Murray v Feros

Winding up of Pharmacy Partnerships and Companies

1. The partnership agreement which governs the operation of the Kambah Partnership provides that the partnership is subject to the law of New South Wales. For the other three partnerships, where there is no written partnership agreement, the applicable law is apparently the law of the Australian Capital Territory. In relation to those partnerships, the Court is exercising cross-vested jurisdiction of the Supreme Court of the Australian Capital Territory.
2. The Court has statutory power to dissolve a partnership where it is "just and equitable" to do so. This power is found in the Partnership Act 1892 (NSW), s 35(f) and the Partnership Act 1963 (ACT), s 40(1)(f). Under each Act the Court has power to make orders consequential on the dissolution, which include the winding up of the partnership: Partnership Act 1892 (NSW), s 39; Partnership Act 1963 (ACT) s 45(2).
3. The plaintiffs relied, in the case of the pharmacy companies, on the Corporations Act 2001 (Cth), s 461(1), which gives the Court power for the winding up of the company if, among other things, the Court is of the opinion that it is just and equitable that the company be wound up: s 461(1)(k).
4. Evidence before the Court shows, as I have already indicated, there have been long-standing disputes between the owners concerning the conduct of the partnership business. The disputes have reached the point where the owners feel that they are unable to continue to work together. The partnership agreement for the Kambah Pharmacy has provisions whereby one partner can be bought out by the others. The agreement also contains dispute resolution provisions. But there is no mechanism for the resolution of the disputes so far as they relate to the other three partnerships, nor is there any shareholders agreement which would provide for the resolution of disputes within the pharmacy companies. It would clearly be impracticable to require the parties to follow the buy-out or dispute resolution procedures set out in the Kambah partnership agreement in isolation. Because of the way in which the partnerships have operated, the disputes between the partners must be resolved all at once.
5. The evidence also shows that there have been extensive discussions between the parties involving proposals and counterproposals for the dispute to be resolved informally by way of some sort of buy-out. Unfortunately, those negotiations have not resulted in any agreement.
6. A further factor is the attitude of the CBA as the financier. The CBA is aware of the dispute and appears to be concerned by it. At the end of January, CBA gave 90 days' notice to the partners to resolve their disputes failing which it appears CBA might be able to take some sort of action to call up the loans. Such an outcome would obviously be most undesirable from the point of view of the partnership businesses. The desirability of winding up the partnerships is underscored by the fact that the parties, having explored the alternatives, have now in effect agreed upon it.
7. For these reasons, I am satisfied that the pharmacy partnerships should be wound up on the just and equitable ground.
8. The short minutes provide in the usual way for declarations to be made by the Court as to the subsistence of each of the partnerships; orders that the partnerships be dissolved; orders appointing a team of insolvency practitioners as receivers and managers for the purpose of winding up the partnership; and directions to the receivers for how they are to carry on that task, as well as the grant of powers to the receivers to enable them to do so. All of this is now uncontroversial but the process of formulating these orders has revealed a problem with one of the pharmacy partnerships, which operates a pharmacy at Gowrie, another suburb of Canberra. There is a dispute about the scope of the partnership business.
9. The pharmacy at Gowrie is conducted from commercial premises which are owned by another company that is owned and controlled by the owners. That company is not a party to the proceedings. The company holds a sub-lease over the building, and elsewhere in the building there are premises used as a supermarket. The company derives income from the operation of the supermarket. The pharmacy partnership occupies the pharmacy part of the building pursuant to informal arrangements with the company which involve, or are said to involve, a degree of subsidy by the company of the partnership's operations. Thus, there is no formal sub-lease to the partnership, and the partnership does not pay commercial rent. It is suggested, however, that the partnership may have funded the acquisition of the building in the past. In these circumstances, it is suggested, the exploitation of the building as a whole, including the derivation of income from the supermarket, could be part of the partnership business. Alternatively, the company which leases the building may hold the sub-lease, to the extent it relates to the part of the building used as a pharmacy, for the benefit of the partnership.
10. It is therefore necessary to decide what the true scope of the partnership business is in this regard. Furthermore, the question of the partnership's tenure of the pharmacy part of the building will need to be formalised before there can be any sale since, presumably, a purchaser will wish to have the benefit of formal tenure if the pharmacy has to be sold as a going concern.
11. The orders declaring the scope of the partnership and dissolving the partnership which are to be made in the case of the pharmacy partnerships are final orders. Once made they will bind all the parties for the future, and will also bind the receivers in the way that they conduct the account which will need to take place upon dissolution of the partnerships.
