Obol Pty Ltd & Anor v Gregory Fisk

Supreme Court of NSW|2007-08-16|Before: Brereton J

CITATION : Obol Pty Ltd & Anor v Gregory Fisk [2007] NSWSC 912

DECISION : Surcharge not established. Falsification established. Interest to run from date of dissolution.

CATCHWORDS : PARTNERSHIP - dissolution and winding up - accounts - surcharges - falsifications - interest

LEGISLATION CITED : (NSW) Partnership Act 1892 ss 24, 39, 44

Obol Pty Ltd (first plaintiff) PARTIES : Philip Gely (second plaintiff) Gregory Fisk (defendant)

COUNSEL : Mr Baran (plaintiffs) Mr Sandroussi (sol) (defendant)

SOLICITORS : Lloyd Lancaster Lawyers (plaintiffs) Mr Sandroussi (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4120/06 Obol Pty Ltd & Anor v Fisk 6173/06 Obol Pty Ltd & Anor v Fisk 6177/06 Obol Pty Ltd & Anor v Fisk JUDGMENT 1 HIS HONOUR: The second plaintiff Phillip Gely is a director of and shareholder in the first plaintiff Obol Pty Ltd. In or about September 1997, Obol and the defendant Gregory Fisk became partners in a project for the acquisition, development, subdivision and sale of land at 131 Castle Hill Road, West Pennant Hills. Mr Fisk was to arrange external funding and manage the project, while Obol would provide the funds and equity (to the extent that they were not borrowed), and that the profits were to be shared equally. Mr Gely says that the parties then contemplated that Obol would be required to provide about $150,000; Mr Fisk disputes this and says that there was no limit. The subdivision has now been completed and the lots sold, and the partnership was dissolved in December 2002, but the partners are unable to agree on the settlement of accounts between them. Obol contends, but Mr Fisk disputes, that Mr Fisk is liable to contribute to losses incurred in the partnership, which have been funded by Obol, and commenced proceedings 4120/06 claiming a declaration that the partnership had been dissolved, and an order for the taking of accounts. 2 In addition, Mr Gely advanced two sums, one of $20,000 and another of $40,000, to Mr Fisk, upon terms that they were repayable, if not earlier, out of Mr Fisk's share of the proceeds of the development. The advances have not been repaid, save as to $2,000, and Mr Fisk has received no proceeds from the development, it not having been profitable. Obol and Mr Gely commenced two proceedings in the Local Court for recovery of the two advances. One of the defences raised by Mr Fisk was to the effect that the loans were not repayable until the partnership accounts were settled. On 19 September 2006, in the partnership proceedings, this court ordered that the Local Court proceedings be transferred to this court and heard together with the partnership proceedings. The transferred proceedings are proceedings 6173/06 and 6177/06. 3 The proceedings have had a chequered procedural history, in the Local Court and in this court. However, on 24 July 2007 I made orders, which were not opposed, declaring that in or about September 1997 Obol and Mr Fisk became partners in the West Pennant Hills project, and that the partnership was dissolved in December 2002, and directing that an account be taken and inquiry held as to what were the assets and liabilities of the partnership and the interests of the parties in them. As, at that stage, the plaintiffs had served a statement of accounts prepared by Obol's accountant in respect of the partnership, and given the amounts in dispute and the delays which had already been occasioned, and in the light of representations that Mr Fisk intended to file an accountant's report, it seemed likely that the accountants might be able to refine the issues in dispute on the accounts, without invoking the full formal procedure for filing of accounts and then responding with objections, surcharges and falsifications, and so I directed that until further order the inquiry proceed before me. Although ultimately Mr Fisk did not serve any accountant's report, it has proved possible, using Obol's accounts as a starting point, to identify the matters in dispute in a manner that permits the taking of accounts to be disposed of without more formal process. On the taking of accounts, the issues are: · The treatment of the transfer from the partnership to Obol of Lot 13, which Obol received in specie at a value of $500,000, subject to a mortgage to Perpetual securing $500,000. Mr Fisk contends that Obol should be charged with its receipt at $720,000, not $500,000; · The treatment of the cost of roadworks, a portion of which Mr Fisk contends has wrongly been charged to the partnership when it ought to have been borne by Obol alone; · Some other issues, raised in the evidence and cross-examination but which were not pursued in submissions; · From what date interest should be payable if it is found that Mr Fisk is liable to Obol for any amount. 4 In respect of the advances, liability to repay them is not disputed. The only issue is when they became repayable, which informs the decision as to when interest on them should commence to run. The Accounts 5 The accounts, prepared by Obol's accountant Mr Burke, as at 30 June 2001, contain a balance sheet as follows: PARTNERSHIP FUNDS Partners' Capital Accounts PARTNER NO. 1 501/02 share of loss ($68,118) PARTNER NUMBER 2 502/02 share of loss ($68,119) TOTAL PARTNERSHIP FUNDS ($136,237) Represented by: INVESTMENTS 672 Funds to Castlereagh $98,930 TOTAL ASSETS $98,930 CURRENT LIABILITIES 680 Bank overdraft 21 Beneficiary loans 870/01 Obol Pty Ltd $736,017 870/03 Proceeds from sales $500,871 TOTAL LIABILITIES $235,167 Excess of liabilities over assets ($136,237) 6 The profit and loss statement is as follows: INCOME Profit on rental operations $33,855 Gross loss from trading ($162,232) Net Income ($128,377) EXPENDITURE 300 Accountancy Fees $3,800 302 Advertising $2,418 309 Bank Charges $1,642 Total Expenditure $7,860 Operating Loss Before Income Tax ($136,267) 7 It emerged in the cross-examination of Mr Burke that the whole of that loss had been claimed by the P&M Gely Superannuation Fund (of which Obol is the trustee) in its 2002 income tax return, on the basis that the superannuation fund had funded the loss. Although that is inconsistent with Obol being entitled to recover half of the loss from Mr Fisk, Mr Burke explained that this was done in circumstances where it was thought unlikely that Mr Fisk would be compelled to contribute, and would have to be revised if he were required to contribute. Ultimately, these internal arrangements do not affect Obol's rights against Mr Fisk. Treatment of transfer of Lot 13 8 It is common ground that early in the project (although there is dispute as to the precise circumstances), it was agreed that Obol would retain one of the four proposed sub-divided lots, namely Lot 13, on which there already stood a house.

