[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[2]
Judgment
BASTEN JA: I agree with Meagher JA.
MEAGHER JA: The first appellant (Dr Segal), first respondent (Dr Sharma) and a third doctor carried on a radiology practice through the corporate trustee of a unit trust. The units in that trust were held by the trustees of three "family" discretionary trusts, the Segal and Sharma Trusts each holding 40%. The second respondent (SWR), now in liquidation, was the trustee of that unit trust (the SWR Unit Trust) which was constituted by a Trust Deed dated 15 December 2012. The "commercial arrangements" between the three doctors in relation to the conduct of that practice were recorded in a separate Deed of Agreement dated 18 April 2013. Clauses 3.8 and 3.9 of that Deed addressed the sharing of profits and losses generated or incurred by the SWR Unit Trust. The issues in the appeal concern the interpretation of those provisions, and in particular clause 3.9.
Those issues arose following earlier litigation between the parties. In those proceedings the doctors sought competing declarations as to which provisions of the Deed of Agreement governed the "determination" of their "commercial arrangements". It was common ground that there had been a determination, however the Deed of Agreement prescribed different consequences depending on the type of determination which occurred. In the outcome Hammerschlag J made a declaration that an "agreed determination" had occurred ([2017] NSWSC 867). His Honour also ordered that Dr Sharma pay Dr Segal's costs in those proceedings, which were paid after a costs assessment and before that assessment was reviewed.
Following that review, Dr Sharma brought proceedings in the District Court claiming the difference between the amount paid and the costs as reviewed, being $116,904. In addition to defending that claim on the basis of an accord and satisfaction, Dr Segal brought a cross-claim against Dr Sharma as assignee from SWR of part of a debt said to be owing by Dr Sharma to SWR under clause 3.9 of the Deed of Agreement. Specifically it was alleged that Dr Sharma was liable to pay SWR 40% of the SWR Unit Trust's loss for the financial year ended 30 June 2018, that being the percentage of his "ownership interest" in that trust. The Trust's loss for that year was claimed to have been $848,778 and Dr Segal took an assignment of part of Dr Sharma's claimed liability, namely $130,000. Dr Segal relied on that assigned debt by way of set-off in satisfaction of Dr Sharma's claim. Although Dr Segal took an assignment of that debt which was said to be owed to SWR by Dr Sharma and the Sharma Trust, he did not make any separate claim against that trust in the underlying proceedings in the District Court.
The primary judge (Russell SC DCJ) dismissed Dr Segal's cross-claim (Sharma v Segal [2020] NSWDC 121), holding that Dr Sharma was not liable to SWR under clause 3.9, and accordingly not liable to Dr Segal as its assignee. Dr Sharma had two further "fallback" arguments, both of which the primary judge rejected. The first was that clause 3.9 only applied to a loss based on audited "financial accounts" of the trust, the accounts relied on by Dr Segal not having been audited; and the second that clause 3.9 had ceased to apply before the commencement of the financial year ended 30 June 2018, there having been an "agreed determination" of the parties' "commercial arrangements" before 30 June 2017. Having dismissed Dr Segal's accord and satisfaction defence and his cross-claim, the primary judge entered judgment for Dr Sharma for $126,239.
Dr Segal appeals from the dismissal of the cross-claim. His grounds of appeal and Dr Sharma's notice of contention raise the following three questions:
1. Whether Dr Sharma is liable under clause 3.9 to pay SWR a 40% share of the losses of the SWR Unit Trust (appeal grounds 1 and 2);
2. If yes to (1), whether clause 3.9 only applies to losses based on audited "financial accounts" of the Unit Trust (contention grounds 1, 2 and 3); and
3. If yes to (1), whether clause 3.9 ceased to apply to any losses of the Trust once there had been an "agreed determination", under clause 5.9.5 of the Deed of Agreement, of the parties' "commercial arrangements" (contention grounds 6 and 7).
If question 1 is answered "no", the remaining questions do not arise and the appeal must be dismissed. If question 1 is answered "yes", an affirmative answer to either of questions 2 and 3 would also require that the appeal be dismissed. If neither of questions 2 and 3 is answered in favour of Dr Sharma, it is not contested that Dr Segal would be entitled to judgment on his cross-claim. Appeal grounds 3, 4 and 5, and contention grounds 4 and 5, do not raise any further or other questions for determination.
These questions are addressed below in the order in which they arise.
