Shazbot Pty Ltd v Warner Capital Pty Ltd

Partnership

1. The orders typically made in a partnership of the type before the Court may be separated into four components. First, it is usual to specify the essential elements of the partnership which exists, or formerly existed, by declaration. Those elements include the parties to the partnership; when it was formed; and the nature of the partnership business. The declaration may also resolve any dispute between the parties concerning terms of the partnership.
2. The second component involves determining the date at which the dissolution takes effect. If the Court finds that dissolution has already been effected by the parties, it makes a declaration to that effect specifying the date of dissolution. If the partnership remains on foot, the Court orders its dissolution.
3. The Partnership Act 1892 (NSW), s 39, confers power on the Court to make orders for the winding up of the partnership and the distribution of any income or assets remaining. This is the third component. Of course the parties may agree upon a mechanism for the winding up, but if they have not done so, it is usual to appoint a receiver to carry out the task. Where the partners or other parties to the proceedings have appropriated partnership income or assets to themselves, the Court should make orders for account and any necessary enquiries.
4. The fourth component, or possible component, is the making of further directions as to the conduct of the winding up, and any accounts or enquiries ordered by the Court. The Court always retains power to make further directions on the application of the parties or the receiver as these processes continue. It is not therefore necessary for the Court to make exhaustive directions at the outset. But often, and particularly where it is apparent that there may be controversy about how the winding up should be conducted, the Court can make directions at that stage. Such directions may cover such matters as the identification of specific steps to be taken by the receiver, and the way in which partnership assets are to be valued for the purpose of taking the partnership accounts.

Declarations

1. For the purpose of this judgment, it is convenient to deal with the first two components together. The parties agreed on declarations reflecting my findings that Mr Warner and Mr Kugel were in partnership together from 19 September 2007 onwards and that the partnership was terminated by mutual agreement between them on 22 September 2014. In my proposed orders I have departed somewhat from the form used by the parties but there is no difference in substance.
2. A further conclusion which I reached, not reflected in the declarations proposed by the parties, was that CWK Pty Ltd received the income of the CWK practice and held the assets of the CWK practice as trustee for the partners, Mr Warner and Mr Kugel. The conclusion so far as the Part X agreement part of DF's business was the same. These conclusions are reflected in my proposed declarations.

