Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Cappe v Tsung [2018] NSWCA 86 Hearing dates: 22 February 2018 Date of orders: 26 April 2018 Decision date: 26 April 2018 Before: Basten JA at [1]; Meagher JA at [2]; Emmett AJA at [31] Decision: Appeal dismissed with costs Catchwords: PARTNERSHIP – special majority of partners accepted offer by corporation to acquire the partnership business – whether special majority could vary inter se entitlement of partners to share in surplus from proceeds of sale – whether cash amounts and shares issued were wholly the proceeds of partnership property Legislation Cited: Partnership Act 1892 (NSW), ss 4, 5, 6, 19, 20, 21, 24, 28, 29, 32, 33, 34, 35, 38, 39, 44; Pt 2, Divs 2, 3, 4 Corporations Act 2001 (Cth), s 127 Cases Cited: Blisset v Daniel (1853) 10 Hare 493; 68 ER 1022 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 Carter Bros v Renouf (1962) 111 CLR 140 Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12 Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 Gambotto v WCP Ltd (1995) 182 CLR 432 Harvey v Harvey (1970) 120 CLR 529 Inland Revenue Commissioners v Gray [1994] STC 360 Rowella Pty Ltd v Abfam Nominees Pty Ltd (1989) 168 CLR 301 Talbot v McDonald (1925) 25 SR (NSW) 267 Tobin v Broadbent (1947) 75 CLR 378 Tsung v Cappe [2017] NSWSC 1053 Category: Principal judgment Parties: Ian Philip Cappe (First Appellant) Warren Shane Lun (Second Appellant) Craig Matthew Dyer (Third Appellant) Andrew Wallace Hooper (Fourth Appellant) Rohit Singh (Fifth Appellant) Joanna Sommerfeld (Sixth Appellant) Lincoln Geoffrey Gillam (Seventh Appellant) Willie Pei Chiao Tsung (Respondent) Representation: Counsel: J Giles SC with P Silver (Appellants) R Newlinds SC with D Barnett (Respondent) Solicitors: Thomson Geer (Appellants) Bridges Lawyers (Respondent) File Number(s): 2017/270966 Decision under appeal Court or tribunal: Supreme Court of NSW Jurisdiction: Equity Citation: [2017] NSWSC 1053 Date of Decision: 11 August 2017 Before: Hammerschlag J File Number(s): 2017/170673 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] headnote [This headnote is not to be read as part of the judgment] The respondent (Dr Tsung) and seven appellants (the Continuing Doctors) operated a diagnostic imaging practice (the Partnership Business) pursuant to a Partnership Agreement. Six of the partners, including Dr Tsung, held a one-seventh share in the partnership. Two of the partners held a one-fourteenth share in the partnership. Relevantly, cl 32 of the Partnership Agreement provided that where consideration needed to be given to the partnership accepting an offer by a corporation to acquire all or part of the partnership business, the motion could only succeeded where a minimum of twelve out of the total fifteen votes were in favour of the motion. On 11 July 2016, Quadrant Private Equity Pty Ltd (Quadrant) wrote to the chairman of the partnership making a "non-binding indicative offer" to purchase the Partnership Business. Dr Tsung did not wish to accept the proposal. On 16 March 2017, the chairman of the partnership gave notice of a proposed meeting for the purpose of considering and accepting in principle Quadrant's offer. The explanatory statement attached to the notice of meeting indicated that Quadrant's offer valued the Partnership Business at $68.8 million, and that the purchase price would be paid in cash as to 60% and shares in a holding company as to 40%. A maximum sum of $3 million in cash would be reserved for payment to Dr Tsung. At a meeting on 30 March 2017, all of the Continuing Doctors cast votes in favour of the proposal. Dr Tsung abstained from voting. On 21 April 2017, the Continuing Doctors entered into a Securities Purchase Agreement (SPA), which proposed a two-stage transaction to be completed on 30 June 2017. In the first stage, to be effected by the proposed Business Sale Agreement (BSA), the partners would transfer all the partnership assets to a new company, Radiology Holdings, in return for the issue of shares in Radiology Holdings to the Continuing Doctors and payment of $3 million to Dr Tsung. In the second stage, to be effected by the SPA, the Continuing Doctors would transfer their shares in Radiology Holdings to Qscan Bidco (an entity of Quadrant) in return for cash and shares in its holding company, Qscan Holdco. On 26 June 2017, the Continuing Doctors resolved to accept the "finalised" offer for the acquisition of the Partnership Business, which conditionally valued the Partnership Business at $62 million. On 30 June 2017, the Continuing Doctors entered into the BSA, and each Continuing Doctor entered into a Practice Management Agreement, whereby they agreed to provide services to Qscan Bidco in exchange for remuneration, and not compete with Qscan Bidco. Dr Tsung commenced proceedings in the Equity Division seeking a declaration that on settlement of the SPA, he was entitled to one-seventh of the surplus proceeds of realisation, less liabilities. The primary judge made that declaration. On appeal, the issues were: (i) whether cl 32 is limited to binding all partners in relation to dealings with a third party concerning "merger or acquisition", or whether the clause also extends to enabling the specified majority of partners to bind all partners in relation to the apportionment, division and distribution of purchase consideration; and (ii) whether the cash and shares received by the partners were partnership assets, or partly referable to promises given by them under the Practice Management Agreements. Held, Meagher JA (Basten JA agreeing) and Emmett AJA, dismissing the appeal: In relation to (i): 1. Clause 32 does not confer on the majority the right to sell partnership assets on a basis that entitles some partners to receive a greater share of the proceeds than the proportion attributed to them under the Partnership Agreement and the Partnership Act 1892 (NSW): [1], [14], [101], [105]. 2. The disposal of partnership assets by the firm is conceptually distinct from an adjustment of a partner's entitlement to share in the proceeds of a disposal. While the majority can impose upon the minority the terms of a merger or acquisition between the partners and a third party, the clause does not enable a majority to determine the manner of apportionment, division and distribution of the consideration payable: [1], [16], [103]. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321; Inland Revenue Commissioners v Gray [1994] STC 360 applied 3. Clauses 23, 24, 25 and 27 of the Partnership Agreement provide for the acquisition of an outgoing partner's share or interest by the remaining partners, in the event of retirement, expulsion, incapacity or death. The presence of such clauses indicates that cl 32 was not intended as a mechanism for determining the rights of partners inter se: [1], [22]; [102]-[104]. 4. It is of no moment to a merging or purchasing entity how the partners divide and distribute the proceeds of a merger or acquisition inter se: [1]; [20]; [107]. 5. The proprietary and fiduciary character of the mutual rights and duties of partners justifies a reluctance to find that the parties intended to authorise so substantial a variation by cl 32: [1], [25] (Meagher JA, Basten JA agreeing). In relation to (ii) 1. The cash paid and shares issued under the BSA and SPA were partnership property, to be applied in determining the surplus assets of the firm. No part was given for any other promise under a Practice Management Agreement: [1]; [30]; [100]; [110]. Judgment 1. BASTEN JA: I agree that the appeal in this matter must be dismissed with costs. I respectfully adopt the reasoning of Meagher JA. 2. MEAGHER JA: I have had the benefit of reading in draft the judgment of Emmett AJA. As explained by his Honour, the resolution of this appeal turns on the construction of cl 32 of the Partnership Agreement (extracted at [5] below) and the characterisation of moneys and shares received under the Business Sale Agreement (BSA) and Securities Purchase Agreement (SPA). More specifically, it turns on the extent to which that clause varied the rights and powers ordinarily incidental to a partnership, as codified and amended by the Partnership Act 1892 (NSW) and reproduced in other clauses of the Partnership Agreement, and on the consideration for which those moneys and shares were given. For the reasons that follow, which do not depart in substance from those given by Emmett AJA, I agree with the orders that his Honour proposes. For ease of reference, I propose first to summarise the essence of the parties' relationship and the transaction giving rise to these issues and then to address them in turn. Background 1. The respondent (Dr Tsung) and seven appellants (the Continuing Doctors) together operated medical practices in a partnership formalised by the Partnership Agreement. Under that agreement, two of the Continuing Doctors had half shares relative to the other partners. Dr Tsung, a full partner, contributed one seventh of the capital of the partnership and was thereby entitled to one seventh of its profits as a going concern: Partnership Agreement, cll 6(a), 7. Thus, subject to any contrary agreement binding on him (whether by or under cl 32 or otherwise), he would be entitled on a dissolution of the partnership to one seventh of the "surplus assets" after payment of the external debts and liabilities of the firm and the return of advances and capital contributions, less what was due from him as a partner to the firm: Partnership Act 1892 (NSW), s 39; Rowella Pty Ltd v Abfam Nominees Pty Ltd (1989) 168 CLR 301 at 306–307. And the assets to be so applied upon dissolution would include proceeds from the sale of any partnership property earlier held: Harvey v Harvey (1970) 120 CLR 529 at 563 (Walsh J). 2. On 21 April 2017, the Continuing Doctors entered into the SPA with QScan Holdco and its subsidiary, QScan Bidco. The SPA proposed a two-stage transaction to be completed in immediate succession on 30 June 2017. In the first stage, to be effected by the proposed BSA between the partnership and Radiology Holdings, the partners would transfer all the partnership assets (including goodwill) to Radiology Holdings in return for the issue of shares in that company to the Continuing Doctors and the payment of $3 million to Dr Tsung. In the second stage, to be effected by the SPA, the Continuing Doctors would transfer their shares in Radiology Holdings to Qscan Bidco in return for cash and shares in its holding company, Qscan Holdco. 