Old v Hodgkinson; Old v McInnes [2008] NSWSC 697 | Case summary

1063/04 - OLD v HODGKINSON 4064/04 - OLD v McINNES JUDGMENT CONCERNING GOODWILL 1 HIS HONOUR: This judgment deals with a further episode of a long running dispute between three patent attorneys who were for a short time in partnership. 2 I will endeavour to simplify the facts as much as I can for the purpose of giving rulings on the question that was argued before me and that is whether the referee correctly considered the aspect of goodwill when making his report to the Court on the accounts between the parties. 3 There were a considerable number of disputes between the former partners after the dissolution of the partnership which raised questions of law and of accounting. After considerable debate, I referred all matters to a referee, Mr Andrew Wily, a chartered accountant and liquidator. Mr Wily filed his report on 19 March 2007. Each of the former partners has filed notice of motion to adopt or reject that report in whole or in part. 4 After further debate, the issues in dispute arising from the report were isolated. I am presently dealing with only one of them, namely whether Mr Wily's report insofar as it deals with the subsistence of goodwill in the Hodgkinson Old & McInnes partnership after its dissolution should be rejected. 5 The matter was debated before me on 20 May 2008 when Mr R D Marshall and Ms B A Arste appeared for Mr Old, Mr M Condon appeared for Mr Hodgkinson and Mr McInnes and Mr L Nikolaidis (solicitor) appeared for the referee. 6 The following facts are taken from the written submissions of Mr Marshall and Ms Arste where they are said to be (and in fact, are) the uncontroversial factual background to the dispute. 7 On or about 1 May 2000, Messrs Old and Hodgkinson entered into a partnership trading under the name of H R Hodgkinson & Co. They carried on a patent and trademark attorneys practice. In doing so, Mr Old had joined Mr Hodgkinson's former sole practice, H R Hodgkinson & Co. The business of that partnership was conducted out of offices at 20 Alfred Street, Milsons Point. 8 On or about 1 July 2000, Mr McInnes joined the partnership as a salaried partner. The business of the new partnership was carried on at the same premises under the name of Hodgkinson Old McInnes (First Partnership). 9 On 7 December 2001, the Supreme Court of New South Wales, by consent, made a declaration that the First Partnership was dissolved on 3 December 2001. Further, it ordered that the First Partnership be reconstituted on and from 3 December 2001 with Messrs Old and Hodgkinson as equal equity partners and Mr McInnes as an income partner (Second Partnership). The Second Partnership carried on business at the same premises as the First Partnership under the same name, Hodgkinson Old McInnes. 10 On 18 July 2002, Messrs Old, Hodgkinson and McInnes signed a Memorandum of Understanding (MOU) which, inter alia, acknowledged that "on and from 1 July 2002 they would form an equal partnership at will" (Third Partnership). This is also known rather confusingly as HOM2 and Mr Wily refers to it by this tag. The Third Partnership also carried on business at the same premises as the Second Partnership under the same name Hodgkinson Old McInnes. The MOU provided that the Third Partnership would otherwise continue until execution of a Trust Deed to regulate the activities of a business carried on in the name of Hodgkinson Old McInnes. The Trust Deed was never executed. 11 By notice dated 29 May 2003, the Third Partnership was dissolved by Mr Old effective from 30 June 2003 (Notice of Dissolution). 12 Following dissolution of the Third Partnership, the defendants continued to carry on business under the name of Hodgkinson and McInnes, dropping the name "Old" and replacing it with the word "and". Mr Old established a new business under the name of "Fraser Old & Sohn". 13 Mr Hodgkinson's business, H R Hodgkinson & Co, was carried on from subleased offices at Level 3, 20 Alfred Street, Milsons Point. The First, Second and Third Partnership businesses succeeded in turn to occupy the same premises, expanding from half a floor to one and a half floors by 30 June 2003. Immediately following dissolution of the Third Partnership, the defendants' business, Hodgkinson and McInnes remained in, and was carried on from, that office space utilising the same telephone, fax, post office box and email arrangements. The change to the letterhead was minimal. Mr Old established himself in different offices located at 118 Alfred Street, Milsons Point, leaving behind everything save for his dictaphone and approximately 400 files out of about 10,000. 14 Mr Wily's report dealt with the goodwill in HOM2. He reported in para 5.10.5 that goodwill existed in HOM2 as at 30 June 2003 for the reasons he subsequently gave. 15 He said in para 5.10.15 that the business of HOM2 continued after 30 June 2003 as a going concern, by virtue of the partners continuing to operate the business, albeit, via two separate entities that is, Fraser Old & Sohn Unit Trust and the Hodgkinson and McInnes partnership. 16 He said in para 5.10.24 that the super profits methodology is the most appropriate methodology to calculate goodwill for HOM2 as at 30 June 2003. 17 For the reasons he gave in his report, Mr Wily adopted a capitalisation rate of 33.3% and assessed the goodwill of HOM2 as at 30 June 2003 at $909,580. 18 He then considered the calculation of notional goodwill that Mr Old extracted from the practice by removing files to set up his new practice. He considered that the notional goodwill was $142,931. 19 Mr Condon for Messrs Hodgkinson and McInnes contends that it is inappropriate to adopt the referee's finding that goodwill be included in the final accounts. 20 His basal submission is that this is because, as four justices of the High Court reaffirmed in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 620, goodwill has no existence independent of the conduct of a business and goodwill cannot be severed from the business that engendered it. 21 Indeed this is no new statement of the law as the classic statement as to goodwill made by Lord Lindley in the House of Lords in Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 235 is as follows: "Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on . " 22 The same approach was taken by Stephen J in Geraghty v Minter (1979) 142 CLR 177 at 193. 