Appointment of receiver

1. A major, if not the major, aspect of Mr Kugel's case at trial was to establish that he was entitled to share in the uncollected WIP in the CWK practice as at the date of dissolution. In this Mr Kugel was successful, but, as I noted in my judgment at [13], there were different contentions as to how Mr Kugel's share should be quantified. I set out some preliminary views at [238]-[242]. Counsel for the parties debated this further before me, and I will return to it in due course. I propose first to address the scope of the task and the mechanism for carrying it out.
2. As I recounted in my judgment, the parties did agree on the distribution of many of the other assets of the business between them. But I rejected Mr Warner's contention that this represented a final agreement for the division of all of the partnership assets. Unless both parties agree to limit its scope (and they have not) there must therefore be a full accounting which covers all of the assets and liabilities of the partnership not just the WIP. It is common ground that the account must be undertaken as at the date of dissolution, namely 22 September 2014.
3. Counsel for both parties proposed that the Court should appoint a referee under UCPR, Part 20, Division 3. Each counsel also proposed more or less detailed directions about how the process should be undertaken, with particular emphasis on how the WIP should be valued.
4. In the course of the hearings, I explained to counsel that I thought there were conceptual difficulties with their approach. I remain of that view. The reference process essentially involves the Court delegating the determination of questions which arise in the proceedings (or even the whole of the proceedings) to the referee. The determination is provisional, in that the referee provides a report which may or may not be adopted by the Court. But with that qualification, the reference proceedings involve the determination of issues on an adversarial basis. The process is adjudicative in nature.
5. The process of winding up a partnership is different. The receiver is vested with the assets and liabilities of the partnership. The receiver's task is to get in the partnership assets, satisfy the partnership liabilities and distribute any surplus to the partners in accordance with their entitlements. This necessarily requires the receiver to take action (which may include legal action) to recover partnership assets and to satisfy or resolve claims against the partnership.
6. While this happens, the partnership, although in dissolution, continues to subsist. The receiver must undertake ancillary and administrative tasks necessitated by the continuation of the partnership. These include the collection of any income on partnership property, the payment of any expenses, and consequential tasks such as the lodgement of tax returns. Like the process of the liquidation of a company the task is at bottom an administrative one.
7. Because all of the assets of the former partnership were appropriated by Mr Warner (or CWK Pty Ltd, continuing under Mr Warner's control) or Mr Kugel (or Shazbot), the task appears similar to what happens in accounting proceedings under UCPR Part 26. Such proceedings may of course themselves be the subject of an order for reference. But on analysis, differences emerge.
8. The first difference arises at the outset. Where, as here, assets of the partnership have been appropriated by the partners or third parties, the receiver's task is to recover those assets or their value from the party who appropriated them. This may be a contentious process, but not necessarily. It may be that the identification of the assets and the determination of their value can be settled by agreement. If that happens, there is no need for adversarial accounting proceedings at all.
9. The second difference occurs at the end. Accounting proceedings result only in the specification of the amount due from one party to another; enforcement of payment, if that proves necessary, then takes place in accordance with the Court's usual procedures. A referee has nothing to do with that process. But a receiver's duty is not completed when the amount due from a party who has appropriated assets of the partnership has been settled, either by agreement, or curial decision. The receiver must recover the monies in question, deduct any administrative expenses (which will include the administrator's fees) and distribute the proceeds to the partners according to their entitlement.
10. Where the appropriating party is a partner of the partnership who will be entitled to a distribution when the winding up is completed, it may be possible for there to be a set off, at least in part. But this does not alter the fact that conceptually the appropriating party must fully account to the receiver for the value of partnership property appropriated, and then receive a distribution representing his or her entitlement.
11. In short, the winding up process is an administrative one which may, but will not necessarily, generate legal proceedings in the nature of an account under Part 26. Where such proceedings do ensue, they are conceptually distinct. They are adversarial in nature, the parties being, on the one hand, the receiver on behalf of the partnership and on the other the party obliged to account. They need not even necessarily take place as part of the partnership suit.
12. What this means is that, unless all affected parties agree, any referee appointed to undertake an account to determine what is owed to a partnership, whether by a partner or a third party, would have to be independent of the receiver. If, as appears to be suggested here, the receiver and the referee were to be the same person, obvious problems of natural justice would arise.
13. There is another point. The completion of the accounting and the winding up will not be completely free of ancillary and administrative tasks. Often there will be a need to submit a tax return or tax returns for the partnership. Even if this merely involves transposing figures from the partnership accounts, it is still a separate task which cannot be undertaken by a referee. But, it may be a substantial task in its own right, requiring negotiations with the Tax Office and the obtaining of external tax advice, or further directions from the Court, or both.
14. For these reasons, I consider it essential to make an order appointing an appropriately qualified person to act as the receiver of the partnership. I will not make an order for reference, at least at this stage. Instead, I will frame the orders so as to identify in general terms the tasks the receiver needs to do and the accounts to be taken. It will of course be open to the receiver to apply for further directions should the need emerge.
15. Counsel for the defendants proposed two identified accounting practitioners to act as joint referees. Alternatively, counsel proposed that a referee be nominated by the President for the time being of the Australian Restructuring Insolvency and Turnaround Association ("ARITA"). Counsel for the plaintiffs resisted the appointment of the two individuals nominated by the defendants and suggested instead that a referee be nominated by the President of the Chartered Accountants Australia & New Zealand (CA ANZ).
16. As I am appointing a receiver not a referee, I will give the parties one final opportunity to agree on the identity of that person. If they do not, I will allow the referee to be nominated by the President of ARITA. The task is essentially one of winding up, with which ARITA members may be presumed to be familiar. Moreover, the business in question was itself an insolvency practice and I consider that experience with the running of such a practice is likely to prove useful.

