New South Wales Supreme Court CITATION : Glandon v Tilmunda (No 2) [2008] NSWSC 441 HEARING DATE(S) : 1 May 2008 JUDGMENT OF : Gzell J EX TEMPORE JUDGMENT DATE : 1 May 2008 DECISION : Consideration for transfer of interest to be deducted from account of profits. Capital account and loan account balances not to be taken in. No accessorial liability of director to account for profits in absence of evidence of receipt from corporate partner. No interest to be raised on profits in the account. Plaintiff to have indemnity costs from day after offer under the rules. Plaintiff to have full costs of the proceedings. No allowance for skill. CATCHWORDS : EQUITY - Fiduciary Obligations - Breach by director of corporate partner - Plaintiff entitled to an account of profits - Whether consideration for transfer of interest in partnership should be deducted from account - Whether balances of captial account and loan account should be taken into account - Whether entitlement to account extended to director in absence of any evidence of his receipt of profits from corporate partner - Whether interest should be allowed on profits in the account - Whether defendant entitled to reject Calderbank offers - Whether plaintiff entitled to indemnity costs from day after offer in accordance with Uniform Civil Procedure Rules 2005, r 42.14 - Whether plaintiff entitled to full costs of proceedings - Whether any allowance for skill should be made when accounts taken on basis that director would have continued to charge for his services LEGISLATION CITED : Civil Procedure Act 2005 Uniform Civil Procedure Rules 2005 Warman International Ltd v Dwyer [1995] HCA 18, (1995) 182 CLR 544 CASES CITED : Dart Industries Inc v Décor Corporation Pty Ltd [1993] HCA 54, (1993) 179 CLR 101 Morgan v Johnson (1998) 44 NSWLR 578 Hillier v Sheather (1995) 36 NSWLR 414 TEXTS CITED : Meagher Gummow & Lehane's Equity: Doctrines and Remedies, 4th ed, LexisNexis Butterworths, Australia, 2002 Glandon Pty Ltd (First plaintiff) Paul Edward Lewis (Second plaintiff) PARTIES : Lesley Joan Lewis (Third plaintiff) Tilmunda Pastoral Co Pty Ltd (First defendant) Peter Stewart Graham (Second defendant) FILE NUMBER(S) : SC 4593/05 COUNSEL : Ms S Crysanthou (Plaintiffs) SOLICITORS : Robert H Butler (Plaintiffs) Terrence Jessop (Ms Mitchell) (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J THURSDAY 1 MAY 2008 4593/05 GLANDON PTY LTD & ORS v TILMUNDA PASTORAL CO PTY LTD & ORS (NO 2) EX TEMPORE JUDGMENT 1 I published my reasons in this matter on 25 March 2008 and stood over a number of issues. Consideration paid for transfer 2 Under the deed of assignment of 26 August 1999, Glandon transferred its interest in the partnership for $55,000. The parties are agreed that this amount should be deducted from the account of profits. Loan account and capital account 3 Glandon does not seek any adjustment for the credit balance in its loan account for the partnership. It submits that no adjustment should be made for the debit balance in its capital account as that was generated by recording the land at cost. 4 Tilmunda submits that as profits on sale of assets were taken into account in the 1999 year, to be consistent, the debit balance in Glandon's capital account should be taken into account and when it is netted off against the credit in the loan account an amount of $18,508 should be deducted from the account. 5 There are two reasons why I reject this argument. First, under the deed of assignment Glandon released Tilmunda with respect to the credit balance in its loan account and Tilmunda released Glandon with respect to the debit balance in the capital account. Those rights and obligations were thereby discharged. Secondly, these balances were on capital account and do not enter the calculation of profits in the account. 6 I was dubious as to whether any adjustment should have been made for the $55,000 for this reason. But there is a difference. The $55,000 not only encompassed a reduction in consideration because of the debit in the capital account, it also reflected future value of the two-fifths interest in the partnership. And one measure of that value was a future profit stream. In that respect it is appropriate to give credit for it. 7 Tilmunda submitted that the figure of -$18,508 should replace the 1999 profit figure of $57,613 in the account because it did not take account of a profit on sale of assets and it was that profit that reduced the deficit in Glandon's capital account to $85,873. 8 The share of profit for the 1999 year in the account was based on operating profits in the partnership. It did not include the profit on sale of fixed assets of $599,534. If operating profits alone had been taken into account Glandon's capital account would have stood in debit at $325,686 instead of the $85,873. It was submitted that Glandon would be double benefited if the substitution of -$18,508 for the $57,613 in the account for the 1999 year was not made. It was submitted that one could not divorce an account of profits from the ability or otherwise to pay the profits. 9 I reject that argument. This matter was not raised during the trial. Subject to the exceptions mentioned in my reasons for judgment, the parties agreed the amounts for profits of the years in question. (See my reasons at [89]). I do not propose to allow Tilmunda to re-open its case at this juncture. I had made it abundantly clear during the trial that I would order the account to be taken by an Associate Judge unless the parties agreed on the figures. That they did. Where there was a difference in approach, there was agreement on the figures for each approach. 10 In any event the argument is flawed. The land was entered in the books at cost of $198,882 when half of it was sold for $700,000. Had the remaining land been valued at that figure in the 1999 accounts, an unrealised profit of $600,559 would have arisen and Glandon's share of it would have wiped out any debit balance in its capital account. Accessorial liability 11 Glandon acknowledges that there is doubt as to whether the liability of an accessory to account for profits extends to the profits made by the principal or only to the profits made by the accessory (Meagher Gummow & Lehane's Equity: Doctrines and Remedies, 4th ed, LexisNexis Butterworths, Australia, 2002, at [5-245]). It submits that Mr Graham is jointly and severally liable because he was in full control of Tilmunda and believed that the individuals constituted the partnership. Mr Graham acknowledged in cross-examination that when Glandon's interest and Mr Liddle's interest in the partnership were acquired he had acquired the whole of the interest in the partnership. It was submitted that, in substance, Mr Graham obtained the whole economic interest in the partnership and the doubts as to joint and several liability of an accessory to account should be limited to accessories with partial interests. 