23 I should next refer to the decision of Needham J in Robb v Alcock of 31 July 1978, which is partially reported in (1978) 2 BPR 9630. That case was fully considered in the submissions of Mr Marshall and Ms Arste who sought to distinguish it. 24 Robb v Alcock was a case where three accountants in partnership dissolved their partnership, but all continued in practice, two in one new firm and the third by himself. They did this after sending a circular to their clients suggesting that the client choose which accountant would get their work. 25 Needham J said at p 10 of the manuscript of the unreported part of his judgment: "The defendants submitted that the business was still being carried on, albeit in two separate parts. I think it is difficult to accept the proposition that two accountancy practices, coming into existence upon the dissolution of a partnership practice constituted by the members of the two new practices, are, in law, to be regarded as the continuation of the original practice. Each of the former partners, no doubt, has the benefit of some part of the assets of the original practice - for example, the plaintiff carried on his practice under the old name - but, in my opinion, the plaintiff's business and the defendants' business constitute two entirely separate entities, and cannot be looked upon as a notional continuation of the old practice." 26 His Honour's conclusion is reported at p 9630 of the BPR: "once a business comes to an end goodwill in it can no longer exist. If the former partners so desire, they can sell the assets of the business, including goodwill…. If, however, the former partners decide to give up the business and go their separate ways, it seems to me that they destroy the goodwill of that business….Each party remains entitled to use the name (an integral part of the former goodwill) and the goodwill which each of the former partners builds up is his own goodwill, ie the goodwill of his new business. It cannot be equated or identified with a portion of the former goodwill. In my opinion, goodwill is not one of the elements to be taken into account in settling the final accounts of the former partnership." 27 I was also referred to the decision of the Court of Appeal consisting of Tobias and Basten JJA and myself in 260 Oxford Street Pty Ltd v Premetis [2006] NSWCA 96. The court there considered the nature of goodwill. However, that judgment, dealing as it did with whether one could sell a trade name as a separate piece of property apart from the rest of the goodwill, does not assist in resolution of the present problem. 28 Mr Condon put that: "28. There was no transfer of business in this case to the defendants on the one hand and the plaintiff on the other. There was no evidence to suggest that there was a series of separate goodwills, and the fact that the firms were competitive with each other - at least in the field of patents - precluded such a possibility. The significance of that competition is underscored by the plaintiff's assertion that his earnings 'more or less exceeded those of [the defendants] added together'. 29. Further, the referee acknowledged that there could be some natural attrition of clients to other firms following dissolution of the HOM2 Partnership. 30. The unreality of the referee's logic is emphasised by his assessment of the factors relevant to the 'super profits' methodology, which he used to assess the value of the business conducted by the two firms after 30 June 2003. At para 5.10.20 he stated: 'The value of this interest is a product of both the firm as a whole and the personal performance of the individual partner.' This calculation paid no regard to the fact that the firm 'as a whole' ceased to exist on 30 June 2003." 29 Thus, in summary, Mr Condon put that the referee misapprehended the evidence in concluding that the business conducted by HOM2 remained intact after its dissolution and failed to apply proper legal principles when considering the attributes of goodwill. 30 Mr Condon submits that the referee's errors of themselves are reasons for rejecting this aspect of the report and refers to Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549, 563. Mr Condon's annexure "A" to his submissions recalculates the entitlements on the basis that his submissions are accepted. 31 Mr Marshall and Ms Arste in their submissions show that they fully appreciate the strength of the opposing case, but they put that each case must be dealt with on its own facts and circumstances and there are cases (this being one) where the analysis of the referee is appropriate. 32 The key plank in this argument is the decision of the South Australian Full Court in Walker v Martin 23 December 1993 (BC 9300519). 33 The basal facts in that case were that the disputants were four doctors (Wallis, Walker, Wilson and Martin) who had been in partnership in the Adelaide Hills with practices at Stirling (the Druid Avenue Medical Centre) and Bridgewater. 34 Dr Wallis gave notice dissolving the partnership and, with a part time employee of the partnership, Dr Bennetts, commenced a practice close to the Druid Avenue Medical Centre. Drs Walker and Wilson continued practice in the partnership's former premises and Dr Martin went elsewhere. Dr Martin had been the last partner to join the practice and had paid a considerable sum to join it. 35 Dr Martin claimed that he was entitled to one quarter of the goodwill of the former practice. 36 The Court allowed Dr Martin's claim. The judgment of King CJ notes that it is not too clear what was the basis of Dr Martin's claim, but it appeared to be that there was an agreement to buy his share for a reasonable price. As Drs Walker and Wilson had taken over the goodwill of the practice with the exception of Dr Wallis' share, they were liable to pay Dr Martin for his quarter share of the goodwill. 37 No authorities were cited in any of the three judgments (King CJ, Millhouse and Olsson JJ). The judges all seemed to consider that it could not logically be said that the goodwill had disappeared and that it had been appropriated by Drs Walker and Wilson less the part taken by Dr Wallis. 38 The decision appears to be ethically fair, but, with respect, it runs contrary to what the High Court has said on the subject and even though it is a decision of an interstate Full Court, it must be considered to be plainly wrong as a matter of principle. 39 Mr Marshall and Ms Arste submitted that the decision in Alcock must be distinguished on its facts and that the present case is analogous to Walker. As in Walker, for all intents and purposes the business continued to operate in the hands of Messrs Hodgkinson and McInnes as it had during HOM2. 40 As I have considered Walker as no authority, this submission does not impress. 41 However, counsel press that there are factors in the present case which show that the result in Walker should be reached in the present case. 42 Those factors are that Messrs Hodgkinson and Mcinnes have retained the following assets from HOM2:

Old v Hodgkinson; Old v McInnes

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Judgment (17 paragraphs)

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