Accounting for assets and liabilities as at 22 September 2014

1. Counsel for the plaintiffs produced a long list of items of intellectual property consisting of internet domains and websites used for marketing purposes, with directions for the valuation of each of these items. Counsel also included a direction concerning the valuation of fixed assets. This resulted in a controversy about whether a particular photocopier should have been included. For his part, counsel for the defendants raised a question about the valuation of the car which was taken by Mr Kugel when he left the practice (see my judgment at [108], [123], [245]).
2. I do not think it is necessary for me to descend to this level of detail in making my orders. The receiver will be required, as part of the accounting process, to identify the tangible and intangible assets of the partnership and to ascribe a value to them. I expect that in doing this the receiver would consult the parties so as to give them an opportunity to identify the assets and make submissions about their value. Any contentious issue can be the subject of an application for directions from the Court. There is no need to spell this out. It is an ordinary incident of the process.
3. There is an exception to this. I think the question of how to deal with CWK's "book" of insolvency administrations, including the WIP accrued as at 22 September 2014 needs specific consideration.
4. Counsel for the defendants submitted that the exercise should start with the calculation of the actual subsequent receipts from the administrations in question. Counsel argued that there should be allowance for costs of administration including such things as storage costs. Counsel also argued that there should be an allowance for time and effort on Mr Warner's part.
5. This approach was rejected by counsel for the plaintiffs. Counsel submitted that the assessment should be undertaken as a single figure with no allowance for collection costs.
6. There is some force in both approaches. The parties contemplated that they would have a clean break. The approach from the plaintiffs is conceptually closer to this. On the other hand it is unrealistic to ignore completely the costs of taking over the administrations which would involve a liability to complete. It remains necessary to recognise that some administrations would have been seen as being, and would have proved, unprofitable.
7. There is a complication concerning how the insolvency "book", including the WIP, as at 22 September 2014, will be treated for partnership accounting and tax purposes. It will be necessary to determine the goodwill value associated with the book. This would traditionally be classified a capital item. But it also involves WIP which is to all intents and purposes income which just needs to be collected. I did not find in Mr Young's submissions any definitive guidance on this question.
8. To deal with this, I think it is necessary to separate the "book" into two components. The first is the income collected from the WIP accrued as at 22 September 2014. The second is the additional goodwill, in the form of an opportunity to earn further fees, from taking over the outstanding administrations. I propose to order that these be accounted for separately. That will mean that if, as I suspect, the tax treatment of the two components differs, that will be readily accommodated.
9. Given the time which has elapsed since the partnership was dissolved, most if not all of the WIP which can be recovered will have been. In these circumstances, as I foreshadowed in my judgment at [239], the appropriate course is to require an account to be undertaken by reference to the collections actually made. If further work has been done on a particular administration after 22 September 2014, and the amount ultimately recovered is less than the value of the total work undertaken, there will need to be some sort of apportionment of the amount recovered between the WIP as at 22 September 2014 and the work done after that date. If there are still amounts in any of the administrations which may be collected in future, an estimate will need to be made of the future collection attributable to the WIP up to 22 September 2014. I will leave the parties to deal with this issue with the receiver in the first instance. If any further direction is required it can be given in due course.
10. My orders also contemplate that Mr Kugel will be required to account (on a surcharge basis) for any income which would have been received from the company liquidations where he was the sole liquidator (see my judgment at [131]-[132]). It was initially agreed that these will be completed by Mr Kugel but in the end Mr Kugel applied for an order that another liquidator be appointed and waived any fees. The effect of this has been to deprive Mr Warner of a half share of any WIP as at 22 September 2014 which could have been recovered had Mr Kugel either completed the liquidations himself or co-operated in having Mr Warner appointed as the replacement liquidator so as to complete them. The liquidations in question are not individually identified in my judgment and will need to be so identified for the purpose of the orders.
11. The goodwill component will need to be valued as a capital amount, excluding of course, the recovery of WIP accrued as at 22 September 2014. This could be a positive or a negative figure. In effect, the question is how much a third party would have paid (or would have required to be paid) to acquire the book of administrations on the basis that he or she was required to account for any of the WIP as at 22 September 2014 back to the partnership.
12. I do not propose to give any detailed directions on conducting this valuation. The receiver may have his or her own experience which can be brought to bear. It may even been possible for a methodology to be agreed between the parties. Any problems can be deal with by future directions.
13. For the purpose of accounting for income collected, in general no deductions of later business expenses will be available to Mr Warner. As I indicated in my judgment at [240] any fees subsequently collected were presumably collected as part of fee runs conducted in the ordinary course of business and would not have involved any additional marginal cost being incurred above the usual overhead cost of conducting such regular fee runs. Similarly, storage expenses and other disbursements associated with carrying on the administration after 22 September 2014 would not have the necessary relationship to the collection of WIP incurred as at that date. It would only be if there were expenses specifically referable to the collection of particular fees that any claim for deduction could be made. If Mr Warner does claim that any such specific expenses were incurred, that can be dealt with between him and the receiver as part of the account.
14. This does not mean that the fact that some of the administrations would have represented a liability is completely immaterial. But it seems to me that this consideration simply forms part of assessing how much an incoming purchaser would have been prepared to pay by way of goodwill (or would have required to be paid, if the goodwill is negative) for the prospect of earning further fees from the book as a whole. Obviously this would involve some sort of assessment of how much could be earned from the book and how much would have to be expended in order to complete the unprofitable administrations, as those matters would have appeared to a prospective purchaser on 22 September 2014. But it does not require any analysis of the level of expenses in fact incurred after that date by Mr Warner.

