Blobel & Ors v Blobel & Ors
[2005] SADC 117
•31 August 2005
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
BLOBEL & ORS v BLOBEL & ORS
Judgment of Her Honour Judge Simpson
31 August 2005
PARTNERSHIP - DISSOLUTION AND WINDING UP
PARTNERSHIP - RIGHTS AND DUTIES OF PARTNERS INTER SE - ACTIONS AND PROCEEDINGS AT LAW BETWEEN PARTNERS OR BETWEEN FIRM AND PARTNERS
Claim by three partners against three other partners in family partnership for breach of fiduciary duty in disposing of partnership assets without authority and at an undervaluation and against purchasers with notice – claim for loss as a result of breach – claim by first to third defendants for declaration of dissolution of partnership, winding up and account – counterclaim by first to third defendants for damages for breach of partnership agreement - Held, dissolution of partnership inferred from circumstances of sale of assets - plaintiffs entitled to maintain action at law and recover damages for loss occasioned by breach of fiduciary duty by first to third defendants – defendants liable on proper valuation of partnership assets – plaintiffs not liable for debts of partnership after sale – claim against fourth and fifth defendants dismissed - claim for alternative relief and counterclaim by defendants dismissed
Partnership Act 1891 Sections 1(1), 9, 24, 25, 36, 28, 29, 32(c), 35, 42, referred to.
Radley v Moffat (1862) 1 SCR (NSW) 112; Jones v Chaseling (1914) 14 SR (NSW); Sheaffe v Hungerford (1879) 1 QLJ (Supp) 51 per Lilley J; Anonymous (1856) 2 K & J 441; 69 ER 855; Leary v Shout (1864) 33 Beav. 582; Watney v Wells (1861) 30 Beav. 56; Pease v Hewitt (1862) 31 Beav 22; Goodman v Sinclair The Times 24 January 1951; Goodman v Whitcomb 1 Jac & W 589; Smith v Jeyes 4 Beav. 502; Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426; Helmore v Smith (1886) 35 Ch D 426; Pawsey v Armstrong (1881) 18 Ch D 698; Page v Ratcliffe (1879) 76 LT 63 CA; Re David and Matthews [1889] 1 Ch 378; Newcombe v Chapple (1985) 3 BPR 9391; Rowlands v Evans; Williams v Rowlands 30 Beav. 30; Pearce v Lindsay (1860) 3 De GJ & Sm 139; Popat v Shonchhatra [1997] 3 All ER 800; Everingham v Everingham (1911) 12 SR NSW 5; Taylor v Neate 39 Ch D 538; In re Dacre [1916] 1 Ch D 344; Knott v Cottee (1852) 16 Beav. 77; Manley v Sartori [1927] 1 Ch 157; Paige v Ratcliffe 75 LT 371; Lindley on Partnership Sweet and Maxwell 13th Ed (1971); The Law of Partnership in Australia Higgins and Fletcher LBC 8th Ed (2001), considered.
BLOBEL & ORS v BLOBEL & ORS
[2005] SADC 117
This is a dispute between members of a family who, as a partnership, operated the Breakaways Café business at Coober Pedy in South Australia, from around April 1997 until February 2001.
The Parties
The first plaintiff, Mr Harald Blobel, and his two sons, Paul Blobel and Mark Blobel, the second and third plaintiffs, have brought proceedings against the first defendant, Mr Harald Blobel’s former wife, Mrs Katerina Blobel, her two sons, Savvas Procopis (Blobel) and Andrew Blobel, the second and third defendants, and Mr Max Reid and Gemstone Explorations Pty Ltd, the fourth and fifth defendants respectively.
The action was commenced against the five defendants by summons filed on 20 December 2001. An appearance was entered on behalf of all defendants on 6 February 2002. The plaintiffs proceeded at trial on an Amended Statement of Claim pursuant to leave granted by the Master on 18 June 2002. In the Amended Statement of Claim, Mr Reid is not named as a party and the allegations against him relate only to his acting as an authorised agent of the fifth defendant, Gemstone Explorations Pty Ltd (‘Gemstone’). No Notice of Discontinuance has been filed in respect of the fourth defendant, Mr Max Reid. A defence was filed on 3 July 2002, apparently on behalf of the first to third defendants and the fifth defendant, Gemstone. Mr Reid is not named in the defence as a party.
By reference to the Court record, it appears that on 26 March 2003, the Court was advised informally that Gemstone was in liquidation. There is, on the Court file:
(i)a facsimile dated 6 May 2003 from the liquidator, Mr Hugh Martin, advising the Court that Gemstone Mining Pty Limited, previously Gemstone Explorations Pty Limited, was placed into Voluntary Administration on 29 May 2002 and that he was appointed liquidator at the second meeting of creditors on 25 June 2002; and
(ii) a copy of a letter dated 8 May 2003, from the Deputy Registrar of the Court, advising the first plaintiff, Mr Harald Blobel, that pursuant to section 471B of the Corporations Law, the leave of the Supreme Court was required to continue the proceedings against Gemstone.
There is no record of any application made to the Supreme Court for leave to continue the proceedings against Gemstone.
At trial, the plaintiffs and the first to third defendants all appeared in person. Mr Harald Blobel generally took on the role as spokesperson for the plaintiffs and Mrs Katerina Blobel for the first to third defendants. The fourth and the fifth defendants took no part in the hearing.
The Claim
The family partnership began in the business known as the Breakaways Café, at Coober Pedy, in about April 1997. On the 13 February 2001, the plant and equipment of the Breakaways Café were sold as a result of an agreement between the first defendant, Mrs Blobel, and Gemstone. There is no dispute that on the following day, 14 February 2001, Gemstone began operating a café business from the same premises, but under a different name, the ‘Gemstone Café’.
The plaintiffs claim that Mrs Blobel did not have authority or capacity to sign the agreement for sale to Gemstone on behalf of the partnership and that through conversations between the first plaintiff, Mr Harald Blobel and Mr Reid, its agent, Gemstone knew or should have known that Mrs Blobel did not have authority and/or capacity to enter into the agreement.
The plaintiffs’ claim is for damages for financial loss sustained as a result of the sale of the plant and equipment of the Breakaways Café, and in particular:
(a) for a share of the proceeds of the sale;
(b)for the loss associated with the sale of the Breakaways Café business, including all stock, plant and equipment, at an undervaluation;
(c)for the loss of income from the continued operation of the Breakaways Café; and
(d)interest.
By their defence, the defendants admit that:
1. The plaintiffs and the first to third defendants established a business partnership, the terms of which were determined in conversations which took place between them in January, February and March 1997;
2. The partnership was established to buy and operate a café business in Coober Pedy;
3. The terms of the partnership were not reduced to writing;
4. The initial arrangement was that each of the partners was entitled to share equally in the partnership business;
5. It was subsequently agreed between the partners that Mr and Mrs Blobel were each to be entitled to one-fifth share (20%), and each of their sons to an equal share of the remaining three-fifths share of the partnership business (15%);
6. On 25 March 1997, Mr and Mrs Blobel became guarantors for a loan to the partnership in the sum of $50,000 from Westpac Banking Corporation;
7. The Breakaways Café business, including all stock, plant and equipment, situated at Hutchinson Street, Coober Pedy, was purchased in April 1997, and thereafter more stock, plant and equipment was purchased by the partnership;
8. On 13 February 2001, the Breakaways Café stock, plant and equipment was sold pursuant to an agreement between Mrs Blobel and Gemstone.
