Partnership business
155 As the oral argument developed it was apparent that there was another controversy between the parties - the nature of the partnership business. This emerged in the following manner.
156 The appellants complained that, assuming the primary judge's conclusion that the partnership terminated in March 2001 was correct, nevertheless his order referring the matter to the Master to determine the value of the business and whether Mr Ryder owed moneys to Mr Frohlich at the date of termination was too limited. It will be recalled that his Honour remitted the matter to the Master to determine (inter alia) "as at the date of dissolution of the partnership (being March 2001) whether monies were owing to Mr Ryder referable to the value of the business at that date".
157 The appellants' contention was founded on the proposition that "whenever the partnership was terminated, the common position was that the business of the partnership (comprising, at least, the management of the Diversified Fund) was still trading as at the hearing of the matter". The consequence was, according to the appellants, that even if the partnership was terminated in March 2001, the respondents continued to operate the partnership business. In the first place this occurred "with the assistance of the appellants, but after 13 February 2003 without that assistance [the respondents] having effectively excluded the appellants from the business)". The appellants submitted that the primary judge's order should have reflected those "uncontroversial facts".
158 The appellants also contended that as the partnership business was continued "by a subset of the original partners", the "outgoing partners" (the plural assuming the four partner thesis was sustained) had elected, pursuant to s 42 of the Partnership Act, to take a share of the profits made by the partnership business since termination. The appellants also contended that even if the partnership was terminated at a past date, they were entitled to receive their equal shares of the assets of the partnership as at the date of realisation of those assets and were not limited to the historical value of their share of the assets at the termination date: see Barclay's Bank Trust Co Limited v Bluff [1982] 1 Ch 172; Chandroutie v Gajadhar [1987] 1 AC 147.
159 Accordingly, the appellants submitted that the primary judge should have ordered that a valuation be taken of the business "as at its present value" (the temporal context of "present" was not defined but presumably means at the date of the accounting exercise) and that his Honour should also have referred the assessment of the appellants' share of post-dissolution profits to the Master.
160 The respondents submitted that the nature of the partnership business was far from "uncontroversial" at the hearing. They contended that the appellants' case proceeded from a fundamental misconception as to what the business and assets of the partnership were. They disputed the proposition that the management of the Diversified Fund (which they contended must mean the "right to manage the Fund and to draw fees from managing it") was part of the partnership business.
161 The respondents accepted that, as part of the partnership, Coastal was to remit to the partners, in consideration of their advice, the net profit of fees earned managing the Diversified Fund. However they contended the right and legal responsibility to manage the Diversified Fund fell to Coastal as the responsible entity pursuant to the Corporations Law. Thus the respondents contended the legal right to manage the Diversified Fund could not be a partnership asset.
162 The respondents also argued that neither the Diversified Fund, nor any goodwill attaching to it, formed part of the goodwill of the partnership. Rather, they contended any goodwill attaching to the Diversified Fund was Coastal's. To the extent any goodwill attached to the partnership, the respondents contended it was the "goodwill … 'of Mr Frohlich and Mr Ryder advising the fund but that is as high as it can get.' " (emphasis in original)
163 The respondents contended that the issue of the nature of the partnership business had been resolved by the primary judge's finding (not challenged by any ground of appeal) that the partnership carried on the business of "establishing the Diversified Fund and advising Coastal with respect to it" [39] and "attracting subscribers to it" [41].
164 The significance of this submission was that if the partnership business was as found by the primary judge in [39] and [41], the respondents contended that that business was no longer being carried on once the partnership was terminated by Mr Ryder's departure. Rather, the respondents argued, after March 2001, Mr Frohlich was acting in his capacity as executive director and controller of Coastal which, in turn, was exploiting its rights as the Diversified Fund's responsible entity. The respondents pointed out that while Mr Ryder "was free to walk away from the partnership business of advising Coastal", Mr Frohlich did not have that opportunity because of his legal responsibilities as an executive director of Coastal.
165 The corollary of this proposition, the respondents contended, was that there were no "partnership assets" which could have been used to generate profits after Mr Ryder ceased to be a partner to which an order under s 42 of the Partnership Act could attach nor, indeed, could there be any partnership assets to which a post-termination value could attach.
166 In reply, Mr Wales submitted that there was no issue on the pleadings that the assertion in the Statement of Claim that the partnership was "an asset management business with respect to 'absolute return investments'" was correct. The pleaded response to that paragraph of the Statement of Claim (paragraph 2) was, in substance, a non-admission that any agreement was ever concluded between the parties and otherwise the allegations in that paragraph were not admitted. Accordingly, Mr Wales submitted that "the parties seem to be ad idem in the pleadings that the business of the partners was a funds managing business".
167 The appellants submitted that the primary judge's statements concerning the partnership business did not lead to an issue estoppel because they were not reflected in the Court's order and could not, therefore, be the subject of an appeal. Mr Wales submitted that the words "the business" could not be interpreted by going to the judgment.
168 Secondly, they contended that the issue of the nature of the partnership business was not raised on the pleadings and that if it was in issue the matter should be remitted to the Equity Division for determination prior to the reference to the Master proceeding. Mr Wales contended that while there was an issue at trial as to whether the arrangement between the appellants and the respondents was to be characterised as a partnership (as the appellants contended) or a joint venture (as the respondents contended), they were "ad idem that the business of the partners was a funds managing business". This submission appears to have been advanced to support the proposition that paras [39] and [41] could not be said, in the circumstances, to support an estoppel. In oral argument Mr Wales also appeared to embrace a concern raised by the Court that if the primary judge had determined the nature of the partnership business, he had failed adequately to reveal his reasons for his conclusion.
