Cheng v Lam [No 7]
[2021] WASC 417
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: CHENG -v- LAM [No 7] [2021] WASC 417
CORAM: TOTTLE J
HEARD: 13 OCTOBER 2021
DELIVERED : 26 NOVEMBER 2021
FILE NO/S: CIV 1706 of 2015
BETWEEN: MARY YUEN SHAN CHENG
Plaintiff
AND
FRANCIS HUNG LAM
First Defendant
ANDREA MAN YEE CHENG
Second Defendant
Catchwords:
Practice and procedure - Application to vary orders - Application dismissed
Practice and procedure - Construction of registrar's report - Specific finding to be accorded precedence over general finding - Directions given
Practice and procedure - Construction of orders and reasons for judgment in partnership dispute - Whether finding of in specie distributions made - No finding of in specie distribution made
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr M A Tedeschi |
| First Defendant | : | Mr P G McGowan |
| Second Defendant | : | Mr P G McGowan |
Solicitors:
| Plaintiff | : | G A Lacerenza & Associates |
| First Defendant | : | Johnstone Crouse Lawyers |
| Second Defendant | : | Johnstone Crouse Lawyers |
Case(s) referred to in decision(s):
Cheng v Lam [No 2] [2018] WASC 199
Cheng v Lam [No 3] [2020] WASC 45
Cheng v Lam [No 4] [2020] WASC 175
Cheng v Lam [No 5] [2021] WASC 129
TOTTLE J:
Introduction
These reasons address four issues that must be determined before accounts, taken by Registrar Whitbread in accordance with orders made by Chaney J on 28 June 2018, can be completed.[1] The reasons assume familiarity with Chaney J's reasons for making those orders, the registrar's report,[2] and with my reasons for decisions concerning earlier interlocutory disputes.[3]
[1] Cheng v Lam [No 2] [2018] WASC 199.
[2] Cheng v Lam [No 3] [2020] WASC 45.
[3] Cheng v Lam [No 4] [2020] WASC 175; Cheng v Lam[No 5] [2021] WASC 129.
Three of the issues are the subject of an application brought by the plaintiff by way of a minute of proposed orders filed on 14 September 2021. By that minute the plaintiff sought to vary the orders made on 3 May 2020 and varied on 27 May 2020 (collectively 'the May 2020 orders') as follows:
(a)To remove at Item 486 rent incorrectly claimed of $156,000.
(b)To recalculate Items 471 and 474 which add to $37,077 by agreed contributions by the Plaintiff at Items 36, 84, 184, 149, 195, 287 and 352 and to increase Item 474 by $7,313 to $44,390.00.
(c)To recalculate the rent at Item 487 regarding 78C Edgecumbe Street, Como to consider the information provided by the Plaintiff by way of rent and expenses, invoices, and bank statements and to adjust Item 487 by reducing the rent from $169,000 to $98,499.02 or such sum as the Plaintiff's schedule of rentals received and supporting documents.
Although the plaintiff's minute of orders refers to a recalculation of item 487 (an allowance claimed by the first and second defendants in respect of rental income received by the plaintiff from a property that had been the subject of a partnership, 78C Edgecumbe Street) as I will explain the exercise that had to be undertaken was an accounting by the plaintiff which was long overdue. The accounting was required because the plaintiff had failed to comply with earlier orders made by the court.
A fourth issue was raised by the plaintiff's counsel at a directions hearing held on 5 August 2021. The plaintiff contended that Chaney J had made a finding that certain properties had been the subject of 'in specie distributions' to members of the former partnerships. The plaintiff's contentions in respect of this issue were first developed in written submissions filed on 16 August 2021.
Item 486 - allowance in favour of the first and second defendants for rental income from 250C Ewen Street, Woodlands
Item 486 is an item claimed by the first and second defendants in their account in respect of rental income they estimated the plaintiff had received over a period of six years from a partnership property registered in her name, 250C Ewen Street, Woodlands. The amount claimed by the first and second defendants was $156,000. It was not an amount that depended on the computation of other amounts claimed in the account. The version of the first and second defendants' account that formed schedule B to the registrar's report was annotated to record that the plaintiff disagreed with the amount claimed.
In submissions filed in the course of taking of the accounts before the registrar the plaintiff grouped items 468 - 497 together and objected to all of the items on the basis that they contained, 'items, summations or uses methods objected to in items no. 2 - 467 above'.[4]
[4] Plaintiff's schedule of evidence and finding contended for in respect of each item objected to 82 and 84 Matlock Street, Mt Hawthorn filed 1 November 2019, 74.