[3]
(1) Whether Dr Sharma is liable by clause 3.9 of the Deed of Agreement for a proportionate share of the losses of the SWR Unit Trust
[4]
Relevant terms of Deed of Agreement
Clause 1.1.11 defines the "Sharma Group" as meaning Dr Sharma and the Sharma Trust, the latter describing the trustee of his discretionary trust. There are similar definitions in relation to the "Segal Group" and the "Chen Group". The SWR Unit Trust is referred to as "NewTrust" (clause 1.1.9). The directors of SWR were, on Dr Chen joining the practice, Drs Segal, Sharma and Chen (clause 4).
Clause 1.2.4 provides:
1.2.4 All references to Dr Sharma shall be deemed mutatis mutandis to include a reference to any, some or all of the entities in the Sharma Group and Dr Sharma shall be deemed to have been given appropriate authority to act on behalf of any, some or all of the entities in the Sharma Group as necessary to give effect to this Agreement [italics in original]
There are similar provisions (clauses 1.2.3 and 1.2.5) in relation to references to Dr Segal and to Dr Chen. It follows that in the case of each of them the only "entity" was the trustee of his discretionary trust.
Clauses 1.2.7 and 1.2.11 provide:
1.2.7 Headings to clauses are included for the sake of convenience only and shall not affect the interpretation of the clauses to which they relate
…
1.2.11 This agreement is interdependent and to be signed simultaneously with the Transaction Documents. If necessary, interpretation of this Agreement is to have regard to the commercial arrangements recorded in all the Transaction Documents.
Most significantly, clauses 3.8 and 3.9 provide:
Profits Shared Proportionately
if NewTrust Runs at a Profit
3.8 Each of Dr Segal, Dr Sharma and Dr Chen agree that if NewTrust runs at a profit, that profit will be retained and distributed by NewTrust as it sees fit. In that instance, each of Dr Segal, Dr Sharma and Dr Chen should enjoy the profit in proportion to their ownership interests in NewTrust.
Losses Shared Proportionately
if NewTrust Runs at a Loss
3.9 Each of Dr Segal, Dr Sharma and Dr Chen agree that if NewTrust runs at a loss based on its financial accounts for each annual period commencing on 1 July and ending on 30 June, then any shortfall shall be paid for in proportion to each of Dr Segal, Dr Sharma and Dr Chen's ownership interest in NewTrust.
[5]
The Trust Deed
The provisions of this Deed relevant to this first question concern SWR's powers as trustee to allocate trusts funds, clause 14.1 providing:
14.1 (a) The Trustee shall in each Accounting Period or as soon as practicable thereafter determine the net income of the Trust Fund and in particular all expenses paid or payable by the Trustee as described in clause 13.2 hereof.
(b) The Trustee may at any time prior to the expiration of each Accounting Period until the Vesting Day determine with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period to pay the same to any one or more of the Unit Holders living or in existence at the time of the determination.
(c) The following rules shall apply to any determination made pursuant to paragraph (b) of this clause namely
(i) …
…
(iv) in making any determination to pay apply or set aside any amount the Trustee may exclude any Unit Holder and may determine to pay apply or set aside such amount to or for or divide the same between Unit Holders in such proportions and in such manner as it in its absolute discretion shall think fit;
…
(d) The Trustee shall pay so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to the end of such Accounting Period pursuant to paragraph (b) of this clause to or for the benefit of the Unit Holders in proportion to the number of units registered in their respective names as at the end of such Accounting Period.
[6]
The primary judge's decision
Applying clauses 1.2.3, 1.2.4 and 1.2.5, his Honour reasoned at Judgment [113]-[115] that the opening phrase of clause 3.8 that "each of Dr Segal, Dr Sharma and Dr Chen agree …" could be read in one of two ways. The first was as referring to each doctor and his discretionary trust, so that they were to be taken to have agreed that profits should be shared in proportion to their ownership interests. Because the doctors did not have any direct ownership interest, it followed that they had no entitlement to any profit to be distributed. The second was as referring only to each doctor's discretionary trust, so that the agreement was that each discretionary trust as Unit Holder would be entitled to any distribution of the profits. On neither reading of clause 3.8 would the doctors have an entitlement to receive any profits directly. His Honour considered that clause 3.9 was to be understood as operating in the same way, the reference to the "shortfall" being "paid for in proportion" to the ownership interests of each doctor being a reference to the unit holding ownership interest of each doctor's trust. It followed in his Honour's view that clause 3.8 gave Dr Sharma no right to a personal share in the profit and clause 3.9 imposed no obligation on him to fund any loss of the SWR Unit Trust.