3. On 26 June 2017, the Continuing Doctors resolved, "for the purposes of" cl 32 of the Partnership Agreement, to "accept the finalised offer for the acquisition of all of the Partnership's business and assets", including interests under a trust, "subject to and in accordance with the provisions of the [SPA]". Clause 32 provided: Merger or acquisition – special meeting and voting provisions (a) Special provisions apply in respect of any possible merger or acquisition involving the partnership, so that any motion at a meeting of partners to consider merger or acquisition ("the motion") can only be put to the vote where:- • all partners have been provided with full details of the proposal in question, and • have been given an ample opportunity to consider that proposal, and • all parties vote, whether personally at the meeting or by proxy, if absent. (b) If a partner fails to vote, then his or her vote shall by reason of this sub-clause be counted as a vote opposing the motion. (c) These special provisions apply where consideration needs to be given to either:- (i) the partnership (including the Associated Trusts) merging with another diagnostic imaging practice, whether corporate or otherwise; or (ii) the partnership accepting an offer by a corporation or another diagnostic imaging practice to acquire all or part of the partnership business (including the assets of the Associated Trusts). (d) The motion can only succeed where a minimum of twelve (12) votes (out of the total of fifteen (15) cast) are in favour of the motion. 1. It was agreed that the reference in para (d) to fifteen votes was an error, the total being fourteen. Nothing, however, turns on this difference. 2. Dr Tsung did not vote and accordingly was taken to have voted against the motion: cl 32(b). The explanatory statement which accompanied the notice of that meeting recorded that the offer conditionally valued the partnership business "at an enterprise value of approximately $62m", and that completion of the proposed transaction was subject to the condition that each Continuing Doctor enter into an agreement with Qscan Holdco to provide radiology services for a period of six years and covenant with Qscan Bidco not to compete with the transferred business for a period of five years. 3. As agreed in the SPA, on completion of the two-stage transaction, each of the five Continuing Doctors who had a one-seventh capital share received cash of approximately $6.768 million and shares in Qscan Holdco valued by the SPA at $2.4 million. Only $3 million, on the other hand, was set aside for Dr Tsung. 4. In proceedings commenced before the transaction was completed on 30 June 2017, Dr Tsung sought a declaration that he was entitled to one seventh of the surplus partnership assets (including the cash and Qscan Holdco shares ultimately received between all partners) after discharge of any outstanding partnership liabilities, less an amount due from him to the firm for its having discharged a liability of his to the Commonwealth Bank. That claim rested on two premises: that Dr Tsung had not agreed to any variation of his interest in the partnership assets, including by or under cl 32; and that all cash and shares received by the partners on completion of the two-stage transaction were partnership assets, for which the partners were liable to account. 5. The Continuing Doctors challenged both premises. As to the first, they argued that a resolution validly passed under cl 32 could authorise acceptance on behalf of all partners of any (bona fide) "offer by a corporation or another diagnostic imaging practice to acquire all or part of the partnership business"; that the resolution of 26 June 2017 authorised the sale of the partnership assets and business on the terms of the SPA; that those terms included that the total consideration for the sale was to be divided between the partners as provided in BSA, cll 4.1(b), 6.3(a) and 6.3(b); and that therefore the rights of each partner under the Partnership Act (especially s 39) and the Partnership Agreement to share in surplus assets were varied accordingly. As to the second premise, they maintained that part of the cash and Qscan Holdco shares received by them at the completion of the second stage represented the consideration for undertakings given by them, but not Dr Tsung, to continue providing radiology services and to refrain from competing with the transferred business. 6. The primary judge (Hammerschlag J) rejected each of the Continuing Doctor's arguments: Tsung v Cappe [2017] NSWSC 1053. Ground 1 of appeal challenges his rejection of the first, and ground 2, the rejection of the second. Construction and application of cl 32 (ground 1) 1. Clause 32 addresses two types of proposed transaction involving the partners and partnership assets: a merger with a corporate or other diagnostic imaging practice; and a contract to sell all or part of "the partnership business" to a corporation or another diagnostic imaging practice. Although on its face the clause stipulates procedures merely "to consider merger or acquisition", it must be construed — for it to have any practical utility — as conferring authority on a special majority to bind all partners to such a transaction by a resolution which is in accordance with paras (a), (b) and (d). 2. The purpose of the clause is to facilitate particular dealings with third parties, of their nature likely to be accompanied by a dissolution of the existing partnership, over the dissent of a minority of partners. Ordinarily, each partner would only have authority to bind the others by contracts actually or ostensibly for the conduct of the partnership business: Partnership Act, s 5; Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 at 547–548. And the majority would only have power to decide "ordinary matters connected with the partnership business", as opposed to changes "in the nature of the partnership business", which would require unanimous consent: see Partnership Act, s 24(8); but see Partnership Agreement, cl 3(a) (in relation to changes in the partnership business). Clause 32 thus confers an extraordinary authority on the special majority. 3. The principal issue between the parties concerns the proper scope of that authority. Narrowly stated, the issue is whether cl 32 empowered the special majority to bind each of the partners to a final distribution of the proceeds from such a sale which was other than in accordance with their proportionate shares in the partnership. In my view, the following considerations establish that it did not. 4. The first emerges from the language of cl 32, which focuses on commercial outcomes, rather than strict legal concepts. Paragraph (c)(ii) identifies the persons to be bound by the proposed contract as "the partnership", which must mean all the partners, who together constitute the "firm": see Partnership Act, s 4. (By contrast, the same expression in para (c)(i) could include the partners and the partnership assets, as each might be "merged" in establishing the new entity.) Paragraph (c)(ii) then identifies the object of the proposed sale as "all or part of the partnership business", which must mean the whole or a discrete part of the assets (including goodwill) generating income in that business: see Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42 at [23] (Gaudron, McHugh, Gummow and Hayne JJ). 5. Hence, the subject matter of a contract validly entered into under para (c)(ii) is the disposal of such assets by the firm, which is conceptually distinct from an adjustment of a partner's entitlement to share in the proceeds of such a disposal. The former concerns the firm's title to those assets, whereas the latter concerns a partner's right to a "proportion of the surplus after the realization of assets and the payment of debts and liabilities": Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327 (McTiernan, Menzies and Mason JJ). These collective and individual entitlements of the partners are viewed from wholly different perspectives, as Hoffmann LJ explained in Inland Revenue Commissioners v Gray [1994] STC 360 at 377 (emphasis added): As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share. 1. Other provisions of the Partnership Agreement recognise this fundamental distinction. Clause 23, for example, refers (in the chapeau of para (d)) to a "retiring partner's direct share or interest in the partnership" and (in para (d)(vi)) to a charge "over the assets of the former partnership business". Clause 32, by contrast, does not in terms contemplate any dealing with a partner's share or interest in the partnership, as distinct from the assets of the partnership business. 2. The limited subject matter of the authority to contract in cl 32(c)(ii) informs its remaining scope. Undoubtedly, that authority did not empower the special majority to bind the partners to any "unauthorised, unusual or unreasonable terms" that happen to be included in such a contract of sale; its scope extended to "whatever was necessary for or ordinarily incidental to the completion of that transaction, and no more": Talbot v McDonald (1925) 25 SR (NSW) 267 at 271 (Street CJ) (emphasis added). 3. A contract under cl 32(c)(ii) may, and ordinarily would, obligate each partner to take steps necessary to convey legal title in partnership assets to the acquiring entity (e.g. registration of dealings with Torrens title or delivery of chattels). That obligation may perhaps be enforceable inter se, that is, at the instance of another partner or partners, as well by the acquiring entity. Moreover, the formation and completion of the contract would progressively extinguish the partners' collective entitlement in equity to the partnership assets being sold. Over the same period, however, the consideration in money or kind for those assets would become partnership property available for distribution on any dissolution subject to any contrary agreement of all partners. 