New South Wales Supreme Court CITATION : ACE Project Group Pty Limited & Anor v Ginger Development Enterprises Pty Limited & (2) Ors [2006] NSWSC 962 HEARING DATE(S) : 04/09/2006 and 05/09/2006 JUDGMENT DATE : 4 October 2006 JURISDICTION : EQUITY DIVISION JUDGMENT OF : Lloyd AJ CATCHWORDS : PARTNERSHIP AGREEMENT: – joint venture agreement – dissolution of agreement– continuing liabilities and obligations after dissolution – calculation and distribution of profits – winding up partnership – implied authority to deal with asset – costs incurred in winding up reasonable or necessary LEGISLATION CITED : Partnership Act 1892 ss 26, 32, 38 Real Property Act 1900 s 74J ACE Project Group Pty Limited & Anor v Ginger Development Enterprises Pty Limited & Ors [2005] NSWSC 1379 CASES CITED : Crown Developments Australia Pty Ltd v Ginger Development Enterprises Pty Ltd [2003] NSWSC 593 Crown Developments Australia Pty Ltd v Ginger Development Enterprises Pty Ltd [2003] NSWCA 296 ACE Project Group Pty Limited - First Plaintiff ACN 082 232 479 Shan Ruan - Second Plaintiff PARTIES : Ginger Development Enterprises Pty Limited - First Defendant ACN 074 997 792 Yau Fong Yuen - Second Defendant Yuk Mui Kum - Third Defendant FILE NUMBER(S) : SC 5702 of 2002 COUNSEL : Mr J B Whittle SC and Ms J E Stuckey-Clarke (barrister) - Plaintiffs Mr A J L Ogborne (barrister) - Defendants SOLICITORS : Raymond Lee & Co - Plaintiffs Dennis Wong & Co - Defendants - 15 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Lloyd AJ Wednesday, 4 October 2006 5702/02 ACE PROJECT GROUP PTY LIMITED & ANOR v GINGER DEVELOPMENT ENTERPRISES PTY LIMITED & (2) ORS JUDGMENT 1 HIS HONOUR: The basic facts are set out in my interlocutory judgment of 7 October 2005 and need not to be repeated: ACE Project Group Pty Limited & Anor v Ginger Development Enterprises Pty Limited & Ors [2005] NSWSC 1379. Essentially the parties entered into an agreement to develop and then sell two residential development projects, one in Arden Street, Clovelly and the other in Crown Street, Surry Hills. My previous judgment identifies the documents that comprise the agreement between the parties and which in turn set out the terms of their agreement. I also answered a number of specific questions raised by the parties for separate determination. 2 After the completion and sale of the Arden Street project, but before the development of the Crown Street project proceeded, the parties had a falling out. The reasons for the falling out are not relevant. It is clear, however, that whether the agreement is described as a partnership or a joint venture agreement, it was dissolved when on 6 June 2001 the second plaintiff, Ms Shan Ruan, resigned as a director of the first defendant, Ginger Development Enterprises Pty Limited ("Ginger"), returned the company seal and duplicate certificate of title for the Crown Street land to the second defendant, Mr Yau Fong Yuen (who, with the third defendant, his wife Mrs Yuk Mui Kum, effectively controls Ginger) and thereafter neither she nor her company, the first plaintiff, ACE Project Group Pty Limited ("ACE") took any further part in the work of the joint enterprise. 3 The Crown Street land having now been sold, the questions which arise relate to the parties respective obligations towards outgoings and their respective entitlements to profits in the final taking of accounts. 4 The parties have consented to the accounts being taken on a partnership basis. Accordingly, the principles which govern the taking of accounts upon dissolution of a partnership are to be applied. Nevertheless, the parties and their respective accountants are at issue over several items in the accounts and this judgment deals with those issues. For the purpose of resolving the issues the parties have set out an agreed statement of issues. It is convenient to consider each issue in turn. 5 Before turning to the particular issues identified by the parties, I note that both sides rely upon s 38 of the Partnership Act 1892, which states that after the dissolution of a partnership the authority of each partner continues so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution. 6 Moreover, as senior counsel for the defendants notes in his written submissions, the principles explained in Lindley & Banks on Partnership (17th ed) at pars 25-52 to 25-54 apply, the main principles being that notwithstanding the dissolution the partners will be obliged to attend to any unfinished business, a partner may continue to be liable for the acts of his or her former co-partners in the winding up of the partnership affairs, the duties which each partner owes to each other continue whilst the partnership affairs are being would up, and a partner's capital contribution may carry income attributable thereto. Account must, however, be taken of any agreement between the partners. 