12. When the issue concerning the tenure of the Gowrie pharmacy was raised it became apparent that final orders of this kind are inappropriate for that pharmacy partnership at this point. The issue as to the scope of the partnership business needs to be resolved first.
13. Accordingly, in the case of the Gowrie pharmacy partnership the receivers will need to be appointed provisionally. It will only be when the issue is resolved that the administration can proceed to formal dissolution and winding up in accordance with such declaration as the Court may make as to the scope of the partnership business.
14. Since the six businesses will probably be sold together, it is necessary to make specific directions requiring their receivers to prepare for a sale of the Gowrie Partnership. If they are appointed on a provisional basis, they might not otherwise have power to do so. It is also necessary to make directions for the resolution of the issue about the scope of the partnership, so that the sale and the consequential accounting can then take place for all of the pharmacy businesses. The Short Minutes of Order provide for this.
15. The same considerations as apply to the pharmacy partnerships apply to the pharmacy companies. For reasons I have given I am satisfied that it is just and equitable that each pharmacy company be wound up.
16. The Corporations Act s 465A(1) require the plaintiffs to lodge notice of the application to wind up the pharmacy companies, serve a company of that notice on each company, and publish notice of the applications in the prescribed manner. The plaintiffs' legal representatives did not do this. When this was drawn to their attention, they sought, on the plaintiffs' behalf, to have the Court dispense with these requirements under Corporations Act 467(3).
17. Failure to comply with the notice requirements is unsatisfactory, but no prejudice has been caused and the case is otherwise suitable for a winding up order. I will therefore grant the dispensation sought and this is provided for in the short minutes.

Selection of liquidator/receiver

1. In their Summons, the plaintiffs sought the appointment of a team of three partners of the firm Ernst & Young led by Brett Stephen Lord. Each of the partners is an experienced insolvency practitioner and one of them is resident in Canberra.
2. Shortly before, or on the first day of hearing, a counterproposal was made on behalf of Mr Feros that Duncan Clubb be appointed as a receiver and liquidator of the Pharmacy businesses. Eventually the proposal was Mr Clubb and his partner, Andrew Thomas Sallway, be jointly appointed, with Mr Clubb as the lead practitioner. Mr Clubb was formerly a partner with Ernst & Young, and in that capacity attended a preliminary meeting with representatives of the owners which was also attended by Mr Lord. Mr Clubb is now with another insolvency firm, BDO, in Sydney. Mr Clubb is an experienced insolvency practitioner and he has personal experience of appointments to pharmacy businesses.
3. BDO's rates are slightly lower, about $10 an hour, than the equivalent rates of Ernst & Young. Mr Clubb has also agreed that BDO will cap its fees at $80,000 per month and has undertaken not to charge for travel to Canberra or for spending time there.
4. When this happened, the Ernst & Young partners agreed to match BDO's fees. They have also retained the services of a consultant experienced in the operation of pharmacies to provide any assistance they may require in this regard. I was also told, without objection, that Mr Lord has a good relationship with the CBA and with Symbion, which is a major supplier to the pharmacies.
5. It is somewhat invidious for the Court to have to choose between Ernst & Young on the one hand and BDO on the other in making the appointment of receivers and liquidators. There is little, if anything, between them. Both teams have a great deal of experience and, no doubt, skill, in undertaking the sort of work which will be involved. In terms of professionalism, this is nothing at all to distinguish them.
6. Counsel for the plaintiffs emphasised that Ernst & Young had been first in the field and have now agreed to match BDO's rates which were only very slightly lower in the first place. Counsel acknowledged that Ernst & Young have not offered a monthly cap on costs and no undertaking has been given concerning travel. But as Ernst & Young has a partner in Canberra as part of the team, that is unlikely to be a very significant matter.
7. I agree with counsel in thinking that the cap of $80,000 per month is a relatively high figure and hopefully the costs will not approach that. But the fact is that it is there. BDO will be no more expensive than Ernst & Young and may, perhaps, prove somewhat cheaper.
8. In the end, however, I do not think that this is a decisive factor. To my mind, the most important consideration in making a distinction between two equally well-qualified and professional firms is that Mr Clubb has personal experience of the administration of pharmacies. I acknowledge that the Ernst & Young team will have, through consultancy arrangements pharmacy expertise available to them. But in my judgment, the fact that Mr Clubb brings such experience in-house to the BDO team is sufficient, all other things being essentially equal, to tip the scale. Accordingly, Mr Clubb and his partner Mr Sallway will receive the appointment.

