Anderson Group v Davies

[2001] NSWSC 356

Reported Decision: (2001) 19 ACLC 1112

New South Wales

Supreme Court

CITATION:	Anderson Group v Davies [2001] NSWSC 356
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1482/01
HEARING DATE(S):	28/03/01, 30/04/01
JUDGMENT DATE:	7 May 2001
PARTIES :	The Anderson Group Pty Limited (In Liquidation) - Plaintiff Kenneth Alexander Davies - First Defendant Sandra Louise Davies - Second Defendant North Wollongong Hotel Pty Limited - Third Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr A. Lo Surdo - Plaintiff Mr P.B. Walsh - Defendants
SOLICITORS:	The Argyle Partnership - Plaintiff Maguire & McInerney - Defendants
CATCHWORDS:	PARTNERSHIP - Whether partnership dissolved by winding up of corporate partner - Winding-up not "bankruptcy" for purposes of Partnership Act, s.33(1) - Appointment of receiver to wind up partnership
LEGISLATION CITED:	Partnership Act 1892
CASES CITED:	Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 Davies v Barlow (1881) 2 LR (NSW) 66 Tate v Barry (1928) 28 SR (NSW) Fitz-Gibbon v Khoury, NSWSC, 1 March 1985 The Laws of Australia "Business Organisations" Banks, Lindley and Banks on Partnership (17th Edition) Lindley on Partnership (5th Edition) Palmer's Company Precedents (4th Edition)
DECISION:	1. A declaration that the partnership between the plaintiff, the first defendant and the second defendant styled North Wollongong Hotel Partnership was dissolved on 5 February 2001; 2. Orders in terms of paragraphs 2, 3, 4, 5, 6, 7, 8 and 9 of the Summons; 3. An order that execution of the orders in item 2 above be stayed pending determination of proceedings 2210/01 or until further order; 4. Liberty for either party to restore the matter to the list on two days' notice to the other party; 5. An order that the defendants pay the plaintiff's costs.

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

MONDAY, 7 MAY 2001

1482/2001 - THE ANDERSON GROUP v DAVIES & ORS

JUDGMENT

HIS HONOUR:

Background

1    The plaintiff is a member of a partnership styled North Wollongong Hotel Partnership. It has a fifty per cent interest in this partnership. The other partners are the first and second defendants whose interests are respectively thirty five per cent and fifteen per cent. The assets of the partnership include land and a hotel building at North Wollongong, stock, goodwill and a debt owing in respect of a loan made by the partnership to the third defendant.

2    From 1993 the partnership operated through the agency of the third defendant, shareholdings in which mirror the percentage interests of the partners in the partnership. The first and second defendants and Mr Gavin Anderson are the directors of the third defendant. The trading receipts of the partnership were paid into the bank account of the third defendant. The trading expenses were paid from that bank account. The real property which is a partnership asset is held in the names of the partners as tenants in common in shares corresponding with their respective interests in the partnership.

3 It is common ground that the partnership has been dissolved, although there is no agreement as to the date or manner of dissolution. The plaintiff contends that the partnership was dissolved on or about 5 February 2001 pursuant to a notice given under s.32 of the Partnership Act 1892. The defendants say that the partnership was dissolved either as the plaintiff contends or upon and by virtue of the winding up of the plaintiff on 3 March 2000. The defendants also say that different consequences may follow, depending on which event brought about dissolution (that is, the winding up of the plaintiff on 3 March 2000 or the giving of notice under s.32 of the Partnership Act in February 2001).

Relief sought

4    The plaintiff claims

(a) a declaration that the partnership was dissolved on 5 February 2001 or some earlier date;
(b) an order that the business of the partnership be wound up under the direction of the Court;
(c) an order for the appointment of a receiver and manager of the partnership business;
(d) an order that the first and second defendants deliver to the receiver and manager all partnership assets within their control;
(e) orders investing the receiver and manager with certain powers, including power to sell the hotel and building and to distribute the net proceedings among the parties according to their entitlements;
(f) an order that each of the plaintiff, the first defendant and the second defendant be at liberty to purchase any partnership asset from the receiver and manager.

5 The plaintiff claims in the alternative an order appointing trustees for sale of the hotel site and building pursuant to s.66G of the Conveyancing Act 1919.

6    I was informed by counsel (Mr Lo Surdo for the plaintiff and Mr Walsh for the defendants) that, as a result of negotiation between the liquidator of the plaintiff and the first and second defendants, a basis for the sale of the plaintiff’s interest to those defendants has been reached. However, because of proceedings elsewhere in this Division, the liquidator is not presently in a position to cause the plaintiff to enter into any contract for sale. Mr Lo Surdo for the plaintiff urges me nevertheless to make the several orders the plaintiff seeks but to grant a stay of execution pending the result of the other proceedings to which I have referred.

