Commissioner of State Taxation v Cyril Henschke Pty Ltd & Ors

[2010] HCATrans 203

[2010] HCATrans 203

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A4 of 2010

B e t w e e n -

COMMISSIONER OF STATE TAXATION

Appellant

and

CYRIL HENSCHKE PTY LTD ACN 007 691 018

First Respondent

HENSCHKE CELLARS PTY LTD 007 902 986

Second Respondent

STEPHEN CARL HENSCHKE

Third Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 3 AUGUST 2010, AT 10.17 AM

Copyright in the High Court of Australia

MR M.G. HINTON,QC Solicitor‑General for the State of South Australia:   If the Court pleases, I appear with my learned friend, MR M.J. WAIT, for the appellant.  (instructed by Crown Solicitor (SA))

MR M.T. FLYNN:   If the Court pleases, I appear with my learned friend, MR M.St J.R. BUTLER, for each of the respondents.  (instructed by Finlaysons Lawyers)

FRENCH CJ:   Yes, Mr Solicitor.

MR HINTON:   If the Court pleases.  Can I attempt in 200 words or less to put the appellant’s case and can I start ‑ ‑ ‑

FRENCH CJ:   Are you going to sit down after that?

MR HINTON:   If your Honours indicate that you are prepared to accept it, then I shall.  Can I start, though, by taking your Honours to page 235 of the appeal book and to the C.A. Henschke & Co as of 22 December 2004.  I draw your Honours’ attention – this is two days before the deed of retirement is executed – to under “NON‑CURRENT ASSETS”, six items down, “Intangible assets” valued at “$35,218,559”.  If I take your Honours two pages further on, page 239, to note 6 we see the corresponding note to that entry.  That 35 million plus represents goodwill, the primary asset of the partnership.

If I could then take your Honours to the accounts for 31 December 2004 and, in particular, to the balance sheet at page 250.  So we are now after the date of the deed of retirement.  Again, looking at the entry for “Intangible assets” at about point 4 on page 250, we see that the primary asset of the partnership remains valued at $35,218,559.  What changed?  During that period Doris Henschke retired.  Her interest, her beneficial interest, in the assets of the partnership ‑ ‑ ‑

GUMMOW J:   Well, wait a minute, her beneficial interest in the assets of the partnership?

MR HINTON:   Yes, your Honour.

GUMMOW J:   That is a question.

MR HINTON:   Putting our case in a nutshell, in between that period of time – if I can go with it this way – her right to any surplus was satisfied and she was paid out 5.6 million, approximately, but on the appellant’s case, she also held a beneficial interest in the rights of the partnership.  On the appellant’s case, that beneficial interest is distinct from the chose in action, the right to the surplus.  What happened to the beneficial interest then? 

If the Court accepts, and we will attempt to persuade the Court that it is distinct, it is a proprietary interest that allows one to manage, control and protect we say, then that beneficial interest, that right to manage, control and protect the assets of the partnership against the rest of the world for the benefit of the partnership and, indeed, potentially against another partner, was transferred, transferred upon satisfaction for chose in action, one being an expression of the value of the other, but the beneficial interest is not derived from the chose in action.  The transfer is effected, in our submission, by the deed of retirement.

GUMMOW J:   The effect of the deed of retirement was to bring to an end the partnership, was it not, and there was a new partnership?

MR HINTON:   In part.

GUMMOW J:   Is that not a point you make towards the end of your submission?

MR HINTON:   There is no doubt about that at all, yes.  But it also transfers to the continuing ‑ ‑ ‑

GUMMOW J:   Just a minute.

MR HINTON:   Sorry, your Honour.

GUMMOW J:   In the course of that termination of the first partnership, the so‑called retiring partner received, was it, $5 million, something like that?

MR HINTON:   About 5.9, approximately, yes, your Honour.

GUMMOW J:   Yes, and by way of according satisfaction for release of whatever interests she had, is that not right, and then you have a partnership with four partners?

MR HINTON:   Yes, your Honour.

GUMMOW J:   Something has happened, you say?

MR HINTON:   Especially as the assets remain of the same value.

GUMMOW J:   There has been no winding‑up?

MR HINTON:   No, your Honour.

GUMMOW J:   So there is some consensual arrangement which produces this transmutation and the question is, has there been any dealing which amounts to conveyance within the meaning of the definition in the Stamp Duties Act?

MR HINTON:   Yes, your Honour.  We would submit that the dealing ‑ ‑ ‑

GUMMOW J:   Perhaps if you approach it that way without sinking into equitable estates and interests in partnership law, you might get an easier and quicker answer.  If you are going to sink into a consideration of the equitable interests and so on, you have to start with United Builders, do you not, in 144 CLR 673 at 687 to 688, which is the last of the series of cases on this question in the Court. Justice Mason describes it as a presently existing equitable chose in action.

MR HINTON:   Yes, your Honour.  At the same time purports to acknowledge the sui generis nature of the individual’s partner’s interest in each and every asset of the partnership and does not purport, in United Builders, to be saying anything in contravention of a quotation in our submissions taken from Canny Gabriel.

GUMMOW J:   You are not understanding what I am putting to you.  The consequence of what Sir Anthony Mason was saying is that Mrs Henschke released her presently existing equitable chose in action in exchange for the moneys, is that not right?  That is what would follow.

MR HINTON:   Yes, your Honour. 

GUMMOW J:   Now, the first question I wanted to ask you is, does the definition of “conveyance” at that stage fix upon releases as such?

MR HINTON:   The definition of “conveyance” is ‑ ‑ ‑

GUMMOW J:   In many Stamp Duties Act it does, but it does not seem to do it in this definition.

MR HINTON:   It does not fix on release at all, your Honour.  I will take your Honours to the legislative context, and can I answer that in the course of taking your Honours through the Act?

GUMMOW J:   Yes.

MR HINTON:   I will start with section 4(1) of the Stamp Duties Act which directs us to Schedule 2.  In Schedule 2 we are concerned with Part 1, item 3.  Stamp duty.  One is liable to stamp duty for a:

(1)      Conveyance or transfer on sale of any property . . . 

(b)in any other case . . . where the value of the property conveyed –

and in this case it would be (x), $500,000.  Item 4 would equally apply.  We then come, perhaps, to answering your Honour Justice Gummow’s question by referring to the definition of “conveyance”.  That is to be found in section 60 of the Act and, importantly for the appellant’s purposes, section 60(d):

(d)      every other assurance or instrument of any kind,

by which or by virtue of which or by the operation of which . . . any real or personal property or any estate or interest in any such property is assured to, or vested in, any person –

an application broader than release, in my submission.  “Property” – to finish with the relevant provisions of the Act – is defined in section 2(1):

means real or personal property and includes –

(a)      intellectual property . . . and

(b)      an interest in property.

An “interest” in property is also defined as meaning:

a legal or equitable interest and includes a potential ‑ ‑ ‑

GUMMOW J:   Where do we see that?

MR HINTON:   Sorry, your Honour.  Same section, your Honour, sorry.

GUMMOW J:   “Interest” is defined.

MR HINTON:   Yes:

includes a potential, contingent, expectant or inchoate interest.

GUMMOW J:   That would certainly include Sir Anthony Mason’s equitable chose in action, would it not?

MR HINTON:   Yes, your Honour.

GUMMOW J:   So, what was it that created the present existing equitable chose in action of these new partners?  The answer, I suppose, the retirement deed.

MR HINTON:   I beg your pardon.

GUMMOW J:   The answer, I suppose, is the retirement deed.

MR HINTON:   Yes, your Honour, it is, and it professes there to point to the fact that the continuing partners intend to continue the business with goodwill intact, as we have said.  The last two definitions that I should take your Honours to are those of “instrument” in section 2 as well and “transfer”.  In our submission, the deed of retirement is an instrument.  By operation of that instrument, property or an estate or interest in such property, namely, Mrs Henschke’s beneficial interests in the assets of the partnership – and I take your Honour Justice Gummow’s point about the chose in action – are assured to, or vested in, the continuing partners.

FRENCH CJ:   The term “beneficial interest” is also defined.  Is that engaged at all in this debate, that is, the statutory definition?

MR HINTON:   It is to the extent that a partner’s interest in the assets of a partnership is a beneficial interest, if the Court pleases.