4. Such agreement is clearly not necessary in a contract with a third party to sell the firm's assets. The purchaser would have no interest (at least in its capacity as purchaser) in the application of or accounting for proceeds of sale between the partners; and, in any event, the partners have an existing arrangement with respect to that matter. For the same reasons, such agreement could not be an ordinary incident of such a contract. 5. The second consideration is the need for consistency in the operation of the Partnership Agreement. The Continuing Doctors submit that agreement as to the ultimate rights and obligations of the partners inter se might be necessary in any merger under cl 32. If that were so, then the special majority's express or implied authority as to any proposed merger would simply be wider than that with respect to a contract of sale. But I would also reject the submission. Any merger must involve a notional dissolution of the existing partnership following the transfer of its assets to another entity: Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508; [2010] HCA 43 at [11]–[12]. A special majority would have authority to determine the firm's collective share in that new entity, which would depend on the relative value of the two businesses being merged. But it need not have authority to vary, retrospectively or prospectively, the current partners' rights and obligations inter se. 6. More importantly, cll 23(d), 24(c), 25(c) and 27(a) of the Partnership Agreement provide for the acquisition of an outgoing partner's share or interest by the remaining partners, in the event of retirement, expulsion, incapacity or death, respectively, at a price determined by applying to the partnership business the valuation principles in the Schedule to that agreement. Such provisions serve to protect against the undervaluation of an outgoing partner's entitlement. Their absence from cl 32 is wholly consistent with the special majority not being empowered to acquire, alter or extinguish the entitlements of a minority of partners in the course of a sale or merger. 7. The third consideration is the proprietary and fiduciary character of the mutual rights and duties of partners. In Carter Bros v Renouf (1962) 111 CLR 140 at 163–4, Kitto, Taylor, Menzies, Windeyer and Owen JJ explained the duty, absent any contrary "common intention", to account for property purchased with partnership money as follows (citations omitted): It could not be otherwise, for the general principle of equity applies between partners that a person in a fiduciary relation to another is not permitted to keep for himself a gain which he has made by the use of his fiduciary position; and accordingly every partner must account to the firm for any benefit derived by him without the consent of the other partners from any use by him of the partnership property. 1. In this way, the duty of each partner to account as a fiduciary (embodied in Partnership Act, s 29 and Partnership Agreement, cl 14(h)) underlies both the title of the firm to the traceable substitutes for its assets (reflected in part by Partnership Act, s 21) and the entitlement of each partner to share in any surplus from whatever assets are held on dissolution (embodied in Partnership Act, s 39): see Cyril Henschke at [24]–[25], citing Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12 at 22 (Viscount Radcliffe). 2. The character of these rights and duties justifies a reluctance to find that the parties intended to authorise so substantial a variation. General wording in an express power is insufficient to authorise what would otherwise constitute a breach of fiduciary duty by an agent: Tobin v Broadbent (1947) 75 CLR 378 at 401 (Dixon J). And even specific powers to deal with the property of a minority interest-holder are strictly construed: see Blisset v Daniel (1853) 10 Hare 493 at 506; 68 ER 1022 at 1028 (Page Wood V-C) (as to powers of expulsion between partners); Gambotto v WCP Ltd (1995) 182 CLR 432 at 446 (Mason CJ, Brennan, Deane and Dawson JJ), 452 (McHugh J) (as to powers to appropriate shares in a company). 3. Accordingly, cl 32 did not authorise the special majority to vary the entitlement of any partner to share in any surplus from the proceeds of sale. Insofar as the BSA and SPA purported to determine the distribution of proceeds of partnership property or the value of any partner's interest in the partnership, that determination was not enforceable by the Continuing Doctors against Dr Tsung. Any consideration for restraints on competition and entry into practice management agreements (ground 2) 1. The remaining, subsidiary issue is whether the cash amounts paid and shares issued under those agreements were wholly proceeds of partnership property or, as the Continuing Doctors submit, partly referable to promises given by them, but not Dr Tsung, specifically restraints of trade under the BSA and the requirement under the SPA to provide evidence of entry into practice management agreements for five-year employment with Qscan Bidco. This issue directs attention to the terms of the BSA and SPA, which are determinative in these circumstances. 2. Clause 4.1 of the BSA expressly provides that "the Purchase Consideration" (being $3 million and the shares in Radiology Holdings) constituted the "total consideration for the transfer of Assets and the assumption of the Accepted Liabilities" (being obligations and liabilities of the partnership to third parties). The Continuing Doctors' covenants not to compete with the business under cl 11.2 may have increased the purchaser's willingness to pay for the net assets by protecting some goodwill: see Murry at [64]. An equivalent covenant from Dr Tsung would perhaps have further increased that willingness. But the BSA forecloses the argument that any part of the consideration in fact received by the Continuing Doctors was due in return for their covenants. 3. In turn, cl 4.1 of the SPA provides that the Newco Cash Amount, the shares in Qscan Holdco to be issued to the Continuing Doctors and any applicable net Adjustment Amount would be the "total consideration for" the shares in Radiology Holdings to be transferred to Qscan Bidco. The entirety of the cash and shares so received by the Continuing Doctors was referable to property for which they were liable to account as partners. No part was given for any other promise under a practice management agreement to provide patient services or not to compete. Furthermore, each of the Continuing Doctors was to receive remuneration for those promises estimated in the explanatory statement (see [7] above) to be approximately 20% of the gross receipts from those services. The adequacy of that remuneration would be a matter for speculation. 4. In the result, I conclude that the cash paid and shares issued under the BSA and SPA were partnership property, to be applied in determining the surplus assets of the firm in accordance with Partnership Act, s 39. Dr Tsung was entitled, as against the Continuing Doctors, to one seventh of that surplus less what was due from him as a partner to the firm. It follows that the appeal should be dismissed with costs. 5. EMMETT AJA: This appeal concerns the construction of a clause in a partnership agreement relating to the sale of the business of the partnership. The partnership business in question (the Practice) consisted of diagnostic imaging practices carried on in towns on the north coast of New South Wales and in the Clarence Valley and in suburbs of Sydney under the name "North Coast Radiology", "Clarence Valley Imaging" and "Dr Craig Dyer and Partners". The question of construction determines the entitlement of the respondent, Dr Willie Tsung (Dr Tsung), to share in the consideration received upon the sale of the whole of the Practice. Dr Tsung was one of the partners. The seven other partners (the Continuing Doctors) are the appellants. 6. To put the question of construction into context, it is necessary to say something about the partnership agreement under which the partners conducted the Practice (the Partnership Agreement), an offer made to the partners on behalf of Quadrant Private Equity Pty Ltd (Quadrant) and the transaction documents entered into following that offer (together the Transaction Documents). The Transaction Documents included a Securities Purchase Agreement entered into on 21 April 2017 (the Securities Purchase Agreement), a Business Sale Agreement entered into on 30 June 2017 (the Business Sale Agreement) and Practice Management Agreements entered into on 30 June 2017 (the Practice Management Agreements). 7. The Continuing Doctors contend that the effect of the Transaction Documents is that they or entities connected with them were entitled to receive cash and shares in a subsidiary of Quadrant having a total value of approximately $59 million and Dr Tsung was entitled to receive cash of $3 million. In essence, Dr Tsung contends that he is entitled to one seventh of approximately $62 million. The Partnership Agreement 1. The Partnership Agreement is written but was not signed by the parties to it. However, it is common ground that it took effect from 1 January 2016. The parties to the Partnership Agreement were Dr Tsung and the Continuing Doctors. 2. The Partnership Agreement recited that, between 3 July 2015 and 31 December 2016, the Continuing Doctors and Dr Tsung carried on the business of the Practice as partners. It also recited that, following an agreement for sale in March 2016, the partnership consisted of five of the Continuing Doctors as to one seventh each, two of the Continuing Doctors as to one fourteenth each and Dr Tsung as to one seventh. 3. By cl 3 of the Partnership Agreement, the partnership business was to be that of a diagnostic imaging practice and such other business or businesses as the partners may, by a 75% majority, decide. That majority is to be contrasted with the majority provided for in cl 32 dealing with mergers and acquisitions, to which I shall refer below. Clause 3 also referred to, relevantly, a service trust known as North Coast Radiology Trust (the Trust), which provided administration services to and for the Practice. 