Toohey v Toohey

Toohey v Toohey - [2020] NSWSC 1854 - NSWSC 2020 case summary — Zoe

Claims and procedural history

The proceedings concern two commercial properties, one at Bankstown and the other at Padstow. The properties are owned by John and Max in equal shares and were acquired by them (apparently by way of inheritance) in October 1998.
After John and Max acquired the properties they rented them out and shared the rental income (less the expenses, or at least some of the expenses). There is no written agreement between the parties but they agree that they were in partnership. An Australian Business Number was obtained for the partnership business, and annual partnership tax returns were lodged by an accountant retained on behalf of the firm.
The parties fell out in 2018 or 2019. These proceedings were commenced in May 2019. They began as an application by John for the trustee sale of the properties under the Conveyancing Act 1919 (NSW), s 66G. Consent orders providing for such a sale were made on 3 December last year by Rein J.
Max's cross‑claim was filed in February this year. It is a claim for indemnity out of the partnership for expenses which Max claims to have incurred in meeting outgoings on the properties or otherwise for the purpose of the partnership business. The alleged expenses total approximately $400,000 and they cover the whole period of the partnership from 1998 to 2019.
On 30 April this year the Registrar fixed the proceedings for hearing before me in February next year. The remaining issues in the proceedings are those which arise on Max's cross‑claim. The trustees have entered into contracts to sell the properties which are expected to complete this month. Under the orders made by Rein J the trustees have set aside $600,000 of the proceeds of sale to cover Max's claim if it is successful.
The Partnership Act 1892 (NSW), s 24 relevantly provides: (1) The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement expressed or implied between the partners, by the following rules: (1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm. (2) The firm must indemnify every partner in respect of payment made and personal liabilities incurred by the partner. (a) In the ordinary and proper conduct of the business of the firm, or (b) In or about anything necessarily done for the preservation of the business or property of the firm. (3) A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which the partner has agreed to subscribe is entitled to interest at the rate of seven per centum per annum from the date of the payment or advances.
Although not expressly invoked, s 24(2) is clearly the basis for Max's claim for indemnity. Max also claims interest at seven per cent on the amounts allegedly expended, in accordance with s 24(3).
Section 39 relevantly provides: On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or the partner's representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm.
Clearly the parties are proceeding on the basis that the final hearing will involve the final winding up of the partnership's business and the distribution of any surplus in accordance with s 39. But it is apparent that further steps will be required to complete that process beyond the mere determination of Max's claims for indemnity.
A final set of partnership accounts will have to be prepared and a final tax return lodged. As part of this process it will be necessary to decide whether, should Max's claim succeed, the relevant expenses should be brought to account in the current financial year or in the financial year in which they were incurred (if that is still possible). There is thus the possibility of having to lodge amendments to earlier tax returns.
Furthermore, the sale of the properties will give rise to a capital gains tax liability. The capital gain will need to be included in the tax return and for that purpose the cost basis of the two properties will need to be calculated. The accounting costs will all be costs to be borne by the partners as part of the winding up of the partnership.
Neither party in their pleadings has sought any orders in this regard. When I raised the matter with counsel at today's hearing both appeared to accept that further steps, and perhaps further orders, would be required in order to complete the process under s 39.
In passing I note that the pleading of Max's indemnity claim leaves something to be desired. The alleged expenses are set out in schedules which are called up by the cross‑claim, not as pleaded allegations, but merely as particulars. It has therefore not been necessary for John as cross‑defendant to plead specifically to each of the allegations of expenditure. Furthermore, no consideration appears to have been given as to whether any of the items of expenditure were of a capital, rather than a revenue, nature.
The existing defence to the cross‑claim was filed on 26 March this year. It presents three main lines of defence.
The first concerns whether the alleged expenses were incurred at all, or if they were, whether they were partnership expenses. The defence at [13a] admits that Max "may have made expenditure on partnership business" in the sum of $50,870.25, which is defined in the defence as the "Admitted Amount". At [13e] it goes on to aver that Max has produced receipts "that show that payments were made and what they were for" for the Admitted Amount. But [13b] otherwise does not admit Max's allegations of expenditure. So far as the remaining $350,000 is concerned, Max has clearly been put to proof.
The second point taken in the defence arises out of alleged requests for Max to produce documents in support of the claimed items of expenditure. The defence avers that from 2001 onwards verbal requests to do this were made by the partnership's accountant to Max. The defence continues that a written request was made in 2019, but asserts (presumably apart from the Admitted Amount) that nothing has been produced.
This part of the defence relies on the Partnership Act, s 28(1), which relevantly provides: (1) Partners in a firm … are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representatives.
The defence is put two ways. First, in [23] John pleads: By reason of his breaches of duty to account and provide information Max is disentitled from claiming the amounts expended save for the Admitted Amounts as advances to the partnership in respect of the final accounts of the Partnership.
Then in succeeding paragraphs of the defence John pleads a case of estoppel arising from Max's failure to produce records in response to the requests. John alleges that as a result of the failure to produce receipts the firm, or he, have suffered detriment.
In particular, it is alleged that there would be substantial additional costs in amending the tax returns. In fact, I think I can take judicial notice that there is a limited time under which a taxpayer may amend returns so s to claim additional deductions which is what would be involved if amendment is required (although, as I have noted above, there is a question about whether this matters in the present case; it may be that no amendment is required because the firm's liability to indemnify Max is only taken up when that indemnity is recognised or established).
The third line of defence is a partial defence of set‑off based on overpayments to Max of approximately $45,000.
The application comes before me following attempts on my part to convene my usual pre‑trial directions hearing for the purpose of finding out what the issues in the case were and how it was progressing towards hearing. There were difficulties in doing so.
Although Max was represented at the time his cross‑claim was filed in February, his solicitor subsequently ceased to act. Attempts to contact Max through his last known address as recorded on the file did not yield any immediate result and he was said not to use email. It was only after Max had failed to appear at the first pre‑trial directions hearing, and I had indicated that on the next occasion I would consider dismissing his claim for want of prosecution, that Max belatedly appeared in person.
After I explained to Max the difficulties he would encounter in trying to conduct the proceedings himself he indicated he would obtain legal representation. There was a further delay while that occurred. A subsequent pre‑trial directions hearing was attended by a solicitor from the firm acting for Max, who was unable to provide me with much assistance about the nature of his case. As we will see, counsel has only recently been briefed. There remain questions, and perhaps a need for further directions, about how the hearing is to be conducted.