The defendants deny that Mrs Blobel did not have the authority or capacity or permission to sign the agreement, and say further that she had the express authority of the second and third defendants, and the express or implied authority of the plaintiffs.
In the alternative, the defendants say that the conduct of the plaintiffs was such as to be calculated to prejudicially affect the carrying on of the partnership business, making it not reasonably practical for the defendants to carry on in the partnership and making it just and equitable that the partnership be dissolved. In particular, the defendants say:
(1) between Christmas and 31 December 1999 the first plaintiff and second and third plaintiff entered the premises of the partnership and:
1.1 took stock out of the shop;
1.2 took parts from the cappuccino machine so it did not function;
1.3 took gas fittings and burners from the stove;
1.4 took the meat slicer and cash register; and
1.5 took a cake mixer, pots, pans and bowls.
(2)the second and third plaintiffs were requested to work in the partnership but refused to do so.
(3)the first plaintiff had the water and electricity disconnected and the telephone disconnected on two occasions, which accounts were in his name.
The defence further alleges that as a result of those matters, the defendants took over the running of the partnership business on 7 February 2000.
The defendants claim:
(a)a declaration that the partnership between the plaintiffs and the first to third defendants has been dissolved as at 13 February 2001 or such other date as the Court determines;
(b) that the affairs of the partnership be wound up; and
(c) that all necessary accounts and inquiries be taken.
The defendants have brought a counter-claim for damages, on account of loss sustained as a consequence of the conduct of the plaintiffs, which the defendants allege breached the partnership agreement and made it not reasonably practical for the defendants to carry on the partnership business with the plaintiffs.
The Witnesses
Mr Harald Blobel, and his sons, Paul Blobel and Mark Blobel, gave evidence and tendered a number of documents. Mrs Katerina Blobel gave evidence for the defendants, who also called Mr Graham Dasborough, a former director of Gemstone. Mr Dasborough was examined in chief by the second defendant, Mr Andrew Blobel. The defendants also tendered documents.
Not all of the documents were strictly admissible, as the best evidence of the matters contained in them, or because of the nature of the material contained in them, but they were received to facilitate the proceedings. Where the material in a document is irrelevant to an issue arising on the pleadings, or is in the nature of notes for cross-examination, or opinion or argument, I have not taken it into account.
On the matters which are material to the proceedings, there was little dispute. However, on those issues where the evidence of the plaintiffs and the defendants did not agree, I have preferred the evidence of the plaintiffs. Mr Harald Blobel and Paul and Mark Blobel gave their evidence in a straightforward way, notwithstanding the personal difficulties associated with the nature of the proceedings. I accept their evidence.
The impression I gained of Mrs Blobel, in giving her evidence, was that the heightened emotional nature of the family dispute appeared to have coloured her perception of events. She appeared to have either little understanding of her obligations in relation to partnership property, or to have relied on advice she received from her solicitor, or others. I found that I could not rely on her evidence where it was at variance with other evidence.
Mr Dasborough gave his evidence in a generally aggressive and defensive manner. Notwithstanding the emphasis Mr Dasborough attempted to give to his evidence relating to the nature of the transaction which resulted in the sale and purchase of the plant and equipment of the Breakaways Café business, the impression remained that he felt there was reason for discomfort. His evidence on the topic of the nature of the transaction in particular was not credible.
Background
Mrs Blobel came to Australia in 1982. Her twin sons, who were then thirteen and a half years old, came to Australia at the end of that year. Mrs Blobel met Mr Blobel in 1983. He had two boys, one five years old and one four years old. Mr and Mrs Blobel were married on 30 April 1983.
Mr and Mrs Blobel, in a partnership trading as H & K Blobel, operated an opal cutting business at Coober Pedy. In 1997, Mr and Mrs Blobel, Paul Blobel, Savvas Procopis and Andrew Blobel were working in the cutting room. Mark Blobel was at school. That business is not the subject of these proceedings. At the beginning of 1997, Mr and Mrs Blobel decided to buy the Breakaways Café business and to operate it as a partnership with their sons. The idea was to build up a business which would provide work and an income for the boys.
The Partnership Agreement
There is no dispute that there was a partnership agreement. It was for an undefined term. It was not reduced to writing. The evidence about the terms of the partnership agreement, in particular in relation to the share of each partner in the business, is to a minor degree different from the pleadings, although nothing turns on the difference.
The first financial accounts for the year ended 30 June 1997 suggest that, at the outset, there was a verbal agreement between the plaintiffs and the first to third defendants that Mr and Mrs Blobel should have a 20% share in the partnership and each of their sons a share of 15%. At some stage, probably in the following year, it seems the agreement was varied so that all the partners were to be on an equal footing. However, the financial accounts for the year ended 30 June 1999 indicate a reversion to the former arrangement, that is, Mr and Mrs Blobel were thereafter entitled to a 20% share and the four sons to a share of 15% of the partnership profits. That is admitted on the pleadings.
The Breakaways Café Business
The Breakaways Café business was purchased by the partnership in April 1997. There is no evidence of the amount paid for the business. On 4 June 1997, the partners apparently entered into a Memorandum of Agreement, Intention to Lease Commercial Premises, with the landlord, to lease the café premises, Shop 8, Lot 7 Hutchinson Street, Coober Pedy. The date of first occupancy is 28 April 1997. The term of the lease was for three years. The expiry date is 31 October 2000. There was a right of renewal for a further term of three years.
A business development loan of $50,000.00 was obtained from Westpac Banking Corporation. It was said, although no details are available, that further significant sums, amounting to around $200,000, were obtained from refinancing arrangements, or directly from the family’s opal cutting business, and invested in replacing equipment and upgrading the kitchen facilities at the Breakaways Café business to comply with regulations.
The café business comprised a coffee lounge, a bakery and a restaurant. The café was open six to seven days a week and required the family to work long hours. Aside from the family, the café business employed some casual help.
Mr Harald Blobel had a background in the hotel industry, as a chef, baker and pastry cook. He initially participated in the business of the Breakaways Café in that capacity, and he developed the bread baking side of the business. Mr Blobel was also primarily responsible for the organisation of the day-to-day finances and maintained the ledger, or business journal, for the business. His sons and Mrs Blobel and her sons also worked very hard in the Breakaways Café. Mrs Blobel did the cooking at the café. Each of the partners contributed in his or her own way to ordering stock, cooking, serving customers and general cleaning. Mr Savvas Procopis had initial responsibility for counting the daily takings and for entry of the amount into the business journal. It is not necessary to establish the nature and extent of the parties’ contribution to building up the business of the Breakaways Café after its purchase in April 1997. I accept that all of the parties were initially involved in varying degrees in the operation of the café and in building it up as a business.
At the beginning, and taking into account that the café provided food for the family, it was decided that each of the partners would draw pocket money of $50.00 per week only, in order to reduce the partnership debt. That was changed later to a weekly allowance of $100.
The Breakaways Café business experienced a setback in April 1999, when Mr Harald Blobel suffered a heart attack. He was afterwards unable, on account of his health, to participate in the business. The baking was taken over by Mr Paul Blobel, although he did not have the same training and experience. Mrs Blobel assumed the major responsibility for the finances of the business.