[7]
Disposition
Counsel for Dr Segal submitted that whilst clause 3.9 does not identify the person or entity by whom any shortfall is to be paid, the most likely candidates were the doctors who earned fees for the services they provided. Although clause 1.2.4 required any references to Dr Sharma at least to include him, Dr Segal's case was "neutral" as to how that provision operated in respect of clause 3.9. Dr Sharma submitted that by clause 14 of the Trust Deed, if the trust operated at a profit a distribution under clause 3.8 could only be made to the unitholding discretionary trusts. Clause 3.9, which applied if the trust ran at a loss, should be construed in the same way. Otherwise it would undermine the limited liability protection which the business structure adopted sought to secure. Clause 3.9 was not a guarantee or an indemnity.
Clauses 3.8 and 3.9 address the manner in which annual profits or losses are to be "enjoyed" in the case of the former, or "paid for" in the case of the latter. Each records what the doctors agree between themselves should happen in either of those events. The subject matter of their agreement is the profit or loss of the unit trust which owns and operates health care clinics "able to provide amenities and services that focus on a broad range of radiology services". The doctors are the persons providing those services and their respective interests in that business are held by discretionary trusts which, in the case of each of Drs Sharma and Segal, hold 40% of the units in the Unit Trust. The Deed of Agreement provides that the three doctors are to be the directors of that corporate trustee.
All of this forms part of the factual and textual context in which the language of clauses 3.8 and 3.9 is to be construed. That is what the objective theory of contract requires, which in turn no doubt informs the command in clause 1.2.11 that the Deed of Agreement is to be interpreted having regard to "the commercial arrangements" recorded in the other significant transaction documents.
Clauses 3.8 and 3.9 separately refer to "each of" the three doctors on two occasions. Those references require attention to the application of clauses 1.2.3, 1.2.4 and 1.2.5 which provide that the references to each doctor "shall be deemed mutatis mutandis to include a reference to any, some or all of the entities" in his Group.
The Latin phrase mutatis mutandis translates to "things being changed that have to be changed". Thus the instruction to the reader is that references to each doctor are to be "treated" as if they "include" references to any, some or all of that doctor's "entities" where the context makes that necessary for the sensible application or operation of the relevant provision.
The use of the word "include", as opposed to "be", makes clear that the defining provision only operates where necessary to extend the reference to that doctor and "any, some or all" of that doctor's entities. Those entities are separate from the named doctor, as is confirmed by the provision deeming him to have authority to act on their behalf "as necessary to give effect to this Agreement".
In the event the Unit Trust "runs at a profit", clause 3.8 records the doctors' agreement as to two matters. The first is that the profit should be "retained and distributed" by the trustee, of which they are the directors, "as it sees fit". The second is that they should each "enjoy [that] profit in proportion to their ownership interests" in that trust.
The powers of SWR, as trustee, to make payments from the profits of its business undertaking are limited to payments to Unit Holders. Under clause 14.1(b) of the Trust Deed, SWR may make "conditional" determinations before the end of a relevant Accounting Period (defined to mean a financial year ending 30 June) from "all or any part or parts of the net income" for that period. In doing so, by clause 14.1(c)(iv) the trustee may exclude any Unit Holder from such a determination and apply any amount between the Unit Holders "in such proportions and in such manner as in its absolute discretion shall think fit". Clause 14.1(d) then provides that the trustee shall pay "so much of the net income" of the trust for that Accounting Period as shall not be the subject of such a determination under clause 14.1(b) "to or for the benefit of the Unit Holders" in proportion to the number of units registered in their respective names.
Thus, as counsel for Dr Segal submitted, clause 3.8 is directed to ensuring that whilst the trustee is to decide whether profit is to be retained or distributed "as it sees fit", any such distribution should be on the basis that the three of them "enjoy the profit in proportion to their ownership interests". So understood the second sentence of clause 3.8 seeks to establish by their agreement a principle or rule that profits are to be shared in the same proportion as their ownership interests, i.e. 40%, 40% and 20%. The efficacy of that agreement depends on it binding the three individuals, who are also directors of the Unit Trust. It is not necessary for its efficacy that the discretionary trusts be parties to that agreement. Their entitlements as unitholders arise under and are governed by the terms of the Trust Deed. Nor is it necessary for those trusts to be parties to the implicit agreement in the second sentence of clause 3.8 in order to identify the proportionate ownership interests of the doctors, or to ensure that any profit is "enjoyed" by them via their discretionary trusts. It follows that the references to the three doctors in clause 3.8 are to be construed as being only to them, and not as including their respective family trusts.