7 I now consider each of the issues. (1) At what date was the partnership dissolved? 8 There are two possible dates. The first is 6 June 2001, when the events I have briefly described in par [2] above took place. The second is 27 November 2002, when these proceedings were commenced and the plaintiffs sought a declaration that the partnership was dissolved. 9 Although the agreement was to carry out two nominated residential development projects, it was open-ended as to time. It was thus either a partnership at will or a partnership for an unidentified time. Dissolution of such a partnership can occur on the giving notice to the other members of the partnership: Partnership Act, ss 26 and 32. 10 In my view the events which occurred on 6 June 2001 constituted a notice of retirement of the plaintiffs from the partnership, which caused a general dissolution of the partnership on that date. (2) Did the plaintiffs authorise the defendants to wind up the partnership? (3) Did the plaintiffs authorise the defendants to sell the Crown Street land as part of the winding up of the partnership? (4) If not, were the defendants entitled to sell the Crown Street land as part of the winding up of the partnership? 11 The action of Ms Ruan in resigning as a director of Ginger (which was the registered proprietor of the Crown Street land) and returning the company seal and the certificate of title to the Crown street land amounted, at the very least, to an implied authority to the defendants to deal with that asset, so far as may be necessary, in accordance with their obligations under a partnership which was being wound up. This included realising the asset by selling it, liquidating the partnership debts and having the surplus assets divided. (5) If any or all of questions 2, 3 and 4 above is or are answered in the affirmative, should all costs reasonably incurred by the defendants in winding up the partnership be allowed on the taking of accounts amongst the parties? 12 The question as asked must be answered "yes". The real question, however, is whether all the costs actually incurred by the defendants were either reasonable or necessary in the circumstances of this case. The defendants say they were. The plaintiffs say they were not. 13 The Crown Street land was put on the market in June 2001 and a contract for the sale of the land to Crown Developments Australia Pty Limited was entered into on 15 February 2002 for a price of $2.2 million. Completion of the sale was to take place within 70 days or on the 21st day after caveats affecting the land were withdrawn. This condition was apparently inserted because the plaintiffs had previously lodged caveats against any dealing with the property. 14 On 26 April 2002 the purchaser defaulted on settlement due on that date. Ginger promptly issued a notice to complete on 29 April 2002 requiring completion by 16 May 2002. However, on 29 April 2002 ACE lodged a third series of caveats against any dealing with the land. After notice of lapsing of the caveats the plaintiffs then lodged a fresh set of caveats. Throughout this time the defendants took active steps to have notices of lapsing of the caveats served so as to enable completion of the sale. This process of lodging fresh caveats upon the lapsing of previous caveats continued until 6 December 2002 when the last of them was withdrawn. 15 According to Mr Yuen, by early November 2002 he was frustrated by the fresh caveats being lodged by one or other of the plaintiffs, a situation which he regarded as insoluble. He sought advice through his then solicitors from Mr J R McKenzie of counsel as to whether Ginger could validly terminate the contract of sale. Mr McKenzie advised that there were grounds to do so. Accordingly on 27 November 2002 Ginger issued a notice of rescission. 16 On 11 December 2002 the purchaser, Crown Developments Australia Pty Ltd, commenced proceedings for specific performance of the contract. Based on the advice received from counsel, Ginger defended those proceedings. The matter was heard by Palmer J on 26 June 2003 and 27 June 2003, and in a reserved judgment delivered on 1 July 2003 his Honour ordered specific performance of the contract and ordered Ginger to pay the costs: Crown Developments Australia Pty Ltd v Ginger Development Enterprises Pty Ltd [2003] NSWSC 593. 