FRENCH CJ:   But how is it engaged in the statute in any way relevant to this debate, because I notice it includes a potential beneficial interest?

MR HINTON:   It would be by virtue of an interest, the definition of “interest”, including an equitable interest and then we trace equitable interest to “beneficial interest means an equitable interest”.

KIEFEL J:   Chief Justice Doyle approached the matter on the basis that Mrs Henschke’s interest was an equitable chose in action and I think his Honour saw the resolution of the matter as being that the chose in action was simply paid out.  His Honour did not seem to think that in the – what would be the new partnership, which is then carried on by the remaining partners, that there was any underlying difference to the extent of the assets, including goodwill.  His Honour appears to have done so at appeal book 295 by reference to notes in relation to the “Partners’ Funds” which, on their face, would seem to be somewhat at odds with the reference to goodwill remaining unchanged in the financial statements to which you have taken us.

MR HINTON:   The reason I took your Honours to goodwill was to show that really what we have at page 295 is a concentration on only one side of the balance sheet without ‑ ‑ ‑

KIEFEL J:   That is, the payment out of her claim, however one describes it, rather than considering what remains to be shared by the ‑ ‑ ‑

MR HINTON:   Yes, your Honour.

KIEFEL J:   And perhaps what remains – that there is no change to the underlying assets.

MR HINTON:   No change at all.  What you do see is a change to cash at bank, as I recall.  Prior, it was 10 million or so, post, it is 1 point something million.  We do not know, we do not have the journal entries, but it is quite possible that the reduction in liabilities is offset by the change in cash, the cash entry on the balance sheet, leaving, of course, the value of the primary asset, goodwill, at 35 plus million.  That stands to reason, goodwill going with the business, the business here being very much connected to the labels and the quality of the product.  Does that answer your Honour’s question?

KIEFEL J:   You still, however, need a conveyance or transfer from her to the partners in the new partnership, these continuing partners.

MR HINTON:   Yes.

KIEFEL J:   That has to be by the retirement deed because that was the basis of assessment.

MR HINTON:   Yes.

KIEFEL J:   So, when the retirement deed says that the partnership is distributing to her her share of the partnership funds, do you say that that is accurate?  Clause 2?

GUMMOW J:   Is not the problem clause 1(b) which is stating a legal impossibility “shall continue the Partnership”?  That is just not legally possible.  Is that not what the cases say?

MR HINTON:   Your Honour is quite right.  That is legally impossible.

GUMMOW J:   The basis of the partnership is a contract.

MR HINTON:   That is quite right.

GUMMOW J:   The earlier contract seems to have been discharged because one of the parties is gone.

MR HINTON:   Yes, your Honour.

GUMMOW J:   There has to be a new contract.  So 1(b) cannot quite mean what it says.  Is it meaning we are not going to the Equity Court to get a winding‑up?

MR HINTON:   Yes, your Honour.  It means we are going to avoid those difficulties, yes.

GUMMOW J:   Yes.

MR HINTON:   We are going to do that by paying Doris Henschke from cash at bank.

GUMMOW J:   Once you realise there is one partnership and then there is another partnership, questions of continuation become somewhat illusory in law.

MR HINTON:   Your Honour is quite right.  Then we have to deal, at a relatively abstract level, with what happened between the present partners at the time of dissolution and their respective interests where we know, for practical terms, we have then the remainder continuing with the same business.  Notionally, they all sit round the table and divide up the partnership.  Doris then gets up from the table – your Honour Justice Gummow is quite right – leaves the room with her interest in her arms, the surplus.  The remainder at the table then put theirs all back in the middle.  Notionally, that is what happens.  But here, in our submission, the deed of retirement implicitly reflects the intention that that asset, that goodwill, will be taken by them and brought into the new partnership.  So to the extent that she has an interest in it, it is conveyed within the meaning of section 60 to them.

KIEFEL J:   Is clause 2 an attempt at a notional distribution as on a winding‑up?

MR HINTON:   Yes, your Honour.

KIEFEL J:   But what do you say was actually effected?  That goodwill was not in fact distributed to her and that her interest, not just in goodwill but in all the assets, must necessarily have been transferred.  Does that follow because what she does is surrender or release her rights in the future to partnership property?  If that is the case, I am not sure whether that is the same as a notional distribution.

MR HINTON:   I hesitate to use those words “surrender” and “release” because of their usage at one time with respect to ‑ ‑ ‑

GUMMOW J:   Why?  It is better than “evaporation” which is used somewhere in this material.  It happens to be a legal expression.

MR HINTON:   Cease to exist.

KIEFEL J:   But if she has released her interest, however described, it is more readily able to say that the interest of the others has swelled, is that not ‑ ‑ ‑

MR HINTON:   I would embrace that.  If your Honour is using it in that sense ‑ ‑ ‑

GUMMOW J:   Is that not the point, Mr Hinton?  It swelled and it is swelled by reason of this instrument.

MR HINTON:   Yes, your Honour.  A point I have been trying to get to, with the greatest respect, she gives it over, she gives over the power to manage and protect and to control goodwill of the partnership, which such rights being her rights in the assets, part of the bundle of rights and estates that she as a partner had.  That bundle of rights and estates comprises her beneficial interest, and then upon dissolution she hands it over, she releases it to them and it swells, yes, your Honour, that is our case.

KIEFEL J:   Do you have to go to this question about beneficial interest?  Can you simply say that she has surrendered her equitable chose in action for money and that she is not therefore going to claim any of her future rights against the partnership?

MR HINTON:   In my submission, one then looks for what has been transferred within the meaning of section ‑ ‑ ‑

KIEFEL J:   Or if she sold her equitable chose to them?

HAYNE J:   What she has done is what clauses 2 and 4 provide, is it not?  Upon payment there is a release, a release of all claims, assets which, until the execution of this deed, had been committed to the venture conducted by four partners.  Thereafter the deed of retirement were to be under the control of, if you like, but were to be committed to the venture conducted by three partners.  What had Mrs Henschke done?  She had released her claims against the partnership in return for money, but assets committed to one venture were now to be committed to a new and different venture.

MR HINTON:   If your Honour includes in that, as part of the concept of release, her power over this asset, her relationship to this asset, then, yes, I embrace what your Honour ‑ ‑ ‑

HAYNE J:   At least amongst other things, her claim to an order for winding‑up of the partnership consequent upon the dissolution effected by her “retiring” from the partnership.

MR HINTON:   I do not disagree.  What causes me some concern is the notion of abandonment where she has just walked away.  That is not what has occurred here, in our submission.  She has given it.  Their interest is enlarged.  If the word “release” achieves that, then I embrace it.

FRENCH CJ:   Does it make any difference to your argument if the transaction is characterised as having extinguished her interest as is put in the respondents’ submissions?  There is an opposition set up at paragraph 8 of the respondents’ submissions between the extinguishment and “convey” or “transfer” within the meaning of the Act.

MR HINTON:   Paragraph what, sorry, your Honour?

FRENCH CJ:   Paragraph 8, on page 4.

MR HINTON:   If it is characterised in that way which is, as I understand it, to adopt the reasoning of Chief Justice Doyle, then there is no transfer of any right.

GUMMOW J:   Why?  That assumes a continuation of the old partnership and that is just not what the law says and is that not a problem that the reasoning, no doubt, put to the Full Court, which it accepted without either of you emphasising to the Full Court the real nature of what is going on, despite the words of 1(b).

MR HINTON:   Your Honour is quite right.  It does not appear as though anyone went through the exercise, somewhat abstract, in working out exactly what happened according to law.  Having not done that, then the learned Chief Justice has erred.

GUMMOW J:   But you now do it in paragraph 54 of your submissions in this Court.

MR HINTON:   Yes, your Honour.

GUMMOW J:   There is a reference to Lindley and the authorities Lindley refers to.  Then there is a judgment of Justice McPherson in McGowan [2002] 2 Qd R 499 at page 507 in various places. There is a decision of Chief Justice Eichelbaum in New Zealand in the case of Hadlee which is referred to in Lindley and that very often, I think, gets – 1980 ‑ ‑ ‑

MR HINTON:   With respect to the effect of a partner ‑ ‑ ‑

GUMMOW J: [1989] 2 NZLR 447 at 455, referring to House of Lords authority back in the 1940s and Chancery authority in the 1890s. This is all basic law school stuff in law schools that manage to teach the subject.

