Trident Austwide Pty Ltd v Bagcorp Pty Ltd as trustee for the Rico Tea Trust

Supreme Court of NSW|2024-04-09|Before: Hmelnitsky J, Goff J

Solicitors: CJM Lawyers (Plaintiff) Carter Newell (First Defendant) Bell Legal (Second Defendant) File Number(s): 2022/157310

JUDGMENT

Until 5 November 2021, the parties carried on business as partners in the Madura Tea Estates partnership pursuant to the terms of a written agreement. On that day, the plaintiff (Trident) retired from the partnership, having first given notice of its intended retirement some months before.
The partnership agreement provides that the partnership shall not be dissolved by reason only of the retirement of a partner. Although the agreement contains provisions which allow the remaining partners to purchase the retiring partner's interest as of right at a "fair" value, the remaining partners did not avail themselves of those pre-emptive rights. Nor did they avail themselves of their right to cause Trident's interest to be offered for sale.
The dispute concerns the amount to which Trident is entitled following its retirement. Trident's case, in short, is that its entitlement is to be determined in the manner described by Goff J (as his Lordship then was) in Sobell v Boston [1975] 2 All ER 282 and subsequent authority, namely on an account by first ascertaining the value of the partnership including goodwill as a whole as at 5 November 2021, and then multiplying that value by its own partnership share of 19%.

