Plaintiff v Defendants

1. there was a partnership between the plaintiff and the first defendant conducted under the name of WW Industrial - Wenco Industrial during the period January 2000 to 15 April 2004 and
2. the partnership was dissolved with effect from 15 April 2004.

The court also ordered by consent that accounts of the partnership be taken and went on to make the following orders in respect of the reference:

"4. Pursuant to Order 50.01 of the Supreme Court (General Civil Procedure) Rules 2005 the questions referred to in the Schedule be referred to Gregory Pollard Meredith of Ferrier Hodgson, 600 Bourke Street, Melbourne as Special Referee for the referee to give his opinion with respect to the questions hereafter ordered.

1. 5. Subject to the requirements of the rules of natural justice and the following directions and any further directions which may be given by the Court, the Special Referee may conduct the reference in such manner as he thinks fit.
2. 6. The Special Referee is not bound by the rules of evidence.
3. 7. On or before 23 August 2006 the Special Referee must conduct a preliminary conference with the parties to determine the manner of conducting the reference.
4. 8. The Special Referee, may, where he considers it appropriate to do so in respect of specific questions, but subject always to paragraph 5:

(a) conduct the reference in the absence of a party who has indicated that it is not interested in that question;

(b) conduct the reference in an investigative rather than an adversarial manner;

(c) consider any documents, submissions or thing and apply his professional expertise to the consideration thereof;

(d) direct that there be no opening of final addresses by a party or that it be limited in subject or in time.

If the Special Referee exercises any of these powers he must record this fact and the circumstances in his report.

1. 9. The Special Referee may for the purposes of the reference investigate any matter or call for any document or explanation he considers appropriate and generally may make such enquiry and inspection of any document or thing or access to premises and any inspection he considers necessary and use such personal knowledge and expertise as is necessary for the purpose of the reference.
2. The Special Referee has the same authority with respect to discovery and production of documents as the Court.
3. The attendance of witnesses and the production of documents may be compelled by subpoena.
4. Each party must comply with any lawful direction of the Special Referee which he considers necessary for the reference.
5. Each of the parties may be represented by an accountant and/or by a legal practitioner.
6. The Special Referee must make a report in writing to the Court stating his opinion (with reasons) upon all the questions hereby referred and giving reasons for the opinion. The report together with a copy for each party must be delivered to the Prothonotary not later than 13 October 2006 or by such later date as the Court may direct."

The orders went on to make provision for the remuneration of the referee and other matters.

4 Attached to the order was a schedule of questions:

"1. What is the correct closing stock figure for the stock of the WW Industries - Wenco Industries Partnership ("the Partnership") as at each of the following dates:

• 30 June 2000
• 30 June 2001
• 30 June 2002
• 30 June 2003
• 15 April 2004

1. 2. What was the gross profit of the Partnership as at each of the accounting dates?
2. 3. What amount is proper to be entered into the partnership accounts as the contributions made by each partner at the commencement of the partnership?
3. 4. What is a reasonable amount payable to a person of like experience to the Second Defendant performing the functions performed by the Second Defendant in the partnership business during the subsistence of the partnership?
4. 5. What amounts (if any) not charged or paid during the subsistence of the partnership are reasonably chargeable to the partnership in each of the accounting dates by:

(iv) sales, storage, cataloguing and indexing services, including commission on sales of partnership products;

(v) principal and interest on monies lent to the Partnership;

(b) WR and BM Whitehead for monies lent to the partnership and securities provided to the partnership bankers in respect of the partnership account at bank;

(c) Quickbiz Pty Ltd for the provision of administrative staff and administrative services to the partnership and monies lent to the partnership;

(d) the First Defendant for monies lent to the partnership;

(e) the Second Defendant for monies lent to the partnership?

1. 6. What amounts properly stand to the credit or debit of the capital accounts and/or loan accounts of the partners:

(b) upon the dissolution of the partnership on 15 April 2004?

In considering and determining this question the Special Referee shall consider two different scenarios -

Having regard to the answers to questions 1, 2, 3, 4 and 5 above, and 7.

Having regard to the answer to questions 1, 2 and 3 above and excluding:

(a) any amount calculated in accordance with questions 4 and 5;

(b) the First Defendant's entitlement in the sum of $150,000 and $225,000 for the years ending 30 June 2002 and 30 June 2003 respectively.