Amendment of accounts and tax returns

1. I found that CWK Pty Ltd held income of the practice (after deduction of business expenses) on trust for the partnership, not under the terms of the CWK Unit Trust. I also found that Debt Free held the Part X income (after deduction of any relevant expenses) on trust for the partnership.
2. In the course of the hearings, I observed that it would be necessary to lodge amended tax returns. This produced a flurry of activity. Mr Warner lodged an application for a private ruling. I have been provided with a copy of the application and attachments. Unfortunately the critical element, namely the actual ruling sought, does not appear to be complete. The thrust of the application seems to have been to ask the Commissioner to rule that it was unnecessary for Mr Warner to pay any further tax and also to rule that there was no need to lodge amended returns except for the last few months or so of the partnership's operation.
3. The Tax Office's formal response was that Mr Warner's application was not a valid one. Nonetheless the Tax Office made some observations about the applicable procedures. These were further explained by Mr Young in his submissions. The Act imposes a four year time limit on amendments. The limit runs from the date on which the relevant assessment was issued (in the case of a refund) or the date on which the tax was paid (in a case where the assessment results in an amount payable by the taxpayer). Mr Young referred to a two year time limit in the case of small business but did not explain this.
4. Mr Warner's personal tax return for the 2014 financial year resulted in a refund when the assessment was issued in October 2014. This return, and all previous years' returns, are now out of time for amendment. The only year within time is the 2015 financial year which would include the three months up to 22 September 2014.
5. But this is not quite the end of the story. Mr Young explained that even where amendment is not possible, a similar effect can be achieved by lodging a late objection to the assessment originally made. The Commissioner has power to extend time to lodge such an objection by a "person aggrieved", which is not limited in time.
6. This suggests that even if it were too late formally to amend the parties' tax returns, the same result could be achieved by lodging a late objection to the assessments made on the original returns. But Mr Young raised a further question. The effect of any amendment would be to increase the amount of tax payable. Could a taxpayer seeking to have the amount of tax payable increased properly be described as a "person aggrieved"? As will be seen, I do not think it is necessary to attempt to answer this question.
7. On reflection, I have decided not to order any accounting between the parties for the period up to 22 September 2014. No party has requested it. I think the Court should simply focus on the orders required to do equity between the parties in these proceedings. That can be achieved by making orders for an account of uncollected income and of the capital value of partnership assets as at 22 September 2014. I do not propose to make any direction that the receiver restate the accounts or lodge tax returns for the period up to 22 September 2014. Whether he needs to do so will depend upon the attitude of the Tax Office and any advice the receiver may obtain on the question.