[4]

Amendment application

The proposed amendment appears in [14A] of the proposed amended defence: In respect of the allegation in paragraph 14 of the Statement of Claim John says that the claim is statute-barred as to the alleged expenditure occurring before 7 February 2014 pursuant to Limitation Act 1969 (NSW) s 15 including alleged expenditure forming part of the Admitted Amount. There are consequential amendments in the balance of the proposed defence.
Before me there was some debate as a result of the suggestion by counsel for Max that in substance, John was seeking to withdraw admissions in the existing defence, for which specific leave would be required under contrary to Uniform Civil Procedure Rules 2005 (NSW), r 12.6. Counsel contended that the pleadings about the Admitted Amount to which I have referred constituted admissions of this purpose.
It is well known that the Limitation Act 1969 (NSW) (or at least the provision relied upon by John in the proposed pleading) operates as a bar on the grant of relief, rather than an extinguishment of the underlying liability. It is therefore not inconsistent to admit the liability but to contend that no relief can be obtained, because it has become statute barred. In substance I think that is what the proposed defence does here.
On analysis therefore, I think that the effect of the amendments is merely to add an additional line of defence to the existing defences which I have summarised. It is not necessary to determine now whether the effect of pleadings about the Admitted Amount constitute an admission of liability with respect to that figure. Even if they do, I do not see an additional plea which alleges that with respect to those amounts the claim is statute barred as being a withdrawal of an admission.
In passing I note that the proposed defence relies upon s 15 of the Limitation Act. That section provides: An action on a cause of action for an account founded on a liability at law to account is not maintainable in respect of any matter if brought after the expiration of a limitation period of six years running from the date on which the matter arises.
I am not sure that this is the applicable provision. The Partnership Act, s 28, imposes an obligation on the parties to account, but it is usual to speak of accounting for income or at least net income. In this context it is recognised that an account must involve the analysis of all credits and debits, and one cannot have an account "in pieces": Adams v Bank of New South Wales [1984] 2 NSWLR 505 at 296C. It follows that usually it is not possible to obtain an account for partnership purposes when the partnership is subsisting.
Max' claim in these proceedings does not have these features. The claim is one for indemnity against expenditure incurred. The firm's liability to indemnify arises immediately (and carries interest), not at the end of the next partnership accounting period. It seems to me that the applicable provision may be s 14 which applies to claims under contract, quasi contract or enactment.
The proposed amendment of the defence was first raised at one of the pre‑trial directions hearings on 30 November. In propounding the application counsel for John accepted that it was necessary to explain why it was not made earlier. There was no evidence in the affidavit in support of the application from John's solicitor to explain the delay between the defence on 26 March and 30 November. Counsel for John frankly acknowledged that the situation was unsatisfactory. She stated that the delay had resulted from an oversight, by which I understood her to mean that John's legal advisors had simply failed to notice that the defence was available.
Counsel for Max criticised this aspect of the application. It is not of course necessary that the explanation which is offered provides an excuse or justification for the delay, but as I understood him, counsel for Max went further. He submitted that the onus was on John as applicant to explain the delay by evidence, rather than by statement from the Bar Table. Counsel pointed out that on the actual evidence, I could not exclude the possibility that even if the defence had initially been overlooked, John's legal advisors had not brought the application forward urgently.
At a level of principle there is substance to these submissions. As we will see in a moment, in an application such as this the onus is clearly on the applicant. If there is any potential for facts to be controversial they should be established by evidence so that they can be scrutinised. In some cases the explanation offered may be challenged and may give rise to significant factual inquiry and debate.