4. By cl 6, the partners agreed that the initial capital of the partnership had been contributed in accordance with the shares stated in the recitals. The capital of the partnership could be increased from time to time as the partners might determine and the amount of any such increase was, unless otherwise agreed, to be contributed by the partners in the same shares and proportions as they are entitled to the initial capital of the partnership. Clause 7 provided that the partners would be entitled to the profits and would be responsible or liable for the losses of the Practice in the same proportions as their contributions to capital. Clause 5 provided that all monies received by the partners or any of them on account of the Practice were to be paid into the partnership bank account. 5. Clause 14 of the Partnership Agreement dealt with "positive covenants" on the part of the Partners. By cl 14(c), each partner was required to be just and faithful to the other partners. By cl 14(h), each partner was to account to the other partners for any benefit derived by the partner, without the consent of all other partners, from any transaction concerning the partnership, or for any use by the partner of the partnership property, name or business connection. 6. Clause 21 provided that the voting rights to the partners would be two votes for each full partner and one vote for a half partner. As a consequence of the sale agreement referred to in the recitals, there were six full partners and two half partners. Dr Tsung was one of the full partners. 7. Clauses 23, 24, 25 and 27 of the Partnership Agreement dealt respectively with: * Retirement of a partner; * Expulsion of a partner; * Illness or incapacity of a partner; * Death of a partner. Each of those provisions followed a similar scheme in that provision was made for the share of a retiring, expelled, ill or incapable or dead partner to be valued in accordance with principles set out in a schedule to the Partnership Agreement. The value so determined was to be the price paid to the partner or the partner's estate upon the partner ceasing to be a member of the partnership. Clause 30 also provided for call and put options in the event of expulsion, death or illness or incapacity of a partner pursuant to the provisions referred to above. The details are not presently relevant. 1. Clause 31 dealt with, relevantly, the Trust. For the purpose of the Partnership Agreement, a partner was taken to hold or control units in the Trust and such units were required to be transferred with the share in the partnership whenever such a transfer happened. 2. Clause 37 provided that, if Dr Tsung ceased to be a partner and the continuing partners acquired Dr Tsung's interest in the partnership and the Trust, the other partners were to authorise the proceeds from the sale of Dr Tsung's share to be paid to the Commonwealth Bank to reduce or pay out a loan made to finance Dr Tsung's entry into the Practice. Clause 37 also provided that, if the continuing partners did not acquire Dr Tsung's share but a third party acquired it, the continuing partners must not consent to such sale or enter into a partnership with third party unless the full purchase proceeds of Dr Tsung's shares were directed to be paid to the Bank for the purposes of the loan. 3. Clause 32, which is the critical provision of the Partnership Agreement for present purposes, dealt with "merger or acquisition – special meeting and voting provisions". Clause 32 provided as follows: "(a) Special provisions apply in respect of any possible merger or acquisition involving the partnership, so that any motion at a meeting of partners to consider merger or acquisition ("the motion") can only be put to the vote where:- * all partners have been provided with full details of the proposal in question, and * have been given ample opportunity to consider that proposal, and * all parties vote, whether personally at the meeting or by proxy, if absent. (b) If a partner fails to vote then his or her vote shall by reason of this Sub-clause be counted as a vote opposing the motion. (c) These special provisions apply where consideration needs to be given to either:- (i) the partnership (including the Associated Trusts) merging with another diagnostic imaging practice, whether corporate or otherwise; or (ii) the partnership accepting an offer by a corporation or another diagnostic imaging practice to acquire all or part of the partnership business (including the assets of the Associated Trusts). (d) The motion can only succeed where a minimum of twelve (12) votes (out of a total of fifteen (15) cast) are in favour of the motion." (Emphasis in original) 1. In essence, the question of construction in the appeal is whether, in the absence of unanimity, cl 32 is limited to binding all partners in relation to dealings with a third party concerning "merger or acquisition". In the alternative, the question is whether, in the event of a "merger or acquisition", the clause also extends to enabling the specified majority of partners to bind all partners concerning the rights of the partners inter se in relation to the division and distribution of the benefits or proceeds of alienation of property of the partnership or the Practice. The question highlights the important distinction in the law of partnership between the rights of partners, qua third parties, on the one hand, and the rights of partners, inter se, on the other. 2. That distinction is recognised in Part 2 of the Partnership Act 1892 (NSW), which deals with "partnerships generally". Division 2 of Part 2 (consisting of ss 5 to 18) is concerned with "Relationship of partners to persons dealing with them" while Division 3 (consisting of ss 19 to 31) is concerned with "Relationship between partners". Part 2 also contains Division 4 concerning "Dissolution of partnership". 3. Section 5, in Division 2, relevantly provides that every partner in a partnership is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member binds the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing knows that the partner has no authority. Section 6 relevantly provides that an act or instrument relating to the business of a firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm by any person thereto authorised, is binding on the firm and all the partners. 4. Section 19, in Division 3, relevantly provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Partnership Act, may be varied by the consent of all the partners. Section 20 relevantly provides that all property and rights and interests in property, originally brought into the partnership stock or acquired on account of the firm, or for the purposes and in the course of the partnership business, must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the Partnership Agreement. Section 28 relevantly provides that partners are bound to render true accounts and full information of all things affecting the partnership to any partner. Section 29 relevantly provides that every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership. 5. Section 32, in Division 4, relevantly provides that, subject to any agreement between the partners, a partnership is dissolved: * If entered into for a fixed term, by the expiration of that term; * If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; * If entered into for an undefined time, by any partner giving notice to the other or others of the partner's intention to dissolve the partnership. Under s 33, subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. Section 34 relevantly provides that a partnership is in every case dissolved by the happening of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. Section 35 also provides that, on application by a partner, the Court may order a dissolution of the partnership whenever in any case circumstances have arisen that, in the opinion of the Court, render it just and equitable that the partnership be dissolved. 1. Under s 38, after the dissolution of a partnership, the authority of each partner to bind the firm, and the other rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership. Section 39 relevantly provides that, on the dissolution of the partnership, every partner is entitled, as against the other partners in the firm, to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm. For that purpose any partner may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm. 2. Section 44 relevantly provides that, in settling accounts between the partners after a dissolution of partnership, the following rules are to be observed, subject to any agreement: * Losses are to be paid first out of profits, next out of capital and lastly by the partners individually in the proportion in which they were entitled to share profits. * The assets of the firm are to be applied in the following manner and order: (1) In paying the debts and liabilities of the firm to persons who are not partners therein. (2) In paying to each partner rateably what is due by the firm to the partner for advances as distinguished from capital. (3) In paying to each partner rateably what is due from the firm to the partner in respect of capital. (4) The ultimate residue, if any, is to be divided among the partners in the proportions in which profits are divisible. 1. The operation of cl 32 of the Partnership Agreement must be construed in the context of the provisions of the Partnership Agreement and the Partnership Act summarised above. Against the background of those provisions, it is necessary to consider the Quadrant Offer and the Transaction Documents involving the acquisition of the whole of the Practice by a subsidiary or related company of Quadrant. The Quadrant Offer and the First Resolution 1. On 11 July 2016, Quadrant wrote to the chairman of the partnership, making a "non-binding indicative offer" (the Proposal). Relevantly, the letter said that Quadrant had valued the Practice and had arrived at an "enterprise value of $68.8 million on a cash and debt fee basis and with an appropriate level of working capital". The letter said that Quadrant was "seeking to partner with" the partners under a transaction that would allow the partners to realise "in aggregate at least 60% of their current investment at an attractive value upfront". The letter said that the Proposal was conditional upon each of the partners entering into a new contractual arrangement that would contain a minimum five year term with twelve months covenant restraining competition with the Practice upon termination of the arrangement. 