1. What was the net profit of the Partnership as at each of the accounting dates."

Having regard to the situation of the litigation at the time, the orders that were made reflected, if I may say so, a sensible step in the process of resolving the dispute. Plainly the object of the exercise was to have an expert assess the quantum of the matters in issue. In addition it had been decided that it was advantageous to do that prior to having the various liability issues determined. An advantage of that course was that the parties would have a much better idea of what it was they were fighting over and so would be in a better position to resolve the dispute, the primary focus of which appears to have been on liability issues. As was said by Mr Sifris, who appeared before Teague J for the plaintiff, the plan as had been identified by his Honour and accepted by the parties was to:

"get the accountant to determine all the questions and then we can argue the law."[2]

This distinction was particularly relevant to questions 4, 5, 6 and 7. What is clear from the transcript is that the understanding of the parties was that in relation to those matters the referee would be doing no more than determining a reasonable figure for the items claimed and that the entitlement to be paid the monies or to charge them to the partnership, remained to be considered. This understanding and objective explains the request to the Special Referee in question 6 that there be two scenarios used in calculating the amount properly standing to the credit or debit of the capital accounts and/or loan accounts of the partners. The two scenarios took account of the fact that in questions 4 and 5, what was involved was an arithmetic calculation which would affect the answer to question 6 only if a court subsequently held that the defendants were entitled, as a matter of law, to receive payments for those amounts. As Mr Sifris put it, scenario 1 represented the consequences of the defendants' position (entitlement to such amounts) and scenario 2 represented the position of the plaintiff which, as counsel stated, was:

"When we get back to court after the Special Referee, we had hoped to persuade a judge that (4) and (5) should not be taken into account. But at least the referee will give his opinion in relation to that."

His Honour[3] explored with Mr Sifris the question as to whether there needed to be further refinement of the questions to enable unforeseen liability issues to be identified and noted by the referee and to allow the referee to determine other factual matters on the basis of competing positions.

That issue was discussed with counsel pointing out the powers the referee had to refer the matter back to court or decline to address a legal issue. Counsel went on to say[4]:

"... we have gone through a lot of trouble to try and put together what we considered to be a neutral order."

Counsel then invited Mr Hardy to indicate what it was in the proposed orders that were objectionable. Mr Hardy responded that basically the orders proposed by Mr Sifris had been adopted in bulk by them. There was further discussion about the questions and the handling of the matter. At the conclusion of discussion on that occasion, Mr Sifris stated the following:

"The second matter is that we understand that the special - the questions - we did take objection to the whole range of questions that our learned friend suggested. But, given your Honour's indication yesterday we broadened them. But we do say that we reserve our position entirely on the questions and on legal matters arising, as indeed do both parties I am sure. We just wanted to say that by consenting to the questions we are not consenting to the legal fundamentals underlying the questions if you like."[5]

Teague J responded that counsel's position had bee noted and recorded on video tape.

5 The referee's report sets out the material supplied to the referee and the assistance given to the referee by his staff. It notes two hearings with representatives of the parties. The first was at Warragul on 26 September 2006 where the referee met with Mr Whitehead and Mr Maric for the defendants and Mr Gowland and Mr Peter Cash, solicitor for the plaintiff. The referee was shown over the business premises in Warragul by Mr Whitehead including inventory and he gave an explanation of the nature of the business. The other hearing with the parties occurred on 6 October 2006 when the referee travelled for a conference with Mr Maric and Mr Gowland at the business premises. On that occasion the referee also reviewed a substantial amount of financial records compiled by Mr Maric.

6 The referee had written submissions from both the plaintiff and the defendants which included material from their accounting experts - Mr Gowland for the plaintiff and Mr Maric for the defendants. It included ledgers and stock reports. It also included reports by Hywood Consulting and an Asset Valuation Report by Gray. There were stock reports as at 31 March and 30 April 2004, payroll reports, vehicle expense worksheets, bank statements and confirmation letters from the ANZ bank as to interest rates and lending impact analysis. Also provided to him were statutory declarations by staff from BJ Bearings Pty Ltd and Quickbiz Pty Ltd concerning the proportion of time allocated by those companies to the partnership.

7 The approach taken by the plaintiff in resisting the adoption of the report has been to advance arguments in respect of the handling of each question by the referee and, applying the ultimate test set out in the rules, to argue that it would be contrary to the "interests of justice"[6] to adopt the referee's report in respect of that particular question. Accordingly, it is necessary to take each question, consider the issues raised by the plaintiff in respect of the handling of it by the referee and to determine whether, having regard to the interests of justice, that particular part of the report should be adopted.