Background

The Madura Tea Estates partnership consisted of growing, importing and blending tea, manufacturing tea products for sale, and of marketing, distributing and selling those products through supermarkets around the country. The business was and remains profitable.
By 2021, the partnership was being conducted on the basis of a written Partnership Agreement dated 1 February 2018 (the Partnership Agreement). The other partners at the time of Trident's retirement were Bagcorp Pty Ltd as trustee for the Rico Tea Trust (Bagcorp), Headcrest Pty Ltd as trustee for the Davey Family Trust (Headcrest) and Broadbond Pty Ltd (Broadbond). They are, respectively, the first, second and third defendants to these proceedings.
The partners' interests were as follows: 1. Trident: 19% 2. Bagcorp: 52% 3. Headcrest: 10% 4. Broadbond: 19%
The Partnership Agreement is in familiar form at least so far as concerns the sharing of profits and losses, contributions of and entitlements to capital, partnership drawings and the like. It is relevant to note that partners are "entitled to the capital and the property for the time being of the Partnership and to the goodwill of the Business in their respective shares": clause 2(4)(b).
It is necessary to refer to clauses 5(1) and (2) at length: "5. ADMISSION TO AND EXIT FROM THE PARTNERSHIP (1) Voluntary Retirement (a) (i) A Partner proposing to voluntarily retire from the Partnership ("the Retiring Partner") may on giving notice in writing of the period specified in Item 9 of the Schedule to the other Partners ("the Continuing Partners") retire from the Partnership and the retirement will take effect at the expiration of such notice period ("Date of Retirement"). (ii) If the Retiring Partner substantially or effectively retires from the Partnership but fails to give such notice in writing, then the notice will be deemed to have been given on the date of such retirement. (iii) If a Partner or a Partner Representative proposes to substantially or effectively cease to manage the Business and the affairs of the Partnership under clause 4(1) the relevant Partner will be deemed to be proposing to voluntarily retire and must comply with this clause 5(1). (iv) If a Partner or a Partner Representative substantially or effectively ceases to manage the Business and the affairs of the Partnership under clause 4(1) the relevant Partner is deemed to have given notice under clause 5(1)(a)(i) from the date such management substantially or effectively ceased. (v) For the avoidance of doubt, retirement of a Partner from the Partnership includes its Partner Representative substantially or effectively ceasing to manage the Business and the affairs of the Partnership under clause 4(1). (b) If a notice under clause 5(1)(a) is given or deemed to be given: (i) the Retiring Partner must sell and the Continuing Partners may, subject to sub-clauses 5(1)I and 5(9), purchase as at the date of retirement the interest of the Retiring Partner in the Partnership ("the Retiring Partners Interest") as determined by the Continuing Partners in accordance with sub-clause 5(1 )(b)(ii) at a price determined in accordance with sub-clause 5(2) and notified to the Retiring Partner by written notice given at least ninety (90) days prior to the Date of Retirement. (ii) if one or more of the Continuing Partners purchases the Retiring Partner's Interest, they shall do so in proportion to their Partnership Shares inter se or in such other proportions as they may determine and shall be severally liable to the Retiring Partner accordingly (c) One or more of the Continuing Partners may elect not to purchase the Retiring Partner's Interest by giving written notice of such election to the Retiring Partner at least ninety (90) days prior to the Date of Retirement. If all the Continuing Partners so elect, the Retiring Partner's Interest may be offered for sale by it to any qualified person as reasonably approved by the Continuing Partners provided that such sale must be completed within the notice period in sub-clause 5(1)(a). If the sale is not completed within that period or any reasonable extension requested by a Partner or if the Continuing Partners otherwise agree before the expiration of that period, the Partnership will be terminated and wound up and sub-clause 5(5) will apply. (d) Within one month of a Partner giving notice pursuant to sub-clause 5(1)(a), any other Partner may give notice of voluntary retirement expiring on the same day as the first notice. (2) Purchase price for Interest of Retiring Partner The purchase price for the Interest of the Retiring Partner for a purchase occurring pursuant to sub-clause 5(1)(b) shall be an amount agreed between the Partners (including the Retiring Partner) or, if the Partners cannot reach agreement, the fair value of the interest of the Retiring Partner as determined by an independent and competent valuer who is a member of the Institute of Chartered Accountants in Australia or of the Australian Society of Certified Practising Accountants as appointed by the president for the time being of the Law Society or Law Institute of the Governing State taking into account, without limitation, the amount of the credit in the capital account of the Retiring Partner as shown by the accounts of the Partnership made up to the date of Such. retirement and the goodwill of the Business and making due allowance for all actual and contingent liabilities, which amount shall be final and binding on all parties. The valuer may fix the charges for the valuation, half of which shall be paid by the Retiring Partner and the other half by those Continuing Partners purchasing the Retiring Partner's Interest and in the relevant proportions inter se."
Clause 5(4) is entitled "Termination for Breach of Agreement". It enumerates a number of matters giving rise to a right of "the other Partners to terminate the Partnership so far as it concerns the Defaulting Partner by giving one month's prior notice in writing to the Defaulting Partner ('Expulsion Notice')".
Clause 5(4)(b) then states: "(b) Upon expiration of an Expulsion Notice, the Defaulting Partner will be expelled from the Partnership. The Continuing Partners shall have the option to purchase the Interest of the Retiring Partner in accordance with sub-clause 5(1)(b) or allow the Defaulting Partner to offer his or her interest for sale in accordance with sub-clause 5(1)(c)."
Clause 5 also includes the following: "(6) Notice of termination or retirement (a) Upon the termination of the Partnership or the retirement or expulsion of any Partner or on the appointment of a new Partner, any Partner may publicly notify such termination, expulsion, retirement or appointment and at least one Partner shall make such public notification if required to do so by the Partnership Act of the Governing State and in the manner so required. (b) Each Partner, including a retiring, expelled or new Partner will sign and concur in all necessary or proper notices required by sub-clause 5(6)(a) and, if any Partner refuses to do so, any other Partner may sign the name of the refusing Partner to any such notice. … (9) Continuation of Partnership Notwithstanding anything contained in this clause, the Partnership and the Partnership-Business shall not come to an end, and the provisions of clause 5(5) will not apply, by reason only of the death, retirement, expulsion, admission or other event affecting the membership of the Partnership as between the surviving or remaining Partners unless such event results in there being only one Partner remaining or the Partners determine by written agreement that the Partnership shall come to an end."
On 10 May 2021, Trident gave notice of its intention to retire pursuant to clause 5 of the Partnership Agreement.
The remaining partners did not exercise their right to acquire Trident's interest, nor did they elect to offer Trident's share to a qualified person in accordance with clause 5(1)(c).
Following the giving of notice of its retirement, Trident commissioned a valuation of its interest in the partnership to provide a basis on which to agree a price for the remaining partners to acquire its interest. The parties attended a mediation on 22 November 2021 but were unable to resolve their dispute. It is not altogether clear what the extent of their dispute was as at November 2021, although there is no doubt that they were at least in dispute as to the value of Trident's interest.
Subsequent events reveal a fairly deep level of discord between Mr Bright, who is the principal of Trident, on the one hand, and the principals of the first and second defendants, on the other. In circumstances where Trident no longer presses for the appointment of a receiver to the partnership it is not necessary for me to comment on those subsequent events in any detail.

History of the proceedings

The proceedings were commenced by summons filed on 31 May 2022. The plaintiffs were Trident and Broadbond. Broadbond is a company associated with Mr Bright but it did not retire from the partnership. An amended summons filed on 23 July 2023 removed Broadbond as a plaintiff and instead joined it as the third defendant, which was appropriate having regard to the fact that it did not seek any relief but was otherwise a necessary party.
The amended summons seeks a range of declarations as to the history of the dispute, including declarations as to the formation of the partnership. Relevantly, it includes: "4 A declaration that as at 5 November 2021 the value of the first plaintiff's share of the First Partnership was $6,649,023.59 and that pursuant to section 43 of the Partnership Act 1892 the said amount was a debt due and owing to the first plaintiff by the Continuing Partnership. … 7 A declaration that the value of the goodwill of the Continuing Partnership as at the date of the court's order is $27,950,000.00 or such other amount as the court determines."
The amended summons also sought orders for the appointment of receivers to the partnership (and associated relief) and for a declaration that Trident is entitled to a share of profits subsequent to retirement in accordance with s 42 of the Partnership Act 1892 (NSW).
On 20 March 2023, Bagcorp filed a cross-summons in which it sought the following relief: "1. If the Court is minded to dissolve the partnership (which is opposed), an order that: a. an independent accountant determine the value of the partnership the subject of the Partnership Agreement as at 5 November 2021 (Partnership Valuation); and b. the First Cross-Defendant is to offer to sell the Retiring Interest to the Cross-Claimant, Second Cross-Defendant and Third Cross-Defendant, or an entity at the Cross-Claimant's, Second Cross-Defendant's and Third Cross-Defendant's election, for an amount equal to the fair value of the First Cross-Claimant's proportionate share of the Partnership Valuation. 2. An order that the First Cross-Defendant pay the Cross-Claimant's costs of and incidental to this Cross-Summons."
The reference in that pleading to dissolution reflected the fact that the original summons had sought orders that the partnership be dissolved. Shortly prior to the commencement of the hearing, Trident notified the Court and the parties that it did not press for the appointment of receivers.