MR HINTON:   My learned junior tells me that it was put to the court below that the dissolution brought about the end of one partnership and thereafter created another partnership.  Why that was not brought into account as part of the Chief Justice’s judgment, I cannot explain.

HAYNE J:   But the significance that follows from this reference to, one, use of the word “retires” and the use of the word “continuing” throughout the deed is the significance that it is manifest from the deed that upon payment Mrs Henschke releases, but all of the assets hitherto committed to the partnership business are thereafter committed to the new partnership business, and that you get from the notion of retirement plus release coupled with the notion of continuing partners et cetera.

MR HINTON:   Agreed, your Honour, and palpably demonstrated by the balance sheet.

HAYNE J:   But then the question becomes, is that sufficient to bring it within the definition of “conveyance” to which you took us?

MR HINTON:   Then the question that arises is the nature of her interest in the assets upon dissolution and what she had to do as part of the release.

GUMMOW J:   Why?  Why do you keep going back to the nature of her interest?  The question is how this valuable goodwill was committed on one day of this partnership and on the next day to another partnership.  Has there been any conveyance, in the meaning of the statute, when this magic takes place?

MR HINTON:   The short answer is, in our submission, the conveyance by virtue of an instrument, an instrument being any writing, is the deed of retirement, characterised its function, as your Honour Justice Hayne has just done. 

FRENCH CJ:   If you look in the definition of “conveyance” through paragraph (d) “instrument of any kind” to the outcome and to that extent words like “transfer” may set up a kind of metaphorical cloud which gets in the way of that analysis, might it not?

MR HINTON:   Guilty as charged, your Honour, yes.  Then we look on “by which or by virtue of which” ‑ ‑ ‑

GUMMOW J:   “Or by the operation of which”.

MR HINTON:   “Or by the operation of which”, your Honour is quite right, I will come back to what your Honour Justice Hayne has just said, retires, continue, et cetera.  We certainly know how goodwill on one day an old partnership becomes the goodwill of a new partnership.  We had, therefore, “conveyance” within the meaning of section 60.

FRENCH CJ:   Which brings you back, I suppose, to the question whether extinguishment is a false issue here.

MR HINTON:   Factually it must be.

FRENCH CJ:   Or evaporation.

HAYNE J:   Leave aside evaporation as the Murray disappears into the sea.

GUMMOW J:   It is the business circumstance which explains why there is one partnership on one day and another partnership on the next day, as it were.

MR HINTON:   Yes.  And the nature of the asset that goes with it, that asset going with the business itself and being  ‑ ‑ ‑

GUMMOW J:   Is primarily the goodwill and there is valuable trade marks.

MR HINTON:   Yes, your Honour, quite right and not severable.  So there has to be a transfer of their interest in it upon the release effected by the retirement deed and, with respect, the Full Court has to be in error and the judge at first instance, who held that implicitly the deed of retirement conveyed her interest, is correct.  It would appear then that by virtue of the debate that much of our argument as to the nature of interests, et cetera, is unnecessary.

I might just, though, take the time to point out to your Honours where we say the error in the Full Court’s judgment does arise.  Perhaps I could, before doing that, start with what the judge at first instance held just so that your Honours have the background and, in particular, can I take your Honours to appeal book page 275 and draw to your Honours’ attention paragraphs 59, 60, 61, and 69 and 70 on page 277.  For the learned trial judge it was the equitable interest held by Doris Henschke in each and every asset of the partnership that was transferred by virtue of the deed of retirement.

GUMMOW J:   What is the significance of McCaughey’s Case in this, in 18 CLR 475?

MR HINTON:   Yes.  McCaughey’s Case concerned a number of agreements dealing with the dissolution of a partnership and, in passing, Chief Justice Griffith makes mention that a release could never ever effect a transfer.  I will take your Honours to the page.

GUMMOW J:   That seems sensible.

FRENCH CJ:   That matters if you are talking about the word “transfer”.

MR HINTON:   Yes, your Honour.  The crucial paragraph is at 486 of 18 CLR, at about point 5.  The question really there was one of what did the particular deed do?  We are talking there with a release, importantly, of debts or claims.  In my submission, the nature of a partner’s interest for the reasons we have set out is far greater than that, and have almost become a mantra from the Bar table, manage, control, protect.  So here we have in arguendo characterised it as a release, in my submission, given up, handed over, with respect to the assets.  Importantly, because we had a series of instruments in that case, the transfer of property was effected by an instrument prior to the deed subject of consideration.

FRENCH CJ:   The term “conveyance” was defined.  I think the definition is set out at page 484 in the judgment of the Chief Justice.

MR HINTON:   Yes, your Honour, and a much narrower definition than we had in this case.

FRENCH CJ:   Where he says:

The test to be applied is, therefore, whether after the execution of the instrument any property became vested in the alleged transferee which was not vested in him before that execution.

MR HINTON:   We come back to the notion of the interest she held in goodwill enlarged by her transfer to the continuing partners, to use that expression, albeit accepting that it is not accurate.  That mantra “control, protect, manage” and the other nature of the interests referred to in our outline is what is released unto them, what is given to them, transferred to them with the result that their interest is enlarged.  The retirement deed performs a different function to that considered in this case.

Chief Justice Doyle did distinguish this case on the basis that it turned, in particular, on the nature of the instruments under consideration.  His consideration of McCaughey is to be found at appeal book 303, paragraphs 60 through to 63.  We would accept this part of his Honour’s judgment in that he concludes that the general observations made by Chief Justice Griffiths, at paragraph 63, in the context of that case could not “safely be used to found an argument that is decisive in this case”.

If your Honour pleases, I have finished pointing out the basis for the learned trial judge’s conclusion.  If I can turn to the Full Court and take your Honours to appeal book 299.  I draw your Honours’ attention to paragraph 45 of the learned Chief Justice’s judgment and to paragraph 49 on the following page.

GUMMOW J:   That is all very good, but where does it get to the United Case?

MR HINTON:   The United Case was touched upon at ‑ ‑ ‑

GUMMOW J:   There is a series of cases in this Court and they are not all that easily understood, but the last of them, which is an attempt to sum it up, is the United Case and, therefore, that is a starting position for an intermediate court, I would have thought.

MR HINTON:   And dealt with at paragraph 48 and there alone.  What his Honour the Chief Justice concludes is that the beneficial interest is in total accord with a chose in action.  Satisfy the chose in action and then you satisfy the beneficial interest.  The beneficial interest is then or ceases to exist, is his reasoning.  In our submission, you do not draw that from United Builders.

GUMMOW J:   The question from United was whether this charge could be a fixed charge bearing in mind that the assets of the partnership fluctuate and you might therefore think, if you were too wedded to this beneficial interest in the assets from time to time theory of life, you might therefore think that you could not have a fixed charge.  It would have to be floating.  The case decides the opposite because of the treatment of the situation as a presently existing equitable chose in action, true enough, a presently existing equitable chose in action which requires, if necessary, a winding‑up and a distribution and specific appropriation upon a distribution.

MR HINTON:   And as to be found at 687 to 688 of the report, as your Honour pointed out.  The point that I am trying to make, and singularly unsuccessfully, is that in the appellant’s submission the equitable chose in action is the end result if you like.  It is what the partnership ultimately moves towards - upon dissolution the payment of any surplus according to partnership shares.  But during the lifetime of the partnership there is an interest in the partnership assets.

GUMMOW J:   What is that?  How is it manifested from time to time?

MR HINTON:   One a day‑to‑day basis, a basis of control, management and protect.

GUMMOW J:   That is not a beneficial interest in a property.

MR HINTON:   Control, manage and protect the interests, the partnership assets for the purposes of the common business undertaking derived from the fact of the partnership and the partnership agreement.  It is the relationship then, the power that ‑ ‑ ‑

GUMMOW J:   It means you can get an injunction if there is a disobedience to the partnership agreement.  It means you can derive a constructive trust if there is a profit made with the assets that should not be made by one partner and so on and so forth, but you have to look at it closely before you buy these abstractions and generalities.

