Shazbot Pty Ltd v Warner Capital Pty Ltd

Background and procedural history

The proceedings arise out of a partnership dispute. They have a long history. I delivered my principal judgment in October 2018: Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645. There was a lengthy debate between the parties on the form of orders to give effect to the judgment and to provide for the continuation of the remaining steps in the proceedings. I delivered judgment in August 2019, in which I set out my conclusions on those issues: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114. I directed the parties to submit a minute of order giving effect to those conclusions and prepared a set of proposed orders for that purpose. Following some further debate, the orders were made on 16 September.
My orders were the subject of an appeal. In June 2020, the Court of Appeal varied some parts of those orders but otherwise dismissed the appeal: Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121. Since then, there has been a further hearing on accounting issues, resulting in a third judgment in May this year. But that judgment is not relevant for the purposes of the present application.

Slip rule application

The application focussed on two aspects of the orders which I made in 2019, as varied by the Court of Appeal. The first was the partnership declaration concerning the corporate and bankruptcy aspect of the practice. The second was the partnership accounting orders.
The relevant orders which I made in 2019, as amended by the Court of Appeal (amendments shown with strikethroughs) are: 1. 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. … 6. 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: i. ABI Pty Ltd; ii. Erwin Fornasier Pty Ltd; iii. Virtual Resource Management Services Pty Ltd ACN 091 718 553; iv. Jamelin Roofing Pty Ltd ACN 91 751 950; v. VIC Duncombe Pty Ltd; and vi. Globalone Pacific Pty Ltd ACN 30 078 170, 7. 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). …
The variations sought by the applications were: 1. replacing "third plaintiff" with "third defendant" in order 1; and 2. either: 1. Adding "and second" after "The first" in orders 6(a), 6(b) and 7(b); or 2. Replacing the "first" with "second" in orders 6(a), 6(b) and 7(b).
The application was based on the Court's inherent jurisdiction or rule 36.17 of the Uniform Civil Procedure Rules 2005. There was no dispute as to the general principles to be applied on an application of this kind. The slip rule is not to be interpreted narrowly, and enables "carrying into effect the actual intention of the judge making the order … making sure that the order [does] not have a consequence which the judge clearly intended to avoid": Newmont Yandal Operations Pty Ltd v J Aron Corporation (2007) 70 NSWLR 411 at [116].
The first variation was agreed, and appropriately so. There was no third plaintiff in the proceedings, but there was a third defendant, CWK. CWK was obviously the intended party. Both the inherent jurisdiction of the Court and UCPR, r 36.17 empower the Court to make the variation.
In passing, I note that recourse to the slip rule may not be necessary for this amendment. The Court has power to set aside any order with the consent of the parties (UCPR, r 36.15). It would be strange if this did not extend to variations by consent.
The second variation was contested. The respondents to the motion submitted that neither form of relief should be granted. The applicants did not specify a clear preference for one form of relief. But they emphasised that a reference to the second defendant was intended in the respective orders.
At this stage, I should say something more about how the orders came to be formulated. As I have mentioned, there was an extensive debate between the parties. The issues of principle were resolved in my August 2019 judgment. In order to assist the parties to formulate the orders, I attached to that judgment a proposed form of order.
There was, as I have mentioned, some further debate between the parties about the orders. The parties then submitted their own proposals which were based on the proposed orders which I had published. Ultimately, I made the final orders in an agreed form in chambers without the need for any further debate. My assumption was that the parties had agreed that the relevant orders were appropriate to give effect to my conclusions. The form of the orders relevant to the present application (orders 1, 6 and 7) did not differ from what I had originally proposed.
There had been some complexity in identifying the parties to the account. On my findings, Mr Warner and Mr Kugel personally were the partners of the partnership. On the face of it, they would ultimately be liable to account for any assets or income of the partnership appropriated by them after it had terminated.
But it was clear that at least some of the WIP had actually been collected in the name of CWK (under Mr Warner's continuing sole ownership). It seemed to me that CWK was liable to account directly to the partnership for partnership property it had received by appropriation on the part of Mr Warner. To that extent, the liability was a joint and several obligation of CWK and Mr Warner. The same applied to other assets appropriated by Mr Warner to CWK or Debtfree, and the assets appropriated by Mr Kugel to Shazbot.