But I think it would be going too far to insist that, even in an apparently simple case such as this one, the explanation must be given fully in affidavit form or the applicant must fail. On the evidence before me I would infer that the limitation defence was overlooked even without counsel's statement from the Bar Table. If I thought there was any real doubt or suspicion about that I would have required a further affidavit but I do not think that is necessary. To insist on full and formal proof would I think be contrary to the Court's obligations under the Civil Procedure Act s 56. It would be likely to run up costs unnecessarily on what is a subsidiary, and in the scheme of things relevantly unimportant, question.
Counsel for Max submitted that if the amendment were permitted it would be necessary for him to consider what reply was to be made to the new defence, both by way of pleading and evidence. He stated that the February hearing date would be lost, or at least there was an unacceptable risk of that happening. Counsel relied strongly on the High Court decision in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175.
Before the Aon decision, there was a tendency in amendment applications to ask whether the proposed amendment was arguable and then to allow the amendment, unless the respondent to the application could demonstrate concrete prejudice resulting from it. In effect, the onus tended to be placed on the respondent to show why the amendment, once shown to be merrely arguable, should not be allowed.
Aon decisively rejected that way of doing things. The High Court's decision makes it clear that the onus is and remains on the applicant to persuade the Court that there are good reasons to permit the amendment. The respondent bears no onus, and certainly has no obligation to demonstrate concrete prejudice, failing which the application will be allowed.
I have adopted what I consider to be the Aon approach in the present case. Nevertheless, in the exercise of my discretion, I propose to allow the amendment. I think there are four points of significance.
First, the proposed defence is more than merely arguable. On the material currently before me it appears to be one of substance. It would apply, apparently, to a significant proportion of Max's claim. Although other defences are pleaded it is far from clear that they will succeed. If John is unable to plead the limitation defence there will be a significant risk that the ultimate decision might not be in accordance with the substantial merits of the case.
Secondly, this is not a case where it can be said that the delay in propounding the defence has resulted in any detrimental reliance on Max's part. In fact, Max was unrepresented for most of the period of the delay. Counsel has only recently become involved and clearly is not yet on top of the matter (in saying this I am not in any way being critical of counsel for Max who presented his argument on this application with admirable economy and force).
Thirdly, at present it seems to me unlikely that allowing the defence will affect the hearing scheduled for February. When I asked counsel what reply he would plead to the limitation defence if it was permitted, he explained that only just having been briefed he would need to consider that carefully and could not provide me any substantial response on this application. In written submissions counsel mentioned the possibility of pleading some sort of estoppel in reply. But the availability of promissory estoppel in these circumstances is limited: Elzamtar v Bangladesh Islamic Centre of NSW Inc [2020] NSWSC 1161 at [143]-[168].
Furthermore, to the extent that any reply involves referring to dealings between the parties (or with the partnership accountant) concerning the incurring of costs by Max and the allowance of indemnity for those costs, that subject has already in a general sense been raised by the existing defence. I see no reason why any supplementary evidence from Max (and from John in reply) could not be prepared before February.
Fourthly and finally, if it turns out that there is insufficient time for Max to reply to the defence before the hearing and to present all of the evidence on the issues raised, it will be open at that stage to apply to vacate the hearing. Any order I make will be subject to liberty to apply for this purpose. While I am determined to conduct the hearing on the dates which have been allocated in February if I possibly can, that will not be at the expense of either party not being able to put forward a full case on the issues which have emerged.

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (3)