Turning to clause 3.9, the three doctors agree that if the SWR Unit Trust "runs at a loss … any shortfall shall be paid for" in proportion to their respective ownership interests. It is to be noted at the outset that the clause contains no promise by them personally to make any "shortfall" payment to or for the benefit of SWR as trustee. Nor does clause 3.9 identify their respective discretionary trusts as promising to SWR to make such a payment. That is wholly understandable in view of clause 4 of the Trust Deed which provides that SWR as trustee "shall not have any power or authority to enter into any contract that shall bind or affect one or more Unit Holders personally or call upon them for any payment whatsoever". That clause also makes clear that SWR as trustee is to be indemnified out of the trust fund against liabilities it incurs, and that the Unit Holders are not to be personally liable for payment of such liabilities.
In its terms clause 3.9, like clause 3.8, records an agreement between the three doctor principals that any losses will be "paid for" between them in accordance with their ownership proportions. That agreement allows the doctors to determine whether and if so how such losses, which will be contributed to by cash and non-cash expenses, are to be funded without exposing them or their discretionary trusts to any personal liability to the trustee for any shortfall, or liability, that may require funding. Thus clause 3.9 is in the nature of a funding arrangement between the three doctors and not a provision requiring that they or the unitholders indemnify the trustee of the Unit Trust for liabilities or losses incurred by it.
For these reasons, and not those given by the primary judge, I agree with his Honour's conclusion that clause 3.9 imposed no liability on Dr Sharma to pay to SWR a 40% share of any losses of the Unit Trust incurred in the financial year ended 30 June 2018, or for that matter in any previous year. It follows that question 1 should be answered in the negative and the appeal dismissed.
Although it is not strictly necessary to do so, I will address briefly the remaining two questions.
[8]
(2) Whether the obligation in clause 3.9 only applies to losses based on the audited "financial accounts" of the SWR Unit Trust
[9]
Relevant provisions
In addition to the provisions of the Deed of Agreement set out above, clause 21 of the Trust Deed provides:
Statement of Accounts and Audit
21.1 The Trustee shall keep a complete and accurate record of all receipts and expenditures on account of the Trust Fund.
21.2 Promptly after the close of each Accounting Period the Trustee shall prepare a written accounting report (prepared in accordance with normally accepted accounting procedures) for such period consisting of a balance sheet and statement of income and expenditure and a list of assets held at the close of such year and a copy thereof shall be furnished upon request to the Unit Holders.
21.3 The Trustee shall appoint as Auditor [Kantilal Ratanshi Gokani] or such other Auditor as the Unit Holder may have majority consent to in writing to examine and ascertain the correctness of the accounts of the Trust Fund.
[10]
The primary judge's decision
The accounts of the Unit Trust for the year ended 30 June 2018 were not audited. Accordingly, the question arising under clause 3.9 was whether the reference to a "loss based on its financial accounts" was to a "written accounting report" prepared in accordance with clause 21.2 of the Trust Deed, or the final version of the financial accounts of the trust fund which had been examined and ascertained to be correct or otherwise by an auditor appointed in accordance with clause 21.3.
Addressing this question, his Honour reasoned as follows (Judgment [132], [135]-[137]). The phrase "financial accounts" in clause 3.9 of the Deed of Agreement was not defined, either in that agreement or the Trust Deed. Clause 21.2 required the trustee after the end of each financial year to produce a "written accounting report (prepared in accordance with normally accepted accounting procedures) … consisting of a balance sheet and statement of income and expenditure". Those documents would ordinarily answer the description of financial statements or accounts and there was no evidence that the parties ever required any auditor to sign off on accounts so produced. In these circumstances the unaudited accounts produced by the trustee answered the description of "its financial accounts" in clause 3.9.
[11]
Disposition
This question arises if clause 3.9 includes a promise to SWR by the doctors or their discretionary trusts to pay for the amount of any "shortfall" on its profit and loss account.
Dr Segal supported the primary judge's analysis. The Unit Trust's unaudited financial statements answered the description "financial accounts", and as a matter of fact there were no audited accounts. Clause 21.3 only required the trustee to appoint an auditor, and not necessarily for the purpose of auditing the trust's accounts. In response Dr Sharma emphasised that the Trust Deed required accounts to be prepared and audited. In that context clause 3.9 should be construed as referring to the accounts which gave the highest assurance of accuracy.
As is noted above clause 1.2.11 provides that the Deed of Agreement is to be interpreted in the light of the other commercial arrangements, which relevantly include clause 21 of the Trust Deed. Clause 21.3 requires that the annual financial statements be audited to ascertain their correctness. Where there is such a requirement, and the parties agree that the existence and amount of a payment obligation should depend on what is revealed by those "financial accounts", a reasonable person in their position would understand that language to refer to the version of those accounts which is likely to be the most accurate and reliable.
