Warner Capital Pty Ltd v Shazbot Pty Ltd

ther insolvency practice was a partnership PARTNERSHIPS - dissolution - account of partnership assets and liabilities - valuation of work in progress - where finding that work in progress comprised "collectible" component and so-called "goodwill" component - whether appropriate to have reference to collections actually made in valuation of collectible work in progress PARTNERSHIPS - dissolution - where no utility in appointing a receiver - form of orders appropriate to give effect to account of partnership assets and liabilities EQUITY - fiduciary duties - where shareholder transferred share to director's nominee for nominal consideration upon dissolution of partnership - whether breach of fiduciary duty claim pleaded - whether open for primary judge to find director breached fiduciary duty owed to shareholder Legislation Cited: Bankruptcy Act 1966 (Cth), s 109, Pts IX, X Corporations Act 2001 (Cth), ss 251A, 443D(b), 556(1)(c) and (de) Evidence Act 1995 (NSW), s 69 Partnership Act 1892 (NSW), ss 1, 1B, 39 Partnership Act 1895 (WA), s 50 Supreme Court Act 1970 (NSW), s 75A(8) Uniform Civil Procedure Rules 2005 (NSW), r 15.1(1), Pt 20, Div 3 Cases Cited: AM Marketing Pty Ltd v Howard Media Pty Ltd [2010] NSWSC 803 Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 Badeley v Consolidated Bank (1888) 38 Ch D 238 Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 Castagna v R; Agius v R [2019] NSWCCA 114 Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7 Cuming v Hennessy [2005] NSWSC 1219 Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317; [2003] HCA 51 Federal Commissioner of Taxation v Phillips (1978) 36 FLR 399; 8 ATR 783 Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 Gosford Christian School Ltd v Totonjian [2006] NSWSC 725; (2006) 201 FLR 424 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64 Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 Hurst v Bryk [2002] 1 AC 185 Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163 Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 Kuru State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 Percival v Wright [1902] 2 Ch 421 Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21 Rowe v Australian United Steam Navigation Co Ltd (1909) 9 CLR 1; [1909] HCA 25 Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 Trego v Hunt [1896] AC 7 University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481; [1985] HCA 28 Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1 Warner v Mayfair Limited, In the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441 Texts Cited: K L Fletcher, The Law of Partnership in Australia (9th ed, 2007, Law Book Co) Lindley & Banks on Partnership (20th ed, 2017, Sweet & Maxwell) Category: Principal judgment Parties: Warner Capital Pty Ltd (First Appellant) Anthony John Warner (Second appellant) Clarence Street Partners Pty Ltd (Third appellant) Debtfree Pty Ltd (Fourth appellant) Shazbot Pty Ltd (First respondent) Steven Barry Kugel (Second respondent) Representation: Counsel: S A Wells / J R Anderson (Appellants) P Afshar (Respondents)

Solicitors: Wyndham Lawyers (Appellants) Uther Webster & Evans (Respondents) File Number(s): 2019/122117 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Citation: [2018] NSWSC 1645 [2019] NSWSC 1114 Before: Parker J File Number(s): 2015/119465

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the Judgment] Mr Anthony Warner and Mr Steven Kugel are insolvency practitioners who together conducted an insolvency practice for a period of seven years until September 2014. Much of their practice consisted of corporate and personal insolvency administrations conducted through a business called CRS Warner Kugel (CWK practice). In addition to the CWK practice, Debt Free Pty Ltd (Debtfree) acted as administrator of debt agreements under Part IX of the Bankruptcy Act 1966 (Cth) and Mr Warner acted as trustee of personal insolvency agreements under Part X of the Bankruptcy Act. The CWK practice was conducted through a corporate trustee (CRS Warner Kugel Pty Ltd or CWK) as trustee of a unit trust (CWK Warner Kugel Unit Trust) of which Mr Warner and Mr Kugel's nominee companies Warner Capital Pty Ltd (Warner Capital) and Shazbot Pty Ltd (Shazbot) respectively, were shareholders and equal beneficiaries and unit holders. In both businesses, excepting the Part IX component of Debtfree, income derived by Mr Warner and Mr Kugel personally was paid over to CWK or Debtfree by endorsing cheques drawn in their favour for remuneration that was referable to their respective appointments. CWK distributed profits to Warner Capital and Shazbot. Mr Warner and Mr Kugel did not prepare partnership accounts or lodge partnership tax returns. Debtfree paid dividends from time to time to its shareholders - Warner Capital and Shazbot. On 22 September 2014, Mr Warner and Mr Kugel agreed to cease working together and a dispute arose as to, inter alia, Mr Kugel's entitlements upon the dissolution of the business relationship. In April 2015, Shazbot and Mr Kugel (the Kugel interests) commenced proceedings against Warner Capital and Mr Warner, and later joined CWK, now known as Clarence Street Partners Pty Ltd, as third defendant, and Debtfree as fourth defendant. In his first judgment, delivered on 31 October 2018, the primary judge (Parker J) found that the business relationship of the parties was a partnership, made findings that the scope of the partnership included its corporate and personal insolvency practice and that part of the Debtfree business referable to the Pt X arrangements, and found that Mr Kugel was entitled to an order for an account. He also found that Mr Warner owed fiduciary duties to Shazbot, which had been breached in the transfer of Shazbot's one share in Debtfree to Warner Capital. In his second judgment, delivered on 30 August 2019, the primary judge indicated the form of the proposed relief. On 16 October 2019, he made declarations, appointed a receiver for the purpose of winding-up of the partnership and made orders that the parties account to the receiver, and that Mr Warner and Warner Capital account to Shazbot for the value of its share in Debtfree. The Warner interests appealed against the whole of the judgment below. The Kugel interests cross-appealed, challenging one aspect of the accounting order. The principal issues before the Court were: (i) whether Mr Warner and Mr Kugel conducted the business of CRS Warner Kugel in partnership, and if so, what was the scope of that partnership? (ii) whether the primary judge erred in finding that Mr Warner breached fiduciary duties owed to Shazbot in respect of the transfer of its shareholding in Debtfree to Warner Capital on the basis of the principles in Brunninghausen v Glavanics (1999) 46 NSWLR 538; (iii) whether the primary judge erred in making certain adverse findings against Mr Warner including, that he purposely withheld billing work in progress (WIP); and (iv) how the WIP as at 22 September 2014 should be valued. This issue was related to the cross-appeal which contended that the account should be undertaken by reference to the value of the WIP as at 22 September 2014 without reference to collections actually made. Held, allowing the appeal in part and dismissing the cross-appeal (per Gleeson JA; Macfarlan and Meagher JJA agreeing): As to issue (i): (1) The insolvency practice of CRS Warner Kugel was conducted as a partnership: at [82]-[83]. Mr Warner and Mr Kugel derived the income of the practice personally: at [67]. It was not to the point that fee cheques in payment of their remuneration were endorsed to CWK and that profits were distributed by CWK to Warner Capital and Shazbot; nor was the business structure inconsistent with a finding of partnership. To the extent that there were differences between the structure of CRS Warner Kugel and a previous partnership between Mr Warner, Mr Kugel and Mr Clifford Sanderson, these differences were not material or significant enough to defeat a finding of partnership: at [71] AM Marketing Pty Ltd v Howard Media Pty Ltd [2010] NSWSC 803; and Castagna v R; Agius v R [2019] NSWCCA 114 applied. (2) The scope of the partnership extended to that part of the Debtfree business which was referable to Part X arrangements. That was because the Part X arrangements were conducted by Mr Warner personally and only he was entitled to the income derived from that work: at [87]. As to issue (ii): (3) The primary judge erred in finding that Mr Warner breached fiduciary duties owed to Shazbot in respect of the transfer of its shareholding in Debtfree to Warner Capital. First, a Brunninghausen v Glavanics type claim ought to have been specifically pleaded to enable the Warner interests to identify the case that they had to meet, and it was not pleaded: at [101]. Second, the circumstances of the share transfer by Shazbot were not analogous to the advantage taken of the disenfranchised minority shareholder in Brunninghausen: at [108]. The finding of breach of fiduciary duty could not be sustained on the evidence: at [116]. Brunninghausen v Glavanics (1999) 46 NSWLR 538 distinguished; Breen v Williams (1996) 186 CLR 71; Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; Friend v Brooker (2009) 239 CLR 129; Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; Sargent v ASL Developments Ltd (1974) 131 CLR 634; and Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345 considered. As to issue (iii): (4) The primary judge erred in finding that Mr Warner purposely withheld billing WIP for the bankruptcy matters: at [133]. This finding was not available on the evidence, and in any event, the allegation that prior to 22 September 2014 Mr Warner had purposely withheld, or failed to take all reasonable steps to realise WIP had been abandoned in the pleading by the Kugel interests: at [122]. As to issue (iv): (5) The primary judge's approach to the valuation of WIP comprising "collectible WIP" and so-called "goodwill" was not in error: at [160], [162] and [169]. For the valuation of WIP, regard can be had to collections actually made. For the valuation of "goodwill" or more accurately, the premium or discount payable by the purchaser or vendor as the case may be to acquire the whole "book" of business, expenses in fact incurred after 22 September 2014 by Mr Warner may not give a reliable indication as to what an incoming purchaser would pay (or would require to be paid) to acquire the whole "book": at [170]. Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 applied; and Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343 considered. (6) There is no utility in appointing a receiver: at [175]. The matter is to be remitted to the primary judge to conduct the inquiry on taking of accounts and directions made requiring the parties to confer with a view to agreeing to narrow the scope of the account: at [184]-[185]. Cuming v Hennessy [2005] NSWSC 1219 considered.