The registrar did not address item 486 as a discrete item when she dealt with the plaintiff's objections to the first and second defendants' account. Rather the registrar followed the approach taken by the plaintiff and dealt with the range of items 468 to 497 together. The registrar recorded:
Items 468 - 497 - Mary & Chan's Net Asset or Liability Position
553No objection to determine; Item is a purely mathematical calculation dependant on value of other Items. Objections to constituent Items already determined. It will be for the accountant appointed by the Court to apply my findings to the First and Second defendants' account. That will change the position within the accounts and come to a conclusion about the net assets and liability position as between the accounting parties.
The registrar's remarks regarding items 468 - 497 appear to have overlooked item 486. I make this observation because the calculation of item 486 did not depend on the value of other constituent items. However, the registrar made express findings about the amount claimed by the first and second defendants in respect of rent from 250C Ewen Street when dealing with the plaintiff's account. In this context the first and second defendants contended that the plaintiff had failed to account for rental income from 250C Ewen Street. This contention was the corollary of the proposition that an allowance for rent in respect of 250C Ewen Street should be made in favour of the first and second defendants in their account, that is, as claimed in item 486. The registrar found that the plaintiff was not required to account for rent in respect of 250C Ewen Street and her findings in this respect were expressed as follows:
564On the Taking of Account I find that the Plaintiff failed to account, at all, for income up to the Dissolution Date. The First and Second Defendants contention (that $156,000 would need to be credited to the First and Second Defendants as shown at Item 486 of Exhibit 3) is speculative. As to rental, however, the First and Second Defendant do not appear to have paid any rent whilst they lived in partnership properties. Given that it is Chan who was apparently living in the subject property (and taking the benefit thereof from the partnership) it would seem inequitable for him to pay rent to the partnership up to the Dissolution Date when other partners (the First and Second Defendants) did not pay rent in respect of their occupation of partnership property. Accordingly, I find that the Plaintiff does not have to bring rent to account. (emphasis added)
The report of Ms Delbridge, the Independent Accounting Expert (the IAE), includes an allowance in the sum of $156,000 in the first and second defendants' favour in respect of rent from 250C Ewen Street by reference to item 486. The plaintiff contends this allowance does not reflect the registrar's finding recorded at [564] of the registrar's report while, for their part, the first and second defendants contend that the inclusion of an allowance of $156,000 in their favour does reflect the finding recorded at [553] of the report.
Further, the first and second defendants contend that, on the taking of the account before the registrar, the plaintiff made no specific objection to item 486 and if the finding at [564] was contended to operate contrarily to the finding made at [553] then to allow the matter to be addressed now would be prejudicial to their position. The first and second defendants argue, in effect, that had the point now agitated by the plaintiff been raised before the hearing at which the adoption of the registrar's report was considered, then they would have contended that the registrar's finding at [564] should not be adopted. They identify a number of reasons why it would have been inequitable (and remains so) for no allowance to have been made in their favour in respect of rental income from 250C Ewen Street.
The registrar's report has been adopted. Thus, in determining the issue of whether any allowance in respect of rent from 250C Ewen Street should be made, it is not permissible to go behind the registrar's report and make a fresh evaluation of the evidence.
Contrary to what appears to have been contemplated by the plaintiff, the exercise that must be undertaken involves no variation to the May 2020 orders. Indeed item 486 was not referred to in those orders. Rather the plaintiff's contentions call for a construction of the registrar's report as adopted by the May 2020 orders. How the first and second defendants understood the registrar's findings in respect of the rental income from 250C Ewen Street when they pressed for the adoption of the report, and any prejudice they contend they may suffer if a construction that is contrary to their understanding is adopted, are not matters relevant to the construction exercise.
There is an apparent inconsistency between the specific finding recorded at [564] of the report and the earlier general finding recorded at [553]. Even though the report deals with two accounts, the object of both accounts is to identify a balance due in favour of one side or the other, thus it is important that the registrar's report is read as a whole. By analogy with the established principle of construction that a specific provision will prevail over an inconsistent general provision, I hold the relevant effect of the finding made by the registrar and recorded at [564] of the report is that no allowance is to be made in the favour of the first and second defendants' in respect of rental income from 250C Ewen Street. Consequently, the allowance included in Ms Delbridge's report in respect of rent from 250C Ewen Street should be removed.