The appointment of a referee

Bagcorp brought an application for the question of the valuation of Trident's partnership interest to be referred to a referee pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 20.14. That application, together with Bagcorp's application for leave to file the cross-summons, came before Richmond J on 17 March 2023. In the course of considering those applications, his Honour pointed out to the parties that the question of what is to occur when a partner retires but where there has otherwise been no general dissolution of the partnership was considered in a line of cases commencing with Sobell v Boston. His Honour particularly drew attention to what Goff J said commencing at page 286d of the report.
The reference to Sobell v Boston appears to have brought some clarity to the parties' approach to the issues in dispute. It soon became apparent that the parties were willing for a referee to be appointed by consent. As to the terms of reference, his Honour indicated that it would be appropriate to ask the referee's opinion on the valuation issue identified at page 286d of Sobell v Boston, namely: "In my judgment, what he is entitled to is the value of his share at the date of his retirement, including, of course, the then goodwill, the ascertainment of which must at all events normally be a matter of inquiry, accounting and valuation, not sale. Once that conclusion is reached then sections 42 and 43 of the Partnership Act 1890 do apply, and whatever is due to the plaintiff, whether under section 42 or on the general account, is a debt due to him from the continuing partners."
The consent order appointing the referee was relevantly in these terms: "Pursuant to Pt 20 r 14 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), refer to Ms Rebecca Conoulty of Sapere Forensic (the Referee) for enquiry and report the matter in the Schedule hereto. … SCHEDULE The following questions arising in the proceedings, namely the value of the First Plaintiff's interest in the partnership, including the goodwill of the partnership, as at the date of retirement, that being 5 November 2021."
At an early stage of her engagement, Ms Conoulty sought clarification of the basis on which she was required to prepare her report. She wrote: "As set out in the email from Justice Richmond's Chambers, I have been asked to provide my opinion as to: "the value of the First Plaintiff's interest in the partnership, including the goodwill of the partnership, as at the date of retirement, that being 5 November 2021" (Valuation Date) Any question concerning value requires the basis of value to be specified. The International Valuation Standards refers to various bases of value including for example market value, equitable value and fair value. Could the parties please advise if there is agreement as to the basis of value that should be adopted for the purpose of determining a value of the First Plaintiff's interest in the partnership?"
There apparently followed an informal conference with Ms Conoulty at which the basis of her valuation was discussed. There is no evidence as to what occurred at that conference, but Bagcorp says that it is evident that the parties agreed that Ms Conoulty should prepare her report on the basis of "market value".
It is certainly the case that Ms Conoulty did prepare her report on a "market value" basis. That is clear from the report itself, where Ms Conoulty explains the basis of her valuation. However, it was equally apparent from the earliest stage that the parties had differing views as to what a market valuation of Trident's partnership share actually involved. So far as Trident was concerned, it contended that the appropriate approach was that laid down in Sobell v Boston and later cases. Trident contended that it was inappropriate here for the value of its interest to be ascertained on the basis of discounts for lack of control and lack of marketability. It also contended that any such discounts should be less than might otherwise be appropriate for a minority parcel for a range of reasons to do with the history of the partnership and its particular business.
The significance of all of this procedural background to the appointment of the referee and to the manner in which she approached the valuation is central to the defendants' case. Their central argument is that it is not open to Trident to contend for a valuation of its interest on any basis different from what it "agreed" for the purpose of preparation of the referee's report. They argue that Trident "agreed" that the referee was to express an opinion on the market value of Trident's interest and that it was from that point bound to accept the outcome of her "market value" valuation, regardless of whether the referee accepted its argument that it was appropriate in a case such as this to proceed in the manner described in Sobell v Boston and subsequent cases.
Before I deal with the substance of that argument, it is relevant to say something about Ms Conoulty's report. The report is lengthy and detailed. At the same time, it is well reasoned and very clearly expressed. It has been of enormous assistance to the Court in resolving this dispute. It has also been of obvious assistance to the parties, because it has facilitated the resolution of their dispute without the need to engage competing valuers. It has been carefully drafted in the light of the parties competing contentions about discounts and has therefore placed the parties and the Court in a position to reach a final conclusion on the question of valuation whatever the outcome on that particular issue.
Ms Conoulty summarised her methodology and conclusions as follows: "MARKET VALUE ASSESSMENT 19. I describe the Partnership in Section II of this report. The First Plaintiff holds a 19% interest in the Partnership. 20. Having regard to my analysis in Sections IV to VI below, I conclude that the market value of the First Plaintiff's interest in the Partnership as at the Valuation Date ranged between $2,807,199 and $3,305,835. In my opinion it is reasonable to value the First Plaintiff's interest at the midpoint of this range which is $3,056,517. My conclusions are summarised in the following table and set out in more detail in Appendix C7 (supported by the workings in Appendices C1 to C6): 21. As shown in the table above when calculating the market value of the First Plaintiff's interest in the Partnership, it is my opinion that a reasonable discount to be applied to the pro rata value of the whole Partnership, to allow for the: (a) lack of control is 10%; and (b) lack of marketability is 20%. 22. Trident has made submissions concerning the appropriateness of applying any discount for lack of control and lack of marketability. 23. To the extent Trident's submissions relate to: (a) valuation issues (for example reasons for minimising a discount for lack of control), I have had regard to these submissions in determining the appropriate discount of 10%; (b) legal arguments, prior judgments, and whether based on those arguments and judgments the correct value should be based on a pro rata of the whole prior to any discounts being applied: (i) I am not a lawyer and therefore do not purport to provide any legal opinions on those prior cases or this issue; (ii) whilst it is my opinion that previous minority interest transactions in the Partnership, as well as offers to buy and offers to sell minority interests in the Partnership have factored in significant discounts, if the Court should find that the circumstances of this particular case require the usual discounts for lack of control and marketability to be set aside then, Table 1 above, at label G, shows my calculation of the value of a 19% interest prior to the application of any discounts. That value ranges from $3,898,887 to $4,591,437 with a midpoint of $4,245,162."
The question of the appropriate discounts for lack of control (label H) and lack of marketability (label K) was addressed in detail in the body of the report and in the appendices. Label G was described as the "pro-rata equity value" of the partnership.