169 Mr Wales also complained that the respondents had never pleaded that if the partnership business was to advise Coastal, that business only endured while being carried on by the two partners so that there was no entitlement to an accounting after March 2001. The respondents' response was that the appellants had never pleaded an entitlement to post termination accounting pursuant to s 42 of the Partnership Act but had first raised this proposal in final written submissions before the primary judge.
170 At the conclusion of the oral argument the Court gave the appellants leave to file written submissions in support of amending the Notice of Appeal to include grounds of appeal challenging the "finding" as to the partnership business and raising a "no reasons" ground concerning that "finding" as well as submissions concerning the interpretation of an order by reference to findings in the judgment.
171 The appellants filed supplementary submissions. They submitted, however, that they did not need to seek to amend the Notice of Appeal. They contended that as the Notice of Appeal already challenged the primary judge's finding concerning the identity of the partners in the partnership, to the extent his Honour's findings about the nature of the partnership business were part of that finding, they were already the subject of appeal. The appellants contended that his Honour's findings did not constitute "an authoritative finding on the question of partnership business" but, rather, were "elliptical and inconsistent". They submitted that the passages the respondents contended were findings as to the nature of the partnership business were inconsistent with the primary judge's statement (at [40]) that "Protected was not part of the business nor was Coastal otherwise than it (Coastal) was the responsible entity of the Diversified Fund".
172 The supplementary submissions did not address the "no reasons" point or the question of interpreting an order by reference to findings in the judgment.
173 The appellants did, however, contend that there was nothing in the primary judge's findings which supported the respondents' contentions as to the nature of the partnership business and/or the identity of the assets of that business. They contended that it was common ground that Coastal was the responsible entity with the statutory responsibility of managing the Diversified Fund so that the role of the partnership could only be to perform tasks important to the success of that Fund. They submitted that those tasks were those to which the primary judge had referred such as giving advice, attracting investors and setting up the Diversified Fund in the first place. They contended that such rights as Coastal possessed with respect to the Diversified Fund were held on behalf of the partnership so that any goodwill associated with that Fund was also held on its behalf. They submitted that there was nothing in the primary judge's findings that was inconsistent with that proposition. They contended that that proposition was supported by Mr Walker's concession that Coastal was obliged to pass to the Ryder and Frohlich interests the entirety of the profits earned by the management of the Diversified Fund demonstrating that it functioned as a "mere vehicle" for the conduct of that Fund.
174 The appellants also contended that the primary judge was clearly of the view that the value of the goodwill associated with the Diversified Fund would be a matter for the Master to determine. They referred to paragraph [59] of his judgment where in referring to the question whether he should remit the matter to the Master to take accounts as at March 2001 as to the respective entitlements of Mr Frohlich and Mr Ryder, he noted the parties' competing positions, including Mr Ryder's proposition that although the Fund was not profitable as at March 2001 "the investments it had had the potential to generate profits and hence a value". The appellants contended that by acknowledging that the Master would entertain a debate about the value of the business as at March 2001 in terms of its potential to generate profits, the primary judge was necessarily dealing with the valuation of partnership goodwill as, they contended, the profitability of the Diversified Fund could not logically relate to the valuation of chattels. In other words, as I understand this submission, the appellants contended it was implicit in the primary judge's judgment that Mr Ryder was entitled to an accounting which included assessing the value of the Diversified Fund as at March 2001.
175 The respondents' supplementary submissions contended that if the Order was thought to be ambiguous as to the meaning of "business", that ambiguity may be resolved by resort to extrinsic material and, in particular, the reasons for judgment.
176 The respondents also argued that in light of the appellants' failure to seek to amend the Notice of Appeal to challenge the primary judge's findings about the nature of the partnership business, the appellants' supplementary submissions exceeded the Court's leave and ought not be entertained. Out of abundant caution, the respondents also addressed the additional matters raised by the appellants.
177 The respondents contended the primary judge had made clear findings of fact as to the nature and extent of the partnership business. They submitted that the primary judge's reference to Coastal being the responsible entity did not convey that Coastal was a part of the partnership business in the sense of being an asset of the partnership or convey that the right to draw fees from managing the Diversified Fund was an asset of the partnership. Rather, the respondents contended the reference to Coastal simply picked up the point that, as the responsible entity of the Diversified Fund, Coastal was the source of the partnership business' intended income being the profits, if any, which Coastal earned from managing the Diversified Fund.
178 The respondents also complained the appellants could not argue that Coastal's rights with respect to the Diversified Fund were "held on behalf of the [two partner] partnership". The respondents also disputed the appellants' reliance on Mr Walker's concession as supporting the proposition that Coastal held its rights with respect to the Diversified Fund on behalf of the partnership. They contended that the effect of that "concession" was that the informal arrangement between Coastal and the partnership pursuant to which the partnership advised Coastal and attracted subscribers to the Diversified Fund and Coastal would pass onto the partnership the profits, if any, derived from managing the Fund, collapsed once the partnership terminated. For these reasons the respondents also submitted that Coastal's goodwill associated with the Diversified Fund could not be held on behalf of the partnership. They challenged the proposition that the valuation of the goodwill associated with the Diversified Fund was inherent in the primary judge's reference to the Master.
179 The respondents also addressed some submissions to the value of the goodwill of the partnership as at its termination as well as to the utility of a s 42 exercise. These are matters which, in my view, need not be addressed as part of this appeal.