Dissolution of the partnership

7 It is, as I have said, common ground that the partnership has been dissolved. The issue with respect to the dissolution is whether it occurred by virtue of the notice given under s.32 of the Act in February 2001 or some eleven months earlier upon the making of an order for the winding up of the plaintiff.

8 The contention that the winding up of the plaintiff effected a dissolution of the partnership proceeds on the basis of s.33(1) of the Partnership Act:

“Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.”

9 I should interpolate here that it is common ground that there is no partnership agreement, whether written or otherwise, and that the positions of the partners are as prescribed by the Partnership Act, with no scope for the operation of qualifications of the kind appearing at the beginning of s.33(1).

10 The contention that dissolution occurred by operation of s.33(1) when an order for the winding up of the plaintiff was made proceeds on the footing that “bankruptcy” in that section should be construed in such a way as to include, in the case of a partner which is a company, winding up. Mr Lo Surdo and Mr Walsh agree that there is no authority on this point, although it is mentioned by text writers. Mr Walsh pointed to the following statement in Banks, Lindley and Banks on Partnership, 17th Edition, at p.705:

“An order for the winding up of a corporate partner is the nearest equivalent to the bankruptcy of an individual. On the other hand, a resolution for a voluntary winding up may be passed for many reasons other than insolvency. Given that the relationship between partners will inevitably be of a less personal nature where a corporate partner is involved, it is submitted that neither an order nor a resolution to wind up such a partner would per se dissolve the firm, although there is, admittedly, no authority on the point.”

11    The authors of The Laws of Australia put the matter thus at “Business Organisations”, section 4.8, para 67:

“It is probable that the dissolution, or an application for winding up by the court of a corporate partner, would take effect in the same manner as the death or bankruptcy of a human partner.”

12 I do not accept that “bankruptcy” in s.33(1) includes the winding up of a company. A fundamental distinction between bankruptcy of an individual debtor and winding up of a corporate debtor is that the former divests the debtor of his property while the latter does not. This proposition is, of course, well settled and is referred to in the joint judgment of Stephen, Mason, Aicken and Wilson JJ in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. Bankruptcy is an event which affects a partner’s interest in the partnership in conceptually the same way as the granting of a charge over a partner’s interest in the partnership assets, an event which may result in dissolution under s.33(2). The rationale for the operation of s.33(1) in case of bankruptcy is that described by Martin CJ in Davies v Barlow (1881) 2 LR (NSW) 66. That decision pre-dated the Partnership Act and concerned an assignment by a partner of his share in the partnership assets to a trustee for the benefit of creditors. In holding that the partnership was dissolved, the Chief Justice said:

“Here, as in the case of bankruptcy, the defendant’s whole assets, including his share in the goods of the firm, became vested in a stranger, who could not carry on his trade, or fulfil his duties as a partner.”

13    Winding up of a company leaves ownership of its assets, including any partnership interest, intact. There is admittedly a change in the identity of the corporate controller and decision-maker but changes of that kind are inherent in the nature of every company limited by shares and do not of themselves cause any partnership interest the company enjoys to become “vested in a stranger, who could not carry on his trade, or fulfil his duties as a partner”. The company’s ability to carry on is not affected by the circumstance of winding up as such, although the underlying cause of the winding up may afford some separate ground on which the Court would order dissolution of partnership under s.35.

14 The idea that a company may enter into partnership is neither controversial nor new. The Partnership Act of New South Wales was enacted four years after the publication of the fifth edition (1888) of Lindley on Partnership which contains the following passage (at p.78):

“There is no general principle of law which prevents a corporation from being a partner with another corporation or with ordinary individuals, except the principle that a corporation cannot lawfully employ its funds for purposes not authorised by its constitution.”

15    The fourth edition of Palmer’s Company Precedents, also published in 1888, contains, among specimens of objects which may be included in a company’s constitution:

“To enter into [partnership or into] any arrangement for sharing profits, union of interests, co-operation, joint adventure, reciprocal concession or otherwise, with any person or company …”,

followed by the note:

“Very clear powers are necessary to enable a company to enter into partnership with any other company or person, or to take shares in any company: Ex parte British Nation Life Assurance Ass , 8 Ch Div 704”.

16 There is therefore no room to think that the Partnership Act was formulated (and, over the years, revised) upon some implicit assumption that companies could not or would not become partners. The references to bankruptcy in s.33(1) must therefore be regarded as confined to those partners who, of their nature, are capable of suffering bankruptcy, namely, natural persons.