9 Mr Gely says that when he and Mr Fisk first discussed the project, they contemplated an early sale of Lot 13 at a price of about $500,000 in order to reduce funding requirements, and that when it proved impossible to sell to a third party, they agreed that Obol would retain Lot 13 at its original valuation of $500,000, in consideration of Obol contributing the proceeds of sale of its Bexley property to reduce external debt and not charging interest on its advances to the partnership. He says that after a potential sale of Lot 13 did not proceed, and after Obol had advanced $156,000 to the partnership, in early February 1998 when interest repayments fell due he became concerned at the level of exposure and decided to limit it by selling his investment property at Bexley (which had been used as security for the borrowings for the project). According to Mr Gely, their conversation was as follows: Gely: If Bexley is sold I would like first right of refusal on the house at the current value and the balance settled at the end of the subdivision otherwise I will have to charge interest on outstanding loans over the $150,000 that was originally agreed to.

Fisk: Yes, you buying the house would be good, it solves the problem of selling the house and keeps costs down.

Mr Fisk: Yes, $500,000 is good, it's what we wanted to sell the house for. Settling the sale of the house at the end of the project is the best way.

10 The sale of Bexley was completed on 22 April 1998, and net proceeds of about $300,000 were contributed to the partnership on Obol's loan account, and applied to the reduction of external debt. As the linen plan had not yet been registered, it was not possible to transfer Lot 13 separately at that stage.

11 Mr Fisk on the other hand contends that it was always intended that Obol retain Lot 13, but that although $500,000 was to be treated as the price initially, on completion of the project an adjustment was to be made for the difference between $500,000 and the market value of Lot 13 on completion of the project. Mr Fisk says that, from the outset, Mr Gely intended to retain Lot 13, and it was for that reason that the land was purchased in Obol's name (to avoid stamp duty on a transfer of Lot 13 at the end of the subdivision). His version of the crucial conversation is as follows: Fisk: So we will register the development in Obol's name from the beginning in order to save you paying stamp duty on the house right at the end of the subdivision, however, what would be the purchase price for the house?