Judgment

1. MACFARLAN JA: I agree with Gleeson JA.
2. MEAGHER JA: I agree, for the reasons his Honour gives, that the orders proposed by Gleeson JA should be made.
3. GLEESON JA: This appeal concerns a dispute between two insolvency practitioners, Mr Anthony Warner and Mr Steven Kugel, who conducted an insolvency practice for a period of seven years up until September 2014. The essential question below was the nature of the relationship under which the insolvency practice was conducted: was it a partnership, or was the practice conducted by the corporate trustee of a unit trust? A related question was the parties' obligations and entitlements upon termination of their business relationship.
4. In his first judgment, delivered on 31 October 2018, Parker J found that the business relationship of the parties was a partnership, made findings as to the scope of the partnership and found that Mr Kugel was entitled to an order for an account. He also found that Mr Warner owed fiduciary duties to Mr Kugel's nominee, Shazbot Pty Ltd (Shazbot), which had been breached in the transfer of Shazbot's one share in Debt Free Pty Ltd (Debtfree) to Mr Warner's nominee, Warner Capital Pty Ltd (Warner Capital): Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 (the principal judgment or PJ). In his second judgment, delivered on 30 August 2019, the primary judge indicated the form of the proposed relief. On 16 October 2019, he made declarations, appointed a receiver for the purpose of winding-up of the partnership and made orders that the parties account to the receiver, and that Mr Warner and Warner Capital account to Shazbot for the value of its share in Debtfree: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114 (the second judgment or SJ).
5. The Warner interests have appealed and seek to set aside all orders made below. In the alternative, they seek to vary the terms of the accounting order. The Kugel interests have cross-appealed challenging one aspect of the accounting order.

Outline of the basic facts

1. The factual circumstances giving rise to the proceedings are described in detail in the principal judgment at [14]-[154]. The following summary is largely taken from the primary judge's reasons.
2. Both Mr Anthony Warner and Mr Steven Kugel are accountants and qualified insolvency practitioners. Both are registered liquidators and Mr Warner is also a registered trustee in bankruptcy.

The earlier partnerships - the CWS practice

1. In November 2006 Mr Kugel joined an existing partnership comprising Mr Warner and Mr Clifford Sanderson who had conducted an insolvency practice in partnership from August 2005 under the name "CRS Warner Sanderson" (the CWS practice). There was no written partnership agreement either before or after Mr Kugel joined as a partner, but Mr Warner circulated a draft heads of agreement by email to Mr Peter Harkin, Mr Kugel's solicitor, and Mr Sanderson on 2 November 2006 stating that "the new partnership will be operated through a unit trust (to be created) which will trade as CRS Warner Sanderson": PJ [30].
2. From 7 November 2006 to 19 September 2007, the three practitioners carried on an insolvency practice in partnership under the name "CRS Warner Sanderson". The CWS practice used two companies as administration entities: Corporate Restructuring Solutions Administration Pty Ltd (the Administration company) for holding assets, staff and leases, and Corporate Restructuring Solutions Pty Ltd (the CRS corporate trustee) acting as trustee of a unit trust known as the "CRS Unit Trust" to obtain favourable taxation benefits through income splitting. Each practitioner endorsed over to the CRS corporate trustee cheques drawn in favour of the practitioner who was legally entitled to receive fees for work done as company administrator, liquidator, or trustee in bankruptcy. The CRS corporate trustee paid a 10 per cent commission to the partnership and an administration fee to the Administration company, and made distributions of profit to the unit holders, the nominees of Mr Warner and Mr Sanderson, and after November 2006, to Mr Kugel personally, although he was not a unit holder.
3. Mr Warner and Mr Sanderson were also directors of Debtfree which conducted a business as part of a joint venture with an English group of companies, Debt Free Direct Group plc. Debtfree provided services to Debt Free Direct Australia Pty Ltd of administering debt agreements under Part IX of the Bankruptcy Act 1966 (Cth). Such agreements provided an alternative to formal bankruptcy, typically for consumer debtors with few assets or liabilities who were unable to meet their financial commitments. As the primary judge found at PJ [19]: [19] … Such agreements provide an alternative to formal bankruptcy, typically for consumer debtors with few assets or liabilities who are unable to meet their financial commitments. They operate under a system of registration with the Australian Financial Security Authority ("AFSA"). The agreements are administered by a registered debt agreement administrator, approved by AFSA.

The CWK practice

1. From 20 September 2007 to 22 September 2014, Mr Warner and Mr Kugel conducted an insolvency practice under the name "CRS Warner Kugel" (CWK practice). Mr Warner arranged for the registration of this business name, owned by CWK, on 17 October 2007. CWK became the trustee of a unit trust known as "CRS Warner Kugel Unit Trust" (CWK Unit Trust) on or about 6 October 2007, although the trust deed establishing that trust was back-dated to 20 September 2007. The beneficiaries and equal unit holders in the CWK Unit Trust were Warner Capital and Shazbot, to whom equal distributions were made from time to time.
2. On 27 September 2007, Mr Warner wrote to Willis Australia Ltd on CWK letterhead as "Partner" advising that the CRS Warner Sanderson partnership was dissolved on 19 September 2007 and: A new partnership was formed which is now known as CRS Warner Kugel. The partners in CRS Warner Kugel are Anthony Warner and Steven Kugel. Both Anthony Warner and Steven Kugel were listed as partners in the professional indemnity insurance which was placed on 3 June 2007. The letter requested that CWK Pty Ltd be noted as an additional insured entity on the policy.
3. In the conduct of the CWK practice, Mr Kugel focused on corporate insolvency administrations, liquidations and voluntary administrations, whilst Mr Warner focused on personal insolvency administrations as trustee in bankruptcy. Most of the corporate appointments were made in favour of Mr Warner and Mr Kugel jointly, with a small number in favour of only Mr Warner or Mr Kugel respectively. Income derived by Mr Warner and Mr Kugel personally for acting as voluntary administrator, liquidator, or trustee in bankruptcy was paid by Mr Warner and Mr Kugel to CWK by endorsing cheques drawn in their favour for remuneration in relation to their respective appointments.
4. CWK employed the professional and administrative staff, who worked under the direction of Mr Warner and Mr Kugel, and leased premises and incurred other liabilities and expenses of the practice. Unlike the arrangements with respect to the prior CWS practice, CWK fulfilled the dual role of administration company and corporate trustee, CWK did not pay a 10 per cent commission to the CWK practice, and no partnership accounts or tax returns were prepared or lodged after 30 June 2008.
5. As well as the CWK practice, there was the Debtfree business for which Mr Warner was mainly responsible, with Debtfree acting as administrator of debt agreements under Part IX of the Bankruptcy Act and Mr Warner acting as trustee of personal insolvency agreements under Part X of the Bankruptcy Act. The primary judge found at PJ [7]: [7] … This business was mainly the responsibility of Mr Warner. It operated under the names "Debt Free Direct" or "Debtfree". The business was acquired in January 2008 and thereafter it was operated through a company called Debtfree Pty Limited ("DF") alongside the CWK practice. The shares in DF were acquired in the name of CWK Pty Ltd but approximately seven months later, in October 2008, they were transferred to Warner Capital and Shazbot. From that point onwards, the profits from the Debtfree operations were distributed by way of dividend to Warner Capital and Shazbot.