All of this had been, at the stage the draft orders were formulated, somewhat tentative. It might have been open to argue that the recipient companies were not liable to account as third parties. But in the end, there was no contest about this.
As framed, orders 6 and 7 dealt with the liabilities of each partner and of his recipient company or companies together. The orders as drafted used the language of appropriation. Perhaps the orders would have been clearer if they had referred separately to "appropriation" by the individual partners, Mr Warner and Mr Kugel, and "receipt" by their respective companies.
The orders had had to be designed, among other things, to cover the possibility of such partial liability on the part of the partners' companies. I say "partial liability" because the individual partner would be liable for all assets or income appropriated by him, whether to himself or some other corporate vehicle, whereas the corporate vehicle would be liable only for amounts received. In that sense, the individual partner's liability was the wider one. This was reflected in the form of orders 6(a) and 7(a), which list the second plaintiff (Mr Kugel) before the first plaintiff (Shazbot).
In these circumstances, it was clearly implicit in the orders that Mr Warner (the second defendant) would be obliged to account for all of the partnership income and assets appropriated by him. The omission to refer to him must be corrected.
But that does not mean that I should add a reference to Mr Warner as second defendant alongside the reference to the Warner Capital (the first defendant). There was no suggestion that Mr Warner had appropriated any assets to Warner Capital. It had been joined to the proceedings for another reason, namely as a defendant to the claim concerning the shares in Debtfree. (Indeed, following the Court of Appeal's decision, neither Warner Capital nor Shazbot seem to have had any continuing interest in the litigation; the proceedings so far as those parties were concerned should probably have been formally dismissed).
The error in the orders was to refer to the first defendant rather than the second defendant. The second form of relief, set out above at [19(2)(b)] should be granted.
The arguments advanced by counsel for the respondents have not convinced me to find otherwise. I deal with them in turn.
Counsel for the defendants submitted that the application should be refused on the grounds of hardship. Counsel submitted that the account might have proceeded differently had Mr Warner appreciated that he himself was to account rather than (as the orders appeared to state) Warner Capital.
I do not think that the evidence supports this submission. There was no evidence from Mr Warner or his legal advisors that they were in fact misled in this way. Mr Warner annexed to an affidavit which he swore on 2 October 2020, a schedule setting out "the assets received by the defendants, their capital value and the extent of the liabilities assumed by the parties". It contained the following note: Total Liquidation accrued WIP collected after 22 September 2014 was $747,389 (exclusive of GST), Clarence Street Partners Pty Ltd collected $25,461.35. The balance was collected by CRS Insolvency Services Pty Ltd.
I think it is clear from this notation that the account was approached by Mr Warner and his legal advisors on the basis that he would be personally liable to account for all of the WIP which had been collected. It seems from the notation that Clarence Street Partners Pty Limited (the former CWK) was initially used for this purpose, and then a new company, CRS Insolvency Services Pty Limited, was used. The notation makes it clear that Mr Warner considered himself obliged to account for receipts by that company, which was not a party to the proceedings or the orders. If only Warner Capital and CWK had been obliged to account, then there would have been no reason to include amounts received by CRS Insolvency Services at all.
Counsel for the defendants next submitted that the fact that the Court of Appeal varied my 2019 orders, rather than dismissing the appeal (which would have left the first instance orders unaffected) meant that regard also needed to be had to the Court of Appeal's intention. This was particularly so, counsel submitted, in circumstances where the Court of Appeal had made its own order, remitting the matter for the account to be taken on a specific basis, and that order did not include the second defendant.