MR HINTON:   With respect, I agree, your Honour, and it can vary, depending upon the content of the partnership agreement, but it is derived from the partnership agreement.

GUMMOW J:   Derived from a contract.

MR HINTON:   Yes, your Honour.  Not from ‑ ‑ ‑

GUMMOW J:   Upon which equity operates in various ways, partly because it is fiduciary duty as well, partly because there are equitable remedies in injunction and account, the account being particularly important with the winding‑up.

MR HINTON:   Yes, your Honour, and partly because each and every partner is both principal and agent and combine the partnership against the world.  So all those factors taken into account are what informs the nature of a beneficial interest of a partner.  Point taken and agreed with, but that also demonstrates that the learned Chief Justice is incorrect when he says that it is derived from a chose in action and then when you satisfy the chose in action, this beneficial interest, as we have discussed, ceases to exist.  That is the core of our case.  When you transfer goodwill, you had to have given up all those added things that we have just discussed, Justice Gummow and I, that allow you to control, protect, manage that asset.  There has to be a conveyance, in our submission, within the meaning of section 60.

FRENCH CJ:   But you do not need a transfer, do you?

MR HINTON:   I just need a conveyance, your Honour, yes.  I drew your Honours’ attention to paragraphs 52 and 55, 56 for the sake of completion and lastly, the conclusion comes in part.  Although his Honour is dealing with the section 71E argument, you will see the conclusion at paragraph 74 and you will see his reasoning also reviewed again at paragraph 79 on page 307.  If your Honours please.

FRENCH CJ:   Thank you, Mr Solicitor.

MR HINTON:   There was only last thing, your Honour ‑ ‑ ‑

FRENCH CJ:   I am sorry.  I thought you were sitting down.

MR HINTON:   I was just conferring with my learned junior before I do.  The one last thing is, of course, there is this parallel drawn between this case and MSP Nominees.  The nature or the position of the unit holder in MSP Nominees ‑ ‑ ‑

GUMMOW J:   Wait a minute.  MSP is a case on section 71, is it not?

MR HINTON:   It is, your Honour, but there was an analogy drawn as to how in that case there was the transmutation of the right of the unit holder in the units of the trust upon being paid out.  We submit in our submission that the nature of Doris Henschke’s interest in the partnership assets is materially different for all the reasons we have been over to the nature of the beneficial interest of the unit holder in MSP in, in effect, what was a discretionary trust.  If the Court pleases, those are my submissions.

FRENCH CJ:   Thank you.  Yes, Mr Flynn.

MR FLYNN:   Your Honours, I propose to begin with the definition of “conveyance” and then perhaps to take the Court through some of the argument ‑ ‑ ‑

GUMMOW J:   How much duty is involved in this case?  Do you know?

MR FLYNN:   It is roughly $300,000, I believe, your Honour.  What I propose to do is to take your Honours back to the definition of “conveyance” and then perhaps take the Court through the argument at first instance because it seems that the argument at first instance is actually directly relevant to the issues that the Court has now ventilated with my learned friend.

However, on our side we adopt a different analysis of the effect of the dissolution to the one that it is apparent the Court has taken and we will go back to that and deal with those issues that were also discussed.  Your Honours, it is perhaps convenient to begin at appeal book 291 to 292 where his Honour Chief Justice Doyle sets out the definitions.  At the bottom of page 291 his Honour sets out section 60, paragraph 14 of the judgment.  There are two definitions:  one of “conveyance” and one of “conveyance on sale”.  Both appear to be relevant, but it does not really appear necessary to look through the definition of “conveyance on sale” because all the essentials of the definition are in “conveyance”.

GUMMOW J:   What was the actual taxing criterion, conveyance or conveyance on sale?

MR FLYNN:   It talks about a conveyance or transfer on sale, your Honour, so what we say is it is conveyance on sale.  The word “conveyance” appears in the definition of “conveyance on sale”, so you then pick up the full definition of “conveyance”.  It is quite confusing, but the key elements do appear to be in the definition of “conveyance”.  The broadest possible meaning one can draw from this definition is that, if one goes to paragraph (d) of the definition of “conveyance”, every instrument of any kind “by which or by virtue of which”, and then if one goes down three lines, any property is assured to or vested in any person.

What we say about that definition is that in the context of this case, those words “by which any property is vested in any person”, does not add anything to what is conveyed by the meaning of the words “transfer” or “convey” in the ordinary meaning.  The reason we say that is that the only interest in property which it could be said became vested in the continuing partners was an interest that had been owned by Mrs Henschke.  So an instrument, whatever form it takes, which results in an interest previously vested in Mrs Henschke become invested in the continuing partners, would in any event  ‑ ‑ ‑

GUMMOW J:   You use this expression “continuing partners”, you see, that is the problem.

MR FLYNN:   Well, can I come to that in a moment, your Honour?  I will deal with that, but in the context of this definition, whether they are continuing partners or not continuing partners, what is put against us is that an interest which was previously vested in Mrs Henschke became vested in others and that can only happen by a transfer or conveyance within the ordinary meaning of those terms.  So that word “vested” in this context adds nothing.  Indeed, Chief Justice, you pointed out that in McCaughey the definition also included those elements.  If I could perhaps take the Court to McCaughey’s Case ‑ ‑ ‑

KIEFEL J:   Except that, I suppose, if you can conclude that an interest has vested in a person, you can therefore infer that there has been a transfer or conveyance.  That would have to be the case, would it not?

MR FLYNN:   Well, in this case the interest that it said  ‑ ‑ ‑

KIEFEL J:   If the interest has moved from one and vested in another, there must have been a transfer or conveyance.

MR FLYNN:   Yes, that is the point.

KIEFEL J:   That is the reason for the use of the word, is it not?

MR FLYNN:   But that is a transfer or conveyance anyway.  The words that becomes vested in this context adds nothing to the ordinary meaning of “transfer” or “conveyance”, your Honour.

KIEFEL J:   Yes, but the vesting may be more apparent than the transfer or conveyance in some cases.  The end result may be obvious, more obvious than the transfer or conveyance.  That is really what much of stamp duty law is about.

MR FLYNN:   Yes, your Honour, but in this case what is said is that there were interests that Mrs Henschke had in the underlying partnership property which became vested in the continuing – I will call them the continuing partners for the time being.

KIEFEL J:   Well, they did not disappear, did they?

MR FLYNN:   The interest in the underlying property did not disappear.

KIEFEL J:   Yes, particularly goodwill.

MR FLYNN:   No, it did not disappear, but the nature of the interest that the partners had in that property is as set out in Everett’s Case - in the other authorities, United Builders.  It was not a specific interest, so one could not say that Mrs Henschke had a one‑sixth piece of goodwill.

KIEFEL J:   No, we are not talking about a transfer of goodwill as such.

MR FLYNN:   Whether one uses the words “became vested in” or “transfer” the point is the same.  If she did not previously have a one‑sixth interest and if the other partners did not have one‑sixth interests, then one could not say that a one‑sixth interest became vested in the continuing partners.

KIEFEL J:   I suppose one could approach it by saying for what was the almost $6 million paid?

MR FLYNN:   Well, what happened was that Mrs Henschke had an entitlement to a share of partnership capital, which is different to partnership assets and property.

KIEFEL J:   There was no distribution of capital or goodwill.

MR FLYNN:   There was a distribution of her share of the partnership assets.

KIEFEL J:   No, there was not.  The financial statements do not bear that out.  That might have been a word that was sought to be used in clause 2, but that is not what happened.  The partnership assets were unaltered.  Any future interest she had in the net surplus at any future time was given up.  That is what was paid for, was it not?

MR FLYNN:   Well, the partnership’s net assets were decreased by the payment which was made to Mrs Henschke.  She withdraw her share of those partnership assets, she received a distribution.  The balance sheet bears that out because the net assets of the partnership declined from about 35 million to about $30 million.  I will take the Court back to those ‑ ‑ ‑

KIEFEL J:   That is by reference to the partners’ funds?

MR FLYNN:   That is by reference to the partners’ funds, and that is what she took under the deed of retirement.  Under the deed of retirement she was entitled to a share of partnership capital and that is what she withdrew.

FRENCH CJ:   There was a reduction in the partnership capital.