Items 471 and 474
Items 471 and 474 were the subject of the registrar's finding at [553] reproduced in the previous section of these reasons. As they were originally included in the first and second defendants' account, neither item 471 nor item 474 involved mathematical calculations dependent on the value of other items which involved objections which had to be determined. In the first and second defendants' account, items 471 and 474 were annotated:
As per plaintiff's own submissions as to her contributions to the developments. This Table 6 was entered into evidence in the Plaintiff's Counsel [sic] Closing Submissions at Trial.
I have referred to the plaintiff's closing submissions at trial and the annotation correctly reflects the content of those submissions, that is, the calculations in the account in respect of items 471 and 474 are based on figures included in the plaintiff's closing trial submissions. The plaintiff has not provided any explanation as to how, what she now contends were miscalculations, were included in her closing trial submissions.
The plaintiff's application in respect of items 471 and 474 fails for three reasons.
(a)First, neither item was referred to in the May 2020 orders and thus the application cannot be brought under the slip rule. There is no other basis upon which the order sought by the plaintiff could be made.
(b)Second, as provided in the May 2020 orders, the registrar's report has been adopted. The plaintiff's application is, in effect, a collateral attack on the May 2020 orders.
(c)Third, it is in both the public interest and in the private interest of litigants, for there to be finality in litigation. It is antithetical to the requirement for finality for decisions and orders carrying decisions into effect to be revisited other than by way of an appeal or for a compelling reason falling within well-established principles. In this instance the plaintiff is seeking a reconsideration of items that are based on an adoption of calculations contained in her closing trial submissions and, even if it was otherwise possible to reconsider the calculations contained in the registrar's report, this would constitute a reason why the court would be disposed to dismiss the plaintiff's application.
78C Edgecumbe Street rental income
This issue has a long history. For present purposes, the following summary will suffice.
As part of the account taken by the registrar the plaintiff was obliged to account for the net rental income received by her in respect of 78C Edgecumbe Street. She did not do so. The first and second defendants contended there should be an allowance in their favour of $169,000.
The May 2020 orders directed the plaintiff to provide the IAE with lease agreements, rental receipts, bank statements and expenses for the period of December 2009 to 28 June 2018. However, the plaintiff did not comply with this direction. The plaintiff's time for compliance with the direction was extended to 7 June 2021. The plaintiff did not comply with that direction but some documents were provided to the IAE in June 2021 and further documents were provided in July 2021.
At the directions hearing held on 5 August 2021, I directed counsel for the parties to confer in relation to the issue, however, conferral did not lead to a resolution.
Further evidentiary material was filed by the plaintiff followed by further submissions. In summary the upshot of all of this is:
(a)it is agreed that the net rental income between September 2012 and 28 June 2018 was $130,344;
(b)the first and second defendants contend that the plaintiff received rental income from the property prior to September 2012 which she has not disclosed - the plaintiff says that the property was not let out before September 2012; and
(c)the first and second defendants dispute that the plaintiff has incurred expenses in respect of local government rates and insurance premiums claimed by the plaintiff - according to the plaintiff's counsel these items amount to $7,487 (rather than $8,214 being the amount calculated by the first and second defendants' counsel).
In the course of giving evidence on the taking of the account, the first defendant gave evidence that the plaintiff and her then husband, Chan, lived together in 78C Edgecumbe Street until 2012.[5] This evidence provides some corroboration for the plaintiff's position that the plaintiff had not let the property out to rent earlier than September 2012 and taken with the rental income records produced by the plaintiff, I find that the plaintiff had not let the property out before September 2012
[5] ts 4 June 2019, 673.
At the hearing on 13 October 2021 the plaintiff's counsel tendered a bundle of bank statements that he contended established that the plaintiff had paid the local government rates and insurance premiums claimed by the plaintiff. The plaintiff's counsel said the relevant entries in the bank statements were marked up so it would not be necessary for me to go through the statements to work out whether the payments had been made. Unfortunately, only three relevant entries were highlighted. However, I have reviewed the statements and am satisfied that all of the local government rates and insurance premiums claimed by the plaintiff were paid out of her bank account.
On the basis of the figures contained in the plaintiff's schedule of rental income and expenses filed on 22 September 2021 I calculate the net rental income for 78C Edgecumbe Street for which the plaintiff should account to be $109,403.
The in-specie distribution issue
The plaintiff contends Chaney J made a finding of fact that, with the exception of 167 and 167A Lockhart Street, the properties which were the subject of the partnerships have been the subject of in specie distributions. The plaintiff contends that the consequences that flow from the in specie distributions are as follows: first, the properties are no longer partnership properties and the recipients of the distributions should account for the distributions in their capital accounts; and second, the properties cannot be the subject of any orders for sale on the final winding up of the partnerships.
