New South Wales Supreme Court CITATION : Geltch v MacDonald & Anor [2007] NSWSC 239 HEARING DATE(S) : 16/03/07 JUDGMENT DATE : 20 March 2007 JUDGMENT OF : Gzell J DECISION : Defendants restrained from terminating lease, partnership agreement and allied agreements until further order. CATCHWORDS : LIQUOR LAW - Licensing - Poker Machine Entitlements - Property of partnership between plaintiff and defendants - Defendants lessors and partnership lessee of hotel - Whether defendants in breach of fiduciary duty of good faith in giving notice of intention to terminate the partnership and notice terminating the lease - Whether partnership prevented from dealing with the poker machine entitlements under terms in the lease and partnership agreement - Whether plaintiff should be confined to damages - Whether hardship and balance of convenience favour injunctive relief LEGISLATION CITED : Gaming Machines Act 2001 Chan v Zacharia (1983-1984) 154 CLR 178 Brenner v Rose (1973) 1 WLR 443 Murray & anor v Tovock Enterprises Pty Ltd [2005] NSWSC 377 CASES CITED : Helmore v Smith (1886) 35 Ch D 436 Jabetin Pty Ltd v Liquor Administration Board (2005) 63 NSWLR 602 Masters v Garcia (2005) 65 NSWLR 92 Masters v Garcia (No 2) [2006] NSWCA 15 Evans Marshall & Co v Bertola SA (1973) 1 WLR 349 Ian David Geltch - Plaintiff PARTIES : Rodney Peter MacDonald - First Defendant Doreen Elizabeth MacDonald - Second Defendant FILE NUMBER(S) : SC 1887/07 COUNSEL : Mr A Hatzis - Plaintiff Mr A Scotting - Defendant SOLICITORS : Deutsch Partners Lawyers Pty Ltd - Plaintiff DTA Lawyers - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J TUESDAY 20 MARCH 2007 1887/07 IAN DAVID GELTCH v RODNEY PETER MACDONALD & ANOR JUDGMENT 1 The plaintiff is in partnership with the defendants in the conduct of a hotel business. The partners were lessees of the hotel premises under a registered head lease. Since the partners did not exercise an option to renew the head lease, they have been holding over as monthly tenants since 1997. 2 The plaintiff and the defendants are directors and shareholders of Abtourk (Syd No 429) Pty Ltd. It was granted a sublease of the premises by the partners. A shareholders' agreement governs the respective rights and responsibilities of the shareholders. 3 The plaintiff entered into a management and operating agreement with the partnership and Abtourk governing his rights and responsibilities in the day-to-day management of the hotel business. 4 The plaintiff was nominated to hold the hotelier's licence by Abtourk. Each of the agreements is interrelated. 5 In 1993, the defendants purchased the freehold on which the hotel stands and thereby became the lessors under the head lease. 6 Over time, the partnership acquired 12 poker machines and 12 poker machine entitlements were made with respect to the hotelier's licence under the Gaming Machines Act 2001. 7 The defendants have given notice of intention to terminate the partnership and notices terminating the other agreements. The plaintiff seeks interlocutory injunctions restraining the defendants from terminating the lease, the sublease, the partnership agreement, the shareholders' agreement and the management and operating agreement. 8 The plaintiff argues that the poker machine entitlements allocated with respect to the hotelier's licence held by him are the property of the partnership, the defendants are duty bound to act in good faith with other members of the partnership and to terminate the agreements and the leases, with consequent transfer of the hotelier's licence to the defendants, constitutes breach of their fiduciary duty. Chan v Zacharia (1983-1984) 154 CLR 178 was cited in support of these propositions. 9 The defendants argue that they have a legal right, as lessors, to terminate the head lease. That right is independent of their fiduciary obligations as members of the partnership and they cannot be prevented from exercising that right as they could if they were strangers to the partnership. Brenner v Rose (1973) 1 WLR 443 was cited in support of that proposition. The defendants also argue that the terms of the head lease prevent the plaintiff from dealing with the poker machine entitlements. They submit that damages are an adequate remedy. They also submit that there is no utility in restraining them from terminating the agreements because the partnership agreement requires a majority vote to dispose of partnership property and they are opposed to the transfer of any of the poker machine entitlements. Reference was made to Murray & anor v Tovock Enterprises Pty Ltd [2005] NSWSC 377. 10 In my view a serious question to be determined at trial is whether the poker machine entitlements were partnership property and whether the defendants were under a fiduciary obligation to join with the plaintiff in realising those assets for the benefit of the partnership. Indeed, Mr Scotting, who appeared for the defendants, did not challenge the proposition that the poker machine entitlements were partnership property for the purposes of the plaintiff's interlocutory application. 