Identifying the issues in dispute

The main issue in dispute was said by the parties to be, in broad terms, the value of Trident's 19% interest in the Madura Tea Estates partnership as at 5 November 2021 and the appropriateness of discounts for lack of control and marketability in arriving at that value. However, to describe the matter in that way tends to obscure the real issue in dispute.
Trident says that in circumstances where there has been no general dissolution of the partnership (which is common ground here: see clause 5(9) of the Partnership Agreement set out above), it is entitled to be paid an amount on retirement by the continuing partners on account of its partnership interest. It is this amount that may be recovered as a debt: s 43 of the Partnership Act. In Trident's view, the real issue in dispute is the amount to which it is entitled on account. The valuation issue is really a question of ascertaining the amount to which it is so entitled.
The defendants see the issue somewhat differently. On their case, it is necessary to identify the value of Trident's 19% interest but the determination of that issue is a necessary stepping-stone to a later transaction. Once the valuation issue is determined, they say that it will be necessary for the defendants to decide whether they wish to purchase Trident's interest at that value or whether some other unspecified course should be taken. I infer that one such course may be the sale of the business and the winding up of the partnership. The cross-summons seeks a so-called Syers order (that is, an order that Trident sell its share to the continuing partners: see Syers v Syers (1876) 1 App Cas 174) but only in the event the court makes an order dissolving the partnership and in any event only if they are successful on the valuation question. By the time of the hearing, the prospect of general dissolution and receivership had gone away, but the defendants made clear that they still sought the Syers order in the event they were successful on the valuation question. The defendants accepted that there had been a technical dissolution of the partnership on Trident's retirement. However, it is apparent from their other contentions (as just mentioned) that they deny that Trident is entitled to an account.