Costs

1. The plaintiffs' primary position is that the defendants should pay their costs of the proceedings. Counsel for the plaintiffs argued that the plaintiffs have, in substance, been successful in the proceedings and costs should follow the event. Counsel for the defendants opposed any order for costs being made against them on an inter partes basis. Counsel contended that the appropriate order was that all parties' costs (that is, both the plaintiffs' costs and the defendants' costs) should be paid out of the assets of the pharmacy partnerships and companies. In response, the plaintiffs adopted as a secondary position that their costs should be paid out of the pharmacy assets but no costs order should be made in favour of the defendants.
2. I will deal first with the pharmacy partnerships. Lindley and Banks on Partnership, 20th edition, (Roderick I'anson Banks, Lindley and Banks on Partnership (20th ed, 2017, London : Sweet & Maxwell) states at 23-121 (footnotes omitted) that prior to the advent of the Civil Procedure Rules in England: …it had long been an established rule that all the costs of proceedings consequent on a dissolution should be paid out of the partnership assets, unless there was a good reason for making some other order.
3. In support of this proposition, the learned author cites, among other cases Hamer v Giles (1879) 11 Ch D 941. The corresponding paragraph in earlier editions was cited with approval by Palmer J in Slim & Ors v Kabra & Ors [2006] NSWSC 837 at [9], and by Hamilton J in Xie v Zhou [2002] NSWSC 1114 at [3], two of the cases to which I refer below.
4. In Slim v Kabra, the principle was directly applicable. It was also applied by Young J in Bluth v Einfeld (Supreme Court (NSW), Young J, 26 November 1991, unrep) at 6-7. Both decisions followed references in which one party claimed to have been more successful than the other. In both cases, the usual rule as stated by the learned authors was applied and the costs of the proceedings were ordered to be paid out of the partnership assets.
5. The rule as stated by Lindley and Banks is stated in terms of "proceedings consequent on a dissolution" (see [41 above). In Bluth v Einfeld (at 6), Young J similarly distinguished between what he described as "administration proceedings" and other, conventional proceedings for relief in the Court. The costs of conducting accounts and otherwise winding up the affairs of the partnership are conceptually distinct from the costs of obtaining the orders for dissolution in the first place.
6. In Queensland Trustees Limited v Fawckner (1964) Qd R 153, the plaintiff as executor of the will of a deceased partner commenced proceedings in the Queensland Supreme Court for a declaration that a partnership be dissolved and the partnership be wound up and for consequential accounts and inquiries. The defendant entered an appearance but did not deliver a defence. The plaintiff then moved for judgment and obtained the declaration and orders sought. The plaintiff also sought an order for costs against the defendant and the judge who heard the application made this order. The defendant appealed against the order. When the appeal came before another judge of the Court, Townley J, his Honour said (at 156): No doubt it is now a settled rule that costs of an action for dissolution and of the taking of the account in court are to be paid out of the partnership assets unless there is some good reason to the contrary. There would appear to have been before his Honour no material showing good reason to depart from that rule. I think with great respect that prima facie his Honour was wrong in ordering the defendant to pay the costs of the action.
7. In the end, the defendant needed an extension of time to bring the appeal and Townley J refused to grant the extension. There was then an appeal to the Full Court which was unsuccessful.
8. It is notable that the rule as stated by Townley J related to the costs of obtaining the dissolution order, not merely the costs of proceedings consequent on dissolution. Lindley and Banks deal with costs of obtaining a dissolution in a separate paragraph which in the current edition states (at [24-69], footnotes omitted): Although costs will normally follow the event in the usual way, the court has a wide discretion and must take into account the various factors listed in the Civil Procedure Rules. This should be compared with the approach historically adopted by the courts in the case of proceedings relating to the winding up of partnerships where there has been a tendency to order costs to be paid out of the partnership assets. A similar order is, in fact, likely to be where the partnership is wound up by reason of a partner's mental incapacity.
9. The statement by Townley J is not absolute. The statement of principle in Lindley and Banks points to a perhaps wider element of discretion still.
10. In Xie v Zhou, the dissolution order sought by the plaintiff was not opposed at the hearing. Hamilton J said (at [3]): The costs are usually ordered out of the partnership assets or where nobody at partnership assets was available to be borne equally among the partners. This is on the basis that the intervention of the Court must be obtained to facilitate the winding up for the benefit of all of the partners. But this is the case where the plaintiff quite reasonably prepared for a contested hearing and whilst there is no question of any great blame on the defendant, much less the solicitor for the course that events took, it is in my view appropriate that the plaintiff have the costs of the proceedings up to and including 20 August 2002 [the date of dissolution order].