11 It is trite law that a duty of good faith arises out of the fiduciary relationship that exists between partners (Helmore v Smith (1886) 35 Ch D 436 at 444). In this case the partnership agreement in cl 15.1(a) required each partner to be just and faithful to the other partners in all matters relating to the partnership and to give a true account of the same when reasonably required to do so by the other and cl 15.1(c) provided that unless otherwise agreed by all the partners, each partner was to conduct himself or herself in a proper and responsible manner and use his or her best skills and endeavours to promote the partnership business to the utmost benefit of the partnership. 12 The duty of good faith requires a partner not to obtain a private advantage at the expense of the partnership. Thus in Chan, two medical practitioners carried on business in leased premises in partnership. There was an option to renew the lease. Dr Chan refused to join with Dr Zacharia in doing so. The partnership was terminated, but before its affairs were wound up, Dr Chan obtained an agreement for a new lease of the premises. It was held that Dr Chan had made it impossible for the partnership to exercise the option and in those circumstances it was inequitable that he should be permitted to retain for himself a new lease that could not have been granted if the option had been exercised. 13 So, it is submitted in this case, that the defendants are bound to join with the plaintiff in realising the poker machine entitlements and their failure to do so constitutes a breach of their fiduciary duty. The poker machine entitlements will cease to be property of the partnership upon the termination of the lease and the transfer of the hotelier's licence, to which they are appurtenant, to the defendants (Jabetin Pty Ltd v Liquor Administration Board (2005) 63 NSWLR 602, Masters v Garcia (2005) 65 NSWLR 92). 14 It is not to the point that decisions of the partnership are by majority and the defendants are opposed to realising poker machine entitlements. If they decline to join the plaintiff in transferring such of the poker machine entitlements as they can for the purpose of preserving their benefit to themselves as landlords upon termination of the lease, there is a serious argument that they will be in breach of their duty of good faith. 15 Brenner is distinguishable because it did not involve the element of private benefit at the expense of the partnership. To the contrary, the receiver of the partnership was directed by the Court that he could accept the offer of the partner who had acquired the leasehold reversion to accept a surrender of the underlease on terms that rent in arrears would be foregone and one quarterly payment would be refunded. The Court was of the view that the offer benefited the partnership and could be accepted. In this case, the proposed termination of the lease will not benefit the partnership. It will have the effect of transferring the benefit of the poker machine entitlements from the partnership to the defendants. 16 Murray bears little resemblance to the issues involved in this case. The lessor and lessees were at arm's length and there was no question of the obligation of one of the parties not to benefit itself at the expense of the other. The plaintiffs had failed to exercise an option for renewal of a lease that was to expire within days of the decision. McDougall J found that there was no equity to have the lease extended, damages were an adequate remedy and to allow the application would not maintain the status quo but would give the plaintiffs an opportunity to enjoy rights that they were at risk of losing. 17 The lease was executed before the poker machine entitlements were made under the Gaming Machines Act 2001. The defendants relied upon cl 9.14. It provided that the lessee and the licensee acknowledged and declared that the ownership of the beneficial interest in the licence should remain with the lessor and the lease should not operate as an assignment or sale of the same. It was submitted that it was arguable that the poker machine entitlements fell within the licence for the purposes of that clause and could not be transferred for the benefit of the partnership. But the licence was defined in cl 1.5 to mean the hotelier's licence or any replacement licence or certificate issued in respect of the licence to premises including any endorsements thereon. I do not regard it as likely that a court would construe that definition as encompassing poker machine entitlements that, although appurtenant to the hotelier's licence, constitute separate property (Jabetin, Masters, Masters v Garcia (No 2) [2006] NSWCA 15). 