2. It appears that all of the Continuing Doctors other than Dr Tsung wished to accept the Proposal proffered on behalf of Quadrant. Dr Tsung did not wish to accept the Proposal. On 23 February 2017, Dr Tsung's solicitors wrote to the solicitors acting for the Continuing Doctors saying that there were three options available as follows: * continue the Practice as is; * the Continuing Doctors buy out Dr Tsung's interest in the Practice at an agreed price; * dissolve the partnership. Dr Tsung's solicitors asked the solicitors for the Continuing Doctors which option they wished to pursue. 1. On 16 March 2017, the chairman of the partnership gave notice to the partners of a proposed meeting pursuant to cl 32 of the Partnership Agreement for the purpose of consideration and approval in principle of the following motion: "That, pursuant to clause 32 of the Deed of Partnership of North Coast Radiology Group, the Partners accept in principle the offer by Quadrant Private Equity (the Quadrant Offer) to effectively acquire the Partnership business, including the [Trust], subject to and in accordance with the terms of the Quadrant Offer and on the terms set out in the Explanatory Statement attached to [the Notice of Meeting dated 16 March 2017] and take such further steps as they deem necessary and are advised to give effect to their acceptance in principle of the Quadrant Offer." (Emphasis in original) 1. The explanatory statement attached to the notice of meeting (the Statement) stated that the original proposal had been "refreshed" in November 2016 and that a further offer had been made in December 2016 (the Quadrant Offer). That statement said that Quadrant required certain "structuring steps" be undertaken with respect to the Practice that would involve a newly established company acquiring, through a wholly owned subsidiary, the full business and assets of the partnership and the units in the Trust. 2. The Statement said that the Quadrant Offer valued the Practice at $68.8 million and that the purchase price offered would be paid in cash as to 60% and, as to 40%, in the form of shares in a holding company to be issued to the partners. The partners and Quadrant were to enter into a shareholders' agreement in respect of the holding company. 3. The Statement said that it was a condition of the Quadrant Offer that all the partners must enter into new employment agreements with the holding company. Another key condition and term of the acquisition was that a non-compete period of five years from completion of the transaction was to apply to the partners and the partners would be required to give warranties and indemnities in respect of the partnership business in favour of the purchaser. The Statement proposed that, without obligation to do so, a maximum sum of $3 million in cash would be reserved for payment to Dr Tsung subject to and simultaneously with completion of the transaction and that Dr Tsung's units in the Trust would be redeemed for a nominal sum. 4. At the meeting held on 30 March 2017, all of the Continuing Doctors cast votes in favour of the Proposal. Dr Tsung abstained from voting. On 10 April 2017, the solicitors for the Continuing Doctors wrote to Dr Tsung's solicitors confirming that at the meeting held on 30 March 2017, the Continuing Doctors had resolved to sell the Practice, including the interests of the Trust, subject to and in accordance with the terms of the Quadrant Offer and on the terms set out in the Statement. 5. Dr Tsung's solicitors responded on 10 April 2017 asserting that there were fundamental flaws with both the notice of meeting and the purported resolution that rendered the resolution "invalid, void and otherwise of no effect". The letter asserted that, while the Continuing Doctors were at liberty to sell their interest in the partnership in accordance with the provisions of the Partnership Agreement, they could not sell Dr Tsung's interest and he did not agree to sell his interest in the Practice. The letter also asserted that cl 32 did not contain any term that provided for or otherwise compel Dr Tsung to sell his interest. 6. The solicitors for the Continuing Doctors responded on 19 April 2017 denying the suggestion that the notice of meeting and purported resolution were invalid or void. They asserted that it was a necessary consequence of the partners accepting the Quadrant Offer pursuant to cl 32 that Dr Tsung would be obliged to sell his interest. The Securities Purchase Agreement 1. On 21 April 2017, the Securities Purchase Agreement was entered into. The parties were Qscan Bidco Pty Ltd, as "Purchaser", Qscan Group Holdings Pty Ltd (Holdco), and the Continuing Doctors, as "Vendors". It contained recitals as follows: * The Vendors will undertake the steps set out in an annexure (the Restructure Steps). * The Purchaser had made an offer to acquire all of the shares in an Australian company to be called "North Coast Radiology Holdings Pty Ltd" to be incorporated by the Vendors as part of the Restructure Steps (Newco) for a combination of shares in Holdco and cash. * Each of the Vendors had accepted that offer. * By accepting that offer, the Vendors had agreed to sell and the Purchaser had agreed to purchase the shares in Newco together with the shares in the trustee of the Trust and the units in the Trust. 1. By cl 2, completion of the Securities Purchase Agreement was to be conditional upon, amongst other things, completion of the Restructure Steps. While that condition precedent was expressed to be for the sole benefit of the Purchaser, the Purchaser could waive the condition. By cl 3.1, the vendors were to sell all of the shares in Newco as at completion together with the shares in the trustee of the Trust and the units in the Trust and the Purchaser was to buy those shares and units on the terms of the Securities Purchase Agreement. 2. Clause 4.1 of the Securities Purchase Agreement provided that the total consideration for the shares in Newco to be paid or provided by the purchaser to the Vendors was to be: * An amount in cash calculated by starting with the Enterprise Value (being $62,632,000), and deducting: $14,400,000 described as the Aggregate Rollover Amount, $3,000,000 described as the Tsung Payout Amount, and other adjustments. * Shares in Holdco to be issued to the Vendors under cl 8.4. Under cl 4.4, the sum of $3 million was to be paid by the Purchaser to the Vendors in accordance with cl 8.3(a) and the Vendors were to ensure that that amount was dealt with in accordance with the provisions of the Business Sale Agreement. I shall refer to those provisions below. They are concerned with the treatment of Dr Tsung. 1. Under cl 8.2, the Vendors were obliged, on the completion date, to deliver to the Purchaser relevant documents approving all actions necessary or otherwise appropriate to enable the Restructure to be completed together with duly executed instruments of transfer of all of the shares in Newco. The vendors were also obliged to deliver evidence that each of the Continuing Doctors had executed a Practice Management Agreement with the Purchaser. By cl 8.3, the Purchaser was required to pay the amount in cash set out in [63] above to the Vendors. By cl 8.4, Holdco was required to issue shares in Holdco as specified in a schedule. 2. By cl 9, each of the Vendors gave certain representations and warranties to the Purchaser. By cl 17.1, each of the Continuing Doctors gave undertakings in restraint of competition with the Practice following completion of the Securities Purchase Agreement. 3. On 28 April 2017, the trustee of the Trust gave notice of redemption of units in the Trust held by WTPC Pty Ltd for a consideration of $208,280. WTPC Pty Ltd is a company associated with Dr Tsung. The Second Resolution 1. On 1 June 2017, Dr Tsung's solicitors wrote to the solicitors for the Continuing Doctors confirming that Dr Tsung's position was that, following the passing of the motion at the meeting held on 30 March 2017, he was bound to sell his interest in the partnership at the price offered by Quadrant. The letter said that Dr Tsung accepted that the partnership had decided "via the mechanism in clause 32" to sell the assets and business of the partnership and that he was bound by, and did not seek to prevent or impugn, the sale. The letter said, however, that Dr Tsung wished to receive "his entitlement to a proportionate (one seventh) share of the proceeds of realisation of the assets and business of the [p]artnership after deducting the [p]artnership debt". 2. On 19 June 2017, the chairman of the partnership gave notice of a meeting to be held on 26 June 2017 for the purpose of considering and approval of a motion that, for the purposes of cl 32 of the Partnership Agreement, the partnership accept "the finalised offer for the acquisition of all of the Partnership business and assets as … proposed by Quadrant … as specified in the Explanatory Statement attached to this Notice of Meeting …". The explanatory statement (the Second Statement) attached to the notice stated that, on 21 April 2017, the Continuing Doctors had signed legal agreements to give effect to the acquisition of the Practice by Quadrant. The Securities Purchase Agreement together with schedules and annexures were annexed to the Second Statement, which noted that that transaction conditionally valued the Practice at approximately $62 million, imposed a condition that each of the Continuing Doctors must enter into practice management agreements and imposed a non-compete period to apply to the Continuing Doctors. 