Trident's entitlement upon retirement

At common law and in the absence of any agreement, the retirement of a partner usually resulted in the general dissolution of the partnership. The retiring partner's remedy in the absence of agreement was for the assets of the partnership to be brought in and sold, the debts paid off and the surplus distributed after the taking of partnership accounts: Syers v Syers at 181. This was and still is often done by the appointment of receivers.
The situation is different where a partner retires from a continuing partnership. In that case, the retiring partner is generally not entitled to the same remedies as are available following a general dissolution of the partnership (ie, appointment of a receiver for the sale of assets). In Sobell v Boston, a partner retired from a law partnership pursuant to an agreement whereby he withdrew and the remaining partners continued to practice without him. There was a dispute as to his entitlement on retirement and he sought orders for the appointment of receivers on the ground that, properly understood, the agreement was for the dissolution of the partnership. That argument was rejected. Instead, Goff J held as I have extracted above at [23].
Sobell v Boston has been relied on for that proposition in Australia: see for example Truong v Lam [2009] WASCA 217 at [24]-[29], and also at [38]; Chia v Ireland [2000] SASC 47 at [37]; and Fazio v Fazio [2012] WASCA 72 at [59]-76].
Despite what was said in Sobell v Boston it is still sometimes said that retirement from a continuing partnership gives rise to a notional or technical dissolution: Chia v Ireland at [45]. Consistently with those cases, the parties here took the view that Trident's retirement gave rise to a technical dissolution but not a general dissolution. The difference between those two concepts was described by the High Court in Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508; [2010] HCA 43 at [11]-[12]; see also Mark Blackett-Ord and Sarah Haren, Partnership Law (6th ed, 2020, Bloomsbury Professional) at 16.1.
Nothing particularly turns on the content of the expression "technical dissolution" here, save that it is a convenient way of saying that Trident's retirement did not give rise to a general dissolution of the partnership. Regardless of whether Trident's retirement did or did not give rise to a technical dissolution, and regardless of what else that expression might mean, there was no general dissolution.
Trident's entitlement on account must first be ascertained by reference to the Partnership Agreement which, as I have noted, entitles it to its partnership share of partnership property and to its share of the goodwill of the business. There was no suggestion that I should read this provision as referring only to book values. Given that the pre-emptive provisions of the Partnership Agreement dealing with retirement were not engaged, Trident's position under the Partnership Agreement would appear to be that it is entitled to an account for its partnership share of the partnership property including goodwill, at market value.
Authority generally supports the taking of an account in these circumstances by calculating the outgoing partners aliquot share of the enterprise value as at the date of retirement. In Chia v Ireland, the Court held that the appropriate measure of Dr Ireland's entitlement on retirement from a medical practice was "her proportionate share in the net proceeds remaining after all the partnership assets have been sold and after payment of the partnership debts and discharging liabilities." That must be understood as a reference to a notional sale as a going concern, which is how it was understood in Truong v Lam at [28].
Leaving aside the question of what the parties agreed about the basis of valuation in the course of their communications with the referee, the cases to which I have referred support the position for which the plaintiff contends. The amount to which Trident is entitled from the continuing partners is an amount equal to its share of the value of the enterprise as a whole as if on a taking of accounts as at that date of retirement. Its entitlement is not simply to the amount for which its partnership interest might have been sold to a willing but not anxious purchaser on that date.
The second defendant referred me to the decision of Black J in Byrne v AJ Byrne Pty Ltd [2012] NSWSC 667. In that case, the plaintiff was a minority shareholder in a company that his Honour at paragraph [78] described as a quasi-partnership company. The plaintiff sought orders under s 233(1)(d) of the Corporations Act 2001 (Cth) for the other shareholders to acquire his shares at a price that did not include any minority discount. One of the bases on which the plaintiff sought to demonstrate that there had been oppression was that the other shareholders had at no point been willing to purchase the plaintiff's shares without a minority discount.
The plaintiff's proposition was that, in determining the price at which shares were to be purchased by order made under s 233, it is generally inappropriate for those shares to be valued on the basis of minority discounts. It followed, so the argument seemed to go, that the majority's continuing refusal to make an offer for his shares at an undiscounted price was a species of oppression, even where oppression was otherwise not made out.
As his Honour pointed out at paragraph [62], there is an important distinction between the question of whether oppression is established, on the one hand, and the valuation issues that can arise when oppression is established and a buy-out order is sought, on the other. His Honour nonetheless proceeded to deal with the plaintiff's argument on its terms. In the course of doing so, his Honour referred to a series of authorities in which it had been held that where a s 233 buy-out order was made it was usually inappropriate to require the plaintiff's shares to be valued on the basis of minority discounts (such as for example discounts for lack of control, liquidity and marketability). So, for example, his Honour referred at [64] to Re Bird Precision Bellows Ltd [1984] Ch 419 at 430 where Nourse J observed: "On the assumption that the unfair prejudice has made it no longer tolerable for [a minority shareholder] to retain his interest in the company, a sale of his shares will invariably be his only practical way out short of a winding up. In that kind of case it seems to me that it would not merely not be fair, but most unfair, that he should be bought on the fictional basis applicable to a free election to sell his shares in accordance with the company's articles of association, or indeed on any other basis which involved a discounted price. In my judgment the correct course would be to fix the price pro rata according to the value of the shares as a whole and without any discount, as being the only fair method of compensating an unwilling vendor of the equivalent of a partnership share."
His Honour also referred to Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 and O'Neill v Phillips [1999] 1 WLR 1092.
However, his Honour also pointed out that the situation is different where a minority shareholder seeks to exit the company, rather than being unilaterally excluded from it. His Honour referred in this respect to what had been said by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [140] and to the reasons of Lord Millett in CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16; [2002] 2 BCLC 108, where his Lordship said at [39]: "If the going concern value is adopted, a further question arises: whether a discount should be applied to reflect the fact that the holding is a minority one. An outsider would normally be unwilling to pay a significant price for a minority holding in a private company, and a fair price as between a willing seller and a willing purchaser might be expected to reflect this fact. It would seem to be unreasonable for the seller to demand a higher price from an unwilling purchaser that he could obtain from a willing one. Small private companies commonly have articles which restrict the transfer of shares by requiring a shareholder who is desirous of disposing of his shares to offer them first to the other shareholders at a price fixed by the company's auditors. It is the common practice of auditors in such circumstances to value the shares as between a willing seller and a willing buyer and to apply a substantial discount to reflect the fact that the shares represent a minority holding."
Black J observed that cases in which minority discounts had been rejected were cases in which the plaintiff was an "unwilling seller in the sense that the sale of his or her shares has been forced upon him or her by the majority's conduct". His Honour said at [70]: "The policy underlying a refusal to apply a minority discount is obvious enough where a shareholder has been unilaterally excluded from management and the majority would then benefit from then being permitted to acquire the minority's shares at the lower value contemplated by a minority discount. I cannot see a basis for extending the application of that policy to circumstances where a person seeks to leave the business rather than being unilaterally excluded from it." His Honour then noted that another rationale for valuing minority shares without a discount may be that in the case of a forced sale the valuation should be based on a notional sale of the business as a whole to an outsider purchaser. His Honour said that, in his view, "that rationale is also not readily applied where the substance of the transaction is the purchase of the minority's interest at the minority's request".
The defendants here particularly relied on these aspects of what was said in Byrne v AJ Byrne Pty Ltd. They submitted that Trident was in the position of a minority shareholder wanting to sell its shares in circumstances where it has not been forced to do so. They submitted that if Trident were to sell its 19% partnership interest to an outsider, that outsider would only be willing to pay a price that reflected minority discounts and that it would therefore be inappropriate and unfair to require the continuing partners to pay Trident an undiscounted price to purchase its interest.
I am unable to accept that what Black J said in Byrne v AJ Byrne Pty Ltd about the position of a shareholder seeking to sell out of a quasi-partnership company assists the defendants here. Trident is not seeking to sell its partnership interest to anybody. The "substance of the transaction" is not a sale of its interest to the remaining partners. Rather, Trident is seeking payment of its entitlement on retirement. On my understanding of how that entitlement arises, set out above, Trident seeks a payment to it, as a debt, of the amount for which the continuing partners are required to account to it in consequence of its retirement. The measure of that entitlement is not what Trident might fetch for its 19% interest on the open market; it is its 19% share of the value of the partnership, including goodwill, as at the date of retirement. The cases cited by Black J in Byrne v AJ Byrne Pty Ltd, if anything, tend in my view to reinforce Trident's case that it would be unfair to require its interest to be discounted in circumstances where the defendants could then sell the business as a going concern and obtain a windfall gain.
Finally, I do not accept that the result I have reached involves any unfairness to the continuing partners, as they submitted. They had a contractual right to acquire Trident's partnership interest for fair value, which they declined. They also had a contractual right to require Trident's interest to be offered to an appropriate third party, which they also declined. Had the partners wished that on retirement a partner was not entitled to an account, but only to the fair or market value of its proportionate interest as if on sale, they could have incorporated such a term into the Partnership Agreement. They might also have included a term, sometimes seen in a professional partnership, that a retiring partner was not entitled to anything other than a nominal amount in relation to the goodwill of the firm.