Termination of the CWK practice

1. On 22 September 2014, Mr Warner and Mr Kugel agreed to cease working together and parted ways. Mr Kugel also left the office that day and did not return or otherwise assist with completing any of the insolvency appointments which were on foot as at 22 September 2014. On 26 September 2014, Mr Kugel resigned from his joint liquidation appointments with Mr Warner.
2. On 22 September 2014, at the request of Mr Warner, Shazbot transferred its one share in Debtfree to Warner Capital for $1.00 and Mr Kugel resigned as a director of the corporate trustee, CWK. Mr Kugel did not transfer Shazbot's shares in CWK or its units in the CWK Unit Trust, pending payment to him of a final distribution. There was a conflict in the evidence as to whether Mr Warner and Mr Kugel reached an agreement on 22 September 2014 that Mr Warner would provide Mr Kugel with a full account of all assets of the CWS practice including the Debtfree business. The primary judge found that no binding agreement was made on 22 September 2014: PJ [221]. It is common ground, as the primary judge also found, that there was no discussion of division of the WIP of the CWK practice and the Debtfree business: PJ [152].
3. In October and November 2014, CWK paid to Shazbot an amount totalling $111,306.87 comprising an interim distribution of $100,000 and a final distribution of $11,306.87, in accordance with a calculation prepared by the external accountants for the CWK on the basis of net cash available for distribution as at 30 September 2014, after payment or allowance for liabilities of the CWK Unit Trust. The calculation did not include any allowance for the WIP of the CWK practice or the Debtfree business.
4. Mr Kugel first raised the WIP issue in an email sent on 18 November 2014, to Sarah Li, an accountant with Mr Warner's new firm, CRS Insolvency Services, asking that she do him a favour "quietly", namely, provide a copy of the WIP sheets showing all the positions of WIP on all the jobs.
5. With respect to the dispute concerning WIP, the primary judge observed at PJ [10]: [10] As at 30 September 2014, monies had been recorded by way of work in progress in the records of the practice, representing fees which had been recorded as chargeable to the administrations then on foot but which had not then been paid. In some of the administrations, no funds were available. In others, money was held but the formal steps required for payment had not been taken. The parties referred to these fees as "WIP Assets". No allowance was made in the payment to Shazbot for any share of the WIP Assets. Nor was any allowance made for any goodwill associated with the CWK practice or the Debtfree business, or for the value of the shares in DF. The defendants deny that they had any obligation to do so.

The proceedings below

1. In April 2015, Shazbot and Mr Kugel (the Kugel interests) commenced proceedings against Warner Capital and Mr Warner, and later joined CWK, now known as Clarence Street Partners Pty Ltd (Clarence Street Partners), as third defendant. Debtfree was joined as fourth defendant on 27 March 2018. It is convenient to refer to Mr Warner and these three entities collectively as the Warner interests.
2. The primary judge identified three principal issues for determination: first, the legal nature of the relationship under which the CWK practice was conducted, and, if there was a partnership, whether it included the Debtfree business; second, whether the Kugel interests have any further right to a share of the value of what the parties referred to as the WIP Assets or of the Debtfree business; and third, if the Kugel interests have some entitlement to a share of the WIP Assets or the Debtfree business, how the value of that is to be determined: PJ [11]-[13].
3. As to the first and second issues, Mr Kugel contended that the CWK practice including the Debtfree business was a partnership between himself and Mr Warner. Mr Warner's response was that the business of the CWK practice was conducted by CWK as trustee for the CWK Unit Trust and the Debtfree business was conducted by Debtfree. Mr Warner contended that he and Mr Kugel did not participate in the CWK practice or the Debtfree business in their personal capacities, but rather as directors and agents for Shazbot and Warner Capital, the shareholders and unit holders.
4. As to the third issue, the primary judge observed at PJ [13]: Initially, both parties presented expert evidence on valuation questions, but it was accepted in the course of the hearing that the Court would not itself go into the details of calculation and would refer the ascertainment of the quantum of any entitlement to a referee. The parties, however, disagree, as to how the accounting process ought to be undertaken.
5. In his principal judgment at [246], the primary judge found, in summary, that: (a) Mr Warner and Mr Kugel had carried on the business of CRS Warner Kugel as partners; (b) the business of the partnership included acting as company administrator, company liquidator, trustee in bankruptcy and administrator of Part X arrangements, but did not include the remaining Part IX debt agreement business operated by Debtfree; (c) Mr Kugel is entitled to an order for an account; and (d) Shazbot is entitled, at its election, to an account of profits or an award of equitable compensation arising from the transfer of its share in Debtfree to Warner Capital on 22 September 2014.

Overview of issues on the appeal and cross-appeal

1. There are four main issues raised on the appeal.
2. First, whether Mr Warner and Mr Kugel conducted the business of CRS Warner Kugel in partnership: grounds 1, 1A, 3, 4 and 4A (the partnership issue).
3. Assuming a partnership, there is a related issue as to the scope of the partnership, namely, whether Debtfree is obliged to account to the partnership for any Pt X income received by it from 22 September 2014 onwards which formed part of the WIP of the partnership as at that date: ground 3 (the scope of the partnership issue).
4. Second, whether the primary judge erred in finding that Mr Warner breached fiduciary duties owed to Shazbot in respect of the transfer of its shareholding in Debtfree to Warner Capital on the basis of the principles in Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199: grounds 5-8 (the breach of fiduciary duty issue).
5. Third, whether the primary judge erred in making certain adverse findings against Mr Warner including that he purposely withheld billing WIP for bankruptcy matters: ground 9 (the withholding WIP issue).
6. Fourth, how the WIP as at 22 September 2014 should be valued: ground 11 (the valuation issue).
7. The fourth issue is related to grounds 1-3 of the cross-appeal which seek to vary order 6 made by the primary judge such that the account should be undertaken by reference to the value of the WIP as at 22 September 2014 without reference to the collections actually made.
8. Before addressing each of the four issues, it should be observed that by the conclusion of oral argument the subject matter of the appeal and cross-appeal were significantly narrowed.
9. First, it is common ground that the business relationship between Mr Warner and Mr Kugel terminated on 22 September 2014 and that no steps were taken after that date to wind up the partnership, which the primary judge declared had been carried on since 20 September 2007 and had dissolved on 22 September 2014. Instead, Mr Warner took most of the assets and the current insolvency administrations of the CWK practice, and the business of Debtfree. Mr Kugel took six company liquidations and some limited assets of the CWK practice being the business name "Insolvency Experts", a related domain name and 1300 telephone number, all of which were transferred to Shazbot.

The existence of a partnership - relevant principles

1. "Partnership" is defined in the Partnership Act 1892 (NSW), s 1(1) as "the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership". It is common ground, as the primary judge found at PJ [159], that fundamental to such a relationship is a binding contract between the partners to conduct the relevant business together.
2. For a partnership to exist three conditions must be satisfied: first, a business must be carried on; second, it must be carried on by persons in common; and third, it must be conducted with a view to profit. The Partnership Act, s 1B defines the expression "business" as every "trade, occupation or profession".
3. The existence of a partnership must be determined by an examination of the parties' contract and the course of dealing between them: AM Marketing Pty Ltd v Howard Media Pty Ltd [2010] NSWSC 803 at [82] (Barrett J), citing Lindley LJ in Badeley v Consolidated Bank (1888) 38 Ch D 238 at 258. In Hurst v Bryk [2002] 1 AC 185 at 194, Lord Millett said: … While partnership is a consensual arrangement based on agreement, it is more than a simple contract (to use the expression of Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 476). It is a continuing personal as well as commercial relationship.

