintiff. In practical terms, the effect of this, I trust, will be to require the parties to co-operate in the process of disengaging their interests.

[13]

ORDERS

I make the following orders: 1. DECLARE that the partnership between the plaintiff and the first defendant operating from premises in Kirribilli, in the conduct of a real estate business under the licence of the second defendant, was dissolved, upon completion of the sale of the business, on or about 20 October 2011. 2. ORDER that the partnership be wound-up under the direction of the Court. 3. ORDER that accounts be taken in the winding-up of the partnership. 4. RESERVE for consideration, pending the conduct of a mediation, all questions relating to conduct of the process of taking accounts. 5. ORDER, pursuant to section 26 of the Civil Procedure Act 2005 NSW, that the proceedings be referred to the Registrar for the appointment of a court-annexed mediation. 6. DECLARE that the rent roll the subject of the contract for sale of business dated 15 August 2011 made between the second defendant as vendor and Burling Realty Commercial Residential Sales Pty Limited as purchaser ("the rent roll"), and the proceeds of sale of the rent roll, comprised property of the partnership between the plaintiff and the first defendant, to which partnership the defendants are liable to account for same. 7. DECLARE that the first and third defendants hold the land contained in Folio identifier 41/830744 ('the Land") on trust for the plaintiff and the first defendant, as former partners, pending the taking of accounts between the partners. 8. ORDER, subject to further order, that the defendants by themselves their servants and agents be restrained from disposing of, further encumbering or otherwise dealing with any interest in the Land, or any proceeds of sale of the rent roll, without the leave of the Court or the prior written consent of the plaintiff. 9. RESERVE to the parties liberty to apply generally, including a reservation to the plaintiff of liberty to apply for further or consequential relief in enforcement of the defendants' liability to account for partnership property or the proceeds of sale thereof.
Prima facie, with costs following the event, the plaintiff is entitled to an order that the defendants pay his costs of the proceedings to date.

At a glance

Court

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Before

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Judgment (14 paragraphs)

Parties

Cases Cited (8)

Cited By (3)