18 The defendants also relied upon cl 9.10 of the lease as preventing the partnership from applying to the Liquor Administration Board for approval of a transfer of poker machine entitlements because the defendants' consent will not be forthcoming. It provided that the lessee should not make any application to the Licensing Court or Liquor Administration Board for transfer or surrender of or any other application affecting the licence without the consent of the lessor. Again, I do not regard an application for approval of the transfer of a poker machine entitlement as affecting the hotelier's licence. 19 Mr Hatzis, who appeared for the plaintiff, submitted that damages were not an adequate remedy because the Liquor Administration Board had a discretion to approve or disapprove an application for transfer of poker machine entitlements and until such time as the Board had given its approval any amount that might be expected to be received upon transfer was speculative. But the going price for a poker machine entitlement is readily available and the Court is capable of determining whether that amount should be discounted for the possibility that the Liquor Administration Board might decline to approve a transfer. 20 In my view, damages are an adequate remedy. That is a factor supporting the defendants' opposition to the grant of interlocutory relief. I may decline the application on this basis, but I am not compelled to do so. As Sachs LJ said in Evans Marshall & Co v Bertola SA (1973) 1 WLR 349 at 379, the standard question in relation to the grant of an injunction: "Are damages an adequate remedy?" might, in light of the authorities of recent years be rewritten: "Is it just, in all the circumstances, that a plaintiff should be confined to his remedy in damages?" 21 Hardship and balance of convenience must also be taken into account and I am of the view that the consideration of those issues weighs heavily against the defendants. If interlocutory relief is granted and the plaintiff were to make an application for transfer of poker machine entitlements, the defendants have a statutory right to prevent the Liquor Administration Board's approval because the Gaming Machines Act 2001, s 19(3)(c) requires an application for the Board's approval of transfer to demonstrate that the proposed transfer is supported by each person who has a financial interest in the hotelier's licence. Since the licence is held for the partnership and the defendants are members of that partnership, they have the necessary financial interest in the hotelier's licence. 22 On the other hand, if interlocutory relief is not granted, the lease is terminated and the hotelier's licence transferred to the defendants, and the other agreements are terminated, the plaintiff will retain no financial interest in the hotelier's licence and have no standing to oppose an application by the defendants to the Liquor Administration Board for approval of a transfer of the poker machine entitlements. Nor could the plaintiff assert a constructive trust in its favour in light of the decision of the Court of Appeal in Jabetin. 23 In my view the plaintiff has established that there is a serious question to be tried and a probability that final relief will be granted justifying the maintenance of the status quo. The plaintiff should not be confined to a claim for damages. He should be awarded injunctive relief. 24 I note that the plaintiff by his counsel gives the usual undertaking as to damages. I make the following orders: · that, until further order, the first and second defendants be restrained from terminating the lease of the property know as the Wade Hotel Leeton ("the Hotel") which lease was made between the first and second defendants (as lessors) and the plaintiff, first and second defendants (as lessees) or from taking any other steps to take possession of the Hotel or to procure a transfer of the hotelier's licence issued in respect of the Hotel to any person other than the plaintiff. · that, until further order, the first and second defendants be restrained from terminating the sub-lease of the Hotel made between the plaintiff, first and second defendants (as sub-lessors) and Abtourk (Syd No 429) Pty Ltd (as sub-lessee). · that, until further order, the first and second defendants be restrained from terminating the partnership agreement dated 20 August 1992 made between the plaintiff and the first and second defendants. · that, until further order, the first and second defendants be restrained from terminating the management and operating agreement dated 20 September 1992 made between the plaintiff, the first and second defendants and Abtourk (Syd No 429) Pty Ltd. · that, until further order, the first and second defendants be restrained from terminating the shareholders' agreement dated 20 August 1992 made between the plaintiff and the first and second defendants. · that the defendants pay the plaintiff's costs of the application. · that the balance of the summons be stood over before the Registrar at 9.30 am on Tuesday 27 March 2007. ********** 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.