3. At the meeting held on 26 June 2017, the resolution was passed. The minutes record that all partners other than Dr Tsung were present at the meeting and all those present cast votes in favour of the motion. The minutes record that the motion had accordingly succeeded in accordance with cl 32 of the Partnership Agreement. The Business Sale Agreement 1. On 30 June 2017, the Business Sale Agreement was signed. The parties were the partners (including Dr Tsung), as "Vendor", and North Coast Radiology Holdings Pty Ltd, as "Purchaser". It was signed by the first appellant, Dr Ian Cappe and the third appellant, Dr Craig Dyer, on behalf of the Vendor as the authorised partners. It was also signed by Dr Cappe and Dr Dyer on behalf of the Purchaser in accordance with s 127 of the Corporations Act 2001 (Cth). 2. The Business Sale Agreement contained recitals to the following effect: * Quadrant had made an offer to the Continuing Doctors and Dr Tsung, on the same terms to all of them, to acquire the Practice. * Quadrant had advised that it required the Practice to be corporatised by transferring it to a newly incorporated special purpose company. * The "Vendor" comprised the Continuing Doctors and Dr Tsung, who in partnership own the assets of the Practice and the Practice. * The Vendor (by resolution in accordance with its Partnership Deed) wished to sell and the Purchaser, North Coast Radiology Holdings Pty Ltd, wished to purchase the assets and the business. 1. The recitals are capable of giving a false impression. While the Proposal contemplated an offer to all of the partners on the same terms to all of them, that was rejected by Dr Tsung. Thereafter, some variation appears to have been made which involved differential terms as between Dr Tsung, on the one hand, and the Continuing Doctors, on the other. The recitals are also inaccurate in so far as they record that the partners, by resolutions in accordance with the Partnership Agreement, wished to sell on the terms of the Business Sale Agreement. There is no resolution to that effect. The only resolutions are those set out above. 2. Clause 2 of the Business Sale Agreement provided that it was to be interdependent with each of the "Transaction Documents" being: * the Business Sale Agreement; * the Securities Purchase Agreement; and * the redemption notice issued to WTPC Pty Ltd. Clause 2 provided that the Business Sale Agreement was not required to be completed unless each Transaction Document had been executed and the redemption of units held by WTPC Pty Ltd and the Trust had occurred. 1. The pivotal provision of the Business Sale Agreement was cl 3, whereby the Vendor agreed to sell and the Purchaser agreed to purchase the Assets. The term "Assets" was defined as all of the assets, rights, title and interest owned by the Vendor or used in the Business as at the completion date. The term "Business" was defined as the Diagnostic Imaging Practices carried on under the names "North Coast Radiology", "Clarence Valley Imaging" and "Dr Craig Dyer and Partners". 2. Clause 3.1(b) provided that, in consideration of the transfer of the Assets by the Vendor to the Purchaser and the other obligations of the Vendor under the Business Sale Agreement, the Purchaser agreed to assume certain liabilities of the business and accept responsibility for the performance, satisfaction and discharge of liabilities specified in the Business Sale Agreement. 3. Clause 4 dealt with the "purchase consideration". The total consideration for the transfer of the Assets and the assumption of liabilities was to be: * The issue and allotment of shares in the Purchaser to entities connected with the Continuing Doctors being one sixth to the full partners and one twelfth to the half partners. * The sum of $1,886,141.29. Clause 4.1(b) provided that the Vendor had, by resolution of its constituent partners, in accordance with the "Partnership Deed governing the Partners in relation to the Business" had agreed that the total consideration for the Business was to be satisfied and divided amongst the partners in accordance cl 6.3(a) and cl 6.3(b). There had in fact been no such resolution. The only resolutions passed were those referred to above. Clause 4.2 provided that the Purchaser would on completion pay to WTPC Pty Ltd the redemption value of the units in the Trust. 1. Under cl 6.2, the Vendor was obliged to deliver relevant documents, books and records to the Purchaser. Specifically, the Vendor was required to do all things necessary to vest ownership, possession and control of all Assets and the Business in the Purchaser. 2. By cl 6.3, the obligation of the Purchaser was to pay to the Vendor: * The sum of $1,886,141.29, which was to be held for the account of Dr Tsung. * The redemption value of the units in the Trust, which was to be applied towards the redemption of the units. In addition, the Purchaser was to issue and allot to the entities associated with the Continuing Doctors the shares in the Purchaser specified in the Schedule. 1. Clause 6.5 provided that all actions to be taken by the Vendor and the Purchaser on completion were to be interdependent and would be deemed to take place simultaneously. No delivery or payment was to be deemed to have been made until all deliveries and payments due to be made on completion had been made or waived. 2. Clause 7.1 provided that, with effect on and from the completion date, the Purchaser was to be entitled to the income, profits, rights and benefits of the Business. The Purchaser was to assume responsibility for and was responsible for the performance, satisfaction and discharge of specified liabilities and must perform, satisfy, discharge those liabilities as and when they fell due for performance, satisfaction or discharge. 3. By cl 11, each of the Continuing Doctors undertook restraints against competition with the Business. By cl 12, the Vendor, which included Dr Tsung, gave warranties in favour of the Purchaser in relation to the Business. 4. It is clear that the terms of the Business Sale Agreement differentiate between the rights of Dr Tsung, on the one hand, and the rights of the Continuing Doctors, on the other. Their obligations appear to be the same, in the sense that each is bound to part with his or her interest in the Assets and the Business. However, their entitlements are clearly different. Whereas the Continuing Doctors receive shares in Newco as consideration for the transfer of their interest in the Assets and the Business, Dr Tsung receives a sum of money in cash equivalent to $3 million. The evidence indicates the value of the shares in Newco, having regard to the Securities Purchase Agreement, is significantly greater than $3 million. 5. Dr Tsung contends that, whereas cl 32 and a resolution passed in accordance with cl 32 may be effective to bind all of the partners qua a third party, it has no effect in regulating the rights and obligations of the partners inter se. That is to say, cl 32 is concerned only with the matters that are the subject of Part 2 of the Partnership Act and cl 32 has no part to play in relation to the rights and obligations of the partners inter se, which are the matters that are the subject of Part 3 of the Partnership Act. The Continuing Doctors, on the other hand, contend that the effect of the resolutions passed under cl 32 of the Partnership Agreement is that the provisions of the Business Sale Agreement bind all of the partners not only as against the Purchaser, Newco, but also as to their rights inter se in relation to the division and distribution of the purchase consideration under the Business Sale Agreement. 6. On 30 June 2017, each of the Continuing Doctors entered into a Practice Management Agreement with Qscan Bidco Pty Ltd (Qscan Bidco). The Practice Management Agreement provided for the provision of services to Qscan Bidco by the Continuing Doctor in connection with the Practice. It also provided for the remuneration of the Continuing Doctor for those services. The term was to be for five years. In addition, cl 13 provided undertakings in restraint of competition. The Decision of the Primary Judge 1. On 7 June 2017, Dr Tsung commenced proceedings in the Commercial List of the Equity Division against the Continuing Doctors. At that stage, while the Securities Purchase Agreement had been entered into, completion had not taken place. Dr Tsung claimed a declaration that, on settlement of the Securities Purchase Agreement, he was entitled to one-seventh of the surplus proceeds of realisation, or value of the proceeds of realisation, of the partnership assets, less the liabilities. He also claimed an order that, on the settlement of the Securities Purchase Agreement, the partnership be dissolved. On 11 August 2017, for reasons published on that day, a judge sitting in the Commercial List (the primary judge) made the declaration sought by Dr Tsung. 2. The parties informed the Court that the primary judge made the declaration on the basis that the parties had agreed that, following settlement of the Securities Purchase Agreement, the partnership would be wound up informally, without the need for a court order to that effect. The only issue on the taking of accounts was whether Dr Tsung is entitled to share in one-seventh of the whole of the purchase consideration, being shares in Holdco and cash including the $3 million, or whether his entitlement is limited to the sum of $3 million. That question was resolved by the declaration. 3. The primary judge considered that, whilst cl 32(a) provides in general terms that special provisions apply in respect of any possible merger or acquisition, cl 32(c) is more specific in providing that the special provisions apply, relevantly, where consideration needs to be given to the partnership's accepting an offer by a corporation to acquire all of the partnership business. His Honour considered that cl 32 must be construed in the light of the fundamental right of a partner to share in the assets, enshrined in cl 7 of the Partnership Agreement and under the provisions of the Partnership Act. 4. The primary judge considered that cl 32(c) confers authority on the specified majority to bind the partners, relevantly, to accept an offer to acquire all of the partnership business. The object secured by that provision was to give the majority power to force the sale of the partnership business by accepting an offer. That authority extends to determining what consideration would be accepted for the sale of the whole of the business. However, his Honour held, cl 32(c) does not, either expressly or by implication, confer authority on the majority to regulate or change how the partners will share in the consideration paid for the sale of the business. His Honour considered that cl 32 did not confer authority on the majority to violate the enshrined rights of partners to share in the profits and property of the partnership in the proportions agreed. 