8 The referee, after careful consideration of the material provided to him, concluded that the inventory figures adopted in the partnership records at each accounting date should be the accepted. They were as follows:

9 The plaintiff has objected to the adoption of paragraphs 49 and 50 and 52(g) and (j) of the report. Paragraphs 49 and 50 relate to an exercise the referee conducted to assess the reasonableness of the inventory value as at 15 April 2004. He concluded from that exercise that the stock value of $1,093,555 recorded in the financial records of the partnership was within the range which he had explored in that exercise. The effect of not adopting those paragraphs and not adopting the related conclusions in paragraph 52(g) and (j), it was argued, would leave the report in the situation that the referee's literal conclusion would be that contained in paragraph 52(i), namely:

"52(i) I am unable to calculate or estimate an alternative closing stock figure to that which has been recorded for the partnership at each of the Accounting Dates."

10 The first argument put for the plaintiff is that the special referee purported to engage in an exercise in assessing the reasonableness of the inventory value which was outside the terms of reference. It was put that the referee was asked to determine what the correct closing stock figures of the partnership were at the relevant dates and was not asked to assess a range of possible stock values. It was put also that, having determined the other matters, including the conclusion stated in paragraph 52(i) above, the reference on that issue was completed and the exercise performed in paragraph 49 relating to "Assessment of Inventory Value Reasonableness" was not within the terms of question 1. It is put that if that analysis is correct the Special Referee was left in the position of being unable to answer question 1. If that is correct the consequence was that while the referee could have continued with questions 3, 4 and 5, it would not have been possible for the referee to address questions 2, 6 and 7.

11 In my view the argument proceeds on an inaccurate basis. The exercise referred to in paragraphs 49 and 50 was plainly an attempt by the referee to assess whether it was reasonable to rely upon the partnership inventory figures. As appears from his report, he faced difficulties in arriving at his own valuation of the inventory at the relevant times because it had been calculated using unconventional methods. For example, Mr Maric, the accountant of the first defendant, asserted that the inventory was valued using the Retail Inventory Method. The referee's view was that, based on the prescription of RIM in the Accounting Standard, it had not been properly utilised[7]. The Australian Accounting Standard AASB 1019, in particular, states that the inventory must be valued at the lower of cost or net realisable value, where "net realisable value" is defined as the future proceeds from the sale of the inventory estimated at the reporting date.[8] The approach taken by the defendant and by Mr Whitehead was to determine a standard cost of each product which took account of the original cost of the item but also other matters which were described as a "buffer" items, namely, freight and shipping costs, wastage, obsolescence, damage, currency fluctuations, shrinkage and product risk assessment, product turnover and the estimated holding period. The referee reported that on the information available he was not able to analyse the standard costs including the buffer.[9]

12 The referee noted that Mr Maric in his report suggested that the buffer figure was around 5 per cent greater than actual historical cost. The Gray's report dated 30 September 2005 stated that the buffer was "usually no more than 15 per cent of the invoiced price"[10]. He also noted that the inventory system used by the partnership did not value stock on hand at historical cost and reports could not be obtained of the historical cost[11]. He also had information from an attempt by Mr Whitehead, during the conference with experts, to analyse the buffer using a small sample of products. He advised that the buffer was around 20 per cent of the historical price[12].

13 The end result was that he could not review, in any useful manner, the standard costs utilised by Mr Whitehead and he commented they appeared to be somewhat arbitrary[13]. He then went on to consider other information that he had such as stock reports as at 31 March and 30 April, in respect of stocktakes performed in August 2001 and June 2002, and a valuation report by Gray - which determined that the market value of the closing stock figure of the partnership was $1,080,000. He noted that Mr Wollaston of Grays was a certified practising valuer rather than an accountant.[14] He also considered an exercise conducted by Mr Maric in which he attempted to justify the partnership inventory figure of $1,093,555 by comparing it with a net realisable value analysis where he deducted 5 per cent from the average stock last price value, then applied his realisation shadings as set out in a table in the report[15]. He then attempted to assess the reasonableness of the partnership inventory value[16].

