Rowlands v MacDonald [2002] NSWSC 282

New South Wales Supreme Court

CITATION : Rowlands v MacDonald [2002] NSWSC 282 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1023/00 HEARING DATE(S) : 05/04/02 JUDGMENT DATE : 11 April 2002

Sandra Lyn Rowlands - Plaintiff PARTIES : Deborah Gai MacDonald - First Defendant Kathryn Kay Bishop - Second Defendant JUDGMENT OF : Barrett J

COUNSEL : Mr N.A. Cotman SC - Plaintiff Mr D.E.J. Ryan SC - First Defendant SOLICITORS : Teece, Hodgson & Ward Lane & Lane - First Defendant CATCHWORDS : PARTNERSHIP - dissolution and winding up - effect of provision that retirement of partner does not dissolve as to other partners - whether court should order taking of accounts or appointment of receiver - factors relevant to appointment of receiver Fitz-Gibbon v Khoury (unreported, NSWSC, 1 March 1985) Floydd v Cheney [1970] Ch 602 Henry v Stewart (unreported, NSWSC, 9 June 1995) CASES CITED : Sobell v Boston [1975] 1 WLR 1587 Tate v Barry (1928) 28 SR (NSW) 380 The Anderson Group Pty Ltd v Davies (2001) 19 ACLC 1112 Wedge v Wedge (1994) 12 WAR 489 DECISION : Receiver appointed