Mr Harald Blobel began to have some concerns about money going missing from the café business. He believed that the second defendant, Mr Savvas Procopis, was responsible. His belief and his subsequent actions, in prohibiting the second defendant from participating any further in the Breakaways Café business, caused a major family rift.
On 4 August 1999, Mr Harald Blobel accused Mr Procopis of stealing money from the business. He demanded that Mr Procopis leave not only the café business, but also the family home. There was a family argument. Mrs Blobel determined that if her son, Savvas, was to leave the home, she would leave it as well.
Mrs Blobel left the family home in August 1999 for a short period, although she continued to work in the Breakaways Café. Mr Procopis did not return to the café business until later that year. Mrs Blobel found the circumstances to be very trying and she said that she was admitted to hospital because she had a breakdown. She was in hospital for ten days. On the day of her discharge from hospital, she went back to the family home. Mr Blobel was not there. When he arrived home, she said that he told her to stay in another bedroom.
The relationship between the members of the family continued to deteriorate after August 1999. The Breakaways Café business went on with extra help employed to make up for the loss of Mr Savvas Procopis’ assistance. Mrs Blobel left the family home again in late October. Mr and Mrs Blobel considered separating permanently and sought counselling. In around October 1999, they considered a proposal to divide their property between them, but no decision was made.
Mr Blobel remained concerned about the finances of the business. On 11 November 1999, the family met, except for Mr Procopis, to discuss the financial affairs of the business. At that time, there was an indication that the finances of the business had improved since August that year. Mrs Blobel said that the relationships within the family were strained and the family was falling apart. The original idea, of building up the business for the four boys to operate, had not been realised.
There were differences of opinion as to who should be responsible for the takings each day. On 26 November 1999, Mrs Blobel opened a bank account in her own name, without the knowledge of Mr Blobel, and began operating that account for the café business, instead of the partnership bank account.
Mr Blobel objected to that arrangement and when he learned of it, on 3 December, he asked Mrs Blobel to rectify it. Mrs Blobel took no action, and shortly afterwards, Mr Blobel asked his son Paul to take over financial responsibility for the business from Mrs Blobel, as a result of Mr Blobel’s continuing concern about the café business finances. On 6 December 1999, Mr Paul Blobel took over responsibility for the day’s takings, the financial records and for paying creditors.
On 7 December 1999, Mr Blobel telephoned his wife to tell her that his son, Paul, would be responsible for depositing the day’s takings of the café and the business would be using the partnership bank account. That caused another argument. On the evening of 7 December 1999, or on the following day, Mrs Blobel made allegations of a serious criminal nature against her husband to the police. Those accusations and the consequences of them in the criminal jurisdiction are not relevant here, except as to the effect of them on the relationship between the partners and on partnership business.
Mr Blobel was arrested on 8 December 1999 and placed on bail, with conditions that prevented him from contacting Mrs Blobel in any way, including attending at the Breakaways Café when Mrs Blobel was there. The complete breakdown of family relations, and the restrictive bail conditions on which Mr Blobel was placed, meant that it was impossible for the business to be conducted as a family partnership at least from 8 December 1999, if not well before.
Mr Mark Blobel decided to stop working in the business and to take up an apprenticeship. He stopped working in the café on 9 December 1999. Mr Paul Blobel stopped working in the café after Christmas Eve 1999, on account of the strained family relationship. Mrs Blobel said that she considered at that time they were all still partners in the partnership.
On around 20 December 1999, Mrs Blobel consulted a solicitor. Proceedings were instituted in the Family Court at the end of December 1999. Mrs Blobel said that her solicitor advised her to take over the café business and leave the opal cutting business to her husband, Mr Blobel.
At the end of December 1999, around Christmas, Mrs Blobel and her sons decided to close the business for one week. Mrs Blobel said that over the Christmas break, some of the stock went missing, together with some equipment, including cooking equipment, parts of a coffee machine, and a cash register, and some equipment was damaged. The missing stock was frozen meat, jars and tins of food, and confectionery. It was Mrs Blobel’s opinion that Mr Blobel was responsible and she reported the missing items to the police. Mrs Blobel said she had further problems with the telephone, electricity and gas supply, which had been connected in Mr Blobel’s name, being disconnected. It was her belief that Mr Blobel was responsible. She arranged for the reconnection in her own name.
Mr Harald Blobel, and his son Mark Blobel, said in evidence that they went to the Breakaways Café on about two occasions in December 1999, once before and once after Christmas, and had taken some foodstuffs which would otherwise have perished over the Christmas break, for consumption by the family. As for the items of equipment said to be missing, Mr Harald Blobel said that some of the items had been at the family home for a time, where he had done some of the baking. Others were his own property. Some items had been taken home when replaced at the café. He said he did not take a cash register from the café. It is probable that Mr Blobel advised the various utilities that he was no longer responsible for payment of the Breakaways Café accounts.
In an affidavit sworn on 31 December 1999 in the Family Court proceedings, Mrs Blobel’s solicitor said that she had been informed by Mrs Blobel that Mr Blobel’s solicitors had given Mrs Blobel notice that the partnership “H & K Blobel”, the opal cutting business, had been dissolved as of 20 December 1999. It seems no notice of the dissolution of the partnership in relation to the Breakaways Café business was given by any of the partners.
On 3 January 2000, Mrs Blobel swore an affidavit filed in the Family Court proceedings in which she said:
I am advised by my solicitor and verily believe that I will have to account for the income, expenditure and general management of the café business in the property settlement proceedings, and that the husband will have to account for the income, expenditure and general management of the opal business in the property settlement proceedings. ….
I continue to pay the creditors of the business, including the bank in relation to the business loan. I have caused a separate account to open for the day to day trading of the café.
Following service on him of the affidavit, Mr Blobel endorsed the page on which the statements above appeared as follows:
My wife K. Blobel is responsible for the outstanding amount. Please contact her solicitor. Regards. Harry Blobel
Mr Blobel said that he wished to advise any creditors of the business, by giving a copy of that document to them, that he was no longer responsible for the payment of the café’s accounts.
By letter dated 8 January 2000, addressed to Mrs Blobel, Mr Paul Blobel and Mr Mark Blobel raised a protest about a failure on her part to deposit into the partnership bank account, takings from the café business in the sum of $28,769.66 for the period 15 November 1999 to 23 December 1999.
There appears to have been a brief period at the beginning of January 2000, when Mrs Blobel reopened the café for business. She said it was a struggle to keep the café open, for a number of reasons, including being handicapped by missing equipment. Mrs Blobel said in her evidence that, after January 2000, she could not continue the business because of the damage caused to it by the conduct of the first plaintiff. Mrs Blobel said she sought the advice of her solicitor, who advised her to keep the café closed. It seems that in January 2000, an injunction was granted in the Family Court proceedings restraining Mr Blobel from entering or remaining on the business premises of the Breakaways Café, and in any event, Mr Blobel was prohibited from attending the premises of the Breakaways Café when Mrs Blobel was there, by his conditions of bail.
The café remained closed until late January-early February 2000. During the interval when the café was closed, Mrs Blobel continued to receive accounts for payment by the café business. Mrs Blobel said that her solicitor told her to try to continue with the business and, in an effort to pay the debts of the café and to generate some income, she decided to re-open the café in February 2000.