Did the plaintiff "agree" to a market valuation regardless of whether it included minority discounts?

The defendants' main case at the hearing was that Trident had agreed that Ms Conoulty should adopt a "market value" approach in preparing her report and that it was not now open to Trident to resile from that approach. Given that Ms Conoulty concluded that a market value of Trident's interest was to be ascertained after minority discounts, they submitted that any attempt to persuade the Court to a different conclusion was an impermissible attempt to relitigate the merits of the arguments about market value which, they said, Ms Conoulty had resolved. They referred me to Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 (Chocolate Factory) at [7(7)], [7(9)] and [7(12)].
I am unable to accept that argument for several reasons. The first is that the plaintiff quite clearly submitted to Ms Conoulty that she should not apply minority discounts because, as a matter of law, that would be inappropriate. The plaintiff may have "agreed" that Ms Conoulty should adopt a market value but it cannot seriously be suggested that it agreed to be bound by a report that was in its view contrary to what the law required.
Secondly, I do not understand Trident's contention to involve a rejection of market value in any event. Its case all along has been that it was entitled to 19% of the market value of the partnership as a whole.
Thirdly, as I explain below, Ms Conoulty has not attempted to resolve the present issue as a valuation issue "on the merits". She has instead recognised that, as Trident contended, there may yet be legal reasons why it is inappropriate to apply minority discounts and, to that extent, she has quite properly stayed out of the fray. Ms Conoulty further made clear what the valuation would be if Trident's methodology was accepted. The airing and resolution of the present dispute about discounts does not involve the re-litigation of an issue otherwise resolved by the valuer. I note in this regard that Ms Conoulty took care to address all of the parties' lengthy and detailed contentions as to an appropriate minority discount (that is, if one was required at all) but neither party seeks to re-argue the merits of any part of that analysis.
Fourthly, even if the above were not the case, I still have a discretion to adopt a referee's report only partially, or to vary it in any way: see UCPR r 20.24(1) and (although referring to a previous version of the relevant rules) Chocolate Factory at [7(4)]. Given the appropriate valuation method is (at best for the defendants) a mixed question of law and fact, even if Trident had acted in the way the defendants suggest, there may well have been occasion for me to exercise my discretion to ensure the valuation adopted in this proceeding accurately reflects the relevant law. Further, the nature of the question of valuation methodology as a mixed question of law and fact lessens the force of the defendants' reliance on McDougall J's warning in Chocolate Factory that "Generally, the referee's findings of fact should not be re-agitated in the Court". I note also the qualification "generally".
The defendants submitted that if Trident wished to dispute the basis of the referee's valuation, it should have brought the matter back to Court to be determined in an interlocutory skirmish. I disagree. No doubt that is something Trident could have attempted to do. But it was necessary to obtain the referee's report either way and, in the events which have happened, no party has been either delayed or prejudiced by the fact that the issue has been resolved at a final hearing with the benefit of a well-reasoned referee's report.