MR FLYNN:   There was a reduction in the partnership capital.  That is correct.  Returning to McCaughey’s Case, at the bottom of page 484 his Honour the Chief Justice says:

The term “conveyance” is defined as meaning “any instrument or deed whereby property is vested in any person -

So it incorporates the same elements as the definition that we are presently concerned with in section 60 whereby property is vested in any person or transferred or conveyed from one person to another.  Then the Chief Justice says:

The test to be applied is, therefore, whether after the execution of the instrument any property became vested in the alleged transferee which was not vested in him before that execution.

So it is the same test that your Honour Justice Kiefel was just talking about applying in this case.  Then his Honour relates a summary of the facts on page 485.  He says that:

the appellant was a member of two partnerships, one consisting of himself and John McCaughey, and the other of himself, John McCaughey and one Vincent.  The partnership assets consisted in both cases of pastoral property, comprising land, stock and the usual accessories, the legal title to the land being vested in the appellant, who in both cases held a predominant interest.  By the deeds of partnership he declared himself a trustee for the members of the respective firms of the land, stock and premises.

In the beginning of 1912 the appellant had agreed to buy out the shares of his respective partners as from 31st December 1911.  This, of course, entailed a dissolution of the partnerships as from that day.  The pecuniary consideration which he was to give, which was very large in both cases, is not material, nor is it material to consider the mode in which it was to be paid.  Shortly afterwards the appellant had agreed to sell to third persons for a lump sum the whole of the property which had been partnership assets.

The contracts for purchase or dissolution may be regarded as in the first instance executory, but no conveyance was necessary to give effect to them so far as regards the land of which the appellant was already the sole legal owner.  So far as regards the stock and other chattels the possession remained in him as continuing partner.  He was, therefore, able to transfer the whole property to his purchasers –

third parties –

without the aid of any assurance from his former partners beyond the contracts of sale or dissolution, which are not now in question.

If one goes over the page to about page 486 point 5, I think there is the passage that my learned friend took the Court to where the Chief Justice says:

My difficulty has been to discover what part of this deed can be suggested to be a transfer of property.

Do not forget his Honour adopted the same test as is applicable in this case in respect of remedial transfer ‑

So far as I could apprehend the argument for the respondent, principal reliance is placed upon the release.  But, in my opinion, it is impossible to construe a release of debts or claims as a conveyance within the meaning of the Statute.  Even if it were possible, the release now in question relates exclusively to matters antecedent to the sales and has no concern with the consideration for the sales.

Justice Barton agreed with the Chief Justice.  There are two points worth noting about this case.  The first is his Honour’s rejection of the notion that a release can constitute a conveyance.  The second point to note is that if partners can acquire legal title without the need for a conveyance, then one does not imply a conveyance as a result of a dissolution.  I would like to take the Court back to the argument before the judge at first instance because in a way this case has come full circle.

GUMMOW J:   The submissions there certainly referred to Mackie at page 270.

MR FLYNN:   That is correct, your Honour.  In fact, it has never been in dispute between the parties that the effect of a retirement is, at law, to effect a dissolution.  However, the courts lower down had not considered that that impacted the outcome.  If one goes to appeal book 272, Justice Gray sets out the parties’ submission there.  At paragraph 46 of the appellants’ submission, that is the Henschkes, appears:

It was submitted by the appellants that goodwill was not transferred from Doris to the continuing partners pursuant to the deed or retirement.  Goodwill is itself indivisible, though its value, when realized, may be shared in proportions.  In Geraghty v Minter, Stephen J observed:

[The goodwill of a partnership business] is inherently inseverable from the business to which it relates . . . 

Thus where, after dissolution, the business previously conducted by a partnership continues to be carried on under the same name by one of the former partners . . . the old goodwill will tend, at least initially, to adhere to that business.  As time passes the business, under its new management, will acquire for itself its own distinctive goodwill which will gradually take the place of the old goodwill.

It follows, it was submitted, that the continuation of the winemaking business after the retirement of Doris did not involve any conveyance or transfer of goodwill.  Rather, the appellants submitted that Doris received from the partnership funds money representing her share of the value of the partnership upon her retirement and the goodwill adhered to the business conducted by the continuing partners.  What she received was a payment, it was claimed, from the net assets of the partnership.

So the Henschkes at first instance were arguing that there was no conveyance, there was no need for conveyance because upon the continuing partners being entitled to continue the business, the goodwill passed without the need for any conveyance or transfer, not forgetting, of course, that the central issue in this case is whether there is an instrument in writing.

GUMMOW J:   When you say “the goodwill passed”, in legal analysis, what does that mean?

MR FLYNN:   We rely on Murray’s Case, your Honour, and Geraghty v Minter ‑ ‑ ‑

HAYNE J:   Let me unpack the proposition a little further than that answer suggests.  One, it is accepted that upon retirement there is a dissolution of the first partnership, is that right?

MR FLYNN:   Yes.

HAYNE J:   It follows, does it not, that section 39 of the Partnership Act 1891 (SA) was thereupon capable of engagement? On dissolution, every partner was entitled ultimately to a winding‑up, is that right?

MR FLYNN:   Yes.

HAYNE J:   In fact that right to a winding‑up was given up by Mrs Henschke, was it not, by her execution of the deed of retirement?

MR FLYNN:   Yes.

HAYNE J:   As a consequence of her giving up that right and a consequence of the agreement of those who had been partner with her in the partnership that was dissolved, that they would not have the affairs of the former partnership wound up, what happened in respect of the goodwill and other assets that were part of the assets of the former partnership?

MR FLYNN:   Well, those assets diminished by the distribution to Mrs Henschke continued in the ownership of the people I will call the continuing partners.

HAYNE J:   Continued in the sense that they, after the deed of retirement, had those assets, is that right?

MR FLYNN:   They had an interest in the assets which is an interest defined by the Court in United Builders and Everett.

HAYNE J:   Yes.  How did it get from partnership one to partnership two?

MR FLYNN:   I was going to come to this in a moment, your Honour, but I will address the Court now.  Even though we accept that on dissolution that the old partnership ceased and a new partnership commenced, it does not mean that all the contractual rights and obligations under the original partnership immediately – I will not use the word “evaporated” – disappeared.  I would like to read a passage from Lindley on Partnership, and I can arrange for copies to be handed up later, but it is from paragraph 19‑10 of the current edition of Lindley on Partnership, and it says under the heading “General dissolution”:

In the event of a general dissolution, each partner will again be entitled to insist on the partnership assets being applied towards payment of the firm’s debts and liabilities and a division of any surplus proceeds.  Until such time as those assets are either sold or divided in specie, it is submitted that each partner’s share will have the same proprietary character as it had prior to the dissolution.

There is a footnote there –

Nevertheless, in terms of value, the share must still be expressed as a net entitlement since, in the absence of some specific agreement between the partners, it cannot properly be viewed in any other light.

This analysis was, in effect, affirmed by the Court of Appeal in Popat v Shonchhatra.

GUMMOW J:   What is the citation of that case?

MR FLYNN:  In fact, I do have a copy of that case, which I can arrange to be provided to the Court. That is [1997] 1 WLR 1367 at page 1372 D to E. So what we say is that upon dissolution the partnership property does not immediately become vested as joint owners in the partners, rather, they continue to have a chose in action which entitles them to a share of the surplus upon dissolution.

KIEFEL J:   But here such an interest held by Mrs Henschke ceased on payment of the money, did it not?

MR FLYNN:   That is correct.  Mrs Henschke’s interest ceased upon payment.

KIEFEL J:   So what happened to the goodwill, to return to Justice Hayne’s question, moving from partnership one, finding its way into partnership two, because the amount of the goodwill is the same in both partnerships, is it not?

MR FLYNN:   Can I perhaps do this in steps, your Honour.  The first step is to go to the deed of retirement, which I think is at court book 172.  At court book page 174, clause 2, it is provided that:

The Partnership shall distribute to Doris her share of the partners’ funds of the Partnership (capital and income), amount to $5,885,298, in full satisfaction of all claims she has against the Partnership.