5. Dr Tsung did not challenge the validity of the Transaction Documents. The primary judge considered that he did not need to since they are binding in so far as they fix the purchase consideration that was to be paid by Newco for the Assets, but are ineffective to vary or limit Dr Tsung's right, as against the Continuing Doctors, to share in the division and distribution of the purchase consideration. His Honour held that, once a surplus was identified following the sale of the Assets and the Business, being relevantly the whole of the Practice, Dr Tsung was entitled to a one seventh share in that surplus and that that entitlement is unaffected by the terms of the Transaction Documents. 6. The primary judge observed that the cash amount of $3 million bore no ostensible relationship to the value of the interest of Dr Tsung in the Assets and the Business that were the subject of the Business Sale Agreement. His Honour characterised the sum of $3 million as an arbitrary figure selected by the Continuing Doctors, and said that nothing in law or equity entitled them to bind Dr Tsung to accept that sum in exchange for his full partnership interest. 7. The primary judge also rejected the Continuing Doctor's secondary argument that Dr Tsung is not entitled to share in what was received under the Securities Purchase Agreement because that was not consideration for the partnership assets, but rather consideration for the shares which had been issued pursuant to the Business Sale Agreement, plus the bundle of rights acquired by Qscan Bidco comprising the employment and restraint arrangements. His Honour held that Dr Tsung was entitled to receive, and the Continuing Doctors were obliged to account to him for, the benefit of his proportionate share of the purchase consideration received under the Business Sale Agreement. The shares that formed part of the purchase consideration carried with them the rights that the holders had under the Securities Purchase Agreement to receive shares in Holdco and cash for the shares in Newco. His Honour considered that it was beside the point that the Continuing Directors agreed, in accordance with the terms of the Securities Purchase Agreement, to enter into separate arrangements in the form of the Practice Management Agreements and to give undertakings in restraint of competition both in the Securities Purchase Agreement and in the Practice Management Agreements, as well as the Business Sale Agreement. The Appeal 1. By their amended notice of appeal filed on 8 November 2017, the Continuing Doctors assert that the primary judge: * erred in holding that, on the proper construction of cl 32, each partner was entitled to a share, equal to his or her proportionate interest in the partnership, of any consideration or assets received by any partner as part of that sale or merger, * should have held that, on the proper construction of cl 32, the stated majority of partners were authorised to enter into and give effect to any transaction that met the description "any possible merger or acquisition involving the partnership", * erred in finding that the amounts payable and shares issued pursuant to the Securities Purchase Agreement amounted to surplus of partnership property or the proceeds of the partnership business, and * should have found that the consideration under the Securities Purchase Agreement was consideration not only for the partnership assets but also for the Continuing Doctors accepting other obligations, including minimum term employment contracts and restraint obligations. 1. The Continuing Doctors contended in their written submissions that the offer was to acquire only part of the business carried on by the partners (that is, excluding the portion of the business carried on by Dr Tsung). However, when pressed, counsel conceded that that contention was not central or important to the Continuing Doctor's argument because cl 32(c) does not distinguish between an acquisition for all or part of the partnership business. 2. In substance, the Continuing Doctors contend that the resolutions passed pursuant to cl 32 not only authorised the majority to bind all partners as against the Purchaser but also authorised the majority to bind all partners in relation to the apportionment, division and distribution among the partners of the purchase consideration provided for in the Business Sale Agreement. 3. Essentially, the Continuing Doctors contend that they were entitled to receive a greater share of the purchase consideration under the Business Sale Agreement because they were prepared to enter into Practice Management Agreements whereby they accepted an obligation to continue to be connected with the Practice for a minimum of five years and to give undertakings in restraint of competition after they cease that connection with the Practice. They contend, in effect, that the additional consideration paid to them under the Business Sale Agreement was to compensate for those commitments, which Dr Tsung was not prepared to undertake. 4. The negotiations that apparently occurred that gave rise to the change in the Proposal were not in evidence. However, the worth of Dr Tsung to Quadrant may be gleaned from the changes. The Proposal involved all of the partners and contemplated purchase consideration having a total value of $68.8 million. That was reduced to $62 million when it was apparent that Dr Tsung would not commit himself to a Practice Management Agreement and a restraint on competition. There was also a suggestion that the value had also been reduced due to the possibility that the fourth appellant, who had recently received medical treatment, might not be able to work for the minimum five year period prescribed by the Practice Management Agreement. However, this possibility was not developed further. That suggests that the value of the Practice to Quadrant was $68.8 million with all eight partners but only $62 million without Dr Tsung. Nevertheless, Dr Tsung's share was to be limited to $3,000,000. 5. On one view, it may be arguable that Dr Tsung was entitled to a greater share than one seventh. The Continuing Doctors will have the advantage of the Practice Management Agreements, in that they will have guaranteed employment for five years, with the benefit of the partnership assets continuing to be available to them for the purpose of carrying on the Practice. They will be able to earn the remuneration payable under the Practice Management Agreements. Dr Tsung has no such benefits. Certainly, Dr Tsung would be entitled to establish a practice in competition with the Practice sold to the Purchaser. However, he would need to buy plant and equipment and obtain premises and administrative support before he would be in a position to generate the income that was being generated from the Practice while he was a member of the partnership. 6. The Continuing Doctors contend that there is nothing in the language of cl 32 that confines it in such a way that it cannot regulate the rights of the partners inter se. They contend that it would be an erroneous construction of cl 32 to impose a limitation on its effect such that the consideration payable under a transaction authorised by cl 32 resolution must be dealt with by the partners inter se in accordance with their prior partnership share, where that is different from the way in which the transaction purports to deal with that share. They contend that cl 32 is not expressly limited to a merger or acquisition that results in the consideration being apportioned between the partners in accordance with their pre-existing interests. They assert that it is within the range of commercially foreseeable possibilities that those partners who continue in practice with a purchaser might assume different obligations and therefore receive differential consideration as compared with partners who do not continue in practice with the purchaser. They say that cl 32 contemplates the creation, in a merger or corporate acquisition, of a new bundle of rights and obligations for each individual partner or group of individual partners. 7. The Continuing Doctors assert that the effect of the construction adopted by the primary judge is that, while they are bound by the terms of the Business Sale Agreement, the Securities Purchase Agreement and the Practice Management Agreements, which impose greater obligations on them, they are nevertheless obliged to share part of the consideration attributable to them with Dr Tsung, inconsistently with the way in which the Transaction Documents provide for the apportionment of the purchase consideration. They contend that, while that may be a possible way for partners to organise their rights and obligations, it is unlikely to have been objectively intended. 8. The Continuing Doctors point out that entry into the Practice Management Agreements was a condition of completion of the Transaction Documents. They assert, in effect, that the differential in the consideration receivable under the Business Sale Agreement is referable to a premium paid for their commitment to the Practice Management Agreements and the restraints on competition. However, there is nothing in the language of any of the Transaction Documents that suggest that that was so. No part of the purchase consideration payable under the Business Sale Agreement is expressed to be attributable to the obligation to enter into the Practice Management Agreements or the restraints on competition. While the Business Sale Agreement was expressed to be interdependent with completion with the Securities Purchase Agreement, there is nothing in the language of the Business Sale Agreement to suggest that any part of the purchase consideration payable by the purchaser was intended to be a premium for the obligation to enter into the Practice Management Agreements or the restraints on competition. 