12 In my reasons for judgment at [108] – [109] I expressed my view that an accessory should only be required to disgorge profits received by it. To my reference to Warman International Ltd v Dwyer [1995] HCA 18, (1995) 182 CLR 544 at 569 should be added a reference to Dart Industries Inc v Décor Corporation Pty Ltd [1993] HCA 54, (1993) 179 CLR 101 at 111. 13 I reject Glandon's submission. First, the parties agreed that Glandon and Tilmunda and not Mr Graham and Dr Lewis were the partners. Secondly, I see no reason in principle for a distinction between an accessory who owns the entire issued capital of an errant fiduciary and an accessory with a lesser interest. The gravamen of the proposition I espoused in my reasons is the receipt by an accessory of the profits wrongly gained by the fiduciary. 14 I accept the submission of Tilmunda that since no basis for receipt by Mr Graham of any portion of the profits of the partnership was laid in cross-examination or otherwise during the trial, it is too late to make any order against him with respect to the account. Further, I do not see any basis upon which I should allow Glandon to re-open its case to establish receipt of the profits in the account by Mr Graham. Interest 15 On the damages of $23,108 Glandon sought interest under the Civil Procedure Act 2005, s 100 from 23 August 1999. Tilmunda submitted that interest should run from when Glandon was first required to pay tax. The evidence was silent about that date. Tilmunda submitted it was not likely to have been before May 2005. Glandon now concedes that interest should run from the later date. 16 Glandon also seeks interest on the account of profits on the assumption that the profits would have been distributed no later than 31 December following the end of each financial year. Tilmunda submits that an order for an account of profits is not compensatory but rather strips profits made by a fiduciary in order that there be no unjust enrichment (See my reasons at [43]). Tilmunda submits that it is only if interest was earned by Tilmunda on partnership profits that an award of interest should be made. There was no evidence to this effect. 17 In my view, no award of interest should be made. To the extent to which the annual profits were retained by the partnership, they constituted circulating capital and contributed to the generation of profits in later years. If Tilmunda received payment of its share of profits at the end of each calendar year, the ability of the partnership to generate profits thereafter would be circumscribed. Such a reduction in profits in the partnership might be partially offset by an order that Tilmunda pay interest on the profits it received. On the other hand, if the profits were retained in the partnership, future profits were likely to be augmented and unjust enrichment principles would not require the fiduciary to pay interest as well. 18 In the absence of evidence of profit distributions from the partnership, no order for interest should be made. Costs 19 Glandon seeks indemnity costs from the making of one or other of two Calderbank offers, or from the later making of an offer under the Uniform Civil Procedure Rules 2005, r 42.14. It will receive a judgment well in excess of the offers. 20 Tilmunda submitted that it was reasonable to reject the Calderbank offers. The first was sent with the statement of claim. The second merely extended the earlier offer for 10 days. In my view, Glandon is entitled to costs on an indemnity basis from the day following the offer under the Rules. I accept Tilmunda's submission that the Calderbank offers were premature. 21 So far as the offer under the Rules is concerned, departure from the Rules should only be countenanced in special circumstances (Morgan v Johnson (1998) 44 NSWLR 578 at 581-582, Hillier v Sheather (1995) 36 NSWLR 414 at 422-423). None has been advanced. 22 Tilmunda submitted that full costs should not be awarded as Glandon lost on issues that had generated substantial costs. I reject that argument. This was not a case in which it is appropriate to divide up issues. The evidence was inextricably mixed. Glandon had to come to Court, its offers having been rejected. It is entitled to costs of the proceedings. Allowance for skill 23 Tilmunda submits that there should be an allowance in the account for Mr Graham's skill and that none has been taken into the management accounts of the partnership in the later years because Mr Graham did not draw fees or rent. 24 I formed the view that no need for any allowance arose. At [94] of my reasons I allowed the amounts charged to the partnership by Mr Graham for his services in 1999. As I there said, on that basis there was no need to make any allowance for skill. 25 Further, the parties had calculated the figures for profits each year on the assumption that Mr Graham continued to make the charges he did in 1999 (See [95] of my reasons). 26 Tilmunda sought an order to re-open its case to call evidence from Mr Graham of expenditure by him in excess of the fees charged in the 1999 accounts. I reject that application. The figures in the 1999 accounts were agreed by the parties to apply for the duration of the account and profits were calculated accordingly. No evidence was adduced at trial that Mr Graham's charges were inadequate. There is no good reason at this juncture to allow the trial to be re-opened. Adjournment 27 I will stand the matter over to enable the parties to bring in short minutes of order reflecting my reasons for judgment of 25 March 2008 and the reasons I have published today. Orders 28 I direct the parties to bring in short minutes of order reflecting my reasons for judgment of 25 March 2008 and my reasons of today. I stand the matter over before me at 9.30 am on Wednesday 7 May 2008. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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