So what Mrs Henschke became entitled to was a share of capital and income.  Now, her entitlement under the old partnership had been to a one‑sixth share of capital and income, but she did not have a one‑sixth share of the goodwill.  What she had was a share in the surplus of assets over liabilities.  The assets included the goodwill but they also included all the other partnership property.  Now, if one perhaps turns now to the balance sheet I would like to take the Court first to appeal book page 229.  This is the balance sheet for the financial report ended 22 December 2004, so it is one day before Mrs Henschke retires.

If one then turns to appeal book 235.  Just pausing for a moment, the left‑hand column states 2005 but, in fact, that column is really 22 December 2004.  The right‑hand column says 2004, that is as at 30/6/2004.  Now, at the bottom of the page appears the partners’ funds.  This is before the retirement - $35,302,788.  What the partners - and listed in this balance sheet are a whole series of assets.  However, Mrs Henschke did not have one‑sixth entitlement to those assets, to any one of those assets.  What she did have, though, was a one-sixth entitlement to the partners’ funds which appears at note 7. 

HAYNE J:  On a winding‑up?

MR FLYNN:   On a winding‑up, yes.

GUMMOW J:   It never happened.

MR FLYNN:   Which did not happen.  Then if one goes to note 7 at page 240 ‑ ‑ ‑

HAYNE J:   That is the goodwill revaluation reserve which accounts for the difference between the two years?

MR FLYNN:   Yes, your Honour.  Most of the capital was attributed to that revaluation. Anyway, one sees how those capital accounts were broken up.  Then if one goes to the next set of financial statements in appeal book 244, these financial statements have appeared as at 31 December 2004.  At appeal book 250, one sees the balance sheet as at 31 December 2004.  The left‑hand column here is headed 2005, but for that one should read 31 December 2004.  The right‑hand column is headed 2004, but for that one should insert 30/6/2004, so the right‑hand columns are the same in both sets of financial statements.

Now, what one sees after the retirement is that the net assets have decreased to $29,417,489.  The interest that each of the continuing partners had after the distribution to Mrs Henschke remained the same, certainly in value and we say, also, in terms of the analysis of the propriety interests.

What they had, when one looks at the list of assets, was an entitlement to a share of the surplus from the sale of those assets after payment of all the liabilities.  They did not have a one‑sixth specific interest in each of those assets.  We say it is simply incorrect to interpret what occurred as having been a swelling of the partners’ interests in the goodwill.  What occurred was that their interests in all these assets remained unchanged.

FRENCH CJ:   In the value of their interest, their proportions ‑ ‑ ‑

MR FLYNN:   The value of their interest, as well, remained unchanged.

FRENCH CJ:   Their proportions changed because there were now three, when there were previously four.  She has walked away with some of the capital.

MR FLYNN:   Yes, she has taken her share of capital.

GUMMOW J:   You keep talking about “their interest”.  Their interest was only the product of such partnership as existed at one particular time or another particular time, and you cannot glide over it.

MR FLYNN:   But in the interim between, in the instant ‑ ‑ ‑

GUMMOW J:   What you are saying, in a popular sense, may be absolutely correct, but it is not accurate as a matter of analysis.  These figures indicate people were living by the sword, as it were, and they have to die by the sword.

MR FLYNN:   But even in the instant between the dissolution of one partnership and the creation of the second partnership, the partners’ interests in those assets was the same.  It was an entitlement to a share in the surplus.

FRENCH CJ:   Instead of a winding‑up is it right to say that she took a figure which might represent a certain amount of the capital of the former partnership?

MR FLYNN:   Yes, that is correct.

FRENCH CJ:   From which she had retired.  A new partnership was constituted with the remaining capital.

MR FLYNN:   Yes, that is correct.

KIEFEL J:   So does the figure for note 7 “Partners’ funds” simply reflect that she is no longer there, as compared with the accounts for the previous period?  Is that all it does?

MR FLYNN:   Yes.  I take it your Honour is looking at page 254A of the appeal book.  It reflects the fact that Mrs Henschke has withdrawn her funds from the partnership and is not a partner of the new partnership.  That is correct.

KIEFEL J:   But partners’ funds do not equate to an interest in the net surplus assets of the partnership.  Putting the reference to the accounting reasons for partners’ funds to one side, it would remain the case that in the column, as at 31 December 2004, as you would say, the 2005 column, the partners in the new partnership would be entitled to share in their respective amounts in the whole of the net surplus on distribution at a future time.

MR FLYNN:   That is correct, but the purpose of these accounts is to try to measure what that would be if a dissolution occurred immediately.

KIEFEL J:   But since the business has not been sold, goodwill, as the accounts show, has not gone anywhere.  The partnership funds are for an entirely different accounting purpose.

MR FLYNN:   If the balance sheet is accurate, it should reflect what they would receive if there were a dissolution and the sale of all the assets.

KIEFEL J:   Could I ask you, note 7 that Chief Justice Doyle refers to at appeal book page 295, where do they appear in our appeal book as part of the accounts?  They are said to be figures from note 7 but I could not tally them.

MR FLYNN:   If one goes back to appeal book 240 – page 241 is the easiest starting point – one sees total partners’ funds before the retirement of $35,302,788.  Then if one goes to the table at appeal book 295 one sees total partners’ funds pre‑retirement, $35,302,788.

KIEFEL J:   I am sorry, where did you go to?

MR FLYNN:   Appeal book 241 then back to appeal book 295.

KIEFEL J:   Yes, but what I want to know is where in the accounts are these figures that his Honour is setting out?  Where do they appear?  I could not see them as part of the ‑ ‑ ‑

MR FLYNN:   Well ‑ ‑ ‑

KIEFEL J:   I am sorry.  At paragraph 22 on page 295, are they tables that his Honour has put together?  He has extrapolated them.

MR FLYNN:   I think they may have been in submissions we provided to the Full Court.  I think we did some calculations simply dividing one‑sixth – to illustrate the point that when you went from one‑sixth to one‑fifth ‑ ‑ ‑

KIEFEL J:   I see.  They are workings.

MR FLYNN:   All you were doing was changing the proportion of a diminished amount of capital ‑ ‑ ‑

FRENCH CJ:   Exactly the same money sum.

MR FLYNN:   Is get the same amount.  All it is is a share in net assets after dissolution.

KIEFEL J:   Yes, I see.

HAYNE J:   That is to equate a snapshot of the value of assets with what may be a radically different idea about which partnership had control of the assets.

MR FLYNN:   Your Honour, we do not put it any higher than that it is consistent with our analysis.  We do not say that it is decisive, of course, but we say it is consistent.  It seeks to deal with, I suppose, the point the Commissioner makes which is well, you went from one‑sixth to one‑fifth.  The one‑sixth to one‑fifth relates to the capital and profits of the partnership.  It does not relate to any individual specific asset.  I think I was taking the Court back through the judgment at first instance.  I would just like to return to that.

HAYNE J:   With a view to demonstrating what proposition, Mr Flynn.

MR FLYNN:   Simply that the argument at first instance, which the Henschkes put forward, was that there was no conveyance or transfer because there was no need for one, because if one analyses what happened as being a transfer of underlying assets, there was no need for a conveyance or transfer because the goodwill adhered to the business which was continued by the continuing partners.  It was actually the Commissioner who embarked on the analysis of the nature of a partner’s interest in a partnership in order to rebut that argument.  Justice Gray accepted the Henschkes’ argument at first instance.  In that sense it seems that the arguments have gone full circle.

HAYNE J:   But the notion that goodwill adhered to the business, which is an element of your proposition, may be right, may be wrong, but the relevant factor observed is, is it not, that the business was conducted by partnership one.  It is now conducted by partnership two.  What has happened, other than conveyance, that has led to that consequence?

MR FLYNN:   Your Honour, even if there was a conveyance, and we do not concede there was a conveyance, duty is only payable if the conveyance happened under an instrument in writing.

HAYNE J:   Yes, and that then takes us to what is the effect of the deed of retirement, and just so that you may deal directly with it, why can the deed of retirement not be understood as one, constituting a release by Mrs Henschke in return for money of, amongst other things, her right to claim winding‑up of partnership one; two, by use of the terms “retirement” and “continue” or “continuing”, as effecting a result that the three who had been partner with Mrs Henschke in partnership one are given control of all of the assets and undertaking remaining after payment out of $5 million for them to continue in a partnership, a new partnership, on the terms, mutatis mutandis, as previously obtained.