11. A similar approach was followed by Le Miere J in Leach v Williams [2017] WASC 188. Again at the hearing there was no opposition to the ground of dissolution, but the defendant was ordered to pay the plaintiff's costs of the action.
12. An application for dissolution of a partnership may be made on a number of different grounds. Some of those grounds may involve a degree of fault on the part of one or other of the partners. Others (and a partner's mental incapacity is a classic example) involve no fault on anyone's part. Although in form adversarial, dissolution proceedings may not in substance be adversarial.
13. In my view, the proper approach to costs in dissolution proceedings is to ask whether, having regard to the grounds of the application, the proceedings are adversarial. But even if the proceedings when commenced could be classified as being adversarial, in deciding to make a costs order inter partes the Court should also take into account the principle reflected in Lai Qin (Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6). That principle is that where as a result of supervening events such as a settlement, it proves unnecessary for the Court to determine the matters which have been put in issue, then generally the Court will not make an order for costs in favour of one party against the other. This is because the Court will not, as a general rule, conduct a trial of a case for the purpose of determining only the incidence of costs.
14. Of course it can be seen that if one party has effectively capitulated then the principle does not apply and costs should follow the event. In my view, that explains the orders made in Xie v Zhou and Leach v Williams. In fact in the latter case, Le Miere J specifically referred to the Lai Qin principle (at [21]) and concluded that the defendant in those proceedings had effectively surrendered to the plaintiff.
15. In the present case I was taken at length through the negotiations which preceded the bringing of the proceedings and communications between the parties' legal representatives during the course of the proceedings. I do not propose to set out that evidence in detail. In summary, it is clear that the relationship had broken down before the proceedings were instituted. But all parties, conscious no doubt of the costs of formal administration, would have preferred to reach an informal or out of court agreement for the sale of the partnership business or the buy-out of one or more of the partners. These negotiations between the parties involved the drafting of a deed which provided for an extra-curial resolution of the dispute. The negotiations began before the proceedings were commenced and continued right up until shortly before the hearing before me.
16. The plaintiffs' main affidavit was dated 9 September, which is almost four weeks before the proceedings were actually commenced. When that affidavit was prepared, and for some weeks afterwards, the plaintiffs' legal representatives were still seeking to resolve the matter extra-curially. It seems to me that the proceedings were commenced on the plaintiffs' behalf as a backstop so as to ensure that if the parties could not reach some sort of extra-curial settlement, dissolution orders could be made.
17. It would have been open to the defendants, perhaps, to resist the making of a dissolution order. As we have seen, provision was made in the timetable for Commercial List Responses and affidavits in opposition to be filed. But the defendants never actually put forward any contentions, or any evidence in opposition to the orders sought. Like the plaintiffs, they were no doubt hoping to resolve the dispute extra-curially but were content for the proceedings to remain on foot so that court orders could be made if that did not prove possible.
18. In late January, the plaintiffs' solicitors wrote to the defendants' solicitors pointing out that no Commercial List Response or no affidavit had been filed and stating that if no such material was filed the plaintiffs would proceed on the basis that there was no contest about the orders. There does not appear to have been any demur from the defendants. From that point forward it must have been clear to the plaintiffs' legal representatives that there was no substantial opposition to the orders which were sought.
19. Counsel for the plaintiffs wisely did not attempt to persuade the Court at the hearing that the dissolution was the fault of any of the defendants. Rather the case was presented on the basis that without going into the rights and wrongs of it, the owners could no longer work together and accordingly it was just and equitable that the partnership be dissolved.
20. I have already mentioned that the Court raised some issues concerning the form of the orders sought. When the matter came before me, a set of short minutes was propounded but as a result of some of the matters to which I have referred there was then a second set of short minutes the following day and there is now a third set of short minutes incorporating further amendments.
21. To my mind this tends to underline the conclusion that this was not a case where the plaintiffs presented a straightforward claim to which the defendants ultimately capitulated following unsuccessful settlement negotiations. Rather the result of the hearing has been the production of a set of orders which involve some departure from those originally proposed by the plaintiffs. The Court has itself contributed to the revision of the orders and the legal representatives of the defendants have done so as well.