14 The situation was that the referee, having been asked to express an opinion as to the correct closing stock figure for the partnership at the relevant dates, was not able by any conventional method to calculate such a figure. What he did have, however, was the valuation methodology used in the partnership which appeared to have been used consistently over each of the accounting dates[17]. At the same time there does not appear to have been an attempt by the plaintiff to put before the referee any extensive alternative figures or calculations or analysis. It can, therefore, be seen that what the referee was engaged in when he did the challenged "Assessment of Inventory Value Reasonableness", was a process by which he could assess the reasonableness of the inventory value system that had been used by the partnership.

15 Such an exercise was plainly within his terms of reference because it was a technique he used to assess the only evidence advanced before him as to the closing inventory value. Using that check and his expertise and experience, he came to the conclusion that he should not amend the inventory figure recorded by the partnership and that the partnership inventory figures should be adopted for the purpose of his determination.

16 Thus he did no more and no less than a court would have done in the circumstances. From an evidentiary point of view, the reality was that the only evidence the parties could place before the referee was that contained in the partnership's own records and in view of the fact that what was involved was the gathering of information relevant to the dissolution of that partnership and the financial consequences that should flow from it, it was plainly just that, in the absence of better figures, those figures should be used.

17 Counsel for the plaintiff also submitted that the exercise recorded in the "Assessment of Inventory Value Reasonableness"[18] was affected by uncertainty and in that situation it would be unjust to adopt the finding which was affected by such uncertainty. Such uncertainty has already been noted by me. That uncertainty, however, does not seem to me to give rise to the conclusion that it would be unjust to accept the referee's opinion on the matter. I refer to and repeat my above reasons.

18 Finally, counsel for the plaintiff submitted that the above paragraphs dealing with the first question should not be adopted because the special referee failed to take into consideration an analysis made by Mr Gowland of 1,400 invoices and that this constituted an error which vitiated the conclusion he had reached. But Mr Gowland's exercise concerned sales invoices and the calculation of gross profits. What the referee was investigating was the value of the stock that had not been sold. In those circumstances it is understandable that the referee did not mention that material in his report. In any event it has not been demonstrated that such analysis could have made any difference to the outcome.

19 I am satisfied that it would be in the interests of justice to adopt the report in respect of question 1.

Question 2 Issues - The gross profit of the partnership at each accounting date

20 Counsel for the plaintiff submitted that the adoption of the referee's report on matters relating to question 2 turned on whether the plaintiff's submissions in relation to question 1 were accepted. Counsel conceded that if they were not accepted, then it had no other arguments to advance against adoption of the report in respect of question 2. Accordingly I am satisfied that it would be in the interests of justice to adopt the report in respect of question 2.

Question 3 Issues - Partnership contributions at the commencement of the partnership

21 It was common ground that the actual payments and figures arrived at by the referee represented the actual situation. On proper examination, the arguments advanced by the plaintiff are directed more to the taking of accounts at a later date. The principal issue that remains is what, in light of the terms of the partnership agreement, should be recorded as contributions to the partnership accounts by the partners out of those sums.

22 The report in respect of question 3 should be adopted.

Questions 4 and 5 Issues - Amounts payable to Mr Whitehead and amounts allegedly payable to companies associated with Mr Whitehead and in respect of alleged loans made by the defendants

23 The plaintiff has raised a number of issues about the entitlement to receive the monies claimed by the defendants and by companies associated with them. They are not to the point, however, because, although it is not expressly spelt out in the questions, the exercise in which the parties engaged with the referee was one in which he was asked to do no more than put a value on the various items that are in dispute between the parties. The entitlement to those items will be the subject of the resumed court hearing. The concern of the plaintiff is understandable but it is plain that the parties chose to have the quantum issues determined in advance of the question of any entitlement on the part of the defendants to claim those amounts from the partnership. That concern is best addressed in my view by my recording the adoption of that part of the report as being confined to the quantum of the amounts recoverable by the defendants if their entitlement to those amounts is established.

24 The plaintiff also submitted, however, that it would be contrary to the interests of justice to adopt this part of the report.

25 The first matter raised was that to adopt this part of the report would limit the effective attack on the credibility of the witnesses relied upon in support of the claims to the entitlement to the various sums. Counsel for the plaintiff sought to identify lines of cross-examination that might be closed, but in my view all the matters raised concerned lines of cross-examination that were still open. For example, witnesses can be cross-examined on the failure to include in the partnership accounts during the partnership most, if not all, of the expenses now sought to be claimed. If it is a disadvantage, it was always going to be a disadvantage. The reality was that the forensic choice was made, for good reason, to have these matters separated and dealt with by an expert - no doubt the parties thinking that this was the most cost effective way to deal with what could be a very expensive exercise before a judge.