- 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BARRETT J

THURSDAY, 11 APRIL 2002

1023/00 – ROWLANDS v MACDONALD & ANOR JUDGMENT 1 The parties to these proceedings (whom I shall call "Ms Rowlands", "Ms MacDonald" and "Ms Bishop") are sisters, being the daughters of the late Donald Grant MacDonald and Nancy Dardenelle MacDonald. The parents and the three daughters became parties to a partnership agreement dated 1 July 1965 regulating a farming and grazing partnership of which they were the members, styled "D G MacDonald & Co (Walgett)". It is accepted, I think, that, at all times material for immediate purposes, the daughters alone continued as partners under that agreement as amended by a subsequent agreement dated 25 March 1997. 2 The principal proceedings centre upon a dispute as to whether a residential property at Paddington occupied by Ms MacDonald is a partnership asset; and as to whether some partners had dealt with partnership assets in a manner inconsistent with their duties as partners. Currently before the court are competing notices of motion seeking interlocutory relief. Ms MacDonald seeks the appointment of a receiver of the partnership business. Ms Rowlands seeks an order for the taking of accounts of the partnership as at 24 December 2001. A claim by Ms Rowlands for injunctive relief on an interlocutory basis is no longer pressed. 3 Most of the partnership assets have been sold, or, at least, are in the final stages of being sold. I leave to one side here property the status of which as partnership assets is in dispute. 4 It is appropriate to begin with the question whether the partnership has been dissolved, that being a matter in issue between the parties and one which has relevance to the interlocutory relief the court is asked to award in the exercise of its discretion. Apart from the partnership agreement itself, the only matters having a bearing on this question are two notices. The first is a notice given by Ms MacDonald to Ms Rowlands and Ms Thomas on or about 19 September 2001 ("the September notice"). The other is a notice given by Ms Rowlands to Ms MacDonald in March 2002 ("the March notice"). 5 The content of the September notice is as follows: "In accordance with the terms of the Partnership Agreement dated 28 March 1997 I hereby give you three month's [sic] notice of my retirement from the partnership. My retirement will be effective on 24th December 2001. In accordance with the provisions of clause 2 of the 1 July 1965 agreement, incorporated into the 28 March 1997 Partnership Agreement, the partnership will be determined and dissolved on that day." 6 The content of the March notice is as follows: "Pursuant to your notice dated 19 September 2001 giving notice of your retirement pursuant to clause 2 of the DONALD GRANT MACDONALD (WALGETT) PARTNERSHIP AGREEMENT dated 25 March 1997 (incorporating the agreement dated 1 July 1965) (the 'Partnership Agreement'), such retirement having taken effect on 24 December 2001, I SANDRA LYN ROWLANDS one of the two continuing partners of the DONALD GRANT MACDONALD (WALGETT) PARTNERSHIP (the 'Partnership') give notice that I do not intend to exercise the option granted to me by clause 23 of the Partnership Agreement to purchase your share of the Partnership. I will now give instructions to Ferrier Hare, Chartered Accountants, the accountants for the Partnership, to prepare a full and general accounting of the Partnership as at 24 December 2001, and to calculate and provide a certificate of the value of your interest in the Partnership as at the date of your resignation in accordance with clauses 21 and 24 of the Partnership Agreement." 7 Clause 2 of the partnership agreement, being the provision referred to in the September notice, is as follows: "Any partner may at any time retire from the partnership on giving not less than three month's [sic] notice to the other partners and leaving same at the place of business of the partnership. At the expiration of such notice the partnership shall determine accordingly and thereupon the provisions of clauses 21, 23 and 24 of this agreement shall apply". 8 Clause 21 applies upon "the determination or dissolution of the partnership". The consequence produced by notice under clause 2 is, according to the terminology of that clause, "determination" ("… the partnership shall determine …"), so that clause 21 operates not only by the directive to that effect in clause in 2 but also by its own terms. Clause 21 takes effect if both of two conditions are satisfied in any case of determination or dissolution: first, "no other arrangement is made"; and, second, "the option of purchase given to the partners be not exercised". 9 The second of these conditions refers, clearly enough, to a right of purchase conferred by clause 23 on the other partners if any partner dies or retires. The right is conferred on "the continuing or surviving partners". It is a right for "such of them as shall so desire" to "purchase in such shares as they shall mutually agree upon the share of such deceased or retiring partner". The right is exercisable, in a case of retirement, by notice in writing given to the retiring partner "within three calendar months after the … retirement of such partner". Clause 24 specifies the manner of determining the price to be paid in the context of such a purchase. 10 Assuming that clause 2 has caused the partnership to determine in consequence of Ms MacDonald's retirement and that the retirement occurred more than three months ago (an assumption to which I shall return), it can be said that the conditions referred to in clause 21 have been satisfied. On the evidence, there has been "no other arrangement" among the three partners. In addition, the other partners (that is, Ms Rowlands and Ms Bishop) have not attempted or purported to exercise the clause 23 right. Ms Rowlands expressly stated in the September notice that she did not intend to exercise and, on the assumption I have just stated, it is now too late for either Ms Rowlands or Ms Bishop to do so. On that basis, clause 21 is now in operation in such a way as to require a full accounting to be taken, realisation of the partnership property, payment of debts and distribution of surplus among partners. 11 The scheme created by clauses 2, 21, 23 and 24 is self-contained and coherent and, if the agreement stopped there, there would be no difficulty. But an element of difficulty or uncertainty is introduced by clause 26: "The death retirement expulsion bankruptcy or insanity of a partner shall not be deemed to dissolve the partnership as to the other partners." 