Gely: We will keep it on paper for $500,000 for the time being with the balance to be settled at the end of the subdivision.

Fisk: So the difference between the current price and the real market value at the end would be adjusted in the figures?

Gely: Yes. 12 The balance sheet reflects the state of accounts after the transfer to Obol of Lot 13 at a value of $500,000, in reduction of Obol's loan account. 13 Subsequently, in 2002, Obol sold Lot 13 to a third party, for a price of $720,000.

14 Mr Fisk's contention that Obol should be charged with its receipt at $720,000 (which is contended to be market value as at dissolution, by inference from the selling price) in lieu of $500,000 is in the nature of a "surcharge", on which Mr Fisk bears the onus. 15 Both Mr Gely and Mr Fisk were cross-examined. Mr Gely disputed that funds raised by the refinancing of the West Pennant Hills properties (with two loans, one of $650,000 secured on Lots 10, 11 and 12, and one of $500,000 secured on Lot 13) were applied to his purchase of land at Castlereagh, in which respect he was subsequently shown to be incorrect. However, I am unpersuaded that that error seriously undermines his credit. On the other hand, nothing in Mr Fisk's cross-examination adversely affected his credit. So far as I could tell, both men were doing their best to tell the court their version of the truth. 16 Mr Gely explained that his reference to "the balance settled at the end of the subdivision" was to the difference between the price of $500,000, and the proceeds to be contributed from Bexley (of about $300,000), which would be adjusted on finalisation. Mr Fisk on the other hand said that the "balance" referred to the difference between the then market value of $500,000 and market value on finalisation. 17 In my view, "balance" is much more apt to describe the concept to which Mr Gely referred than that to which Mr Fisk referred. "Balance" represents the difference between the price ($500,000) and the initial payment ($300,000 approximately). It is not a term so easily applicable to the difference between the then "book" price and a future unknown market value. Mr Gely's version is rendered more probable and Mr Fisk's less probable by the circumstance that at that time the parties anticipated that the project would take only about twelve months, in which context a significant change in value of Lot 13 would not have been anticipated. Mr Gely's version is also favoured by the circumstance that the whole land was originally purchased in the name of Obol, on Mr Fisk's version expressly to facilitate the ultimate retention by Obol of Lot 13. If Obol was always to retain Lot 13, from the outset, in a project expected to take only twelve months, it is difficult to see why the parties would have contemplated accounting for it at value on completion of the subdivision and sale of the other lots. 18 It was common ground that the phrase used by Mr Gely was "first right of refusal". This conveys that the intent was not an immediate sale, but an entitlement upon completion of the subdivision to receive Lot 13 at its existing present value of $500,000, in consideration of the immediate contribution of the proceeds of Bexley, and the foregoing of interest on advances. [Under (NSW) Partnership Act 1892, s 24(3), a partner making, for the purpose of the partnership, any advance beyond the amount of capital which the partner has agreed to subscribe is entitled to interest at the rate of 7% per annum from the date of the advance].