Mrs Blobel said in an affidavit sworn on 5 April 2002, in the Family Court proceedings, that her solicitor arranged as between Mr Blobel and his sons that on 1 February 2000 she and her sons would take over the business, which they did. In a letter to Mr Blobel’s solicitors, dated 2 February 2000, Mrs Blobel’s solicitor said that Mrs Blobel was to attend to the operation of the Breakaways Café business and would continue to operate the business and account for its income and expenditure. There was no suggestion at the time that the arrangement was a result of inappropriate conduct of the plaintiffs in the partnership business.
Mrs Blobel obtained some replacement equipment and bought stock. Mrs Blobel’s son, Mr Andrew Blobel, assumed responsibility for the bakery side of the business, although he had no training or experience as a chef or baker. Mrs Blobel said that she experienced significant difficulties in continuing to operate the café business as from January 2000, including difficulties in obtaining proper equipment and in doing the cooking herself. Mrs Blobel said that she bought a cash register second hand, but I note that was not purchased until 15 June 2000, some months after the café was re-opened. Some of the difficulties, she said, arose because of what she believed to be the actions of Mr Blobel in attempting to make things difficult and sabotage the business. There is no evidence of that. However, the family must have been under considerable strain generally as a result of the ongoing criminal proceedings against the first plaintiff, in which the first defendant was the alleged victim.
The accountant for the family’s businesses was the firm of chartered accountants, Waters & Lagzdins. They were engaged to prepare the financial accounts for the Breakaways Café business. It seems, and I infer, that as early as the beginning of 2000, a partner in the firm, Mr JK Waters, was asked by Mrs Blobel’s solicitor to prepare a valuation of the Breakaways Café business. In his letter dated 31 March 2000 to Mrs Blobel’s solicitor, Mr Waters said:
The business commenced during the year ended 30th June, 1997 and only traded for a short period.
We have used the trading for the years ended 30th June 1998 and 1999 as the basis for our valuation which are summarised as follows:
1998 Sales $ 329,492 Gross Profit 47.5% Net Profit 47,800 ADD Back: Interest 4,746 $ 52,546 1999 Sales $ 354,169 Gross Profit 51.8% Net Profit 75,343 ADD Back: Interest 4,757 $ 80,100 Total Net Profit 1998 & 1999
$ 132,646
Average Per Year
$ 66,323
Therefore, based on the average trading for the last 2 years the goodwill would be valued at $66,323.
We can also value the business based on average weekly turnover, and the average for this type of business is 10 times the average weekly turnover. The average weekly turnover for 1999 is $6,811 which would value the goodwill at $68,110.
Therefore, taking the net assets as at 30 June 1999 of $54,116 and adding the difference between goodwill of say $68,000 less $10,000 already showing in the Balance Sheet, would value the business at approximately $112,000.
Mrs Blobel said in her evidence that she had difficulties in meeting the rent payments and payments to other creditors. She came to an arrangement with the landlord in relation to a decrease in the rent and with the creditors to make payments over time.
In an affidavit sworn in the Family Court proceedings on 5 April 2002, Mrs Blobel said:
The business had to close as the husband had taken stock, he also took the gas fittings for the stove and took the handles from the Cappuccino machine and various other items… (He) also constantly disconnected the power, telephone and water. In the year 2000, another café opened across the road from the Breakaways Café, which increased competition. The business became un-viable and the lease ran out in October 2000 and we were on a monthly tenancy. As at the year 30 June 2000 the business was running at a loss of $40,193.00. The business was suffering losses due to the competition, the need to purchase stock and due to what the husband did and the delay it caused and the necessity to purchase new plant and equipment.
In fact, the café business was not running at a loss as at 30 June 2000. There is no evidence of factors mentioned by Mrs Blobel, attributed to the conduct of the first plaintiff, having the effect she described on the operation of the business. It is likely that the accounts reflect, amongst other things, the marked change in the circumstances of the family’s participation in the business.
The financial accounts for the Breakaways Café for the year ended 30 June 2000 show a turnover of $262,671, compared to $354,169 the previous year and a net profit of $40,260.00, compared to the previous year when the net profit was $75,343.00. The figure referred to by Mrs Blobel, of a loss of $40,193, appears to bear no relation to the profitability of the business as at 30 June 2000, and rather to be a reference to the negative net assets of the business as at 30 June 2001 after the sale of plant and equipment.
In January 2001, Mr Blobel had written to the Registrar of the Family Court regarding concerns raised with him by Westpac, the partnership bank, about the loan account in the partnership name, his own concern about the business and its assets under the management of the first defendant, and steps he might take to prevent the sale of assets by the first defendant. He was advised by the Registrar that he could make an application to the Court.
On 3 February 2001, Mrs Blobel’s solicitor took out an application in the Family Court for orders, including an order:
That the wife be at liberty to arrange sale of the bakery and take-away, plant and equipment and stock and assets trading as Breakaways Café and the net proceeds (if any) be paid to Chapman & Associates Pty Ltd Trust Account.
Mr Blobel attended on the application on 5 February 2001. Mrs Blobel’s solicitor attended on her behalf. Mr Blobel told the Court that he wished to file a response to the application, which was adjourned to 12 February 2001. In response, Mr Blobel filed an application of his own, including for an order restraining the sale of joint assets, and an affidavit sworn on 12 February 2001. He was not able to attend on 12 February, and on 13 February 2001, Mrs Blobel’s solicitor in the Family Court proceedings wrote to him, advising Mr Blobel that the application for the sale of the café business had been adjourned to 21 February 2001.
In fact, on 13 February 2001, and before the application was dealt with, Mrs Blobel had come to an agreement with a third party, the fourth defendant, for the sale and purchase of assets of the Breakaways Café business.
Mrs Blobel said that she asked Mr Max Reid, who had been a customer at the café and a miner at Coober Pedy, if he knew if anybody wished to buy the equipment of the Breakaways Café. Mr Reid told her that he would like to. He made a written offer, on behalf of Gemstone, dated 7 February 2001, as follows:
OFFER TO PURCHASE THE FOLLOWING EQUIPMENT
At this moment all the following equipment is housed and being used at the Breakaways Café, Coober Pedy.
The above company is prepared to take over the book debts and pay out the back wages to the total value of sixty ($60,000.00) thousand dollars.
A list of plant and equipment followed.
On the same day, Mrs Blobel sent a copy of the written offer to her solicitor. Mrs Blobel said in her evidence that her solicitor in the Family Court proceedings told her that she was able to enter into the agreement for the sale. She was told that there was no injunction preventing her doing from that and she would not be in breach of any court order if she sold the business. Mrs Blobel said that her two sons gave her permission and so she came to an agreement with Mr Reid. Mrs Blobel said in her evidence that she was intending to close the doors of the business because she could not continue to pay the creditors.
An agreement was reached between Gemstone and Mrs Blobel, as “the beneficial owner of the shop equipment listed below which is at the Breakaways Café, Coober Pedy in South Australia 5723”. Pursuant to the Heads of Agreement of 13 February 2001, Gemstone agreed to pay out creditors in the total sum of $20,334.67 and to pay wages to the second and third defendants in the sums of $19,832.66 and $19,832.67 respectively, said to relieve Mrs Blobel from the obligation to make payment in respect of any debts owing to them.