Counsel for the applicants had earlier submitted that the fact that the 2019 orders had been varied by the Court of Appeal was no barrier to obtaining the relief sought. Counsel relied on a decision of White J (as his Honour then was) in J Aron Corporation v Newmont Yandal Operations Pty Ltd (2006) 202 FLR 359. Counsel quoted from [69] of his Honour's judgment: The defendant did not submit that the Court lacked jurisdiction to set aside the order of 7 April 2005 because the appeal from the making of that order was dismissed by the Court of Appeal. The dismissal of the appeal did not mean that the order of 7 April 2005 acquired a new status, as if it were an order of the Court of Appeal which could not be interfered with by a single judge. The order remains susceptible to correction in the Court's inherent jurisdiction or under the slip rule by a single judge. An example of orders of a single judge being corrected under the slip rule by another single judge, after those orders had been considered and varied on appeal, is to be found in Owston Nominees (No. 2) Pty Ltd v Branir Pty Ltd (2003) 129 FCR 558. The defendant did rely upon the conduct of the appeal in support of its contention that, in its discretion, the Court should not exercise jurisdiction to set aside the 7 April 2005 order, if that jurisdiction existed. However, it accepted that the dismissal of the appeal was not itself a jurisdictional bar to making the orders sought.
Counsel for the applicants, orally, also referred to a decision of Allsop J cited by White J - Owston Nominees No 2 Pty Ltd v Branir Pty Ltd (2003) 129 FCR 558. Counsel observed that it too was concerned with a slip rule application regarding orders that had been varied on appeal, despite the appeal having been in substance unsuccessful. Counsel submitted that those circumstances had not prevented the application of the slip rule.
Counsel for the respondents, in reply, submitted that Owston in fact was a decision of the Full Court of the Federal Court, and did not involve the slip rule. It seems however that counsel must have been referring to some other judgment in the Owston litigation. The decision of Allsop J to which I have referred appears to be consistent with counsel for the applicants' submission and White J's reference to it.
Further, I think that counsel for the applicants' submission is correct as a matter of principle. Appellate intervention ought to make no difference, apart from those parts of the orders varied on appeal.
Was the present case one where variation was sought of an order varied on appeal? Counsel for the defendants pointed to order 6(b) of the Court of Appeal, which provided: Remit the matter to the primary judge for the taking of accounts, with the following directions: … (b) within 42 days of these orders, to the extent that the parties are unable to agree on narrowing the scope of the account: (i) the first, third and fourth defendants shall file their detailed account verified by affidavit with respect to the matters identified in order 6(a), (b) and 7(b), (c) made on 16 September 2019, as amended by order 4 above; (ii) the first and second plaintiffs shall file their detailed account verified by affidavit with respect to each item referred to in order 6(c) and 7(a) made on 16 September 2019, as amended by order 4 above; (iii) direct that the items of each said account shall be numbered consecutively; (iv) the account shall also state what the plaintiffs and defendants respectively claim to be the assets and liabilities of the Partnership Firm as at 22 September 2014, and the value thereof, to the extent that those matters are not agreed pursuant to the direction in 6(a) above.
Counsel fastened on the reference to the first, third and fourth defendants in sub-paragraph (i), which was the same as in my orders 6 and 7. Counsel submitted that, had there been an obvious error in those orders, the Court of Appeal would have picked it up. Further, counsel submitted that in circumstances where the Court of Appeal had varied the orders in question, and made their own specific order remitting the matter, any slip rule application would need to be made to the Court of Appeal, and probably to a bench similarly constituted (to the extent that was possible).
I do not accept these submissions. There is nothing to suggest that the Court of Appeal gave any consideration to the identity of the accounting parties. There was no need for the Court to pay any attention to the form of orders 6 and 7, apart from removing references to the receiver. I think it is clear that the original error in the proposed form of orders was not picked up either by the parties when they were negotiating the form of orders to be made, nor by me when making the orders in September 2019, nor by the Court of Appeal. Unsatisfactory as this may be, it is perhaps not surprising that no one thought it necessary to check whether the references to the parties in the orders were correct. It is easy to see how that sort of thing can be missed.
Nor do I think there is any difficulty with order 6(b) made by the Court of Appeal. It is true that the order should have referred to the second defendant rather than the first defendant. But the order itself was a procedural direction. It was expressly subject to variation by the parties and could also have been varied by the Court as part of the accounting processes. For practical purposes that is what has happened, as it is apparent that the orders have been interpreted as requiring Mr Warner personally to account. The direction is now spent.

At a glance

Court

Decision date

Before

Source

Judgment (5 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (6)

Cited By (2)