MR FLYNN:   Your Honour, we say that in order to get to that result, one has to take steps that are not provided for under the deed of retirement.  Like the taxpayers in McCaughey, the continuing partners had possession of the relevant assets.  They did not need a conveyance in writing.

GUMMOW J:   They needed a new contract though, a partnership, did they not?

MR FLYNN:   Sorry, a new contract, your Honour?

GUMMOW J:   A partnership?

MR FLYNN:   A new partnership which took the effect of a variation perhaps of the old partnership, yes.

GUMMOW J:   You had a contract between A, B, C and D.  Now, you have a contract after D obtains this release, accordant satisfaction by way of release.

MR FLYNN:   Yes.

GUMMOW J:   You now have a contract between A, B and C.

FRENCH CJ:   If you accept there was a dissolution it is a new contract, is it not, not a variation?

MR FLYNN:   Yes, yes, your Honour, we accept it is a new contract.

GUMMOW J:   It has to be.

MR FLYNN:   Yes.  It does not follow that there is necessarily a conveyance of underlying assets as a result of that new contract, and McCaughey is an illustration of that.

GUMMOW J:   The reasons that have been put to you, I think, may explain why in practice there has been an attraction to oral arrangements in this area.

MR FLYNN:   Well, in the past, yes, your Honour is right.  In the past devices were employed to avoid stamp duty by using oral contracts, or contracts that take effect by performance of a deed rather than in writing.

GUMMOW J:   The problem was when there was an interest in registered land or registered lease, of course, but where you did not have that sort of impediment there was an attraction to doing these things orally.

MR FLYNN:   That may be the case, but here because of the nature of the assets there was simply no need to do that.  They were assets that were in possession of the continuing partners, and once they had the release from Mrs Henschke there was no need for a conveyance.

GUMMOW J:   Well, that seems to have been the gravamen of Mr Merralls’ argument at first instance.

MR FLYNN:   It was, yes, and it was one that Justice Gray rejected on the basis that it was the equitable chose in action that somehow was assigned and brought with it the underlying assets.  That was why the focus in the Full Court was on that.  That was the territory that the arguments were all centred on.  We do not resile at all from the judgments of the Full Court.  We rely on the passage that I have referred the Court to in Lindley on Partnership, and I can arrange to get copies of that passage handed up.  It indicates that the continuing partners did not thereby immediately acquire physical ownership of the underlying assets.  They continued to hold a chose in action which conferred entitlements to a share in the surplus on a winding‑up.

I was proposing to take the Court to some passages from the judgments of Justice Kitto in Livingston and the judgment of the majority in Everett’s Case, which I will not do, but there is a passage from the judgment of Justice Windeyer in Bolton v Federal Commissioner of Taxation which I would like to take the Court to.  It is referred to in Everett’s Case but the full quotation is not set out in Everett. It is [1965] ALR 481 at 491.

This was a case in which – it was a chartered accounting firm and the partners hit upon a scheme which may have sounded like a good idea at the time in which they each set up a trust, and each partner assigned to one of the other partners his interest in the partnership which the other partner then held for the benefit of the assigning partner and his family.  So Justice Windeyer’s judgment needs to be read in light of those facts.  At the bottom of page 491 at line 43 his Honour says:

One partner’s share in a partnership is not a separate thing separately designated from that of another partner.  It is a fractional interest in a surplus of assets over liabilities on a winding up and in the future profits of the partnership business.  Therefore if A and B, being partners in equal shares, purport to exchange their shares one for another they accomplish nothing.

GUMMOW J:   Yes, that is right.  This is a case when there is A and B, but in the present case there is A, B and C and then there is A and B, C being Mrs Henschke.

MR FLYNN:   Well, Mrs Henschke starts out as a partner, she receives a payment being her share of the partnership capital.  The partners then agree that they will, rather than have the winding‑up, continue, but at no point in those transactions do those partners or Mrs Henschke acquire any title to specific partnership property which could then be transferred to the continuing partners.  Then his Honour said:

And equally obviously they accomplish nothing if they purport to exchange some other equivalent fractional shares, say 17½ per cent, to which they are entitled.  And if by a concerted transaction they purport to sell equivalent shares to one another for the same sums of money, say £7000, payable at once, again they accomplish nothing.  In the present case the so‑called assignments for value ‑ Bolton assigning to himself ‑ were assumed by the appellants to have resulted in transfers of the fractional interests of one to another.  I am unable to accept this view of the matter.  I do not think that any transfer of shares in the partnership took place.

That passage was relied upon by the majority in Everett’s Case.  There is one other case I might take the Court to which I was not proposing to read from but I think I will.  It is a case of Watson v Ralph (1982) 148 CLR 646. I have had copies made which I can have handed up. That was a case where a husband and wife were carrying on a farming business. The wife died so, of course, the partnership was dissolved. The wife left a will. The gift she made appears at page 649 of the report. There are two lines at about point 4 of the page before a long quote and then in the long quote, about eleven lines down, one sees a gift which was:

to stand possessed of my residuary estate as to both capital and income UPON TRUST if at the time of my death I shall be the owner of the freehold property situate at Whittlesea in the State of Victoria owned at the date hereof jointly by my said husband and myself –

So she and her husband are registered proprietors and they also are using that land in a partnership business.  She dies, so the partnership is dissolved.  Now, if I can take the Court to page 650, the first full paragraph of that page at about point 3 of the page, his Honour, Chief Justice Gibbs says:

The testatrix, at the time of her death, was neither the legal owner, nor the sole beneficial owner, of the freehold property at Whittlesea.  The land was then part of the property of the partnership of which the testatrix and her husband were the members.  The nature of a partner’s interest in the assets of the partnership was described as follows by Kitto J in Livingston v Commissioner of Stamp Duties (Q.) –

So his Honour adopts the passage from Livingston which Chief Justice Doyle relied upon.  Then he says –

The testatrix accordingly had an equitable interest in every asset of the partnership, including the land:  see also Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd; and Federal Commissioner of Taxation v Everett.

It was submitted on behalf of the appellants that when the testatrix used the words “the owner of the freehold property situate at Whittlesea” she meant to refer to the equitable interest that she, as a partner, had in that property.  This submission was accepted in the Supreme Court by the learned trial judge, who held that the appellants took an undivided half share in equity in the Whittlesea property.  On appeal the Full Court held that the appellants took no interest in the estate and allowed the appeal. 

Then his Honour says, the last paragraph on page 650:

The words of the condition, literally construed, were not satisfied.  The testatrix was not “the owner” of the land at the time of her death.  Counsel for the appellants submitted that the relevant words of the condition should be construed as meaning “if I shall still be the owner”, or “if I shall be the owner of an interest”, or “if I shall be the owner as a partner”, or “if I shall be an owner”.  It is implicit in this submission that some departure from the natural meaning of the words of the condition must be made if the appellants are to succeed.

So the outcome was that the gift failed and the rest of the Court agreed with Chief Justice Gibbs.  Justice Aickin delivered a separate judgment reaching the same outcome.

GUMMOW J:   Just look at Justice Aickin at the bottom of 654:

The testatrix having been survived by her husband, the partnership would have been automatically dissolved upon her death.  In the absence of an agreement between her executors and her husband for a new partnership to take over the assets of the old partnership, the latter would have had to be wound up on the death of the testatrix.  Indeed, if there were a new partnership formed between her executors and her husband, the original partnership would still have had to be wound up.

That is reflective of some of the propositions that have been put in argument this morning.

MR FLYNN:   Yes, and they are not disputed, your Honour, we accept that, but it does not follow from that that each of the partners of the former firm therefore required a specific interest in the partnership assets.

HAYNE J:   Work of that proposition is done by the word “specific”.  What is the statutory root of all this is section 20(1) of the Act, is it not, which identifies what “partnership property” is and that partnership property:

must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

So the assets that were committed to the venture conducted by partnership one in this case had, under the Act, except to the extent modified by the agreement, be held and applied by the partners in partnership one exclusively, et cetera.  Then after this deed of retirement, those assets which have hitherto been held down to be applied by the partners of partnership one for the purposes of that partnership, now come to the three survivors in the new partnership, partnership two.  What has happened, if it is not a conveyance?