17 Mr Yuen then sought advice from Messrs Ellicott QC, Jackson QC and Grieve QC as to whether Ginger could appeal with any prospects of success. Both Mr Ellicott QC and Mr Jackson QC were of the opinion that Ginger had good arguable grounds of appeal. Mr Grieve QC was apparently more equivocal. Based upon the opinions of Messrs Elliott QC and Jackson QC an appeal was lodged and heard on 16 September 2003. On 16 October 2003 the Court of Appeal dismissed the appeal with costs: Crown Developments Australia Pty Ltd v Ginger Development Enterprises Pty Ltd [2003] NSWCA 296. The contract for sale was thereafter completed on 11 November 2003. 18 The question now for determination is whether all or any of the costs and expenses incurred by Ginger during the period up to the completion of the sale were reasonably incurred in the winding up. The defendants say that they were, the plaintiff say they were not. 19 The plaintiffs say that after 6 June 2001 Ginger was effectively acting in its own interests in dealing with the land; the plaintiffs lodged the caveats in order to protect their interest; in seeking to have notices of lapsing of the caveats Ginger was asserting that ACE had no interest in the land; Ginger then resisted the suit for specific performance brought by a willing purchaser, which action by Ginger was directed to not selling the land. These, it is submitted, are not actions falling within s 38 of the Partnership Act as being necessary to wind up the partnership. 20 On 20 November 2002 the plaintiffs' solicitors sought an undertaking from the defendants' solicitors that the proceeds of settlement of the Crown Street property be held in a separate trust account and not be released pending resolution of the present dispute. No undertaking was given. 21 Mr Yuen gave evidence to the effect that he was always acting in the best interests of Ginger in the defendants' dealing with the land and that after the land was sold he could then work out the figures and finalise the relationship. The defendants submit that it was within the bounds of reasonable conduct of the sale to break the impasse by getting out of the contract and in doing so acting on the advice of counsel. The defendants submit that Ms Ruan was equally subject to a duty to facilitate the sale but she did not do that – she did the opposite, she frustrated the sale by lodging caveats against the dealings, so that holding costs mounted up, interest mounted up and legal costs mounted up. 22 Shortly stated, the plaintiffs say that the costs and expenses in holding and selling the land were the result of actions which were not reasonably necessary for the winding up of the partnership and so should not be deducted from the sale price for the purpose of calculating the profit but should be borne by the defendants. The defendants, on the other hand, say that all such costs were reasonably and necessarily incurred or alternatively, as I understand it, were caused by the conduct of the plaintiffs and the converse should apply. 23 In my view both parties are equally to blame for the blow-out in costs and expenses from the date of the contract for sale 15 February 2002 to the ultimate date of completion of that contract on 11 November 2003. 24 Section 74J of the Real Property Act 1900 states that a caveat shall lapse after a period of 21 days after notice of lapsing is brought, unless an order is obtained from the Supreme Court extending the operation of the caveat. That is, the caveator must establish its interest in the land to the satisfaction of the Supreme Court within the 21 days. No attempt was made by either plaintiff to assert their interest in land in the Supreme Court. They simply allowed caveats to lapse and then lodged another succession of caveats. There is no doubt in my mind that this had the effect of delaying matters until the last of the caveats was withdrawn on 6 December 2002. 25 The defendants were, in my view acting unreasonably in thereafter resisting the claim for specific performance brought by the purchaser. Here was a purchaser who was apparently ready, willing and able to complete the purchase. The whole saga could have been quickly finalised if the defendants had proceeded to settlement upon withdrawl of the last of the caveats. I accept the fact that the defendants had obtained legal advice to the effect that there were grounds for resisting the claim for specific performance, but instead they chose to litigate the matter when there seemed to have been no need to do so. If they had been successful in the litigation they would have had to find another purchaser and enter into another contract for sale, with further consequent delay. 26 The plaintiffs' conduct resulted in a delay of about 10 months (15 February 2002 to 6 December 2002) and the defendants' conduct resulted in a further delay of about 11 months (12 December 2002 to 11 November 2003). 