Adoption of the report

The plaintiff submitted that if I were to accept its argument about the inappropriateness of minority discounts, the Court should adopt the referee's report but at the same time exclude (or decline to adopt) those parts of Ms Conoulty's conclusions that applied minority discounts. The defendants submitted, correctly in my view, that it was not appropriate in the present circumstances for the Court to adopt the report on terms that effectively redrafted its conclusions.
Given that the report accommodates the views of all parties on the question of minority discounts and given that Ms Conoulty has made clear what the correct value of Trident's interest is on either view, it is appropriate simply to adopt the whole of her report. That does not however mean that I must adopt her conclusion as to the "market value" of Trident's interest. The conclusion I expressed above was that the real question for determination is the value of Trident's entitlement on retirement and not the market value of its interest as if on sale, which is the matter on which Ms Conoulty expressed her ultimate conclusion. I am nonetheless able to reach a firm conclusion as to the real matter in dispute on the basis of Ms Conoulty's report. As she points out at [19]-[20], 19% of the enterprise value of the partnership as at 5 November 2021 is the amount at Label G set out at [30] above. I note that the parties were in agreement that it was appropriate for the Court to adopt the mid-point of Ms Conoulty's valuation range.
The defendants submitted that even this conclusion involved a rewriting of Ms Conoulty's report. They submitted that Ms Conoulty did not express any truly alternative conclusion as to the value of Trident's interest. They submitted that Ms Conoulty may have reached a different conclusion on the question of value if she were instead to proceed on the basis I have described.
I do not accept that submission. The material which the parties provided to Ms Conoulty made it very clear that the plaintiff contended that her valuation should (a) proceed on the basis of no minority discount at all but (b) if there was to be a minority discount, then it should be ascertained having regard to a range of matters which they identified.
Prior to finalising her report, Ms Conoulty gave the parties an opportunity to comment on a draft. Counsel for the plaintiff took that opportunity to emphasise that Trident's position was as I have just mentioned, namely that as a matter of law the valuation exercise did not require her to discount her valuation for minority interests (he referred among other things to s 43 of the Partnership Act 1892) but that she should in any event determine any discount in the manner for which the plaintiff otherwise contended. He specifically submitted that she should "provide two alternative valuations [of] Trident's share in the partnership (a pro rata market value and a discounted value) and allow the court to determine the appropriate basis to ultimately apply." His reference to a pro rata market value was a reference to Trident's "share of the partnership, with the value of the partnership to be calculated on a market basis".
That is precisely what Ms Conoulty did. Her reference at [23(b)], set out at paragraph [30] above, to whether discounts were required as a matter of law and to the appropriate conclusion in the event she were wrong about this matter is quite clearly a reference to the dispute now before me. The reasons which Ms Conoulty gave for reaching a different conclusion were hardly surprising, particularly given the form of question which the parties posed to her. Her reasoning includes the uncontroversial propositions that Trident did not have a controlling interest in partnership affairs and that, as a 19% partner, it could not expect to be able to convert its interest to cash as might be the case with, say, shares in a public company.
However, as I have sought to explain, the question for determination is not what a willing but not anxious buyer would pay for Trident's 19% interest in the partnership, but the amount to which it is entitled from the continuing partners "on account" following retirement.
Ms Conoulty's report, which I adopt, allows me to determine that amount on the basis for which Trident contends to be the sum of $4,245,162.