Primary judge's reasons

1. After noting that there was no evidence of any express communication, oral or written, between Mr Warner and Mr Kugel at the time the practice was established which formally defined the roles being played by them and CWK, and taking into account the prior course of dealings between Mr Warner and Mr Kugel, the primary judge found that their relationship was a partnership, concluding at PJ [171]: … I think it is clear from the actions of Mr Warner and Mr Kugel, and their communications with the staff and clients, in September 2007, that their intention was to establish a new two-person practice and associated company acting as trustee of a unit trust of the same type which had previously existed for the CWS practice. In effect, Mr Warner and Mr Kugel were to enjoy the same relationship with each other in the CWK practice as Mr Warner, Mr Sanderson and Mr Kugel had enjoyed in the former CWS practice. It is therefore relevant to ask what the nature of that earlier relationship was.
2. Addressing the effect of the involvement of CWK, given the stated intention of Mr Warner and Mr Kugel that the practice would be conducted "through" a company acting as trustee of a unit trust, his Honour found at PJ [175]: I think the starting point is that the income of the CWK practice consisted of fees earned from insolvency administrations conducted by Mr Warner and Mr Kugel. It was Mr Kugel and Mr Warner personally who held the appointments, and they personally were entitled to the fees. This was reflected in the fact that fees were paid by drawing cheques in the names of Mr Warner and Mr Kugel, such cheques then being endorsed over to CWK Pty Ltd. It is clear that Mr Warner and Mr Kugel intended from the outset that the practice's income would derive from their personal fee-earning capacity. There is no challenge to this finding, which is plainly correct, and accorded with the evidence given by Mr Kugel in cross-examination and the business records of the CWK practice, in particular, the description of "Appointee Fees" in the payment vouchers and the drawing of cheques in favour of Mr Warner or Mr Kugel personally and the subsequent endorsing of those cheques to CWK.
3. His Honour found that Mr Warner and Mr Kugel intended that they would practice in common because they had carried through to the CWK practice their intention reflected in the heads of agreement for the CWS practice that income from their insolvency appointments would be shared and they would not be entitled to practice on their own individual accounts: PJ [176]. As to indicators of the existence of a partnership, his Honour found that CWK was not entitled to practice as a liquidator or trustee in bankruptcy, it had no entitlement to receive any fees out of the administrations and the tax invoices issued by it were incorrect because CWK was not supplying the relevant services: PJ [177]. Again, these findings are not challenged.

Submissions

1. The Warner interests contended that the primary judge erred in finding a partnership because the CWK practice was carried on by CWK as the corporate trustee of the CWK Unit Trust, not by Mr Warner and Mr Kugel personally.
2. It was said that the conduct of the parties in implementing corporate and unit trust structures, the terms of the trust deed (cl 99) and the use of CWK as the corporate trustee of the unit trust in the conduct of the business to limit personal liability and minimise tax, was inconsistent with the existence of a partnership. The submission went so far as to contend that the "practical reality is that [WIP] is an asset of the trust, despite not being recorded as such in the financial records of the trust", that is, the CWK Unit Trust.

The existence of a partnership

1. Plainly, a business was carried on by the CWK practice, and it was conducted with a view to profit. The first and third conditions for the existence of a partnership were satisfied. What is in dispute is the second condition for the existence of a partnership: was the CWK practice carried on by persons in common, or was it carried on by CWK as the corporate trustee of the unit trust?
2. The starting point in determining the parties' intentions is the finding that Mr Warner and Mr Kugel derived income personally as company administrator, liquidator and trustee in bankruptcy for work done in those capacities. Whilst this finding was not directly challenged, the Warner interests pointed to the fact that CWK issued invoices which requested payment by cheques made payable to CWK itself. The invoices are not determinative. Of greater significance is who performed the work, as reflected in the payment vouchers and fee cheques drawn by staff employed by CWK in favour of the relevant "appointee", Mr Warner or Mr Kugel as the case may be. Importantly, as counsel for the Warner interests acknowledged, only the insolvency practitioner is entitled to receive remuneration as a priority payment in the relevant administrations: see s 556(1)(de), Corporations Act 2001 (Cth) for a liquidator; ss 443D(b) and 556(1)(c), Corporations Act for a company administrator; and s 109, Bankruptcy Act for a trustee in bankruptcy.
3. In endorsing fee cheques to CWK, Mr Warner and Mr Kugel were not paying those amounts to CWK as their employer; it was acknowledged that they were not employees of CWK, as his Honour found at PJ [186]. Nor were they endorsing fee cheques to CWK as their principal; it was accepted that there was no evidence that they acted as agents for CWK and no case was run below that this was how the relationship worked; cf Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1.
4. In the present case, there were no contractual relationships between CWK and the relevant insolvent companies or bankrupt estates which obliged CWK to provide any services or entitled them to any remuneration from those companies or the bankrupt estates. In its Trust tax return, CWK described its main business activity as "Business consultant service". CWK itself was not conducting the business of administering insolvent corporate and personal estates.

Scope of the partnership

1. Ground 3 contends that the primary judge erred in finding that the business of the partnership included, relevantly, acting as administrator of Pt X arrangements. It is common ground that the WIP of Debtfree in respect of Pt X arrangements unbilled as at 22 September 2014 is about $81,000.
2. According to the submission, even assuming the existence of the partnership, Mr Warner and Debtfree have no obligation to account for the Pt X income received by Debtfree from Mr Warner, because Shazbot transferred its one share in Debtfree to Warner Capital on 22 September 2014. The submission continued that by transferring Shazbot's share in Debtfree, Mr Kugel relinquished any claim that he had qua partner against Debtfree.
3. The primary judge found that the scope of the partnership between Mr Warner and Mr Kugel included the Pt X arrangements, of which Mr Warner was trustee, as this work involved the personal exertion of Mr Warner. His Honour said at PJ [213]: It remains to consider the fees signed over by Mr Warner to DF for acting as administrator of Part X arrangements. Unlike the fees derived from debt agreements under Part IX, DF had no right itself to receive those fees. The appointment as Part X debt administrator was personal to Mr Warner. In my view, the fees for conducting those operations were partnership income, for essentially the same reasons that the income of the CWK practice was partnership income and not income of CWK Pty Ltd.
4. The finding that Debtfree had no right itself to receive the fee cheques for acting as administrator of Pt X arrangements which Mr Warner endorsed to Debtfree is not directly challenged. No argument was advanced at trial that Mr Warner was the agent of Debtfree for the purpose of administering the Pt X arrangements and liable to account to his principal for the income from that work. There was no error in finding that the income from the Pt X arrangements was derived by Mr Warner and that the insolvency business involving Pt X arrangements was within the scope of the partnership. Ground 3 should be rejected.

Notice of contention

1. In view of the above conclusions, it is not necessary to address the matters raised by the Kugel interests in pars 1, 1A, 2 and 3 of the amended notice of contention relying upon the alternative pleading in the 2FASOC of a joint venture, or the alleged dissolution term of the alleged partnership or joint venture agreed in September 2007, as pleaded in par 17.11 of the 2FASOC.

