McKensey v Hewitt [2007] NSWSC 307

New South Wales Supreme Court

CITATION : McKensey v Hewitt [2007] NSWSC 307

HEARING DATE(S) : 28 November 2006, 5 February and 12 March 2007

JUDGMENT DATE : 5 April 2007

JURISDICTION : Equity Division

JUDGMENT OF : Windeyer J at 1

DECISION : Notice of motion dismissed with costs

CATCHWORDS : JUDGMENTS AND ORDERS - construction of agreement - varied by court orders

CASES CITED : Kirkpatrick v Kotis (2004) 62 NSWLR 567 Rogers v Wentworth (unreported NSWCA 18 April 1988)

Hugh Stanley McKensey (First Plaintiff) PARTIES : Victor John Lewis (Second Plaintiff) Peter Charles Hicks (Third Plaintiff) Christopher Michael Hewitt (Defendant)

FILE NUMBER(S) : SC 1585 of 1995

COUNSEL : Mr T Alexis SC (Plaintiffs) Mr M Ashhurst (Defendant)

SOLICITORS : Harris Wheeler (Plaintiffs) Hewitts Commercial Lawyers (Defendant)

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

WINDEYER J

THURSDAY 5 APRIL 2007

1585/95 HUGH STANLEY MCKENSEY & ORS V CHRISTOPHER MICHAEL HEWITT JUDGMENT 1 This judgment deals with a notice of motion filed on 7 August 2006 on behalf of Mr Hewitt, the first defendant. The action has had a tortuous history arising out of a dispute between persons who were, at various times, members of an accounting partnership in Newcastle, known as Forsythes. 2 On 10 September 1994 the then partners of Forsythes entered into what has been called a separation agreement setting out terms under which Mr Hewitt and another partner, Phillip Anthony Nelson, would retire from the old partnership (Forsythes (Old)) and under which the remaining partners of Forsythes (Old), namely Messrs McKensey, Lewis and Hicks, would carry on a new partnership of Forsythes under the same name (Forsythes (New)). 3 An earlier dispute involving an earlier Forsythes partnership in which a Mr Page was a partner was also subject to much litigation in this court. The only matter of relevance here is that when Mr Page left the firm taking certain clients with him it became necessary to value the firm to establish his interest in it. Mr Page took certain clients of the firm with him when he left, so that the goodwill attributable to those clients was deducted from the figure otherwise payable to him as his share in the partnership. In that case there was only one valuation done, that being for the whole partnership, with the value attributed to the goodwill of those clients taken by Mr Page being the proportion the maintainable earnings attributed to them bore to the earnings of the whole partnership. 4 Clauses 10 and 16 of the separation agreement are as follows: 10. On or before 31 December 1994, the parties jointly engage, and pay in the proportions of their interests in Forsythes (Old) at 28 August 1994, the services of Rob Knights of Rob Knights & Co, Chartered Accountants of Sydney, or in the event of him being unable or unwilling to so act, a valuer appointed by the NSW State Chairman of the Institute of Chartered Accountants in Australia, to value the goodwill of the accountancy practice and associated entities of Forsythes (Old) excluding the HMC Unit Trust, Forsythes Computer Systems Pty Ltd and Back to Basic Business Services Pty Ltd. The basis upon which the valuation is to be conducted is that of a willing but not anxious buyer and a willing but not anxious seller, with the seller being prepared to enter into reasonable covenants not to compete. The above valuation will be based solely upon the trading results of Forsythes (Old) for the year ended 30 June 1994. Settlement for the amount owing to the Retiring Partners, representing their share of the goodwill, will be in accordance with the Settlement Payment. … 16. An interim schedule of the maintainable fees earned by Forsythes (Old) from clients taken over by the Retiring Partners jointly, based on fees applicable to the year ended 30 June 1994, is attached hereto as Schedule G. On final determination of those fees, the value of the goodwill attributable to them is to be determined by the same valuer in accordance with 10. The value so determined will be due to Forsythes (New) by the Retiring Partners and will form part of the Settlement Payment. 5 It was and is accepted that the interests of the retiring partners in Forsythes (Old) would be paid out by the remaining partners, but that the goodwill value of the clients taken away by the retiring partners would be set off against this amount. It is not necessary to decide whether this was logical or not. Before me counsel accepted that this was the basis of the agreement. 6 The proceedings between the remaining partners as plaintiffs and the retiring partners as defendants were heard before Einstein J in September 1997 and determined on 15 October 1997. One of the issues was the proper construction of clause 16. The contention of the defendant retiring partners apparently was that there was a need for only one valuation to cover clause 10 and clause 16, as the goodwill attributable to the maintainable earnings of clients taken away by the retiring partners would be a proportionate amount of the whole of the goodwill of Forsythes (Old) being the proportion those earnings bore to the total earnings of Forsythes (Old). As I explained, that was the basis upon which Mr Page's share in goodwill of the original partnership was determined when that partnership was terminated. 7 At an early stage of the proceedings before Einstein J an offer was made and accepted which resulted in the settlement of a substantial part of the proceedings before him. As a result of this agreement an order by consent was made in the following terms: 1. The Court now declares that upon the proper construction of the settlement agreement made on 10 September 1994 between Hugh Stanley McKensey, Victor John Lewis, Peter Charles Hicks, Christopher Michael Hewitt and Phillip Antony Nelson, the words "in accordance with 10" which appear in cl16 of that agreement mean: (i) that the valuation is to be by a valuer jointly engaged by the parties; (ii) that the basis upon which the valuation is to be undertaken is to be that of a willing but not anxious buyer and a willing but not anxious seller, with the seller being prepared to enter into reasonable covenants not to compete and; (iii) that the valuation is to be based solely upon the trading results of Forsythes (Old) for the year ended 30 June 1994. 8 Pursuant to these orders, and after certain vicissitudes because Mr Knights, the named valuer, had died and there were difficulties with the method of appointing a valuer in his place, Mr Vella was appointed by court order as valuer to carry out the clause 10 and clause 16 valuations in accordance with the consent orders. 9 By valuation dated 21 April 2006, Mr Vella has valued the goodwill of Forsythes (Old) at $880,000 and the goodwill attributable to the fees parcel taken by the retiring partners at $221,200. The valuations are separate; that is the latter figure is not a percentage of the former calculated rateably to the proportion of fees taken by the retiring partners to the total fees of Forsythes (Old). The total valuation of Forsythes (Old) consisted of a composite of figures, calculated on differing bases depending upon the component of the business. The general accounting value component was arrived at by "deducting from the value of goodwill determined on a capitalization of maintainable earnings methodology, the fair market value of the net tangible assets devoted to the practice" based on a multiple of 6. The clause 16 valuation was done on a "rule of thumb basis", determining the figure in the dollar a purchaser would pay for a parcel of fees of that type. 10 The motion which I am dealing with seeks declarations and an order as follows: 1. A declaration that the valuation of Trevor Vella on 21 June 2006 and pursuant to the Settlement Agreement between the parties dated 10 September 1994 in proceeding numbered 1585 of 1995 is not a final and binding determination. 2. A declaration that the valuation pursuant to the Settlement Agreement between the parties dated 10 September 1994 in proceeding numbered 1585 of 1995 is to be a valuation performed in accordance with the Consent Orders made the 17th day of September 1997, that is to say, there is to be one valuation only carried out on the same basis for goodwill generally under clause 10 and goodwill attributable to the fees referred to clause 16 of the Settlement Agreement.