Pursuant to the Heads of Agreement, Gemstone became the owner of the equipment listed in the agreement, having paid out the total sum of $60,000.00. The Heads of Agreement was signed on behalf of Gemstone by Mr Reid’s wife, apparently a director of Gemstone, and was witnessed by Mr Graham Dasborough.
Mr Dasborough was called by the defendants to give evidence. Mr Dasborough said that he was a director of Gemstone between December 2000 and November 2001. Mr Reid’s wife, Mrs Edna Reid, was the other director of the company. Mr Dasborough said Mrs Reid had the authority to sign the Heads of Agreement on behalf of the company. He said that Mr Reid was an adviser to the company, but was not an officer of the company. Mr Reid was given authority to negotiate with Mrs Blobel by Mr Dasborough and Mrs Reid, who had discussed it and come to a decision as directors of the company. Mr Dasborough believed that there may originally have been a partnership between Mr and Mrs Blobel and their sons, but that it was no longer in place and they were able to deal with Mrs Blobel alone.
Mr Dasborough said that there was no intention to purchase any goodwill of the business, because in his opinion and after discussions with Mrs Blobel, there was no goodwill attached to the business. Mr Dasborough said that it was Gemstone’s intention to purchase only the plant, stock and equipment and not the business as a going concern. Mr Dasborough said that he did not see the financial accounts of the company at any time. The decision to buy the plant and equipment was not based on any assessment of the value of the partnership business, or its assets or liabilities, and in particular no thought was given to goodwill.
It was, however, the company’s intention to operate a café in the same premises, over which the company had negotiated a lease. Mr Dasborough said that the company intended to start a café business on the premises, but not to carry on the original business.
On 13 February 2001, the Breakaways Café ceased operations. On 14 February 2001, Gemstone opened the doors on its café business, now called Gemstone Café, and employing the first to third defendants, Mrs Blobel and her two sons.
Findings
There is no dispute that the plaintiffs were in partnership with the first to third defendants, that is, they were in a relationship carrying on a business in common with a view of profit.[1] The provisions of the Partnership Act 1891 (‘the Act’) apply.
[1] Section 1(1) Partnership Act 1891
Pursuant to section 5 of the Act, every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership. Section 9 of the Act provides that every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner.
Section 24 provides for rules as to the interests and duties of partners, where there is no agreement, express or implied, otherwise between the partners, as follows:
(a)all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;
(b)the firm must indemnify every partner in respect of payments made and personal liabilities incurred by the partner –
(i)in the ordinary and proper conduct of the business of the firm; or
(ii) in or about anything necessarily done for the preservation of the business or property of the firm;
(c)a partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which the partner has agreed to subscribe, is entitled to interest at the rate of seven per centum per annum from the date of the payment or advance;
(d)a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by the partner;
(e)every partner may take part in the management of the partnership business;
(f)no partner will be entitled to remuneration for acting in the partnership business;
(g)no person may be introduced as a partner without the consent of all existing partners
(h)any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners;
(i)the partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every partner may, when the partner thinks fit, have access to and inspect and copy any of them.
Section 25 provides that no majority of the partners can expel any partner in the absence of express agreement between the partners. There was no such agreement here. In spite of the third defendant, Mr Procopis, being told by Mr Harald Blobel in August 1999 that he could no longer work in the café business, Mr Procopis was regarded as a continuing partner.
It appears from the evidence that no fixed term was agreed upon for the duration of the partnership. In that event, pursuant to section 26 of the Act, any partner was able to determine the partnership at any time on giving notice of his or her intention to all the other partners. That has not been done in this case.
Bank accounts were opened in the name of the partnership. A business development loan in the sum of $50,000.00 was approved by Westpac Banking Corporation and a loan account No. 11-3486 was opened in the name of the partnership on 28 April 1997. A partnership cheque account with Westpac Banking Corporation, account No. 11-3400, was operated in the partnership name.
Financial Accounts for the financial years ending 30 June 1997 up to and including the year ending 30 June 2001, prepared on behalf of the Breakaways Café business by the accountants, Waters & Lagzdins, were tendered by the plaintiffs.
They can be summarised as follows:
Financial year ending 30/06/1997 30/06/1998 30/06/1999 30/06/2000 30/06/2001 Net profit/loss from trading -$8,176 $47,187 $75,343 $40,260 -$10,881 Loss/gain on sale of non-current assets $250 -$14,000 Profit on sale of non-current assets $363 Net Profit -$8,176 $47,800 $75,343 $40,260 -$24,881 Capital Introduced Harald Blobel $18,649 $3,250 Katerina Blobel $18,649 $3,250 $19,959 Savvas Blobel $9,242 Andrew Blobel $9,242 Distribution to Partners (Share of Profit/loss) Harald Blobel -$1,635 $9,560 $15,069 $8,052 $0 Paul Blobel -$1,226 $9,560 $11,301 $6,039 $0 Mark Blobel -$1,226 $9,560 $11,302 $6,039 $0 Katerina Blobel -$1,635 $9,560 $15,069 $8,052 -$8,295 Savvas Blobel (Procopis) -$1,226 $9,560 $11,301 $6,039 -$8,293 Andrew Blobel -$1,226 $11,301 $6,039 -$8,293 -$8,174 $47,800 $75,343 $40,260 -$24,881 Drawings Harald Blobel $729 $8,929 $23,224 $15,120 $4,943 Paul Blobel $729 $4,001 $5,992 $3,560 $11,392 Mark Blobel $729 $4,001 $5,992 $3,560 $11,392 Katerina Blobel $729 $8,929 $23,224 $19,388 $6,351 Savvas Blobel (Procopis) $729 $4,001 $5,992 $10,228 $25,734 Andrew Blobel $729 $0 $5,992 $10,728 $25,734 Partnership Funds Harald Blobel $16,285 $16,916 $12,011 $4,943 $0 Paul Blobel -$1,955 $3,604 $8,913 $11,392 $0 Mark Blobel -$1,955 $3,604 $8,913 $11,392 $0 Katerina Blobel $16,285 $16,916 $12,011 $675 $5,988 Savvas Blobel (Procopis) -$1,955 $3,604 $8,913 $4,724 -$20,061 Andrew Blobel -$1,955 -$1,955 $3,354 -$1,335 -$26,120 Total $24,750 $42,689 $54,115 $31,791 -$40,193 Net Assets $24,750 $42,689 $54,115 $31,791 -$40,193
The defendants in these proceedings make an application to the Court for dissolution of the partnership, on one of the grounds provided for in section 35 of the Act, which provides, inter alia:
….
(c)When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business;
(d)When a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner;
…or
(f)Whenever in any case circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.