12 In the event of retirement as provided for in clause 2, that clause itself causes the partnership to "determine". The consequences of realisation of assets, payment of debts and distribution of surplus follow pursuant to clause 21 only if "no other arrangement is made" and none of the non-retiring partners exercise the clause 23 right to buy the retiring partner's share. Those consequences are at odds with the indefinite continuation of a relationship of partners among the non-retiring partners. The effect of clause 26 in such a case must, it seems to me, be to cause such a relationship to continue among those non-retiring partners for the limited purpose of accommodating either any "other arrangement" to which all partners commit themselves or the carrying on of the partnership business as partners by those, if any, of the non-retiring partners by whom it is to be purchased in consequence of exercise of the clause 23 right; whereas if there is no "other arrangement" and no exercise of the clause 23 right, there is no work left for clause 26 to do. 13 Unless clause 26 is, in this particular context, read in that way, it not only cuts across the clearly intended operation of clause 21 but does so in an illogical way. It cannot possibly be intended that the non-retiring partners simply carry on as a reduced partnership without purchase by them of the retiring partner's share or some other arrangement agreed by all. There is no room for any notion that a partner retiring under clause 2 departs empty handed and the others automatically succeed to that partner's share by virtue of clause 26. 14 I return to my assumption that, as a result of the giving of the September notice, Ms MacDonald's retirement occurred more than three months ago and caused the partnership to determine. It is clear that the September notice conveys "not less than three months notice" but there is some ambiguity as to the time of "expiration of such notice". This is because the document not only says, "I give you three month's notice …" but also states, "My retirement will be effective on 24 December 2001". The expiration of the period of notice may therefore have been either 19 December 2001 or 24 December 2001. 15 In the context of the present applications, it is not necessary to decide between these possibilities. The important point is that clause 2 operated to cause the partnership to "determine" on either 19 December 2001 or 24 December 2001. The September notice was given more than six months ago and the determination pursuant to clause 2 occurred more than three months ago. As a consequence and in the absence of either some other arrangement among the three partners or exercise by either or both of the other two of the right to purchase Ms MacDonald's share, clause 21 is now operative and, given the sequence of events that clause prescribes, I consider the correct characterisation of events to be that the partnership has been dissolved. 16 The conclusion that there has been a dissolution brings into play a need for due and orderly winding up. Before deciding, in the context of the possibilities currently before the court, which is the desirable way of achieving that result, I proceed to review the evidence over and above the agreements, the September notice and the March notice. 17 The principal evidence adduced on the hearing of the present applications is contained in an affidavit of Ms MacDonald and an affidavit of Ms Rowlands' solicitor. The latter affidavit does no more than to annex correspondence. 18 Ms MacDonald relates some of the more recent history of the partnership business. At the beginning of the period relevant to the proceedings, Ms Bishop, by agreement of the other partners, acted as manager and resided on the property. She had also advanced to the partnership a sum of $400,000. Ms McDonald states that she found it very difficult to obtain information about the business while Ms Bishop was the manager. Ms MacDonald afterwards took action to obtain from Macquarie Bank, with which the partnership conducted an account, details of cheques drawn by Ms Bishop on that account. She did this in relation to what she calls "a very small sample of cheques" and, she says, discovered several examples (she mentions four) of cheques drawn for apparently personal expenses of Ms Bishop yet recorded in the partnership books as applicable to ostensibly partnership and business purposes. Thereafter, Ms MacDonald obtained from Macquarie Bank copies of every cheque that could be found drawn by Ms Bishop on the partnership account. She then analysed the cheques and discovered, she says, that a total sum of $198,684.82 had been applied towards Ms Bishop's personal expenses while being shown business expenses of the partnership in its records. 19 In December 1998, Ms Bishop left the property. Ms Rowlands afterwards appointed an outside manager and, it is said, gave him instructions that he was to report to her only and not to forward any reports to Ms Bishop or Ms MacDonald. 20 In September 2000, Ms MacDonald tried to obtain from the National Australia Bank copies of all past bank statements for the partnership account with that bank. The reply from the bank branch was that Ms MacDonald was not entitled to the information as Ms Rowlands was the only signatory and had instructed the bank it was not to forward copies of the statements to Ms MacDonald. Ms Mac Donald then took the matter up with the area manager in Dubbo and, as a consequence of that, the account was closed on 16 January 2001. 21 Another matter on which evidence is given by Ms MacDonald concerns apparent intermingling of partnership funds by Ms Rowlands with her own funds (this relates to a sum of $65,868 received for cattle sold to a Mr Keech), where the sum appears to have been paid in the first instance into Ms Rowlands' bank account and afterwards transferred from that account to the partnership account. Ms MacDonald also deposes to events of February 2001 concerning five separate cheques for a combined amount of $200,000, being proceeds of the sale of stock and crops by the partnership. She deposes to having discovered that those five cheques were paid into a fully drawn credit facility account of the partnership with Primary Industries Bank of Australia, without first passing through the partnership bank account. When Ms Rowlands was asked where the cheques had been and who had had control of them, she replied, "They have been in a drawer". 22 On 9 January 2002, Ms MacDonald received from Macquarie Bank a statement showing that $200,000 had been transferred from the partnership account to another account with Macquarie Bank. She made contact with Macquarie Bank and in due course established that the cheque represented a payment made to Ms Bishop on the authority of Ms Rowlands and Ms Bishop. 23 Ms MacDonald further relates matters from which she has formed a suspicion that partnership moneys may be kept in an account with the ANZ Bank held in the name of Ms Rowlands alone. 24 On the hearing of the applications, neither of the other parties sought to adduce evidence contradicting any part of Ms MacDonald's account, although she was closely cross-examined by counsel for Ms Rowlands. 