Isenberg v The Law Partnership [2001] NSWSC 243

New South Wales Supreme Court

CITATION : Isenberg v The Law Partnership [2001] NSWSC 243 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 5118 of 1998 HEARING DATE(S) : 16 February and 16 March 2001 JUDGMENT DATE : 5 April 2001

Normal Saul Isenberg (First Plaintiff) Nan's Enterprises Pty Limited (Second Plaintiff) The Law Partnership Pty Limited (First Defendant) PARTIES : Graeme Philip Player (Second Defendant) Grant Edward Spedding (Third Defendant) David Jonathon Catts (Fourth Defendant) Borlob Pty Limited as Trustee of The Borlob Property Trust (Fifth Defendant) JUDGMENT OF : Windeyer J at 1

COUNSEL : Mr W Haffenden (Plaintiffs) Mr C A Moore (Defendants) KNPW Lawyers (Plaintiffs) SOLICITORS : Blake Dawson Waldron (Fifth Defendant) The Law Partnership (First, Second Third and Fourth Defendants) CATCHWORDS : PARTNERSHIP - dissolution and winding up - s44 Partnership Act 1891 - whether moneys lent in name of company appearing in books in that name were to be treated as a loan from a partner LEGISLATION CITED : Partnership Act 1892 s44 DECISION : See paragraph 14