26 Another argument advanced was that in the interests of justice, the report in this area should not be adopted because it had been intended that the calculations would be purely arithmetic and based upon original records, but a number of the items, such as costs of providing staff by BJ Bearings Pty Ltd and Quickbiz Pty Ltd were calculated on the basis of a large number of statutory declarations made by staff in which they estimated the time they had spent working for the partnership.

27 It is true that in the transcript of the discussion leading up to the provision of the draft orders and the making of the orders, reference had been made to the use of primary sources in the tasks to be given to the referee but a fair reading of the transcript reveals that it was not anticipated that the referee would be confined to such material and that is borne out by the orders that were actually made which plainly allow for the receipt of oral and other evidence.

28 There appeared to be a suggestion, also, that it would not be in the interests of justice to accept the report insofar as it related to questions 4 and 5 because much would depend on the credibility of the deponents of the statutory declarations and they had not been challenged or questioned before the referee and that could not occur at the hearing of the substantive question of the entitlement to claim the amounts.

29 The plaintiff cannot now be allowed to raise such an argument when it had the opportunity to test and question such declarents before the referee but, for reasons not explained in the material before me, did not do so.[19] As to the argument expressed as to the consequences for the hearing of the entitlement aspect and the disadvantage of not being able to cross-examine on all such matters including the figures claimed, again that was a forensic choice. The plaintiff was represented by counsel and a solicitor at the hearing before Justice Teague. It must have been quite clear to it and its lawyers that this would be a practical consequence of the separation of the issues.

30 There also appeared to be an argument put that it was not in the interests of justice to have a situation in which the evidence of individuals might be accepted in respect of the quantum amount (particularly a witness like Mr Whitehead, a key witness on the entitlement issue) when as a result of the hearing before the court on the entitlement issue there might be adverse credibility findings made against those witnesses.

31 This argument takes a simplistic view of credibility issues. It is quite common for a witness whose evidence is rejected on some issues to have it accepted on others. If a problem has been created, it is the result of a forensic choice. In any event, should it happen, for example, that Mr Whitehead's credit is damaged in the action to the point that it is not possible for the defendants to succeed on the question of entitlement, then the defendants will lose on these issues even though they succeeded in getting a series of quantum figures from the referee which they could rely upon if they won on the entitlement issue.

32 The foregoing issues do not provide a basis for suggesting that it is not in the interests of justice to accept the report on these questions.

33 Finally in relation to question 5 and the matters in the report relating to it, counsel for the plaintiff drew attention to the fact that in respect of the amount claimed in respect of administrative staff provided by Quickbiz Pty Ltd to the partnership, there was an amount of $5,994 claimed for the accounting period ending 30 June 2000 which the referee accepted. Counsel for the plaintiff pointed out that Quickbiz Pty Ltd was not in existence on or prior to 30 June 2000. The defendants, having considered the matter, have consented to the referee's finding on that matter being excluded from the adoption of the report.

Questions 6 and 7 Issues - Capital accounts and profit partnership

34 No specific arguments were advanced in relation to these questions and whether the report in relation to them should be adopted. Their fate depends upon the outcome of the challenges made to the report in respect of the other issues.

35 No error of law has been demonstrated. Denial of natural justice has not been demonstrated. The plaintiff, in particular, had the opportunity to place all relevant material and to challenge that otherwise placed before the referee. The approach of the referee appears to have been thorough and analytical, independent and professional. In my view the proper outcome of the application is clear - it is in the interests of justice that the referee's report should be adopted with the exception of the assessment allowed in respect of the Quickbiz Pty Ltd claim referred to above and with an appropriate statement or qualification that makes it clear that the report insofar as it relates to questions 4 and 5 is accepted on the basis that it expresses the opinion of the referee in respect of the quantum of the amounts recoverable by the defendants if they are able to establish their entitlement to those amounts.

36 I will hear further submissions from the parties as to the appropriate form and content of the necessary orders.

[19] Parker v Robinson, Supreme Court of Victoria, unreported 19 May 1994, Byrne J at 69; Chloride Batteries v Glendale Chemical Products (1988) 17 NSWLR 60, 66-7.