(2) Breach of fiduciary duty by Mr Warner

1. The primary judge found that the transfer of the one share held by Shazbot in Debtfree for $1.00 on 22 September 2014, represented a very substantial undervalue and that, unknown to Mr Kugel, Debtfree had not declared a dividend and therefore had retained the profits made in the year ending 30 June 2014, and there would have been further profits attributable to the period up to 22 September 2014: PJ [228].
2. Whilst finding that the transaction was effective at law, his Honour also found that the facts of this case closely parallel those in Brunninghausen v Glavanics, and continued at PJ [232]: In my opinion, the facts of this case so far as they concern DF closely parallel those in Brunninghausen v Glavanics. Mr Warner was the sole director of DF. He therefore had exclusive control over the payment of dividends. He was responsible for managing the accounts of DF along with the other aspects of the practice. He arranged for DF not to pay a dividend in the hope that Mr Kugel would not notice, and he did not. Mr Kugel trusted Mr Warner on this subject. When Mr Warner put forward the resolution and the transfer at a figure of one dollar he must have known that this was much less than the value of the share at the time. He did not draw it to Mr Kugel's attention and Mr Kugel did not focus on it. Mr Kugel was no doubt distracted by the undertaking to pay out the assets and liabilities of the practice. In my opinion, equity would not permit Mr Warner to take advantage of the sale at this price. Mr Kugel was in a vulnerable position, and had been put in the vulnerable position by Mr Warner.
3. His Honour noted that Mr Kugel and Shazbot did not expressly make the case that the transfer of the shares in Debtfree was procured by breach of fiduciary duty of the type in Brunninghausen v Glavanics, but found that the case as pleaded, did include that Mr Warner's conduct of the business of Debtfree was subject to fiduciary obligations, either of a partnership or of a joint venture nature, and the conduct of Mr Warner in failing to draw to Mr Kugel's or Shazbot's attention that the transfer price of $1.00 was much less than the current value of the Debtfree share was a breach of fiduciary duty: PJ [233].
4. His Honour said that the case for breach of duty was put as a claim for equitable compensation and that Shazbot was entitled to elect between an account of profits or equitable compensation: PJ [234]. As mentioned, Shazbot elected to claim an account: SJ [51]. It was common ground that the account of profits will effectively represent a half share of the value of Debtfree as at 22 September 2014, after an adjustment to take account of the Pt X income for which Debtfree is required to account to the partnership: SJ [53].

Submissions

1. The Warner interests contended that the primary judge erred in finding that Mr Warner breached fiduciary duties owed to Shazbot essentially for two reasons: 1. all allegations of breach of duty were abandoned in the final pleading in the 2FASOC, and no case was pleaded or run on the basis of breach of duty of any type; 2. no case was advanced that Mr Warner owed fiduciary duties to Shazbot in its capacity as a shareholder of Debtfree, and no relief was sought in the nature of equitable compensation or an account of profits.

Brunninghausen v Glavanics

1. Although the legal principles are not in dispute, it is necessary first to say something about breach of fiduciary duty of the type found in Brunninghausen v Glavanics, particularly given that the High Court has spoken firmly against the imposition of prescriptive fiduciary obligations: Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 at 113; Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 at 197-198, Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [74], and Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [31], [32].
2. Brunninghausen v Glavanics involved a claim for breach of fiduciary duty owed to the plaintiff-shareholder by the defendant who was effectively the sole director and the majority shareholder in connection with the sale of the plaintiff's shares to the defendant. The defendant had purchased the plaintiff's shares at a price well below the price that a third party was willing to pay, without telling the plaintiff about the existence of that offer. The primary judge found that the defendant owed the plaintiff a fiduciary duty, which had been breached in the sale of his shares to the defendant and awarded equitable compensation. The defendant appealed.
3. Handley JA (Priestley JA and Stein JA agreeing) identified at [97]-[98] the particular circumstances of the case that gave rise to the fiduciary obligation owed by the director to a shareholder: (a) the plaintiff was effectively a disenfranchised, minority shareholder, locked into the company and any attempt to insist on his rights as a director would have led to his removal; (b) the plaintiff therefore was almost totally powerless; he had no legal rights as a shareholder to inspect the company's books of account or financial records; (c) while he was entitled to copies of the annual accounts, realistically he chose not to exercise that entitlement, and importantly, that alone would not provide any real guide to the value of his shares; (d) he had no effective right to be informed of the negotiations for the sale of the company's business by the defendant; (e) the defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff in terms of disclosing, if he saw fit, information about the pending negotiations for the sale of the business but could not be compelled to do so.

The pleaded case

1. The Kugel interests' pleaded case was that Mr Warner had promised to provide to Mr Kugel a "full account of all of the assets of the Partnership" and that in reliance upon that promise, Mr Kugel agreed, among other things, to transfer Shazbot's share in Debtfree to Warner Capital. That case was rejected by the primary judge on the basis that he was not satisfied that Mr Warner made a promise to that effect: PJ [149], [152], [155].
2. If a Brunninghausen v Glavanics type claim for breach of fiduciary duty was to be relied upon, it ought to have been specifically pleaded to enable the Warner interests to identify the case that they had to meet: Uniform Civil Procedure Rules 2005 (NSW), r 15.1(1). The pleading in the 2FASOC did not do so. All allegations that Mr Warner owed statutory and fiduciary duties to Mr Kugel qua partner and owed duties as a director and officer of Debtfree, were abandoned in the final pleading.
3. To the extent that his Honour found that "the case as pleaded did include the allegations that the business of [Debtfree] was subject to fiduciary obligations, either of a partnership or of a joint venture nature", that was an error. Consistently with no Brunninghausen v Glavanics case being advanced, the claim for equitable compensation, which had been included in previous pleading amendments, was abandoned in the final pleading in the 2FASOC.
4. It follows that the primary judge erred in making findings adversely to Mr Warner on a case which had not been pleaded or run at trial. Grounds 5 and 6 are made out. Accordingly, order 8 should be set aside.

Errors in the factual findings

1. I have considered whether grounds 7 and 8 should be resolved, although unnecessary to the outcome of the appeal: see Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12]; and Boensch v Pascoe [2019] HCA 49; (2019) 94 ALJR 112 at [8], [101]. These grounds challenge his Honour's factual finding of breach of fiduciary duty and conclusion as to the available relief. Given that the matter was fully argued, and there remains the possibility of further appeal, I will indicate my views.
2. The finding of breach of fiduciary duty by Mr Warner was based on three matters: (a) that as sole director of Debtfree, Mr Warner had exclusive control over the payment of dividends and had arranged for Debtfree not to pay a dividend for the year ending 30 June 2014 "in the hope that Mr Kugel would not notice, and he did not"; (b) that when Mr Warner put forward the resolution and transfer of the share for a nominal consideration of $1.00, he must have known that this was much less than the value of the share at the time and he did not draw it to Mr Kugel's attention and Mr Kugel did not focus on it; and (c) that Mr Kugel was "no doubt distracted by the undertaking to pay out the assets and liabilities of the practice"; Mr Kugel was in a vulnerable position and had been put in that position by Mr Warner: PJ [232].
3. As to (a), his Honour correctly found that the intention of Mr Warner as sole director of Debtfree not to pay a dividend in the 2014 year was disclosed by Mr Warner to Mr Maurice Watson on 19 May 2014: PJ [104]. It seems, however, that when later addressing the issue of non-payment of dividends by Debtfree, his Honour overlooked the evidence that Mr Watson was the accountant for both Mr Kugel and Shazbot.
4. The circumstances in which the knowledge of an agent is to be imputed to the principal were explained by Mason J in Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 at 658: As against a third party the law imputes to a principal knowledge gained by his agent in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal, under such circumstances that it is the duty of the agent to communicate it to the principal. This principle is applicable to Mr Warner's communication to Mr Watson in his email of 19 May 2014. His Honour erred in disregarding this disclosure by Mr Warner.

Notice of contention

1. Anticipating the possibility that the finding of breach of fiduciary duty might not be not upheld on appeal, the Kugel interests sought leave at the hearing to amend their notice of contention by adding a new par 4 in the following terms: 4. The second respondent, alternatively the first respondent, is entitled to 50% of the value of the cash/retained earnings of Debt Free, given the share in Debtfree was transferred to the first appellant in reliance on the promise that the second appellant would account to the second respondent for the cash/retained earnings of Debt Free.
2. The Court refused leave to include par 4 in the amended notice of contention and indicated that to the extent reasons are necessary they would be provided in the Court's reasons for judgment. The matter can be dealt with briefly.
3. The contention in par 4 is based on an unconscionable conduct case. According to the submission, whilst his Honour did not find that Mr Warner made a promise to Mr Kugel at the 22 September meeting to account for the entirety of the assets, including the value of WIP, his Honour did find a promise had been made by Mr Warner to account for the cash of the business. It was said that in reliance upon this narrower promise, Mr Kugel caused Shazbot to transfer its share in Debtfree to Warner Capital.
4. There are three difficulties with this contention. First, no unconscionable conduct case of this nature was pleaded. Second, Mr Kugel did not give evidence of reliance upon such a narrower promise. Third, no findings were sought or made by the primary judge on the issue of reliance by Mr Kugel, which would have required credit findings.
5. It is well-established that a party is bound by its conduct of its case and should not be permitted to raise a new argument which, whether deliberately or by inadvertence, it failed to put during the hearing when it had an opportunity to do so: Rowe v Australian United Steam Navigation Co Ltd (1909) 9 CLR 1 at 24; [1909] HCA 25; University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481; [1985] HCA 28 at 483; Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 647 (Mason P, Gleeson CJ and Priestley JA agreeing). The objection by counsel for the Warner interests to the addition of par 4 to the amended notice of contention should be upheld.