19 Mr Sandroussi, for Mr Fisk, submitted that the manner in which the $300,000 from Bexley was dealt with in the accounts was more consistent with Mr Fisk's version, but I do not agree. First, the accounts were prepared long after the event, in or about 2002, and not progressively. Secondly, all they reveal is the $300,000 being introduced through Obol's loan account and applied to reduction of external debt. Similarly, the transfer of Lot 13 was effected by treating it as a repayment on Obol's loan account. That is not inconsistent with Obol purchasing Lot 13 for $500,000, of which $300,000 was paid forthwith and the balance on completion. 20 Mr Burke gave evidence that in September 2001, Mr Fisk contended to him that the cost of connecting services to Lot 13 should be borne by Obol and not the partnership, as the DA did not require the services to be extended to Lot 13; Mr Burke responded that the DA required connection of all services to be completed. On 30 September 2002, Mr Fisk sent Mr Gely a facsimile message seeking information about the project, including: - The extension of the road from Lot 11 to Lot 13 is an expense item to be taken up by Obol. I would appreciate some indication as to the extent of the offset (my suggestion looking at the physical size of the extension would be in the vicinity of 33%). We need to determine this figure and then isolate the costs relevant to that extension to determine this adjustment. - A number of expense items are in fact incorrectly applied against the joint development when they apply to the house on Lot 13 which is the responsibility of Obol. I will outline these in the amended accounts we are currently working on. 21 The amended accounts were never forthcoming, but the second of those points at least supports the view that Lot 13 stood outside the responsibility of the partnership. It is also striking that that letter (nor any other communication in evidence) contains no suggestion on the part of Mr Fisk that Obol should be treated as having received Lot 13 at a value of $720,000, not $500,000. Mr Burke says he told Mr Fisk on about 1 October 2002 that all interest costs were borne by the partnership until the last lot was settled, and thereafter Obol would be responsible for the interest on the $500,000 loan secured on Lot 13 (and, for that matter, for the principal as well), to which Mr Fisk said, "Okay, but what about the cost of the road works and the land tax", to which Mr Burke replied that Obol was not charging interest on the moneys it had advanced to keep the development going. Mr Burke's evidence in this respect was not challenged. 22 Ultimately, if Mr Fisk's version were correct, it does not make sense that there would have been any reference to $500,000 at the time, because it was meaningless if the true agreement were for transfer at valuation on the date of completion. It was not as if an amount was required at that stage to be inserted in any transfer or other document, since no transfer could take place until completion of the subdivision and registration of the linen plan (at which time current market value, if relevant, could have been ascertained and inserted). Nor could it have been (as was at one stage suggested) for taxation purposes, since no accounts were prepared for taxation purposes at that stage, and upon final accounts the true (hypothetically greater) price would have had to be brought to account. 23 The most powerful argument in favour of Mr Fisk's version is that until practical completion of the subdivision on 30 June 2001, rents from Lot 13, and interest expense from borrowings attributable to it, were treated as applicable to the development as a whole, and not to Lot 13 alone. According to Mr Burke, he was told (presumably by Mr Gely) that all interest costs were the responsibility of the development until the last lot was settled, from when Obol would be responsible for interest on the loan on Lot 13. At first sight, those matters are indicative of Lot 13 being treated as remaining an asset of the subdivision until practical completion of the subdivision. However, in respect of interest, closer consideration refutes this: the interest was on borrowings made for the purpose of refinancing existing indebtedness of the partnership. The original loan from St George had to be repaid. The partnership was indebted to Obol on loan account for well in excess of $1 million. The refinance permitted the partnership to repay St George, and refund part of its indebtedness to Obol. It is true that doing so enabled Obol to apply some funds to the purchase of the Castlereagh property, but (contrary to the submissions on behalf of Mr Fisk) that does not mean that the replacement loans were somehow the responsibility of Obol and not the partnership. The partnership was already indebted to Obol for amounts substantially in excess of what was repaid as a result of the refinance; and the refinance permitted that indebtedness to be reduced though not extinguished. In those circumstances, treatment of interest on the refinancing loans as a partnership responsibility was in any event appropriate. So far as the rent is concerned, that was a benefit to the partnership, to which it was at least arguably not entitled, but Mr Gely has not put it in issue. 24 Ultimately, Mr Fisk bearing the onus on this issue, I am unpersuaded that the agreement between the parties was other than that Obol would be entitled to receive Lot 13 at a value of $500,000, on completion of the subdivision, in consideration of Obol introducing additional capital from the proceeds of Bexley and forgoing any claim for interest on advances over the initial subscription of $150,000. Accordingly I am unpersuaded that Mr Fisk has made good this surcharge.