22. It was always going to be necessary to present evidence to demonstrate to the Court that it was just and equitable that the pharmacy partnership should be wound up. The plaintiff undertook that task and they should have their costs of doing so, but in my view, the costs should come out of the assets of the partnerships.
23. I do not consider that in substance the proceedings had been adversarial. Even if I were wrong on that, as a matter of substance the proceedings have been resolved by agreement between the parties which has made it unnecessary for the Court to rule in favour of one side or the other. I do not see the outcome of the proceedings as representing a capitulation. Accordingly the appropriate order is that the plaintiffs' costs be paid out of the assets of the partnership.
24. But I see no reason why the defendants' costs of the proceedings should be paid out of the partnership assets. The plaintiffs had the burden of establishing grounds for winding up of the partnership and the defendants did not. Accordingly, there will be no order as to the defendant's costs of the proceedings to date.
25. So far as the pharmacy companies are concerned, the position is similar. In the case of a winding up in insolvency, a successful applicant has a statutory entitlement to costs. But in the case of a winding up under s 461, the costs are under the discretion of the Court. Sometimes it is appropriate to award costs against another defendant rather than against the defendant company. Where the plaintiff contends that the affairs of the company are being conducted in a way which is oppressive (see s 461(f)) the plaintiff may choose to join the alleged oppressors as additional defendants in the litigation. If the plaintiff succeeds, the Court may well consider that the proper course is to award costs in favour of the plaintiff against the oppressors rather than against the company, so as to avoid the successful plaintiff in its capacity as a shareholder of the company indirectly bearing a share of its own costs. But nothing like that has happened in this case. I note in passing that at an earlier stage of the litigation, the plaintiffs sought relief under Corporations Act, s 233, but the Summons was amended to abandon that claim for relief.
26. In the case of Discount Pharmacy Pty Limited, there is a further technical problem with the plaintiffs' application that the defendants, other than the company, pay the costs. The proper parties against whom a costs order would be made in such a case, if the plaintiffs are correct, are the companies controlled by Mr Feros and Mr Watt which are the shareholders of Discount Pharmacy. But those companies have not been joined to these proceedings.
27. For these reasons, the cost orders so far as each of the pharmacy companies is concerned will be that the company pay the plaintiffs' costs of the proceedings. There will be no order as to the cost of the defendants.
28. The final issue concerns the quantification of the costs. Counsel for the plaintiffs sought to have a gross sum costs order made. Evidence was presented from the solicitors for the plaintiffs which put that the plaintiffs' costs in the matter (incurred and estimated) at approximately $340,000. These costs of course include the costs of extra-curial advice and negotiations. According to the plaintiffs' solicitor's estimate, the costs relating to the proceedings are approximately $230,000. The Court was invited to make a lump sum costs order by reference to that amount.
29. The Court has power to make a lump sum costs order under Uniform Civil Procedure Act s 98(4) but such an order is a departure from the usual practice which is that the quantum of costs (if not agreed) is determined by assessment under the Legal Profession Uniform Law (NSW), Part 4.3, Division 7. There has not been and probably could not be an exhaustive statement of principle as to circumstances in which the Court will exercise its discretion to make a gross sum costs order. The categories of cases in which such orders are made are not closed. The case in which such an order is made does not have to be unusual or a rare one. But in my view there must be some good reason to displace the usual practice of the Court.
30. Counsel for the plaintiff submitted that the Court should make an order on a gross sum basis now to avoid a likelihood of further dispute between the parties. But in my view the possibility or even the likelihood of a dispute as to the quantum of costs does not itself justify the making of such an order in this case. Such disputes are often unproductive but they need not be.
31. In the present case, the assessment of the costs is complicated by the fact that on any view a very substantial proportion of the costs which have been incurred could not be recovered under an order for costs in these proceedings. The Court has no real way of determining from the material before it how accurate the plaintiffs' solicitor's estimate of the costs that have been incurred actually is. I appreciate that it was necessary to prepare this matter for hearing but the figure claimed does not seem particularly low for a case which involved the preparation of a Commercial List Statement, a principal and a supplementary affidavit from Mr Murray, and the presentation of a case which was not in substance disputed. In my view, the fact that the costs of the proceedings would have to be disentangled from other costs is a positive reason why, if the parties are unable to reach agreement, the costs should be determined by way of assessment in the ordinary way. Accordingly, I decline to make a gross sum costs order as asked.
32. On that basis, the Court makes orders in accordance with the short minutes of order which I initial and date with today's date.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 March 2019