(3) The abandoned WIP withholding case

1. In their final pleading, the Kugel interests abandoned the allegation that prior to 22 September 2014 Mr Warner had purposely withheld, or failed to take all reasonable steps to realise, the "WIP Assets". The "WIP Assets" were defined in par 34 of the 2FASOC as comprising, as at September 2014, WIP generated and recorded in relation to personal debt agreements administered by Mr Warner which had not yet been billed, and WIP generated and recorded in respect of insolvency appointments, including all personal insolvency appointments, administered by either Mr Kugel and Mr Warner which had not yet been billed.
2. The primary judge found that a fee run had been done in February 2014 for both the corporate insolvency and personal insolvency administrations, and that subsequent fee runs were done for the corporate insolvency administrations in June and September 2014: PJ [104]. There is no challenge to these findings.
3. The primary judge further found that Mr Warner took steps to cease paying out monies from the personal insolvency side of the practice and he ensured that no fee run was done for the personal insolvency administrations (after February 2014): PJ [104]. The latter finding is challenged by ground 9 on the basis that this allegation had been expressly abandoned, and in any event, the finding was not open to be made on the evidence.
4. The Warner interests submitted that affidavit evidence on this issue from Ms Jasmine Low had been served and arrangements had been made for her to be cross-examined by video link from London on 8 February 2018. Ms Low was responsible for billing WIP for bankruptcy administrations in which Mr Warner had been appointed trustee in bankruptcy.
5. The affidavit sworn by Ms Low gave an explanation for the delays in those billings. Reference was made to Mr Warner being on holidays for three weeks in July 2014, that Ms Low and another person assisting her had been busy with other work in July and early August 2014 completing annual estate (bankruptcy) returns for the Australian Financial Security Authority and that she was away for two weeks in September 2014. In [8] of her affidavit, Ms Low said: At no time did [Mr] Warner instruct me not to bill the bankruptcy clients. Any delay in billing the bankruptcy clients arose from work pressures applicable to me at the time.

Decision

1. Mr Warner was cross-examined at trial in relation to his initial offer to Mr Kugel on 19 September 2014 that Mr Kugel take the liquidation business and Mr Warner take the bankruptcy, Pt X administrations, and Debtfree business. Mr Warner accepted that he was aware that the WIP had not been drawn in the bankruptcy matters as at July 2014, that he had not taken any steps to draw down the bankruptcy WIP, and that he was going to "walk away" with the bankruptcy WIP, if Mr Kugel agreed to his initial offer. He also agreed with the negative proposition that was put to him: Q: You didn't instruct, did you, your staff to bill the WIP in the bankruptcies in July of 2014? A: No.
2. Importantly, the affirmative proposition - that Mr Warner gave an instruction to staff not to bill the WIP in the bankruptcy matters in July of 2014 - was not put in cross-examination. Nor did the cross-examination address who was responsible for generating such billings, which would have brought to prominence the role of Ms Low and the significance of the abandonment in the pleading of the purposely withholding WIP allegation.
3. On the second day of the trial, counsel for the Warner interests informed his Honour that, given the abandonment of the issue to which Ms Low's evidence was directed, her evidence was no longer required. In those circumstances, the previous orders made for Ms Low to give evidence by video link were vacated.
4. In closing oral addresses at trial, a submission was made by counsel for the Kugel interests that Mr Warner "deliberately" did not draw fees in the bankruptcy administrations. Objection was immediately taken by counsel for the Warner interests. After some debate on the objection, which included the complaint by counsel for the Warner interests that the purposely withholding WIP allegation had been abandoned in the final pleading, and that the evidence from Ms Low dealing with this issue had not been adduced when that allegation was abandoned, counsel for the Kugel interests accepted that if the transcript did not record that the actual allegation was ever put to Mr Warner, then his Honour ought disregard the submission. (It seems that the full transcript was not then available.)
5. It cannot be accepted, as the Kugel interests submitted in this Court, that Ms Low's evidence was wholly inadmissible, or that leave would not have been granted to adduce oral evidence to address any successful objections, or that no weight could be given to her evidence, had it been adduced. Nor can it be accepted, as the Kugel interests submitted, that Ms Low's evidence would not have affected the assessment of Mr Warner's evidence, had he been cross-examined on the matter.

(4) Entitlements on dissolution

1. Partnership Act, s 39 provides: 39 Rights of partners to application of partnership property 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.
2. In Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7 at [40], Bell, Keane, Nettle and Edelman JJ said of s 50 of the Partnership Act 1895 (WA), which is in the same terms as s 39 of the New South Wales Partnership Act: Upon dissolution, but before the partnership is wound up, the partnership property will continue to be held by the legal owner on trust with a duty to sell. Once winding up is complete, and the interest of each partner in the share of the surplus can be identified, then, like the rights of legatees of a wholly administered estate, s 50 of the Partnership Act recognises the partners' right to the transfer of the net value of their entitlements from the person holding the surplus. (Citations omitted.) Gageler J said at [73]: Unless varied by the partnership agreement or otherwise by the consent of all partners, each partner has a right against all other partners to have all of the partnership property held and applied exclusively for the purposes of the partnership in accordance with the partnership agreement and, on dissolution of the partnership, to have the debts and liabilities of the partnership paid out of the partnership property and then to have the surplus applied in payment of what is due to the partners respectively under the partnership agreement . That right which a partner has against the other partners is itself property of the partner: it is an equitable chose in action. (Citations omitted.)

Principal judgment

1. Addressing the parties' entitlements on the dissolution of the partnership, the primary judge found that the parties agreed to dissolve their business relationship but did not make any specific agreement as to all the assets and liabilities of the partnership; in particular, they did not provide for the realisation of WIP: PJ [218]. His Honour rejected Mr Kugel's submission that there had been an express agreement by Mr Warner to account to him for the WIP and for the value of the Debtfree business, finding that there was never any express agreement concerning the value of the WIP and still less the value of Debtfree: PJ [226].
2. His Honour concluded that there was no binding agreement which prevented Mr Kugel from having partnership accounts taken in accordance with his entitlement under s 39 of the Partnership Act: PJ [221].
3. As to the scope of the account with respect to the WIP of the CWK practice, his Honour identified two stages to the analysis: first, to value the WIP accrued as at 22 September 2014, and second, to value what he described as "residual goodwill": PJ [239], [241].
4. As to the first stage, his Honour said that if, as at that date, monies were held in the relevant administration which could have been drawn upon, either immediately or upon the making of an application for remuneration, then the value of the WIP is its book value. Where insufficient monies were held in the administration, then the value of the work-in-progress would have to be discounted for the delay in recovery, or possible non-recovery. His Honour acknowledged that it may be appropriate to look at actual recoveries, referring to Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 at 293-295: PJ [239]. His Honour expressed the preliminary view that no just allowances would be appropriate: PJ [240].
5. As to the second stage, his Honour described this as the opportunity Mr Warner gained to earn further fees in future in taking over the matters, against which allowance must be made for the burden of completing the administrations which had insufficient assets to meet the administration costs which must be considered as a single "book": PJ [241]. His Honour continued at PJ [242]-[244]: [242] Had Mr Warner and Mr Kugel simultaneously become unable to practise and the partnership had been terminated on that account, it would have been necessary to dispose of the partnership business to a third party. Ignoring WIP accrued before the date of termination, some of the administrations might have represented liabilities, in that the completion of the administration would be likely to yield less than the cost of completing it. Other administrations might have been seen as likely to yield more, and might therefore have a "goodwill" value to an incoming practitioner. The question is what such an incoming practitioner would pay, or require to be paid, in those circumstances, for the whole "book" of uncompleted administrations, after allowing for WIP. This could be an asset or a liability depending on the overall value of the "book". Such an enquiry may not be worthwhile, but if either party requires it, I think it needs to be undertaken as part of the overall assessment. [243] Mr Warner was clearly content to allow Mr Kugel to take the benefit of the Insolvency Experts name and associated telephone number and domain names, in return for taking over the liquidations and insolvency matters. But if Mr Kugel seeks an allowance of the insolvency files, then Mr Warner is entitled to have the value of the Insolvency Experts intellectual property taken into account. [244] It will be recalled that the parties also agreed that Mr Warner would complete the official liquidations, on the basis that he would pay the necessary costs but would receive the benefit of anything obtained from Global One. Mr Kugel's conduct in having Mr Krejci appointed as liquidator and in waiving any entitlement to fees has deprived Mr Warner of the opportunity to receive funds from Global One. It seems to me that there will have to be an assessment of the amount which was recoverable for WIP on that administration up to 22 September 2014, and Mr Kugel will have to make an allowance in favour of Mr Warner for this.