The Court may dissolve a partnership when a partner has been guilty of such conduct as in the opinion of the Court, having regard to the nature of the business, is calculated, in the sense that it is likely[2] to affect prejudicially the carrying on of the business. In particular, “continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation”, has been held sufficient to justify a dissolution.[3]
[2] Anonymous (1856) 2 K & J 441; 69 ER 855; The Law of Partnership in Australia, Higgins and Fletcher, LBC 8th ed (2001) at 224
[3] Leary v Shout (1864) 33 Beav. 582; Watney v Wells (1861) 30 Beav. 56; Pease v Hewitt (1862) 31 Beav. 22; Goodman v Sinclair The Times 24 January 1951
However, it is not considered to be the duty of the Court to enter into partnership squabbles, and it will not dissolve a partnership on the ground of the ill temper or misconduct of one or more of the partners, unless the others are in effect excluded from the concern; or unless the misconduct is of such a nature as to destroy the mutual confidence which must subsist between partners if they are to continue to carry on their business together.[4]
[4] Goodman v Whitcomb 1 Jac & W 589; Smith v Jeyes 4 Beav. 502
It is not necessary, in order to induce the Court to interfere, to show personal rudeness on the part of one partner to the other, or even any gross misconduct as a partner. All that is necessary is to satisfy the Court that it is impossible for the partners to place that confidence in each other which each has a right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it.[5]
[5] Lindley on Partnership Sweet and Maxwell 13th ed, (1971) at 587-598; cited with approval Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426, 430; Goodman v Sinclair, above
The defendants seek a declaration that the partnership has been dissolved as at 13 February 2001, or such other date as the Court determines, together with orders for winding up the partnership and taking an account. The grounds on which the order is sought are that having regard to the nature of the business, the plaintiffs have been guilty of such conduct as is calculated to prejudicially affect the carrying on of the business. In particular, the defendants assert, in their defence, that the plaintiffs took stock, parts of the cappuccino machine, gas fittings and burners from the stove, the meat slicer and cash register and a cake mixer, pots, pans and bowls, over Christmas 1999. The defendants also rely on the second and third plaintiffs refusing to work when requested to do so, and the first plaintiff disconnecting the telephone, electricity and gas supply at about the same time.
The evidence does not support any finding in relation to the conduct of the plaintiffs which could in my opinion provide grounds for the orders sought by the defendants. The plaintiffs admit that they removed some stock from the café over Christmas 1999 for their own consumption. The business had been providing food for the family and account taken of it. Mr Harald Blobel said that as regards parts from the cappuccino machine, some were housed at home when a new machine was purchased, and that some of the cooking and baking equipment may have been at their home in any event. Mr Blobel said the knives belonged to him personally. I accept the evidence of the plaintiffs. There is no convincing evidence of any removal of stock and/or equipment from the café by the plaintiffs, or any of them, which affected the carrying on of the partnership café business.
There is also no evidence that the second and third plaintiffs refused to work in the partnership when asked to do so, nor that the first plaintiff was responsible for disconnecting the telephone, electricity or gas supply, although in any event, the first defendant put all the accounts in her own name when she assumed responsibility for the management of the café in January 2000.
In my opinion, in the circumstances of the disintegrating relationship between the partners, the conduct, even if proved, could not be used by the defendants to justify an order on their application that the partnership be dissolved. In this case, in my opinion, it is not possible to say that the defendants’ conduct played no part in the deteriorating relationship between the parties. In any event, it was not necessary to have recourse to the Court to dissolve the partnership. It could have been dissolved by notice given by any of the partners to the other partners at any time without the need to show cause[6].
[6] sections 26 and 32(c) Partnership Act 1891
The allegations of the defendants reflect the fact that the partners were unable to carry on the business together. Given the fiduciary nature of the relationship between partners, the parties faced inevitable difficulties in conducting the business as a partnership following the complete breakdown of family relations:
The relation between partners is … fiduciary. Indeed, it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners. Their mutual confidence is the lifeblood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust one another that the business goes on. (Helmore v Smith (1886) 35 Ch D 436 at 444)
Where partners each insist “that the other is in the wrong, get more exasperated, and ultimately render it impossible to carry on business together,” it is appropriate to treat the case “as one in which both the partners were in the wrong, and it then becomes a simple case of dissolution from incompatibility of temper or by mutual assent”.[7]
[7] Pease v Hewitt (1862) 31 Beav.22
The relationship between the partners began to experience serious difficulties in April 1999, when Mr Harald Blobel suffered a heart attack and could no longer participate as he had been in the café and bakery business. It further deteriorated in August 1999, with the accusation against the second defendant of his taking money from the till and his exclusion from the home and from working the café business. As a result, the relationship between Mr and Mrs Blobel suffered what turned out to be irreparable harm, from which their marriage did not recover. The accusations of criminal conduct brought by Mrs Blobel against her husband and the consequences of them, and the institution of the Family Court proceedings in December 1999, effectively prevented the Breakaways Café business being conducted as a family partnership at least from 1 January 2000.
Having regard to the evidence of the family circumstances generally, and to the affidavits sworn in the Family Court proceedings, there would be no difficulty in finding that there was a destruction of mutual trust and confidence between the parties as and from at least the end of December 1999. However, the partnership was not treated by the parties as at an end at that time, and no notice of an intention to determine the partnership was given by any of the partners to the others.
Thereafter the first to third defendants carried on the café business. They were subject to an obligation to render a full account to any other partner, or his legal representative, and to account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership, or from any use by the partner of the partnership property, name or business connection.[8] The first defendant, Mrs Blobel, acknowledged her duty to account for the income, expenditure and general management of the café business.
[8] sections 28 and 29 Partnership Act 1891
The first to third defendants continued to operate the Breakaways Café business up until 13 February 2001. There is very little evidence about what happened to the café business in 2000. It is likely in my opinion that the café was simply too much for the defendants to cope with on their own. There may have been competition from another café nearby. The turnover decreased and there was difficulty in paying creditors. The evidence does not support any allegation that the business failed, or had to be closed, on account of any action taken by, or conduct of, the plaintiffs, or any of them.
In March 2000, early on in the Family Court proceedings, Mrs Blobel’s solicitor arranged for the accountant who was familiar with the business to prepare a valuation for it. Mr Waters valued the business at that time as a going concern at approximately $112,000. He allowed a sum of $68,000 in respect of goodwill. Generally, in the absence of agreement to the contrary, if there is goodwill attached to a business, it must be sold for the benefit of all partners.[9] There is no evidence that the defendants made any attempt to make appropriate arrangements to sell the business as a going concern prior to February 2001, or at all.
[9] Pawsey v Armstrong (1881) 18 Ch D 698; Page v Ratcliffe (1879) 76 LT 63, CA; Re David and Matthews [1889] 1 Ch 378
The first to third defendants say that they sold the equipment only of the Breakaways Café for the sum of $60,000. No agreement, express or implied, was reached with the plaintiffs for the sale of the equipment. It was, on the evidence, likely to have been opposed. The evidence strongly suggests that the sale of the equipment to Gemstone, and the terms of the agreement between Gemstone and Mrs Blobel, were arranged in haste in order to avoid any opposition by the plaintiffs to the arrangement, and to limit the amount to be paid for the Breakaways Café business by Gemstone, by characterising the agreement as one of the purchase and sale of ‘shop equipment’ only.
No expert accounting evidence was called by the plaintiffs or the defendants. I have relied on the financial accounts prepared by the Chartered Accountants, Waters Lagzdins, and tendered by the plaintiffs. The written down value of the partnership assets listed in the depreciation schedule to the partnership accounts as at 30 June 2000, I assume including the items specified in the agreement, was $84,593. There is no explanation from the defendants about why the ‘shop equipment’ was sold for the sum of $60,000, and no explanation for what happened to the other items of plant and equipment not mentioned in the agreement. There is no adequate explanation from the defendants regarding what must have been their decision not to take up the right of the partnership to renew the lease of the café premises after 31 October 2000, thereby allowing Gemstone to take over the lease of the premises in which the Breakaway Café business was conducted. No amount was allowed for the goodwill of the business, and the defendants have not established any proper reason for excluding the goodwill attached to the business and given a value of about $68,000 in Mr Waters’ report of 31 March 2000.