It is not relevant to this question of construction that the trust had not audited its accounts at any earlier point in time. That conduct, occurring after the Deed of Agreement was entered into, cannot be taken into account in resolving that question: Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35]. Whilst it appears that no one required the Unit Trust to audit its accounts before the financial year ended 30 June 2018, there remained an underlying obligation to do so and the existence of that obligation forms part of the surrounding circumstances in which clause 3.9 is to be construed.
For these reasons the primary judge erred in not answering this second question in the affirmative. Doing so provides an additional reason for dismissing the appeal.
[12]
(3) Whether clause 3.9 ceased to apply once there had been an "agreed determination" under clause 5.9.5
[13]
Relevant provisions
Clause 5.9 of the Deed of Agreement provides that it may become necessary to "determine the commercial arrangements recorded herein for reasons" that include, among other things, the death of one or more of the doctors, or one or more of them serving on the others a document stating that they no longer wish to be part of the "commercial arrangements", or if:
5.9.5 Each of Dr Segal, Dr Sharma and Dr Chen agrees that the commercial arrangements ought to be determined and that they no longer wish to work at the Property.
Clause 5.11.2 designates a determination under clause 5.9.5 to be an "agreed determination". Clause 5.13 then provides that in the event of such a determination the following provisions apply:
5.13.1 The Business will be sold and the Proceeds paid to NewTrust;
5.13.2 Final distributions and the winding up of NewTrust will be made after receipt of appropriate accounting and legal advice by each of the Segal Group, the Sharma Group and the Chen Group; and
5.13.3 In the event that appropriate accounting and legal advice is not finalised within 6 months from the later of the sale of the Business or the Property, time to be of the essence in this regard (unless all parties agree in writing to a deferral), parties agree that NewTrust will be liquidated with the accounting and legal consequences flowing therefrom falling as they may.
[14]
The primary judge's decision
The relevant provisions in clause 5 refer to the "commercial arrangements" being determined. The primary judge concluded that the determination of these arrangements was different from the termination of the Deed of Agreement, and that an agreed determination did not terminate the continued application of those arrangements: Judgment [106]. Furthermore Dr Sharma and Dr Segal continued practising at the health care clinics after the "agreed determination", even though there was no evidence of any new or different commercial arrangement being reached or discussed: Judgment [107]-[108]. As such the primary judge found that the obligations of the parties pursuant to the Deed (including under clause 3.9) did not terminate upon the happening of an "agreed determination", but rather continued until the relevant business was sold: Judgment [109].
[15]
Disposition
In relation to this question, Dr Segal again supported the reasoning of the primary judge. An agreement that the existing arrangements "ought to be determined" was not one to do so immediately. In the meantime the business was still to operate, and clause 3 (including clause 3.9) had continuing effect. For Dr Sharma it was submitted that following an agreed determination, the business was to enter a "wind up phase". Clause 3.9 did not apply in circumstances where the doctors had agreed that they did not wish to continue in business with each other.
Clause 5.13.1 provides that following an agreed determination, the Business will be sold and the proceeds paid to the Unit Trust. "Business" is defined in clause 1.1.2 to mean "the exploitation of the commercial advantages associated with control of the Facilities". The "Facilities" is defined to mean the control of the health care clinics able to provide amenities and radiology services. Thus what is proposed to be sold under clause 5.13.1 is a continuing business. That is confirmed by clause 5.13.2, which provides that the SWR Unit Trust will be wound up after that sale occurs. If the intention of the parties was to sell the assets of the Unit Trust, rather than the business as a going concern, clause 5.13.1 could simply have required the trust be wound up, rather than that the "Business" be sold.
Whilst the business continues to operate, clause 3 has continuing relevancy. It provides in broad terms how the business is to operate, including by giving the doctors preferential access to use the facilities, determining how session times are to be allocated, and specifying how fees are to be charged. In particular, clauses 3.8 and 3.9 remain relevant because they deal with how profits and losses are to be distributed and funded.
The primary judge did not err in resolving question 3 in the negative.
[16]
Conclusion
As grounds 1 and 2 of appeal should be dismissed, and grounds 1, 2 and 3 of the notice of contention upheld, Dr Segal's appeal must be dismissed.
The following orders should be made:
1. Appeal dismissed.
2. Appellants pay the first respondent's costs of the appeal.
PAYNE JA: I agree with Meagher JA.
[17]
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Decision last updated: 09 December 2020