17 I reject the possibility that the North Wollongong Hotel Partnership was dissolved on 3 March 2000 when an order for the winding up of the plaintiff was made. Dissolution occurred on or about 5 February 2001 pursuant to Notice of Dissolution given pursuant to s.32 of the Partnership Act.

Should a receiver be appointed?

18 Mr Lo Surdo referred to the following passage in the judgment of Long Innes J in Tate v Barry (1928) 28 SR (NSW) 380:-

“It must now, I think, be regarded as settled that in a suit instituted in Equity for the winding up of a partnership already dissolved, or for the dissolution of an admitted partnership in which it is clear that dissolution will be granted at the hearing, the plaintiff is entitled as a general rule, and practically as a matter of course, to the appointment of an interim receiver: Baxter v West (28 LJ Ch 169).”

19    But, as Mr Walsh pointed out, caution in applying this general rule is advocated by Powell J (as he then was) in Fitz-Gibbon v Khoury, NSWSC, 1 March 1985:

“This general rule notwithstanding, it is equally well established that it is not inevitable that, in any such case, an interim receiver and manager will be appointed, and that the Court retains a residual discretion as to whether any appointment should be made; one of the bases upon which, in an appropriate case, an appointment will be refused, is that the consequences of such an appointment will be “ruinous” (see, for example, Walters v Taylor (1807) 15 Ves 16; 33 ER 658; Tate v Barry (supra); Sobel v Boston [1975] 2 All ER 282).”

20    It was submitted by Mr Walsh that “ruinous” consequences may well follow if a receiver is appointed in this case. He referred to the affidavit of the first defendant who has some twenty four years experience as a hotel licensee and says, based on his observation of other hotels which have gone into receivership, that that event generally produces adverse consequences for the business in terms of loss of staff morale with resultant drop in service standards, dissatisfaction among suppliers because of loss of personal relationship with the publican and reduced patronage and therefore loss of revenue.

21    The answer in the present case must be that, as the first defendant’s affidavit also shows, it is the third defendant - the company in which the partners hold shares in proportions corresponding to their partnership interests - that is the “public face” of the hotel business, in that the business has been carried on through the agency of the company. Suppliers are no doubt paid with company cheques. There is also the point that the licensee is the second defendant and that receivership will not affect this.

22    There are, in any event, factors in this case which warrant the attention of an impartial person appointed by the Court. I refer in particular to the intermingling of the financial affairs of the partnership and the company as evidenced by the outstanding loan account, the fact that moneys of the partnership are taken into the bank account of the company and the fact that profit and loss accounts of the partnership do not reflect its trading operations, these being disclosed instead in the accounts of the company. I do not suggest for a moment that there is evidence that anything untoward is behind these practices but they are sufficiently irregular to require the kind of attention to which I have referred.

23    Sufficient grounds for the appointment of a receiver are therefore shown.

24    Mr Walsh submitted that, if there is to be a receiver, it should be the first defendant. However, in light of the matters to which I have just referred as warranting the attention of an impartial person appointed by the Court, as well as the first defendant’s role within the company, it is preferable in this instance that some other person be appointed. Mr Lo Surdo has tendered the consent of Mr M.J.M. Smith of Smith Hancock, chartered accountants.

The stay application

25    Mr Lo Surdo has submitted that, if orders appointing a receiver and dealing with ancillary matters are made, there should be a stay of execution pending the outcome of the proceedings pending elsewhere in this Division which, for the time being, prevent consummation of the desired sale of the plaintiff’s interest to the second and third defendants.

26    I am disposed to grant such a stay. Although, as I have said, I do not see any basis on which appointment of a receiver would be “ruinous”, it is obviously preferable that negotiated buy out of the plaintiff’s interest occur if that can be achieved. It is fair, therefore, that time be given to resolve, one or the other, the potential obstacle to that course presented by the other proceedings.

Orders

27    I make the following declaration and orders:

1. A declaration that the partnership between the plaintiff, the first defendant and the second defendant styled North Wollongong Hotel Partnership was dissolved on 5 February 2001.
2. Orders in the terms of paragraphs 2, 3, 4, 5, 6, 7, 8 and 9 of the Summons.
3. An order that execution of the orders in item 2 above be stayed pending determination of proceedings 2210/01or until further order.
4. Liberty for either party to restore the matter to the list on two days’ notice to the other party.
5. An order that the defendants pay the plaintiff’s costs.
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Last Modified: 05/08/2001