Contrary to the terms of the Heads of Agreement and to the evidence of Mrs Blobel and Mr Dasborough, I find that Mrs Blobel was not the beneficial owner of the assets of the Breakaway Café business, and it was the café business, and not simply ‘shop equipment’, which was acquired by Gemstone. The shop equipment, and I infer, other items of plant and equipment, were utilised in a café business in the same premises on the following day by Gemstone, using a different name for the café. I do not accept that it was appropriate to assume that there was no value to be placed on goodwill attaching to the assets Gemstone acquired.
It was inappropriate for the proceeds from the sale of the business to be paid as wages to the second and third defendants.[10] While there seems to have been some attempt to account for the funds obtained from Gemstone in the preparation of the Balance Sheet of the business for the year ended 30 June 2001, the fact that Mrs Blobel perceived payment of wages to her sons as an acceptable part of the transaction with Gemstone indicates a lack of understanding of her obligations under the partnership, and the obligations of her sons, to account for any benefit derived without the consent of the other partners, from any transaction concerning the partnership, or from the use by a partner of the partnership property or name[11].
[10] section 24(f) Partnership Act 1891
[11] section 29(1) Partnership Act 1891
It is likely that Mrs Blobel was anxious to sell the Breakaways Café business for any price she could obtain. However, she, and her sons, had no authority to dispose of the café business.[12] No satisfactory explanation has been given by the defendants regarding the terms of the agreement with Gemstone.
[12] Newcombe v Chapple unreported SCNSW 27 February 1985 per Hodgson J; The Law of Partnership in Australia, Higgins and Fletcher, LBC (2001) 8th ed at 233
There was an application pending before the Family Court to allow her to sell the business. It was opposed. Where the Court orders a sale, it will, if necessary, direct an enquiry as to the proper mode of selling, and in particular whether there should be an immediate sale or the concern should be carried on for the purpose only of winding up its affairs. An order may be made, for example, that partnership property be sold as a going concern, by a disinterested person, with liberty to all parties to bid.[13]
[13] Rowlands v Evans; Williams v Rowlands 30 Beav. 302; Taylor v Neate 39 Ch D 538; Pawsey v Armstrong 18 Ch D 698; Lindley on Partnership, above, at 565
In this case, the first to third defendants disposed of the partnership business without authority from all the partners, or the Court. The sale of the assets of the Breakaways Café business to Gemstone by the first defendant, with the consent of the second and third defendants, effectively brought the partnership business, and the partnership, to an end. It is appropriate, in spite of no notice of dissolution of the partnership being given, to infer a dissolution of the partnership from the circumstances, as and from 13 February 2001.[14]
[14] Pearce v Lindsay (1860) 3 De GJ & Sm139
The relationship between partners is a fiduciary relationship. The nature of the relationship between parties necessarily includes a duty of good faith and honesty, preserving confidence, avoiding conflicts of interest and profiting personally from partnership opportunities, and the obligation to account for any benefits obtained in breach of these duties. The duty of good faith continues even after dissolution of the partnership, at least until final accounts have been taken.[15]
[15] Popat v Shonchhatra [1997] 3 All ER 800; Everingham v Everingham (1911) 12 SR NSW 5
The manner of disposal of the business to Gemstone, the price obtained, and the application of the monies make the sale a questionable transaction and apparently lacking in good faith. I find that the first to third defendants disposed of the business of the Breakaways Café in breach of their fiduciary duty to the plaintiffs as their partners in the business. The first to third defendants are obliged to account to the plaintiffs for the sale of the business and for any loss to the partnership, and therefore to the plaintiffs, associated with it.
The plaintiffs’ claim is for damages for the financial loss occasioned by the sale of the business at an undervaluation, and for loss sustained as a result of their being unable to obtain an income from the partnership. The plaintiffs do not seek an order for a general account of all partnership dealings and transactions. The defendants seek orders for enquiries to be made and an account taken.
Every partner has a right to have an account from his co-partners of their dealings and transactions. An action for an account may be maintained by partners although the partnership accounts are not complicated and where an action for damages may be sustainable. An order may be made that an account be taken of all partnership dealings and transactions between the plaintiffs and the defendants as co-partners from a particular day. The costs of taking the accounts directed at a hearing are usually defrayed out of the partnership assets and if necessary by contribution between the partners. The time from which the account would be taken, in the circumstances of this partnership, is the commencement of the partnership continuing up to the date of dissolution of the partnership, but kept open for the purpose of debiting and crediting the parties with the monies payable by or to them in respect of transactions incidental to the winding-up.[16]
[16] Lindley on Partnership, above at 518, 539 and 542-543
In my opinion, it is appropriate in the circumstances of this case to allow the plaintiffs to maintain an action for damages, without an order that an account be taken[17], for the following reasons:
1. The Breakaways Café business was disposed of in breach of good faith by the first to third defendants on 13 February 2001;
2. The funds obtained have been used to pay creditors and to pay wages to the second and third defendants for their work in the business;
3. There appears to be little prospect of, or purpose in, disentangling the finances of the partnership, including over the thirteen and a half months when the business was managed by the first to third defendants to the exclusion of the plaintiffs;
4. The business generated only a small profit in the year ended 30 June 2000 and sustained a net loss in the year ended 30 June 2001;
5. The partnership has no funds from which to defray the cost of taking an account which would have to be borne by the partners;
6. The plaintiffs do not ask for an account to be taken;
7. The first to third defendants do ask for an account, but in my opinion, should not be granted that relief, as they have been found to be in breach of their partnership obligations;
8. The cause of action is the breach by the first to third defendants of their fiduciary duty to the plaintiffs, as a result of which the subject matter of the partnership, the Breakaways Café business, was lost. The action does not depend on accounting between the parties and can be decided irrespective of the state of accounts between them.[18]
[17] Lindley on Partnership, above at 568
[18] Radley v Moffat (1862) 1 SCR (NSW) 112; Jones v Chaseling (1914) 14 SR (NSW); Sheaffe v Hungerford (1879) 1 QLJ (Supp) 51 per Lilley J
No evidence was called by the plaintiffs in relation to the accounts prepared by the accountants for the business. Although some of the plaintiffs’ evidence called the basis for the accounts into question, the plaintiffs called no expert evidence to challenge the financial accounts, nor in relation to the valuation of the business prepared for the first defendant through her solicitor in March 2000. The defendants called no evidence about the value of the business as at 13 February 2001, or at any time between the date of the valuation on 31 March 2000 and the date of sale on 13 February 2001.
I proceed therefore on the basis that the accounts prepared by the firm of Waters & Lagzdins, Chartered Accountants, are correct, and the only valuation of the business of the Breakaways Café is a value of $112,000 at 31 March 2000.
I accept for the purposes of this claim that the value of the business as at 31 March 2000 was $112,000, and in my opinion, that is the value to be assigned to it in assessing the loss of the plaintiffs by its sale to Gemstone in February 2001. It was not appropriate for the first to third defendants, or the first defendant on their behalf, to agree to dispose of the equipment to Gemstone as she did, and nor was it appropriate that the any of the proceeds of the sale be applied as wages for the second and third defendants, who were partners in the business. No proper account has been made to the plaintiffs for the proceeds of sale.