27 In my view the costs occasioned thereby should be borne equally by the parties. For completeness I refer to the accounts prepared by the parties' accountants and the items listed as Ginger's expenditure and outgoings from 7 June 2001 to 11 December 2003 (Appendix "W" to the accounts, listed on page 4 of Exhibit A) and in my opinion all of these expenses, except for item 10 (travel expenses) should be borne equally by each side and so are allowable as expenses which are to be deducted from the purchase price of the land for the purpose of calculating the profits. There is nothing in the evidence to support the claimed travel expenses. Those expenses should not be deducted but should (if they were incurred) be borne by the defendants. 28 I should briefly comment about each of the other disputed expenses in Appendix "W" to the accounts and which all relate to post 7 June 2001 expenditure. Some items are clearly "one-off" items of expenditure which were payable irrespective of any delay and thus allowable as outgoings of the partnership. These are the items in Note 4 - $24,000, being commission paid on the sale of the Crown Street land; Note 5 - $49,408, being the costs of the development application and building application; and Note 7 - $7,867.75, being consultants fees. 29 The other items in Appendix "W" refer to expenditure of a generally recurring or continuing nature. The item for rates and taxes - $50,581.28 - would come within this category. But since I have found that each side has more or less equally contributed to the delay which occurred, they should each bear this cost and is an allowable of expenditure in the winding up of the partnership. The same comment may be made about Note 6 - building cleaning costs of $5,000, Note 9 - interest on the loan to the partnership from Mr and Mrs Yuen of $399,006, Note 12 - accounting fees of $13,480, and Note 16 - interest to purchaser of $11,384.32. The same comment applies to Note 8 on page 5 of Exhibit 1 relating to land tax of $61,119 for the full period – that is, the disputed proportion of $11,895 is an allowable expense of the partnership. 30 The legal expenses of $254,429.66 to which Note 9 refers should also, in my opinion, be an allowable expense in the winding up of the partnership. The parties' agreement provides that "solicitor's and accountant's fees" shall be deducted for the purpose of calculating the profits. Having regard to the fact that the parties themselves drew up the documents which represent the agreement, I infer that it was their intention by the use of the word "solicitor's" fees to include legal expenses generally. The fees in the present case were incurred by Ginger in attempting to remove the caveats lodged by the plaintiffs and in then defending the specific performance suit brought by Crown Developments Australia Pty Ltd. Moreover, the latter course was adopted upon the legal advice of highly respected and experienced junior and senior counsel. Although the greater proportion of the legal expenses relates to the latter course of conduct, it is likely that that would not have been incurred if the caveats had not been lodged in the first place. It would be an artificial exercise to apportion the blame between the parties and, as previously noted, they are both equally culpable for their part in the delay. 31 Note 3 relating to the sum of $14,469 being the penalty on cancellation of the vehicle lease is separately considered under issue (8) below. (6) As to Note 1 of the Expert Accountants' Joint Report ("the Joint Report"), is the $150,000 payment made in respect of the Arden Street project to the plaintiff properly characterised as part of the "design fee" or as an advance payment of profit due to the plaintiff? 32 There is a disputed item in relation to the calculation of the profits of the partnership prior to the dissolution on 6 June 2001. This item relates to the Arden Street project. The parties' respective accountants are unable to agree on how to treat an advance payment of $150,000 made to ACE. 33 The plaintiffs say that this was an advance payment within the meaning of paragraph 2(10) of the parties' agreement dated 5 April 1988 and so should be deducted from calculating the profits. The defendants say that this was not a payment within paragraph 2(10), but was an advance payment of the kind listed in paragraph 3 of that agreement and should not be deducted from calculating the profits. 