Treatment of cost of roadworks to Lot 13 25 The next issue is the cost of the roadworks. Mr Fisk contends that by charging the partnership with the entirety of the cost of the road works, some of which was attributable to extending the internal access road for the benefit of Lot 13 over and above what was required for the development, the partnership has been charged with an expense which ought to be borne by Obol alone. This is in the nature of a "falsification", on which Obol bears the burden. 26 The accounts show (account no. 256/11) the total expenses on roadworks as $47,163. It is common ground that 23% of the total was attributable to the extension for the benefit of Lot 13; that corresponds to $10,847.49. It is also now common ground that those additional roadworks were not a requirement of the development approval, but exclusively for the benefit of Lot 13, which already had access to the front from the main road.

27 It was submitted for Mr Gely that there was an agreement that the costs of the additional roadworks would be charged against the partnership in consideration of Obol not charging interest on the additional advances it made for the benefit of the partnership. However: · Mr Fisk denied that there was any such agreement; · Mr Gely gave no evidence of any such agreement; · Obol had already agreed not to charge interest on its advances in consideration for the sale to it of Lot 13 at then market value of $500,000; and · The only evidence suggestive of any such agreement was that after draft accounts were provided to Mr Fisk in 2002, he pointed out that they did not make provision for the extension of the road to Lot 13 at the cost of Obol, and suggested that the extent of that cost required determination (he then suggested 33%), to which Mr Burke replied that he believed that the extension was a condition of the subdivision not an extra at Obol's request, but if not there would have to be an apportionment as suggested. When it was clarified that it was indeed not a condition of the development approval, Mr Burke contended that there should be no adjustment as it was "splitting hairs" and in any event Obol had an offsetting claim for interest in respect of its advances to the partnership. That Mr Burke made this proposal - which no-one suggests Mr Fisk ever accepted - does not begin to establish any such agreement as was suggested. 28 I am entirely unpersuaded that there was any such agreement, and no entitlement to charge 23% of the costs of the roadworks against the partnership has been established. Accordingly Mr Fisk succeeds on this "falsification". The result is that the cost of road works chargeable to the partnership is reduced by $10,847.49 to $36,315.51.

29 Mr Burke accepted that the consequence of such an adjustment would be to reduce the partnership's current liabilities (Obol loan account) by the same amount, from $736,017, to $725,170, with a corresponding reduction in the deficiency of funds, from ($136,237), to ($125,390). The deficiency on each partner's capital account would then be reduced from ($68,119) to ($62,695). Other Accounting Issues 30 There were three other issues raised in the evidence, which were not pursued in submissions and can shortly be addressed. 31 Mr Fisk complained that various actions and decisions of Mr Gely in connection with the management of the partnership occasioned delay and additional cost. It suffices to say that no basis was shown why, even if the allegation were made good, they were other than bona fide decisions in the course of the partnership business, nor why their consequences should be chargeable against one partner only. 32 It was suggested that interest on the Perpetual loan had incorrectly been charged to the partnership, when it was for the benefit of Lot 13 only. I have already explained that this does not accurately describe the role of the Perpetual loan, which was to refinance the existing liabilities of the partnership. 33 It was also suggested that the Perpetual loan had been used inter alia to fund Mr Gely's acquisition of the Castlereagh property. Although Mr Gely at first denied this, the evidence appears to establish it. Moreover, the evidence records as an asset of the partnership, under the heading, "Investments", an item "Funds to Castlereagh" of $98,930. Mr Burke explained that he treated these advances in this way in order to facilitate tracing the funds applied to Castlereagh separately from other repayments to Obol, but that in truth it was a repayment to Obol. I accept this, but the accounts should reflect it by treating it as a repayment on loan account to Obol, rather than as an investment. This makes no difference to the deficiency of funds, nor the deficiency on each partner's capital account. 34 The ultimate result is that Obol is a creditor of the partnership to the extent of $125,390, and Mr Fisk is a debtor to the partnership for $62,695. Mr Fisk ought to pay Obol $62,695. Interest 35 The next question is from when interest should commence to run on that sum, and at what rate. Obol claims interest from the "notional date of subdivision" said to be 1 June 1999 to date, at 10% as an approximation of the average court rate. I can see no basis for using 1 June 1999 or any other "notional date of subdivision"; to do so would be to attribute responsibility to Mr Fisk alone for the delays encountered, and the evidence does not reveal any reason why that would be appropriate. 36 Mr Fisk's liability and Obol's claim is not for interest on Obol's advances (Obol is entitled to no such interest, because of the terms of the agreement about Lot 13), but for interest on the amount Mr Fisk was liable to contribute to the losses. The accounts were struck as at 30 June 2001, albeit including a sale that was completed on 23 July 2001, but they were not finalised and provided to Mr Fisk until 3 December 2002. The partnership was dissolved in December 2002. Obol's entitlement is that described in Partnership Act, s 39, and arose only upon dissolution. It was also upon dissolution that the liability of Mr Fisk to contribute to the shortfall arose, pursuant to Partnership Act, s 44. In my opinion interest should run from that time. For that purpose the court rate for unpaid judgment debts, as distinct from the Partnership Act rate, is appropriate. 37 I will therefore allow interest on $62,695 from 3 December 2002 to date, which at the rate prescribed from time to time for interest on unpaid judgment debts by the Rules of Court amounts to $27,056, producing a total of $89,752. The Personal Loans 38 Mr Fisk does not dispute that he is liable to repay the personal loans, totalling $58,000. The only issue requiring resolution is the date from which interest should run. 39 The terms of the loan were recorded in a receipt issued by Mr Fisk to Mr Gely upon receipt of the second ($40,000) loan, but expressed to apply to both advances, as follows: Funds Received This is to confirm receipt from Phil Gely of the sum of $40,000-00 which is a loan repayable by instalments prior to the completion of the West Pennant Hills Development. If the total amount is not repaid by this time, it will be deducted from my proceeds from the development.