Orders

Trident submitted that I should make orders in the following form: "1. A declaration that the plaintiff and the defendants entered into a partnership trading as Madura Tea Estate in accordance with a written partnership agreement dated 1 July 2018 as and from 1 July 2018 (Partnership). 2. A declaration that the plaintiff retired from the Partnership on 5 November 2021. 3. A declaration that the defendants are entitled to and do retain the assets of the Partnership. 4. A declaration that it was impliedly agreed that the financial position between the parties would be dealt with via an account prepared as though there had been a dissolution of the partnership on 5 November 2021. 5. An order pursuant to UCPR 20.24(1)(a) that the of Report of Rebecca Conoulty dated 14 July 2023 be adopted save for the following paragraphs and parts, which are rejected: 20, 21, 23a, 203 to 211, 212 to 219 and Table 1 from "discount for lack of control" to the end of the table. 6. A declaration that the value of the assets of the Partnership on 5 November 2021 was $22,342,958.00 (the Value of the Partnership). 7. An order that the first defendant's costs of the Amended Summons and prayers 1 to 3 of the Cross Summons up to the end of the hearing commencing on 8 April 2024 as agreed with the Plaintiff or, if not so agreed, as assessed, be deducted from the amount of the Value of the Partnership. 8. An order that the Plaintiff's costs of the Amended Summons and prayers 1 to 3 of the Cross Summons up to the end of the hearing commencing on 8 April 2024 as agreed with the Defendants or, if not so agreed, as assessed, be paid by the Defendants. 9. An order that the amount in the previous order also be deducted from the amount of the Value of the Partnership. 10. A declaration that the plaintiff's share of the Partnership's assets as at 5 November 2021 is 19% of the Value of the Partnership after deduction of the costs in Orders 7 and 8 (the Plaintiff's Partnership Share). 11. An order that the defendants pay the plaintiff interest from 5 November 2021 on the amount of the Plaintiff's Partnership Share pursuant to section 42(1) of the Partnership Act 1892. 12. Direct the first defendant to file an application for the assessment of its costs with the Manager, Costs Assessment by 4pm on 6 May 2024 if those costs are not agreed by that time. 13. Direct the Plaintiff file an application for the assessment of its costs with the Manager, Costs Assessment by 4pm on 6 May 2024 if those costs are not agreed by that time. 14. Order that there be no order as to costs of the Second Defendant with the intention that it bear its own costs. 15. Adjourn the proceedings to [time date] before Hmelnitsky J for further consideration, and if appropriate to make final orders."
As to the first four orders, notwithstanding that some such declarations are sometimes seen in the cases, it is not apparent to me that there is any particular need for the court to make them here. The defendants submitted that they were all matters that are uncontentious and that there is no utility in making them. I agree.
As to costs, it is appropriate that the parties' costs come out of the value of the partnership, at least notionally: Hamer v Giles (1879) 11 ChD 942 at 942 per Jessel MR.
It is also appropriate in my view that there be no order as to the second defendant's costs: Statham v Shephard (No 2) (1974) 23 FLR 244 at 246; HP Mercantile Pty Ltd v Hartnett [2017] NSWCA 79 at [14].
In Gilmore Finance Pty Ltd v Aesthete Pty Ltd (No 2) [2023] NSWCA 31, the Court of Appeal considered an application for costs by successful unitholders who had been separately represented in the appeal. The Court rejected their application, saying at paragraph [10]: "We do not accept these submissions. As the applicant pointed out in response, they do not address the principle stated in Statham v Shephard (No 2) (1974) 23 FLR 244 at 246, and regularly applied in this Court, including in Local Democracy Matters and HP Mercantile Pty Ltd v Hartnett, which is that "the court will not normally allow two sets of costs to defendants where there is no possible conflict of interest between them in the presentation of their cases." In the present case, there was no possibility of conflict between the trustees and their owner and controller on the one hand, and the unitholders who joined with them in opposing the removal of the trustees. The fourth and fifth respondents could have retained the same firm and counsel, who could have made it clear that they opposed the removal application. The fourth and fifth respondents could also have filed an appearance and put on a submission (or asked the first, second and third respondents to do so) indicating that they opposed the application, but otherwise not taking any active part in the proceedings in this Court."
The defendants here are in the same position. The second defendant submitted that there had been a real possibility of conflict between the defendants because there was no agreement as to who among them would have to bear the cost of buying out the plaintiff. However, that was not a question that arose in the proceedings. It may perhaps have arisen on the cross-claim if a Syers order had been made. But, even there, it was clear that the second defendant simply supported the relief sought by the first defendant. No defendant contended at any point for an outcome different to what any other defendant contended. The second defendant also pointed out that there had been some submissions put by it that were not put by the first defendant. That, however, is not a circumstance that takes the matter outside the scope of what was said in HP Mercantile or Gilmore Finance: see G E Dal Pont, Law of Costs (4th ed, 2018, LexisNexis Australia) at 11.52.
I will therefore make the costs orders proposed by Trident.
The parties informed me that they may yet be in a position to reach a conclusion as to the amount of costs and that I should therefore not make final orders just yet. The benefit of having some agreement about costs is that I will then be in a position to make final orders disposing of the whole of the matter. If the question of costs were to go to assessment, it would be impossible to make a final order as to Trident's entitlement until the outcome of that process were known.
I will not make any final orders at this stage. I will instead ask the parties to bring in short minutes of order on or before 14 May 2024. If they cannot be agreed, the parties are directed to bring in competing short minutes, together with submissions of no more than five pages, by that date.

Amendments 30 April 2024 - Changed image size 06 May 2024 - [34], [36] and [53]: minor grammatical amendments 06 May 2024 - Changed image size 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: 06 May 2024

Uniform Civil Procedure Rules 2005(NSW)rr 20.14, 20.24, r 20.14.

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