34 I refer to the full text of the agreement of 5 April 1998 which is set out in par [6] of my interlocutory judgment. That document records the agreement reached by the parties. Paragraph 1 states that the apportionment of the future profits derived from the two projects shall be split 51% to Mr Yuen and his wife and 49% to Mr Ruan or her private company. Paragraph 2 specifies the method of calculating the profits by listing the deductions to be made from the sale of the properties. There then follows a list of eleven items of which the paragraph 2(10) reads: "Advance payments to Shan Ruan or her private company". Paragraph 3 lists the items of expenditure for which Ms Ruan or her private company were to be responsible and which is to come out of her 49% of the profits. The subparagraphs listed under paragraph 3 are: (1) The past salary payments paid by the company to Shan Ruan (2) All company vehicle expenses (including insurance). (3) All expenses of the company's employees. (4) All of the day-to-day expenses of the company, rents, electricity, telephone, printing, correspondence, etc. (5) The design fee already paid by Ginger to Shan Ruan's private company. 35 It is apparent from the evidence of both Ms Ruan and Mr Yuen that the payment of $150,000 which occurred in July 2000, was expressly said to be an advance payment of profits payable in relation to the Arden Street project although these profits had not been calculated. An equal payment of $150,000 was made on 11 July 2000 to Mr Yuen and his wife as an advance payment of profits. 36 In my interlocutory judgment of 7 October 2005 I held that paragrapgh 2(10) referred to advance payments of profits and that such payments were not to be deducted from Ms Ruan's 49% share of profits. The deductions from Ms Ruan's 49% share of the profits are those which are listed under paragraph 3 of the agreement noted above. 37 Senior counsel for the defendants submits that such a conclusion does not sit comfortably with the overall scheme of the agreement: paragraph 1 specifies the 51% and 49% split of profits, paragraph 2 sets out the method of calculating the profits and paragraph 3 specifies what expenditure Ms Ruan has to bear out of her own 49% share of profits. According to the submission, if the pre-payment of profit is made on account of profit yet to be ascertained, then it would disadvantage Mr Yuen and his wife – Ms Ruan would get the $150,000 plus 49% of the profits thereafter. That is to say, if the plaintiffs' view is accepted, the advance payment of profit to Ms Ruan would be treated as an expense of the partnership and not as a distribution of profits, which would defeat the intention of the 51% to 49% split in paragraph 1 and to the disadvantage of Mr and Mrs Yuen. The submission is that the parties expressly agreed to an interim distribution of profits – that is, a pre-payment of their respective entitlement under paragraph 1 of the agreement. 38 There is much force in the defendants' submission. I do not think, however, that the payment falls under paragraph 3 of the agreement – that is, it does not come within any of the categories listed in subparagraphs (1) to (5), as noted in par [34] above. It was expressly stated by the parties at the time to be an interim distribution of profit – not a payment by way of salary or design fee. In my opinion the contention of senior counsel for the defendants is to be preferred. That is, this particular payment must be treated as an advance payment of part of the 49% of profits due to Ms Ruan as noted by the parties at the time. This view is reinforced by the fact that there was at the same time an advance payment of profits to Mr Yuen and his wife in the same amount and which must be treated in the same manner. Whatever is meant by paragraph 2(10) of the agreement, it is not covered by this particular payment. (7) As to Note 2 of the Joint Report, are the salary payments properly characterised as forming part of "All expenses of the company's employees" within the meaning of Section 3.3 of Annexure H? 39 In the agreement of 5 April 1998, paragraph 3 lists those expenses which are to come out of Ms Ruan's 49% profit share, noted in par [34] above. One of these categories of expenditure is: "(3) All expenses of the company's employees". The reference to the company is a reference to Ginger - it is distinct from other references to Ms Ruan's private company. 40 The question posed by this issue relates to the payment of $25,757 salary to Mr Chen, who was Ms Ruan's partner in ACE and its predecessor A + C Design Team. 41 The defendants' accountant has deducted that salary payment paid by the company from the 49% profit owed to the plaintiffs on the basis that it constitutes "expenses of the company's employees" within paragraph 3(3) of the agreement. 