Notwithstanding the application of the balance of funds to pay creditors of the partnership business, the first defendant allowed Gemstone to gain the advantage of those payments, in effectively allowing Gemstone to acquire the café business as a going concern, without acknowledgement of the full extent of the benefits it acquired, and the evidence suggests that the payments to creditors, and to the second and third defendants, were expressly made to relieve the first defendant from personal responsibility for them.
In my opinion, the payments to creditors and to the first to third defendants ought not to be brought into account as a reduction to the loss sustained by the plaintiffs as a result of the disposal of partnership assets by the first to third defendants. The first to third defendants should be found liable to account to the plaintiffs for the full value of the partnership business.[19]
[19] Inre Dacre [1916] 1 Ch D 344; Knott v Cottee (1852) 16 Beav. 77
No adjustment should be made either, in my view, on account of the efforts of the defendants in running the business between 1 January 2000 and 13 February 2001. If it were relevant to take account of profits generated after effective dissolution of the partnership, the partner by whose exertions the profits have been generated may be allowed compensation for his efforts, unless guilty of a breach of trust, when no compensation is allowed.[20] The first to third defendants here have breached their obligations to the partnership.
[20] Lindley on Partnership, above at 607; Manley v Sartori [1927] 1 Ch 157; Paige v Ratcliffe 75 LT 371
Of the total sum of $112,000 representing the proper value of the Breakaways Café business if sold as a going concern, in accordance with the agreement between the partners, the first plaintiff is entitled to a share of 20% or $22,400, and the second and third plaintiffs, to a share of 15% or $16,800 each.
As to the claim by the plaintiffs for compensation for being prevented from obtaining an income from the partnership business, no evidence was called regarding how the loss might be assessed.
Some assistance may be gained from drawing an analogy with circumstances contemplated in section 42(1) of the Act, which provides:
Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or the partner’s estate, then, in the absence of any agreement to the contrary, the outgoing partner or the partner’s estate is entitled, at the option of the partner, or the partner’s representatives, to such share of the profits made since the dissolution as the Court may find to be attributable to use of the partner’s share of the partnership assets, or to interest at the rate of 7% per annum on the amount of the partner’s share of the partnership assets.
In this case, the trading, profit and loss statement for the year ended 30 June 2000 shows a profit of $40,260, taking the sum of $10,000 into account in expenses incurred as amortisation of the goodwill. No evidence was called in respect of the correctness or otherwise of that accounting method. I therefore take the financial statements at their face value. The statement for the year ended 30 June 2001, shows a trading loss of $10,881, after claiming depreciation in the sum of $10,593 on plant and equipment, together with a further loss, associated with the disposal of plant and equipment to Gemstone, in the sum of $14,000.
I accept, on the evidence presented, that the plaintiffs have in fact received no amounts by way of drawings or distribution and no benefit from the use of provisions through the café business since 1 January 2000, when the first defendant assumed control of the finances of the partnership business, until and including 13 February 2001, when the partnership café business was sold. On the evidence presented, there is, in my opinion, no basis for any claim by the plaintiffs beyond that date.
On the basis of the financial accounts, for the 12 months from 30 June 1999 to 30 June 2000, the first, second and third plaintiffs were entitled to a share in the profits of $8,052, $6,039 and $6,039 respectively, and for the six months from 1 January 2000 to 30 June 2000, I make an assumption of an entitlement of half the total sum, that is, $4026, $3020 and $3020 respectively. It is true that in the year ended 30 June 1999, the most successful year of operation of the Breakaways Café business, the plaintiffs derived a greater benefit than was possible under the later management of the business by first to third defendants. However, none of the plaintiffs gave notice to the first to third defendants of an intention to dissolve the partnership and settle the partnership accounts in the period between 1 January 2000 and 13 February 2001. It must be assumed therefore that the plaintiffs were content in the circumstances to allow the first to third defendants to continue to operate the café business.
In the year ended 30 June 2001, the partnership sustained a trading loss in the sum of $10,881, and therefore the plaintiffs would not be entitled to any share of profits. There were none.
If, in the alternative, compensation is assessed by way of interest at 7% on the use of partnership assets, in which I include goodwill, for the period 1 July 2000 to 13 February 2001, the first plaintiff would be entitled to a total sum of $112,000 x 20% x 7% = $1,568, for 12 months, and for the seven and a half months to 13 February 2001, the sum of $980. Using the same method of calculation, in respect of an interest of 15%, the second and third plaintiffs would each be entitled to the further sum of $735.
The amount due to the plaintiffs on account of the use of partnership assets and retention of partnership funds by the first to third defendants from 1 January 2000 to 30 June 2000 and from 1 July 2000 to 13 February 2001 is as follows:
First plaintiff $4,026 + $980 = $ 5,006 Second Plaintiff $3,020 + $735 = $ 3,755 Third plaintiff $3,020 + $735 = $ 3,755 Taking into account their share in the proper value of partnership assets on sale to Gemstone, the plaintiffs are entitled to damages as follows:
First plaintiff $22,400 + $5,006 = $27,406 Second plaintiff $16,800 + $3,755 = $20,555 Third plaintiff $16,800 + $3,755 = $20,555
In my opinion, the most appropriate date from which liability on the part of the first to third defendants to pay the plaintiffs those amounts should be assumed to have arisen is the date of dissolution of the partnership, 13 February 2001. I allow the following sums in lieu of interest at 6.25% per annum to the date of judgment on the amounts owing to the plaintiffs pursuant to section 39 of the District Court Act 1991:
First plaintiff: $7,500 Second plaintiff: $5,600 Third plaintiff: $5,600
The financial accounts for the year ended 30 June 2001 show the current and non-current liabilities as $41, 205 as follows:
Current Liabilities
Bank Overdraft
$ 3,161
Trade Creditors
$ 1,881
Non-Current Liabilities
Loan Westpac Bank
$ 36,163
Total Liabilities $ 41,205
There are no fixed assets, following the disposal of the plant and equipment by the first to third defendants. A sum of $1012 was held as cash at bank. The excess of liabilities over assets is $40,193. The second and third defendants received ‘wages’ in the sum of $19,832.66 and $19,832.67 respectively.
The financial accounts show drawings for the same financial year by the second and third defendants of $25,734 each, which appear to have been brought into account in the balance sheet, which shows partnership funds in deficit as follows:
Harald Blobel ‑ Katerina Blobel $ 5,988 Savvas Blobel $ (20,061) Andrew Blobel $ (26,120) Paul Blobel ‑ Mark Blobel ‑ Total Partnership Funds $ (40,193)
The payments to the second and third defendants should be treated as payments to them in advance.[21] There is no evidence of the current financial position of the partnership. In the circumstances of the disposal of the partnership business by the first to third defendants, in my opinion, the plaintiffs should not be held responsible for remaining liabilities of the partnership, if any. Any outstanding liabilities should be borne in full by the first to third defendants.
[21] In re Dacre, above
The plaintiffs are entitled to judgment against the first to third defendants in the following amounts:
First plaintiff: $ 34,906 Second plaintiff: $ 26,155 Third plaintiff: $ 26,155 In total
$ 87,216
There is no evidence against the fourth or fifth defendants on the plaintiffs’ claim. The plaintiffs’ claim against the fourth and fifth defendants is dismissed.
The relief sought by the defendants in the defence is refused. The defendants’ counterclaim is dismissed.
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