Chaney J did not make an express finding in the terms for which the plaintiff contends. The plaintiff argues the finding is to be discerned from a number of paragraphs in the reasons for judgment read in conjunction with the order carrying the reasons into effect. The plaintiff relied on those paragraphs of the reasons in which Chaney J outlined the essential features of each property development project. It is not necessary to reproduce all of the relevant paragraphs of the reasons. The paragraphs dealing with 78 Edgecumbe Street illustrate his Honour's approach.
78 Edgecumbe Street
28The fourth project was the purchase and development of 78 Edgecumbe Street, Como (78 Edgecumbe Street property), which the parties purchased in February 2007.
29The 78 Edgecumbe Street property was purchased in the names of Mary, Frank and Andrea as tenants in common in equal shares. The contract price for the property was $962,500. A loan from the CBA, being loan account 511 031 108, was obtained to purchase the 78 Edgecumbe Street property. The loan was in the names of Mary, Frank and Andrea and was for the sum of $1,000,600. The 78 Edgecumbe Street property was subdivided into four units, being 78A, 78B, 78C and 78D Edgecumbe Street, Como. 78A was registered in the name of Andrea, 78B was registered in the name of Frank, 78C was registered in the name of Mary, and 78D was registered in the names of Mary, Frank and Andrea as tenants in common in equal shares.
30The properties were sold as follows:
(1)78A Edgecumbe Street was sold in December 2009. The contract price was $1,070,000.00. The net proceeds of sale, being $1,049,463.05, were deposited into CBA account 10054782. $300,000 was subsequently transferred to CBA loan 511 031 108, and $200,000.00 transferred to CBA loan 422 911 904.
(2)78B Edgecumbe Street was sold in November 2012. The contract price was $910,000. The net proceeds of sale, being $893,647.01, were deposited into two separate accounts. $293,159.61 was deposited into CBA account 10054782, and the remaining $600,000 was deposited into Australia and New Zealand Banking Group Ltd (ANZ) account 181 962 937, in the name of Frank.
(3)78D Edgecumbe Street was sold on or around April 2010. The contract price was $925,000. The net proceeds of sale, being $909,997.09, were deposited into two separate accounts. $907,980.63 was deposited into CBA account 10054782, and $2,106.46 was taken by ANZ to discharge mortgage L241952.
78C Edgecumbe Street remains unsold and registered in Mary's name.
Chaney J referred to the properties that remained unsold as follows:
Remaining unsold properties
46The properties that are unsold are:
(1)78C Edgecumbe Street, Como registered in Mary's name;
(2)250C Ewen Street, Woodlands registered in Mary's name;
(3)167 Lockhart Street, Como registered in the names of Mary and Chan in joint tenants of one half as tenants in common with Frank and Andrea as joint tenants of the other half;
(4)167A Lockhart Street, Como registered in the names of Mary and Chan in joint tenants of one half as tenants in common with Frank and Andrea as joint tenants of the other half; and
(5)Units 1 and 2, 84 Matlock Street, Mt Hawthorn registered in the names of Frank and David respectively.
In a paragraph on which the plaintiff places particular reliance, Chaney J made the following observation as to how the unsold properties should be treated for the purpose of accounting:
Treatment of unsold properties
131For the purpose of accounting, there should be no distinction drawn between the developed properties which were sold, and those that are as yet unsold. The value of unsold properties should be treated as, in effect, a receipt of value of those properties in accordance with the title ownership. For example, a property in Mary or Chan's name should be accounted for as a receipt by them of the value of that property. How such interest might ultimately be adjusted, and whether properties need to be sold for that purpose, is a matter to be determined by the parties once the account is settled.
The plaintiff contends that in [131] Chaney J was 'making it very clear that the parties own those properties'.[6]
[6] ts 13 October 2021, 1133.
At [134] of the reasons Chaney J stated that the account should be based on a number of findings. The first of these findings was as follows:
The accounts are to be prepared on the basis that each agreement giving rise to the interests of the parties to that agreement provided that the proceeds of the relevant development and sale of the property are to be applied first in payment of any mortgage over the property, then in payment of all costs and expenses incurred in relation to the acquisition, development or sale of the property, and then repayment of any payments made a party to the agreement in discharge of such costs and expenses other than by use of the parties' joint funds or borrowings with the balance to be divided in accordance with the interest of the parties as reflected on the title to the relevant property at the time of its purchase by the parties.