42 The plaintiffs submit, however, that as a matter of plain English, a salary received by an employee is not an expense of that employee but income received by the employee – the natural meaning of the phrase "expenses of the company's employees" is a reference to the expenses incurred by the company's employees, such as transport, meals and accommodation. The plaintiffs further submit that if it were intended that salary payments to Mr Chen were to be deducted from the plaintiffs 49% of the profits, it would have been included under paragraph 3(1) which covers "salary" payments. The plaintiffs thus say that this item of expenditure should not be deducted from the plaintiffs' 49% share of profits. 43 The defendants submit that the agreement before the court is a translation from Chinese and it is necessary to look at the overall scheme of the agreement to assist in the interpretation of a particular provision. In this context the defendants submit that the phrase "All expenses of the company's employees" refers to any expenses incurred in employing those employees, including their salary and out-of-pocket expenses. 44 I think that the defendants' contention and that of their accountant is to be preferred. This seems to have been the understanding of Ms Ruan herself. Mr Yuen deposes to a conversation with Ms Ruan, which is not disputed by Ms Ruan, in par [16] of his affidavit of 18 March 2004 as follows: In about June 1997 whilst checking Ginger's bank statements it came to my attention that Ms Ruan and Mr Chen were drawing $2,168.80 fortnightly. I has a conversation with Mr Ruan in Chinese in words to the following effect: "Why are you taking this money out of Ginger's account each fortnight? That is not part of our agreement." She said: "It is called 'salary' paid by Ginger for tax purposes but I will treat these drawings as pre-payments of the fees payable at 10% of construction costs. They will eventually be deducted from the 10% design and management fees payable to A+C Design and from the 49% of the net profits." I said: "I am not happy about this. It is not what was originally agreed." I felt that as I had committed myself to the Arden Street Land project, I had no choice but to agree. 45 I conclude, therefore, that this item is to be deducted from Ms Ruan's 49% share of the profits. (8) As to Note 3 of the Joint Report, should the moneys be treated as company vehicle expenses within the meaning of section 3.2 of Annexure H? 46 The plaintiffs concede that the question should be answered "yes" and these expenses should be deducted from the 49% share of profits passing to Ms Ruan or ACE. (9) As to Note 11 of the Joint Report, were the legal costs incurred by the defendants reasonably incurred in the winding up of the partnership? 47 This issue has been considered in a general way under issue (5) above. The answer is "yes". (10) As to Note 13 of the Joint Report, should the interest calculation have been made on the basis that interest or capital should be repaid first? 48 The parties agree that in the absence of any agreement to the contrary, payments to a creditor where both principal and interest are due are first credited to interest and then to principal. The calculations made by the defendants' accountant on this basis should be accepted. (11) As to Note 17 of the Joint Report, did Ms Ruan authorise the payment of the accounting fees to Mr Wu? 49 This refers to a payment of $4,000 said to have been made to Mr Ka Lung Wu for the preparation and lodgement of Ginger's tax returns. Paragraph 2(7) of the 5 April 1998 agreement states that in calculating the profits a deduction should be made for "All solicitor's and accountant's fees". Mr Wu was the accountant to the joint venture at the relevant time. 50 The plaintiffs say that there is no source of documentation to support the payment other than a cheque butt. The relevant cheque butt was written by Ms Ruan. I think that is sufficient evidence to verify the payment. (12) As to Note 18 of the Joint Report, are these legal fees properly to be taken into account in calculating the profits of the partnership 51 This refers to an amount for legal fees. The plaintiffs accept that these legal fees are properly allowable in the accounting. There being no dispute about it, this item is to be taken into account as an expense of the partnership before net profit is calculated. Conclusion 52 Having answered the questions raised by the parties, I now expect that settled accounts will be able to be prepared for final approval and the making of final orders which will dispose of the proceedings. I reserve the question of costs, but express the hope that the parties may be able to agree on an appropriate order as to costs. I also reserve liberty to apply. The matter should be re-listed for mention or for the making of final orders. I hereby certify that the preceding 52 paragraphs are a true copy of the reasons for judgment herein of the Honourable Mr Justice D H Lloyd. Associate Dated: 4 October 2006 ********** 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.