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J

THURSDAY 5 APRIL 2001

5118/98 NORMAL SAUL ISENBERG & ANOR V THE LAW PARTNERSHIP PTY LIMITED & ORS

JUDGMENT on Notice of Motion filed 4 December 2000

1 The question for decision arises in partnership proceedings. Messrs. Isenberg, Player and Spedding entered into partnership as solicitors on 1 July 1986 under the name "ISP Law". The partnership was dissolved on 31 August 1998. Mr Andrew Wily was appointed receiver of the partnership assets by court order on 15 February 1999. It seems that the three former partners are locked in bitter dispute with Mr Isenberg being on one side and Messrs Player and Spedding on the other. The issue to be determined pursuant to the notice of motion, is whether a loan of $150,000, which appears in the books of the partnership as a loan from the second plaintiff, Nan's Enterprises Pty Limited, is entitled to rank in priority for payment with external creditors of the partnership. Facts 2 Section 44 of the Partnership Act 1892 provides rules for distribution of assets on final settlement of accounts of a partnership. Liabilities of the firm to persons not partners are payable in priority to debts due to partners for advances. Clause 30(e)of the partnership agreement was to the same effect. 3 It seems that the partnership was successful for a period, but was under considerable financial pressure in 1995 and 1996 when there were negotiations with Westpac Banking Corporation and suggestions that the firm's banking business might be transferred to the National Australia Bank. There were discussions among the partners as to the possible sale of their individual assets and the making of loans to the partnership by each of them. It became clear that Mr Player had no ability to provide moneys, even after the sale of his home. Mr Spedding apparently arranged to sell a home unit which he owned to his father and after that sale to pay the net proceeds of sale to the partnership by way of loan. Nan's Enterprises Pty Limited is a company of which Mr Isenberg is a director and a shareholder. His wife is the other director and shareholder. The company acts as trustee for certain trusts and holds assets on its own account. It owned, on its own account, a home unit property at Dee Why, which at least by October 1995, it proposed to sell. Mr Isenberg said he told Mr Player at a meeting on 17 October 1995 that when the unit was sold: "It may be able to lend some money to the partnership providing that terms were agreed". There is some dispute about that, but I accept that in general to be the terms of what was said. The unit was sold pursuant to contract of sale dated 15 January 1996, the sale being settled on 26 February 1996. The sum of $152,933.82 received from the sale was placed by Nan's Enterprises Pty Limited on term deposit with the National Australia Bank. 4 There was a meeting of the partners on 1 April 1996. There is a dispute about what took place and what was agreed at that meeting and I will return to that. At that time Nan's Enterprises Pty Limited withdrew $150,000 from the deposit with the National Australia Bank by cheque made payable to ISP Law. The cheque was handed to the accountant or bookkeeper at ISP Law and on 2 April 1996 a receipt was issued. This set out that the money was received on account of Nan's Enterprises Pty Limited and was received from Nan's Enterprises Pty Limited as a loan at eight percent per annum, interest payable on twenty-eighth day of each month. Thereafter interest was paid from 1 May 1996 to 31 October 1996 by cheques drawn in favour of Nan's Enterprises Pty Limited and between 1 November 1996 and 31 October 1998 by automatic bank transfer to the account of that company with National Australia Bank. 5 In all accounts and balance sheets of the partnership after the $150,000 was received there was shown under the heading of "Non-Current Liab-Loans-Assoc" in an entry as follows "unsecured loan - Nan Enterp P/L $150,000". Under the same heading were also shown unsecured loans from partners' family trusts and from partners these latter, either being shown as unsecured loan "B" or unsecured loan "C". So far as the "B" items were concerned, these were moneys lent to the partnership by individual partners. So far as the "C" loans were concerned, these were apparently moneys borrowed by partners from outside sources and lodged with the partnership. The agreement was then that interest would be paid on the "C" loans at the same rate as was payable by the partners to the third party money provider. No objection to the relevant entry was ever raised. 6 If there were no other evidence it is clear that a finding would have to be made that Nan's Enterprises Pty Limited should be paid in priority to the partners. All documentary evidence points to the moneys having been lent by that company and the partners treating that to be the position. There is no evidence that Nan's Enterprises Pty Limited agreed to furnish the funds on any basis other than that which would apply at law in the absence of agreement. Whatever may have been said by Mr Isenberg, it is not claimed and there is no evidence it was said under authority of or on behalf of the company. Thus the position must be that unless Mr Isenberg himself borrowed the moneys from Nan's Enterprises Pty Limited and on-lent those moneys to the partnership, and there is no evidence he did, then the company is entitled to be paid in priority. That really disposes of the matter and makes it unnecessary to deal further with what happened on 1 April, but as a great deal of attention was given to that aspect of the matter, it is perhaps best to say something about it. 7 On 31 March, Mr Isenberg had produced a memorandum which was headed "Suggestion re debt and drawings" addressed to his partners. So far as the debt was concerned, it stated: Interest Norm put in $150K = $1,000 pm (not wait for new bank arrangements) Same terms as GS $110K = $733.33 pm Repayable on demand ?? Interest at 8% pa paid monthly in arrears by automatic bank tfr on 28th day of each month @ 1/12 x 8% = 2/3 % pm 8 There was a meeting of the partners on 1 April. The memorandum was discussed. Mr Spedding said that he had lent $110,000 to the partnership. Mr Isenberg's version of what happened next was that he said that Nan's Enterprises Pty Limited could put in $150,000 from the term deposit on interest at eight percent, payable monthly in arrears with the rates of interest and dates of payment to be the same as for Mr Spedding's loan. He said that was agreed. 9 Messrs. Player and Spedding insist that Mr Isenberg was talking in the first person about lending $150,000 with his loan to be on the same terms as Mr Spedding's. Mr Spedding made a note at the meeting, one of the items being "NI 150K agreed - on demand till all new bank locked in". There was discussion at the meeting as to whether or not the loans were to be repayable on demand and clearly it was agreed that there was no means of repaying them until some particular work was gained or the office premises sold. 10 The next day Mr Player wrote a memo to the accounts department which, among other things, contained the following: Please implement within the accounts system the following matters resolved by the partners on 1 April 1996. 1. Within the next few days Norm will be depositing to the I.S.P. Law overdraft the amount of $150,000 as an interest bearing loan to be treated similarly as the $110,000 loan made by Grant before Christmas. Both of these loans are to be paid interest at the rate of 8% per annum calculated monthly in arrears and now to be paid by automatic bank transfer on the 28th of each month . I believe that the interest on Grant's loan was recently brought up to date and paid on 21st March. I had previously stated that this interest payments would then be made on the 21st of each succeeding month. Please now countermand this instruction and pay interest on both Norm's and Grant's loans on the 28th . The first payments under the new arrangement will fall due on 28th April. Both of these payments will need to be adjusted on a pro rata basis. Thereafter, the respective monthly interest payments will be $733.33 per month for Grant and $1,000 per month for Norm. Hopefully, in advance of the second payment due on 28th May we will have sorted out our ongoing banking relationship with Westpac or some other Bank and a monthly automatic debit authority can be entered into for these payments to come out automatically thereafter. Pauline/Shauna please check with Norm who is lending the money on his behalf whether it is him personally, his wife or his family company/trust. The Loan account should be opened in the appropriate name and the payment will need to e made to the appropriate account nominated by Norm. I believe that you now have details of the bank account from Grant to which his monthly payments are to be made. If not, please check this with him. 11 Mr Isenberg naturally places reliance on the fifth paragraph. His former partners place reliance on the first and second paragraphs. That is because Mr Spedding had put in $110,000 and of course his loan was a partner's loan, so that if Mr Isenberg were putting in $150,000 on the same basis, or which was to be "treated similarly" then it is argued that it must be treated as a personal loan by Mr Isenberg. 12 So far as this dispute is concerned I have come to the conclusion that it is more likely than not that Mr Isenberg was speaking in the first person, but there must have been some reference to the source of funds. This is consistent with the written material in evidence and with the partnership circumstances which existed at the time. It is unlikely that any consideration was given to the priority status of the loan under the heading "same terms". 13 The difficulty with all of this however is that it has never been shown that Nan's Enterprises Pty Limited advanced moneys to Mr Isenberg for the purpose of his advancing them to the partnership. Even if Mr Isenberg agreed to bring this about there is no evidence which goes towards establishing that Nan's Enterprises Pty Limited was part of this arrangement. Without such evidence the loan must be treated as a non-partner loan to the partnership as it has always appeared in the partnership accounts. 14 Orders