25 I turn now to the correspondence, being correspondence among the solicitors for the respective parties (by which I mean Ms MacDonald and Ms Rowlands, as Ms Bishop is apparently no longer represented) and the partnership's accountant, Mr Ferrier of the firm Ferrier Hare & Associates. It is clear from this correspondence that there is general recognition that the partnership has come to the end of its useful life and that the issues to be resolved concern the best way of cutting remaining ties so that the partners may go their separate ways. At one stage, it was proposed that the accountant, Mr Ferrier, should act as an informal receiver to effect a winding up. However, it appears that Mr Ferrier is having difficulties obtaining information about partnership transactions undertaken by Ms Rowlands. A letter he sent to her on 3 April 2002 states that, as she is aware, he is unable to finalise the partnership financial statements and tax return for the year ended 30 June 2001. He goes on to ask that Ms Rowlands provide details of stock purchased and sold during the year, stock on hand at year end and trade and sundry debtors and creditors as at year end. This letter, it will be noted, was written more than nine months after the end of the financial period. In it, Mr Ferrier says that there is "some urgency to finalise the 2001 figures". 26 A general characterisation of the present position is that it is one of mistrust and stand-off. Two of the partners, Ms MacDonald and Ms Rowlands, appear to communicate only through lawyers. There is some evidence that Ms Rowlands and Ms Bishop caused $200,000 of partnership funds to be paid to Ms Bishop without Ms MacDonald's knowledge. There is some evidence that Ms Bishop may have used partnership funds to meet personal expenses to the extent of almost another $200,000 and that this occurred not in any open way which might be consistent with a practice of partners charging personal items to the firm on the basis of later reimbursement but, rather, in a way which involved misdescription of expenditure items in the partnership's books to make them look like partnership expenses. There is some evidence that Ms Rowlands has taken partnership funds into her own separate bank account and allowed substantial cheques received for the partnership to remain unbanked in a drawer and that some partnership funds may be held by her in an account with the ANZ Bank opened in her sole name without the knowledge or consent of the other partners or, at least, one of them. Added to all this, an attempt to have Mr Ferrier act as a de facto or informal receiver to bring the financial relationship of the parties to a conclusion appears quite clearly to have failed and he is apparently having difficulty in obtaining information needed to complete the financial statements and tax return. 27 I turn now to the law. In Tate v Barry (1928) 28 SR (NSW) 380, Long Innes J said: "It must now, I think, be regarded as settled that in a suit instituted in Equity for the winding up of a partnership already dissolved, or for the dissolution of an admitted partnership in which it is clear that dissolution will be granted at the hearing, the plaintiff is entitled as a general rule, and practically as a matter of course, to the appointment of an interim receiver: Baxter v West 28 LJ Ch 169." 28 Given my finding that this partnership is in a state where clause 21 is in operation unaffected by clause 26, the general principle is applicable here. But the remedy remains discretionary and it was emphasised by Powell J in Fitz-Gibbon v Khoury (unreported, NSWSC, 1 March 1985) that the court must pay attention to the surrounding circumstances: "This general rule notwithstanding, it is equally well established that it is not inevitable that, in any such case, an interim receiver and manager will be appointed, and that the Court retains a residual discretion as to whether any appointment should be made; one of the bases upon which, in an appropriate case, an appointment will be refused, is that the consequences of such an appointment will be 'ruinous' (see, for example, Walters v Taylor (1807)15 Ves 16; 33 ER 658; Tate v Barry (1928) 28 SR (NSW) 380; Sobel v Boston [1975] 2 All ER 282)." 29 The "ruinous" concern manifests itself principally in cases where, following the dissolution which is the occasion for the application for appointment of a receiver, some or all of the partners will conduct business with the aid of the existing goodwill. In Henry v Stewart (unreported, NSWSC, 9 June 1995), a case involving dissolution of a partnership of solicitors where two groups intended to continue practising separately, Cohen J recognised as a factor material to the exercise of the court's discretion the "fact that the appointment of a receiver may cause unjustified concern to those who have dealings with the partners or their new firms". His Honour referred to Floydd v Cheney [1970] Ch 602 and Sobell v Boston [1975] 1 WLR 1587. These concerns play no part where, as here, the enterprise in which the partners have been involved will not be continued by any of them. 30 In the present case, two particular factors point strongly towards the appointment of a receiver. The first is that the parties are in what can properly be regarded as a state of serious dispute making resolution through co-operation sufficiently problematic to warrant the introduction of a third party. The relevance of that factor to the exercise of the court's discretion is recognised in Wedge v Wedge (1994) 12 WAR 489. The second matter is the evidence suggesting that there may have been irregularities in the partnership's financial affairs, with accounting records misdescribing entries and the intermingling of partnership moneys with those of individuals. Possibilities of that kind were material to the decision to appoint a receiver in The Anderson Group Pty Ltd v Davies (2001) 19 ACLC 1112. The factors in both these categories to which I have referred must very seriously call into question the ability of the partners themselves to reach an accounting. 31 In my judgment, an order of the kind Ms Rowlands seeks for the taking of accounts of the partnership is not sufficient in this case. The difficulty the partnership accountant is already experiencing in obtaining crucial information makes that clear. There is a need for the assets to be taken into the protection of the court. I therefore propose to make an order appointing a receiver as Ms MacDonald seeks. The circumstances are not such as to warrant the appointment of one of the partners as receiver. Mr Silvia's consent to act has been tendered and it will be appropriate that he be the appointee. However, as it was made clear to me at the conclusion of the hearing that there would be submissions as to the detailed form of the orders were I to reach this point, I shall defer making orders until I have heard further submissions. **********