Second judgment

1. In his second judgment, his Honour noted that the parties had agreed on the distribution of many of the other assets of the business between them but unless the parties agreed to limit its scope (and they had not) there must be a full accounting which covers all of the assets and liabilities of the partnership, not just the WIP: SJ [15].
2. His Honour rejected the parties' proposal that the Court should appoint a referee under UCPR, Pt 20, Div 3 and instead determined to appoint a receiver, given what his Honour referred to as the nature of the process of winding up a partnership: SJ [16]-[27].
3. His Honour refrained from giving directions as to the approach to valuation in the accounting for assets and liabilities of the partnership as at 22 September 2014, except the question of how to deal with CWK's "book" of insolvency of administrations, including the WIP accrued as at 22 September 2014: SJ [32].
4. Consistently with the view expressed in his principal judgment, his Honour found that it is necessary to separate the insolvency "book" into two components, the first being the income collected from the WIP accrued as at 22 September 2014, and the second being the "additional goodwill" in the form of an opportunity to earn further fees, from taking over the outstanding administrations: SJ [37].
5. His Honour considered that given the lapse of time since the partnership was dissolved most, if not all, of the WIP which can be recovered will have been. Accordingly, the appropriate course was to require an account to be undertaken by reference to the collections actually made: SJ [38].
6. His Honour continued at SJ [38]: 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.

Submissions

1. Assuming that the partnership finding is not set aside, the Warner interests submitted that any assessment of the value of WIP of the partnership as at 22 September 2014 should have regard to actual receipts and payments, rather than simply applying an arbitrary discount to gross WIP recorded for each insolvency appointment as at 22 September 2014. The submission continued that the "actuals" approach should be applied, not only with respect to collections, as his Honour found at SJ [38], but also with respect to expenses incurred after 22 September 2014.
2. In oral argument, counsel for the Warner interests said: We simply say that in such unfunded administrations that required further work to be done with no remuneration, one should look at what work was required to be done? How long did it take and what's it worth? That should be deducted from the value of the overall book or work in progress as at September 2014. before clarifying that this submission is only directed to the second element of the valuation exercise identified by the primary judge, described as residual "goodwill". That is, the complaint is limited to the finding at SJ [43] that an assessment of the value of goodwill "… does not require any analysis of the level of expenses in fact incurred after that date [22 September 2014] by Mr Warner".
3. As to the cross-appeal, the Kugel interests submitted that his Honour erred in finding at SJ [39], as foreshadowed at PJ [239], that the appropriate course in relation to the first stage of the analysis is to require an account be taken by reference to collections actually made.

Decision

1. Although the expert valuation evidence from the accountants was not tendered at trial as this issue was hived off by his Honour, it is useful first to give an indication of the quantum of the dispute as outlined by counsel in this Court.
2. The Warner interests say that their expert's report prepared in November 2016, quantified the actual collections of WIP as about $770,000 for liquidation matters and $780,000 for bankruptcy matters. They accept that there have been further collections since then. It is said that against the value of collectible WIP there needs to be deducted the costs to complete those administrations where there were no funds or insufficient funds to pay WIP; and that such costs total $1.16 million for liquidation matters and $720,000 for bankruptcy matters, and thus overall the valuation of WIP is a negative number.
3. The Kugel interests say that their expert's report quantified WIP in two components: $991,396.81 for amounts able to be drawn in liquidation and bankruptcy matters at 22 September 2014 or shortly thereafter, and $990,559.56, being 50 per cent discount of the remaining WIP for liquidation and bankruptcy matters on a "swings and roundabouts" approach.
4. As noted, it is common ground that the actual collections of WIP for the Pt X arrangements in the Debtfree business are about $82,000.

Collectible WIP

1. It is convenient first to address the issue raised by the cross-appeal. This challenges his Honour's methodology for the first stage of the valuation of WIP of the CWK practice accrued as at 22 September 2014. The Kugel interests say that actual collections are irrelevant to the valuation of WIP. I do not agree.
2. The relevant question is the value of an asset of the CWK practice, namely the WIP accrued as at 22 September 2014. That valuation question requires an assessment of the amount of WIP which was collectable as at 22 September 2014. In Kizbeau, the High Court noted at 293 that courts frequently assess questions of value or damages on the basis that "where facts are available they are to be preferred to prophecies" even though those facts occur after the date at which the value or damages will be assessed.
3. That approach was correctly adopted by his Honour in the present case. A prime example why the account should be undertaken by reference to the collections actually made would be if creditor or Court approval of the insolvency practitioner's remuneration is for an amount less than the unbilled WIP as at 22 September 2014.
4. A specific example where actual collections should be taken into account, concerns the Pt X arrangements conducted through Debtfree, which his Honour found were part of the partnership business. With respect to the administration of the personal insolvency agreement of Mr Craig Gore under Pt X, as at 22 September 2014 that matter apparently had WIP of $54,456.99, however, none of this was collected and the funds held in this administration were transferred to Mr Gore's new trustee in bankruptcy, Mr Greg Maloney, pursuant to court order in 2015: Warner v Mayfair Limited, In the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441.
5. There was no error in his Honour declining to allow the Warner interests a general deduction for later business expenses by Mr Warner, for the reasons given at SJ [42]: see [150] above. The qualification by his Honour for a deduction in relation to expenses specifically referable to the collection of particular fees was appropriate.
6. Grounds 1, 2 and 3 of the cross-appeal should be dismissed.

"Goodwill"

1. "Goodwill" has been described as a rather elusive concept: Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163 at [66], citing Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [54]. Isaac v Dargan Financial Pty Ltd involved the protection of goodwill under a covenant in restraint of trade. The Court (Gleeson JA, Bathurst CJ and Beazley P agreeing) said of "goodwill" in that context at [66]: Goodwill has been referred to as the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it: Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42 at [24]. It has been said that it is more accurate to refer to goodwill as having sources than being composed of elements, given that goodwill is to be seen as adding value to a business "by reason of" situation, name and reputation, and other matters, not because goodwill is composed of such elements: Federal Commissioner of Taxation v Murry at [24], citing Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 235 (Lord Lindley). It has also been recognised that many of the sources of goodwill are not themselves property, nor assets for accounting purposes: Federal Commissioner of Taxation v Murry at [25].
2. Lindley & Banks on Partnership (20th ed, 2017, Sweet & Maxwell) states at [10.223] that given its intangible nature, it is difficult to produce a precise definition of "goodwill" citing, among others, Trego v Hunt [1896] AC 7 at 16-17 (Lord Herschell). The current author noted that Lord Lindley explained: The term goodwill can hardly be said to have any precise signification. It is generally used to denote the benefit arising from connection and reputation; and its value is what can be got for the chance of being able to keep that connection and improve it. Upon the sale of an established business its goodwill may have a marketable value, whether the business is that of a professional man or of any other person. But it is plain that goodwill has no meaning except in connection with a continuing business; it may have no value except in connection with a particular house, and may be so inseparably connected with it as to pass with it under a will or deed without being specially mentioned. In such a case the goodwill increases the value of the house; but the value of the goodwill of any business to a purchaser depends, in some cases entirely, and in all very much, on the absence of competition on the part of those by whom the business has been previously carried on.