This amount is in addition to the $20,000-00 previously received which is to be repaid in the same manner. 40 Having regard to the terms of that receipt I accept that there was no obligation on Mr Fisk to repay until the event upon which any entitlement on his part to receive proceeds from the development would arise. Mr Gely claims interest from 1 June 1999, but I do not see how this can be justified when there is nothing to suggest that the loan was to bear interest, and where although reference was made to unspecified instalments, the terms also contemplated that instalments might not be paid and repayment might be out of the proceeds of the development. The earliest occasion upon which it could be said that Mr Fisk's entitlements to proceeds could be ascertained was on completion of the sale of the last of the lots on 23 July 2001. However, in truth his entitlement did not arise until dissolution, because provision had first to be made for creditors. 41 As the agreed date of dissolution is December 2002, I will allow interest $58,000 from 3 December 2002 to date, which at the rate prescribed from time to time for interest on unpaid judgment debts by the Rules of Court amounts to $25,030, producing a total of $83,030. Conclusion 42 Mr Fisk has not sustained the alleged surcharge in respect of the value at which Lot 13 was transferred to Obol. Mr Fisk succeeds on the alleged falsification in respect of so much of the cost of road works as was attributable to the extension of the access way to Lot 13.

43 Upon dissolution of the partnership on the agreed date of December 2002 Mr Fisk became liable to contribute to the deficiency of funds to the extent of $62,695. That sum will bear interest from December 2002 to judgment. 44 The liability of Mr Fisk to repay Mr Gely $58,000 on the personal loans is not in dispute. Those loans became repayable upon dissolution of the partnership in December 2002, and I will allow interest from that date. 45 As the plaintiffs in proceedings 4120/06 claimed judgment in respect of the personal loans, and as I will dispose of all matters by giving judgment in those proceedings, that will also resolve the claims in the proceedings removed from the Local Court, which should therefore be perpetually stayed.

(1) Certify that the amount payable by Mr Fisk to Obol upon dissolution of their partnership was $62,695. (2) Give judgment that the defendant pay the first plaintiff the sum of $89,752. (3) Give judgment that the defendant pay the second plaintiff the sum of $83,030. (4) Order that proceedings 6173/06 and 6177/06 be perpetually stayed. (5) Order that the defendant pay the plaintiffs' costs, including the costs of proceedings 6173/06 and 6177/06, and the proceedings in the Local Court, save insofar as any specific costs order has otherwise provided.

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