9. It would require clear language in a provision such as cl 32 to enable the majority to take from the minority their entitlement under s 29 of the Partnership Act and cl 14(h) of the Partnership Agreement. That entitlement is to require each partner to account to each other partner for any benefit derived by that partner from any transaction concerning the partnership or any use by that partner of the partnership property name or business connection. There is no basis for construing cl 32 as conferring on the majority the right to sell partnership assets, much less the whole of the business of the partnership, on a basis that entitles some partners to receive a greater share of the proceeds than the proportion attributed to them under the Partnership Agreement. 10. Clause 32(a) refers to a motion "to consider merger or acquisition" and cl 32(c) operates to put content into that phrase. Thus, cl 32(c)(i) refers to consideration being given to merging with another diagnostic imaging practice. Clause 32(c)(ii) refers to consideration being given to accepting an offer by a corporation to acquire all or part of the partnership business. Both are arrangements with a third party that would be expected to have the effect of alienating assets of the partnership and discharging liabilities of the partnership. The purpose of cl 32 is to permit the majority to require the minority to join in the alienation of partnership assets and the discharge of partnership liabilities. If the proposal is a transaction consisting of merger or acquisition as defined in cl 32(c), the minority can be compelled to agree to such a merger with, or acquisition of the partnership assets by, a third party. That is as far as the clause goes. 11. The Continuing Doctors accept that the power or rights conferred by cl 32 on the majority must be exercised for a proper purpose. That is to say, cl 32 could not bind Dr Tsung if the terms of the Transaction Documents involved a breach of the obligation under cl 14(c) to be just and faithful, or a breach of the fiduciary duties that partners owe to each other. However, there would be no need for such a qualification if cl 32 is given the construction contended for by Dr Tsung, such that it is limited to binding the minority to enter a proposed transaction with a third party (except to say that the Continuing Doctors could also not enter into a transaction otherwise than in good faith or in breach of fiduciary duty). Thus, the specified majority can impose upon the minority terms of a merger or acquisition as between all of the partners, on the one hand, and a third party on the other. That, however, says nothing about the manner of apportionment, division and distribution among the partners of the consideration payable to the partnership as a whole by the merging diagnostic imaging practice, or the corporation acquiring the partnership business. 12. As indicated above, the Partnership Agreement afforded to the partners a mechanism whereby, in certain circumstances, a partner could be excluded and the interest of that partner could be acquired by the remaining partners. Similarly, the Partnership Agreement provided for acquisition by the remaining partners of the interest of a deceased partner. It would be curious, therefore, if cl 32, by a sidewind, enabled the specified majority to acquire the interest of the minority without recourse to the mechanism provided for in cl 23, cl 24, cl 25 and cl 27. The presence of such clauses indicates that cl 32 was not intended as a mechanism for determining the rights of the partners inter se. It is limited to empowering the majority to require the minority to enter into a merger or corporate acquisition, in the circumstances specified, and to prevent the minority frustrating the will of the majority in that regard. It says nothing about the manner in which the benefits or proceeds received by the partnership as a whole, following such merger or corporate acquisition, are to be divided and distributed among the partners. 13. It may be, and indeed it is likely, that the Continuing Doctors believed that the provisions of the Business Sale Agreement require that the total consideration be divided amongst the partners in accordance with cl 6.3(a) and cl 6.3(b) of the Business Sale Agreement. As between the partners, on the one hand, and the Purchaser, on the other, that is the way in which the purchase consideration is to be applied. However, there is nothing in the language of cl 32 that would authorise a resolution determining the manner in which the consideration payable to the partners under a merger or acquisition should be different from the manner provided for in the Partnership Agreement generally and under the Partnership Act. 14. In the event of dissolution of the partnership, each of the partners would be entitled to the undistributed profits in the proportions of their contributions to capital, as specified in the recitals to the Partnership Agreement. If there were to be a surplus after all liabilities have been discharged, each partner would then be entitled to the surplus in the same proportions. It would be a curious result if that entitlement could be changed by a sidewind by the operation of a resolution pursuant to cl 32. There is nothing in cl 32 that authorises the majority to impose on the minority a different regime for the distribution of surplus from that otherwise provided for in the Partnership Agreement and in Partnership Act. 15. It is of no moment to a merging or purchasing entity how the members of the partnership divide and distribute the proceeds of a merger or acquisition amongst the partners inter se. So far as the third party entity is concerned, the manner of the distribution or division of the purchase consideration payable by that entity would be of no interest or consequence. The interest of the entity is to acquire a good title to the relevant assets of the Practice. 16. In a sense, the partners are an asset of the Practice. So much was clearly in the mind of Quadrant, in so far as it was a condition of the Securities Purchase Agreement that each of the Continuing Doctors enter into a Practice Management Agreement. However, Dr Tsung was not a party to the Securities Purchase Agreement. He was a party to the Business Sale Agreement because, despite his reluctance to do so, cl 32 empowered the majority to require him to part with his interest in the partnership assets and business on such terms, as regards the acquirer of that interest, as the majority determined. However, there is no reason to construe cl 32 as authorising the majority to vary the entitlements of the partners inter se to have the proceeds generated by the relevant transaction divided and distributed amongst them otherwise than in accordance with the terms of their Partnership Agreement. 17. The resolution passed on 26 June 2017 was to accept the offer made on behalf of Quadrant on the terms of the Business Sale Agreement and the Securities Purchase Agreement. Neither of those Transaction Documents contains a provision directed at the interests of the partners inter se. Clause 4.1(b) of the Business Sale Agreement touches on the question and purports to record a resolution of the partners. As I have said, there is no such resolution that purports to deal with partnership entitlements inter se. On that basis, cl 4.1(b) should be construed as relating to the manner of payment of the purchase consideration, which is of importance to the Purchaser in order to ensure a good receipt and discharge as between vendor and purchaser. 18. The distinction sought to be drawn by the Continuing Doctors between themselves and Dr Tsung, that greater consideration should be attributed to them because of the commitments they give to enter into the Practice Management Agreements and the undertakings as to restraint of competition, ignores the fact that those matters are directed to future conduct of the Practice being alienated by the partners, whereas the division and distribution of the purchase consideration is concerned with the entitlements of the partners up to the time of completion. 19. There was no evidence as to how the reduction in the "enterprise value" was arrived at. It may be, for example, that the fewer numbers of partners would reduce the income that could be generated. That is to say, a replacement partner would be required if the level of income generated was to be maintained. To that extent, the business was worth something less to Quadrant because it would not generate the same income as it had with all eight partners up to 30 June 2017. Whether or not the Continuing Partners intended a differential result in terms of division and distribution of the purchase consideration, cl 32 on its proper construction did not authorise them to do so. Conclusion 1. The primary judge made no error in construing cl 32 of the Partnership Agreement. The appeal should be dismissed. The Continuing Doctors should pay Dr Tsung's costs of the appeal. ********** Amendments 27 April 2018 - [8] first sentence, changed "six" to "five" [40] penultimate sentence, changed "provided that" to "provided" [42] final sentence, changed "purposes the loan" to "purposes of the loan" [43(b)] quote, changed "he saw her vote" to "his or her vote" [58] third sentence, changed "for the solicitors" to "the solicitors" [67] first sentence, changed "bound by to sell" to "bound to sell" [68] first sentence, changed "Partnerhip" to "Partnership" [70] final sentence, changed year of Corporations Act from "2000" to "2001" (also on cover sheet) [86] first sentence, changed "that that" to "that" [97] final sentence, changed "he a member" to "he was a member" [105] final sentence, changed "manner provided" to "the manner provided" 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. Decision last updated: 27 April 2018