Utility of appointing a receiver

1. At trial neither side urged the primary judge to appoint a receiver. Their preferred choice was the appointment of a referee to undertake the account. That was rejected by his Honour for the reasons already mentioned: see [143] above.
2. In this Court, neither side sought to uphold the order appointing a receiver. The parties' preferred approach is that the inquiry as to the income collected by each side from the WIP as at 22 September 2014 and the partnership's assets and liabilities on dissolution, including any valuation questions, be determined by a judge. There is merit in that course.
3. The partnership came to an end nearly six years ago. Mr Warner has had the de facto administration of the winding up in large part, whilst Mr Kugel has a much smaller role in relation to six liquidations and the receipt of limited assets. As his Honour noted, the WIP has been largely collected. Beyond ascertainment of the value of the WIP, there seems to be little, if any, dispute as to the other assets and liabilities of the partnership. On the other hand, the costs of a receiver will be considerable. And there is the prospect of further applications to the Court for directions in relation to issues arising if the receiver takes the accounts.
4. In my view, there is no present utility in the appointment of a receiver. This case is one in which the description by Young CJ in Eq of the partnership dispute in Cuming v Hennessy [2005] NSWSC 1219 at [15] concerning the appointment of an interim receiver is apt: … I would have thought that if the parties were using only the commercial part of their brains, and not the emotional part of their brains, there would not be too much difficulty in working out a system whereby work in progress and allied matters could be finalised in a far more inexpensive way than by putting in a receiver. ...
5. The preferable course is that a judge conduct the inquiry on the taking of accounts. That course is likely to be the most efficient and cost effective manner of determining the remaining matters in dispute.

What orders should be made?

1. The primary judge correctly noted that unless both parties agree to limit its scope (and they have not) there must be a full accounting which covers all assets and liabilities of the partnership: SJ [16]. That remains the case. However, the parties should be given one further opportunity to narrow their dispute. If they fail to take that opportunity, then the additional cost and delay of a full accounting cannot be avoided, but the parties will only have themselves to blame.
2. At the conclusion of the hearing, the Court directed the parties to provide a joint note identifying their cases as to the assets to be valued and the valuation principles to be applied. There is a measure of agreement as to the assets to be valued. The difference between the parties as to the valuation reflected their competing arguments on appeal, which have been addressed above.
3. As to narrowing the dispute concerning the assets to be valued, it is convenient to extract the relevant part of the parties' joint note. Adopting the explanation of the different text, the position of the parties is as follows: 2. In this note: (a) plain text is text inserted by the appellants or is otherwise not to contest; (b) bold text is text inserted by the respondents; and (c) underlined text is text inserted by the appellants in reply. Assets to be valued 3. On the assumption that there was a partnership between Messrs Warner and Kugel and that the assets of the partnership included all business undertakings operated by or "through" CRS Warner Kugel Pty Ltd (the third appellant, now known as Clarence Street Partners Pty Ltd ("CWK Pty Ltd")) and Debtfree Pty Ltd ("Debtfree") (insofar as Part X Bankruptcy Act 1966 (Cth) administrations are concerned), the following assets are to be valued as at 22 September 2014 on the basis that the assets would be sold to a willing but not too anxious buyer: [The words "on the basis…buyer" are unnecessary as this paragraph deals with the identification of assets to be valued, not the approach to valuation.] (a) all work-in-progress from both the corporate liquidations and personal bankruptcies unbilled as at 22 September 2014, in the gross amount of $2,971,723.93; (b) work-in-progress of Debtfree Pty Ltd (the fourth appellant) in respect of Bankruptcy Act Pt X administrations unbilled as at 22 September 2014, in the gross amount of $81,063.53; (c) the cash in Debtfree from the conduct of the Part X administrations, as at 22 September 2014 comprising billed work in progress, which was found to be part of the business of the partnership and is not relevant to the Brunninghausen findings; [This is predicated upon the respondents succeeding in defending the primary judge's Brunninghausen findings and is therefore not agreed. Further, no account is taken of any liabilities of Debtfree at that time.] (d) work-in-progress of the liquidations that were transferred to Mr Krejci (an official liquidator) in mid-2015 unbilled as at 22 September 2014 (which comprises part of 3(a)); (e) the "Insolvency Experts" intellectual property (website, business name and telephone number ) transferred to Shazbot Pty Ltd (the first respondent) between 24 September 2014 to 29 October 2014; and (f) other intellectual property and assets of the partnership. [This is not agreed. The appellants addressed this issue before the primary judge, who determined that the identification of assets would be a matter for any receiver. ]

Conclusion and costs

1. The Warner interests have achieved some success on appeal to the extent of setting aside the order that Mr Warner account to Shazbot for the value of its share in Debtfree as at 22 September 2014. They have also succeeded in setting aside the withholding WIP allegation, but this is not material to the relief obtained by the Kugel interests.
2. As to costs of the appeal, given the proportion of time spent on the issues on which the Warner interests succeeded and their relative significance to the overall likely monetary outcome compared to the issues on which they failed, I would be inclined to order the Warner interests pay 60 per cent of the Kugel interests' costs of the appeal.
3. As to the cross-appeal which has failed, there seems to be no reason why costs should not follow the event: UCPR, r 42.1.
4. Given the mixed result on appeal, the parties should be afforded an opportunity to make submissions on costs in this Court, with the issue being determined on the papers.
5. As to costs of the proceedings below, it seems that no costs order was made on 16 September 2019, and the Warner interests did not seek any order in that regard in their amended notice of appeal. For the avoidance of doubt, the question of costs of the proceeding below is to be determined by the primary judge.

Orders

1. I propose the following orders: 1. Appeal allowed in part as to grounds 5, 6, 7, 8 and 9(a)(i) and (c)(i). 2. Cross appeal dismissed. 3. Set aside orders 4, 5, and 8 made by the primary judge on 16 September 2019. 4. Vary orders 6 and 7 made by the primary judge on 16 September 2019 by deleting the words "to the Receiver" wherever appearing in orders 6(a), (b), (c) and 7(a) and (b). 5. Order that it is a condition of the relief granted by the primary judge on 16 September 2019, as amended by order (4) above, that Shazbot Pty Ltd transfer to Warner Capital Pty Ltd its share in CRS Warner Kugel Pty Ltd and its units in the CRS Warner Kugel Unit Trust. 6. Remit the matter to the primary judge for the taking of accounts, with the following directions: 1. within 21 days of these orders, the parties' legal representatives are to confer and attempt to reach agreement as to the quantum of each item of income the subject of the account and the value of the assets and liabilities of the Partnership Firm as at 22 September 2014 (as defined in order 1 made on 16 September 2019), and to file a document recording the extent of any agreement as to the account required to be given by the plaintiffs and the defendants respectively; 2. within 42 days of these orders, to the extent that the parties are unable to agree on narrowing the scope of the account: 1. 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; 2. 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; 3. direct that the items of each said account shall be numbered consecutively; 4. 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. 1. the primary judge shall give such further directions with respect to the inquiry as considered necessary. 1. Direct the parties to file and serve short written submissions (not exceeding five pages) on the question of costs of the appeal and cross-appeal as follows: 1. appellants' submissions within 7 days; 2. respondents'/cross-appellants' submissions within a further 7 days; 3. appellants'/cross-respondents' submissions in reply (if any) within a further 5 days. 1. For the avoidance of doubt, the question of costs of the proceedings below is to be determined by the primary judge.

Amendments 26 June 2020 - [12], [152] 03 July 2020 - Amendments made to [184], [191(5)] 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: 03 July 2020