Breach of fiduciary duty

1. It is common ground that, as a result of my decision, Shazbot is entitled to an account from Mr Warner for the value of its share in DF.
2. My proposed orders contain a declaration that Mr Warner breached his fiduciary duty to Shazbot and an order for Mr Warner to account to Shazbot for the profits received by him as a result. Again, once an order for account is made in these general terms, UCPR Part 46 will become available to allow any disputed aspects of the account to be determined.
3. As I understand it, it is common ground that the account of profits will effectively represent a half share of the value of DF as at 22 September 2014. This will of course require an adjustment to take account of the Part X income for which DF will be required to account to the partnership. If further guidance is needed then the receiver may make an application for directions in due course.

Orders

1. The order of the Court is:
2. Direct that the parties lodge any written submissions on the proposed orders annexed to this judgment within 14 days. ANNEXURE A Proposed Orders
3. Declare that from 19 September 2007 in acting as company liquidators, company administrators or bankruptcy trustee under the name "CRS Warner Kugel" the second defendant and the second plaintiff ("the Partners") carried on business in partnership within the meaning of the Partnership Act 1892 (NSW) ("the Partnership Firm"); and to the extent that the business was in the name of the third plaintiff (including the holding of shares in the fourth defendant), by the third plaintiff was conducted as trustee for the Partnership Firm.
4. Declare that from 19 September 2007, in acting as trustee of personal insolvency agreements under Part X of the Bankruptcy Act 1966 (Cth) under the name "Debtfree", the second defendant acted as a partner of the Partnership Firm; was part of and to the extent that that part of the business was conducted in the name of the fourth defendant, it was conducted as trustee for the Partnership Firm.
5. Declare that the Partnership Firm was dissolved by agreement between the parties on 22 September 2014.
6. Order that [name] ("the Receiver") be appointed to get in the surplus assets of the Partnership Firm as at 22 September 2014 after deduction of the firm's debts and liabilities as at that date; and to divide those surplus assets (less any costs and expenses incurred by the Receivers) equally among the Partners; and to carry out any other necessary steps to complete the winding up of the Partnership Firm.
7. Order that: (a) the first and third defendants account to the Receiver for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at the date of the account) which formed part of the company liquidation, company administration or bankruptcy trustee work in progress of the Partnership Firm as at 22 September 2014; (b) the first and fourth defendants account to the Receiver for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at the date of the account) which formed part of the Part X agreement work in progress of the Partnership Firm as at 22 September 2014; (c) the second plaintiff account to the Receiver for collections which would in the ordinary course have been made of work in progress of the Partnership Firm as at 22 September 2014 for the following company liquidations: [list of companies].
8. Order that: (a) the second and first plaintiffs account to the Receiver for the capital value of all assets of the Partnership Firm received or appropriated by them after 22 September 2014, less the amount of any debts or liabilities of the Partnership Firm assumed by either of them; (b) the first and third defendants account to the Receiver for the capital value of assets of the Partnership Firm received or appropriated by either of them after 22 September 2014, less the amount of any debts or liabilities of the Partnership Firm assumed by either of them; (c) the account in (b) is to include the capital value (if any) of the goodwill as at 22 September 2014 associated with the future conduct of the insolvency administrations being conducted by the partners as at that date (but excluding the collection of work in progress of the Partnership Firm as at 22 September 2014).
9. Order that the second defendant account to the first plaintiff for the value of the first plaintiff's share in the fourth defendant as at 22 September 2014, after deducting the fourth defendant's liability to account to the Receiver in accordance with order 5(b) above.

Amendments 05 September 2019 - make minor typographical amendments DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 September 2019