In par 4 of the orders of 28 June 2018 Chaney J directed that the account was to be based on a number of findings the first of which 4(a) was that reproduced under the preceding paragraph. A further finding 4(f) was:
For accounting, there should be no distinction drawn between the developed properties which were sold, and those that are yet unsold. The value of the unsold properties are to be treated as a receipt of value of those properties in accordance with the interest of the parties as reflected on the title to the relevant property at the time of its purchase by the parties.
The first and second defendants argue that [131] of Chaney J's reasons must be read in the light of his Honour's findings as to the terms of the partnership agreements which were as follows:[7]
Having found the evidence of both sides unreliable, the terms of the development agreements can only be ascertained by reference to the conduct of the parties. That conduct includes the manner in which individual titles were distributed, the apparent acceptance of documents which showed entitlements proportionate to ownership shares, and the description of what was contained in a running account referred to in Frank's Family Court affidavit. Those matters lead me to conclude that the terms upon which each of the eight property investments proceeded were those pleaded by the defendants save as to the method of division of profit. That is, any proceeds realised from the sale of the relevant property was to be applied first in payment of any borrowings used to purchase or develop the property; second, in payment of all costs and expenses incurred in the purchase and development of the property; and third, in repayment of any amounts paid by any of the participants towards the maintenance or development of the properties. Any balance then remaining was to be divided between the participants in the project in proportion to their interests registered against the title to the project property at the time of its purchase.
[7] Cheng v Lam [No 2] [114].
I do not accept the plaintiff's contention that there was an in specie distribution of any partnership properties as contended for by the plaintiff for a number of inter-related reasons.
(a)Neither Chaney J's reasons nor the orders made on 28 June 2018 refer to in specie distributions. Had his Honour made a finding that the parties had agreed that certain properties were the subject of in specie distributions I am confident he would have stated that clearly both in the reasons and in the orders. In particular, it is a matter that would have been the subject of specific comment in par 4(a) or 4(f) or possibly both. This is because the finding of in specie distributions would have been of central relevance to the ultimate winding up of the partnerships' affairs.
(b)The plaintiff's contention that Chaney J had made a finding to the effect that the parties had agreed to make in specie distributions as a method of distributing a partner's interest in a particular project is inconsistent with his Honour's findings as to the terms of the agreements governing the projects as set out in [114] of the reasons.
(c)The passages in the reasons for judgment in which Chaney J summarised the essential features of each property development project do not, of themselves, support the plaintiff's in specie distribution contention. That is, there is no express reference to distributions in specie or the use of language that conveys findings to that effect.
(d)Paragraph [131] of the reasons does not support the plaintiff's contention for the following reasons.
(i)First, the paragraph begins with the phrase '[f]or the purposes of accounting'. This must be understood as a reference to the account to be undertaken on the basis of the findings recorded at [134] of the reasons, which themselves reflected the findings made by his Honour as to the terms of the agreements, and which make no mention of an in specie distribution.
(ii)Second, [131] does not refer to a distribution of properties but refers to 'the value of unsold properties' and to 'a receipt of the value of those properties'.
(iii)Third, in [131] Chaney J referred expressly to the possibility that the interest in such properties would need to be adjusted and the properties might need to be sold. Both these possibilities are inconsistent with the concept of an in specie distribution.
(e)Order 4(f) of the 28 June 2018 orders specified that the value of unsold properties is to be treated as a receipt of the value of those properties in accordance with the interests of the parties as reflected on the title to the property at the time of its purchase by the parties. That the order provided that the value received was to be determined by reference to the interest of the parties at the time of the purchase of the property as opposed to at any later date is fundamentally inconsistent with the notion that the judge had found that subsequent transfers constituted in specie distributions.
Conclusion and orders
The plaintiff has been partially successful though not in the terms of the application brought by her minute of 14 September 2021. By that I mean that the issue concerning the allowance for rental income for 250C Ewen Street has been resolved in her favour but, for the reasons given, this success does not result in any variation to the May 2020 orders. Rather, Ms Delbridge's report will need to be amended. The plaintiff's application otherwise fails.
The finding made by me in relation to the rental income from 78C Edgecumbe Street will need to be incorporated into Ms Delbridge's report.
I will hear from the parties in respect of the terms of the orders to be made and costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RC
Associate to the Honourable Justice Tottle
26 NOVEMBER 2021
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