MR FLYNN:   What has happened is that the partners in partnership two have continued to have a chose in action, being their entitlement on a winding‑up to a share of the surplus.  The title to the partnership assets has not been transferred or conveyed because there was no need - by instrument in writing because there was no need for a formal conveyance or transfer.  It follows that there is not a dutiable instrument.

HAYNE J:   That proposition seems to be, correct me if I am wrong, that the deed of retirement does not of itself - what is the statutory expression, “by virtue of which or by the operation of which” vest in the new partners property previously subject to the statutory requirements of 20(1) in respect of partnership one.  Is that right?

MR FLYNN:   Yes.

HAYNE J:   That is the point on which you stand or fall, is it not, Mr Flynn?

MR FLYNN:   Yes, it is ‑ ‑ ‑

HAYNE J:   Or if you would prefer it, it is the point on which the Commissioner stands or falls.  It is much more gentle to put it that way, Mr Flynn.

MR FLYNN:   Thank you, your Honour.  We do prefer it that way.

KIEFEL J:   We are probably retracing steps, but you cannot get to partnership two under the new contract with the new proportions, in respect of which the partners hold, of the net surplus of the partnership of all of the partnership assets.  You cannot get to that point while Mrs Henschke retains her interest as a partner under the old partnership agreement.

MR FLYNN:   While she holds her existing interest, that is right, I suppose.

KIEFEL J:   After the deed of retirement and the creation of the new partnership agreement the partners in the new partnership hold proportionate shares in the assets which are different.

MR FLYNN:   No, your Honour, that is where we differ from your Honour’s analysis.  They hold proportionate shares in the capital which are different.  They do not hold different proportionate shares in the underlying assets.

KIEFEL J:   No, I am sorry.  Their future interest in the net surplus as on a winding‑up has been enlarged.  Would you agree with that?

MR FLYNN:   No, we certainly reject that.  If you wound the partnership up the day after Mrs Henschke retired they would get exactly the same share in exactly the same dollar value as they would have received the day before she retired.

HAYNE J:   But that is a consequence of taking a snapshot and not, as Sir Victor Windeyer pointed out in Bolton, recognising that a partner share in a partnership is a fractional interest not only in the surplus of assets over liabilities on winding‑up, but also in future profits of the partnership business.  It is only if you freeze the frame and look only at the position of the instant after this change in partnership arrangements – if I may use that as a neutral term – that you end up with an identical dollar value?

MR FLYNN:   That is correct, your Honour, but it is those two points that are the critical points for the purpose of determining liability for stamp duty because it is in that instantaneous gap of time that it is said that there was a transfer.  They are the two relevant points.  Your Honour, I am concerned that there may be a point ‑ ‑ ‑

GUMMOW J:   Can I just interrupt you for a second?  This may be uncontroversial, but are we correct in assuming that the Partnership Act 1891 (SA) applied to these parties?

MR FLYNN:   Yes, your Honour. 

GUMMOW J:   Yes, we have copies of the Act.

MR FLYNN:   Your Honour Justice Kiefel, I am just a bit concerned that I am not understanding the point you are making about the value of the interests before and after the retirement because it is certainly our case that the value of those interests did not change as a result of the retirement and that the amount that one of the partners would receive as a result of a winding‑up after the retirement was exactly the same as the amount one would receive before.

KIEFEL J:   That was the point Chief Justice Doyle made.  You are relying on that.

MR FLYNN:   At page 295 of the appeal book.

KIEFEL J:   Yes, I follow that.

HEYDON J:   The choses in action which the later partners had – each chose in action which each of them had was different, was it not, from the one they had before Mrs Henschke left the partnership?  Take casks, vats and barrels valued at $1.556 million in the pre‑balance sheet and the same figure in the post‑balance sheet.  The chose in action each of them had in relation to that asset, or in relation to the totality of the assets of which that was one, changed its nature, did it not, after she left?

MR FLYNN:   We would say it did not change its nature, your Honour.

HEYDON J:   It expanded, did it not?  The partner who had one‑sixth now had one‑fifth.

MR FLYNN:   They had one‑fifth of the capital which meant that on a winding‑up that would still produce the same amount.  All that changed was the actual fraction.

HEYDON J:   They get the same amount of the total assets because one integer has fallen radically from 35 million to 29 million.  That which was nothing on 30 June suddenly became 35 million six months later and then dropped 6 million when Mrs Henschke went out.

MR FLYNN:   We would say nothing turns upon the revaluation.  That was really recognition of a value that was already there at 30 June 2004 but which was not recognised in the balance sheet.  But in terms of the choses in action we contend that they still consisted of a share in surplus upon a winding‑up of exactly the same assets minus the money which had been distributed to Mrs Henschke which was not dutiable.  That was a distribution that did occur, or a transfer of property that did occur, but that was the only transfer of property.

HEYDON J:   Is the fallacy in what I am putting that I am looking at individual items of assets when I should be looking at a kind of global pool?

MR FLYNN:   Yes, your Honour.  We rely particularly on the passage from Bolton v Commissioner of Taxation.  Your Honours, there is one matter I wanted to deal with.  It was a passage from Lindley & Banks on Partnership, which was referred to by the Commissioner in his submissions in reply.  If I could just go to the passage, it was paragraph 7 of the reply.  What the Commissioner says is:

In paragraph [2] of the Respondent’s Submissions the Respondent takes issue with the statement that partners have a “joint interest” in all the partnership assets.  Ashworth v Munn is cited as authority for the proposition that partners do not own partnership property, which is real property, as tenants in common or as joint tenants.  This may be explained by reference to s 22(1) . . . Moreover, there is no doubt that partners hold partnership property via some form of equitable co‑ownership. 

There is a reference there to Lindley & Banks on Partnership at paragraph 5‑08.  I have had handed up to your Honours an extract of that passage and your Honours will see that the paragraph is actually dealing with a distinction between co‑ownership of property and partnership and it is pointing out that a partnership will not necessarily subsist between the co‑owners of the property.  So we say it does not really stand for that proposition at all and, indeed, Lindley then goes on – we are concerned with the next heading – to compare and contrast the two concepts.

Your Honours, there is one other point which was made by Justice Bleby at appeal book page 309, which I would also like to take the Court through.  It is at appeal book page 309 and beginning at paragraph 88 his Honour contrasts what could have occurred if the continuing partners had purchased Mrs Henschke’s interest, rather than Mrs Henschke simply withdrawing her share of capital.  At paragraph 88 Justice Bleby says:

As the balance sheets of the partnership show, there was a reduction in the net partners’ funds upon the retirement of Mrs Henschke by one sixth, representing the agreed value of the equitable right or chose in action that Mrs Henschke had upon a winding‑up of the partnership.  The payment to her represented what the partners agreed would have been her entitlement if the partnership had been wound up on the date of her retirement.  The total value of the remaining net assets after her retirement and then shared by the continuing partners was reduced accordingly.  The value of their respective interests in the partnership remained the same because of that reduction. 

So that is the point that Chief Justice Doyle made through the tables.

There was no conveyance on the sale to them.

No doubt the same result for Mrs Henschke could have been achieved in a different way had the parties so desired.  If the continuing partners wished to maintain the capital of the partnership at the same level as it was before the retirement, Mrs Henschke could have sold her chose in action to an incoming partner or to one or all of the continuing partners for the same amount.  However, any such transaction would have been quite different in nature and, in all probability, in stamp duty consequences, if it had been effected in that way.

The difference would have been that the partnership capital would have remained at the $35 million ‑ ‑ ‑

FRENCH CJ:   The subtext of all of this is a continuing partnership, is it not, which is contrary to the common ground between two.

MR FLYNN:   Yes.

KIEFEL J:   And to return briefly to the table, the only reason that on your and Chief Justice Doyle’s analysis would be there is a reduction in capital is because they have chosen to revalue goodwill.  They have attributed the payment to her to goodwill, whereas, in fact, the goodwill in partnership one is still in existence when you get to partnership two.  It is just that there has been a payment made to her which has been attributed in the books to goodwill, but, in fact, there could not have been any distribution of goodwill because there has been no sale of the partnership business.

MR FLYNN:   Your Honour is certainly correct, that it was not a distribution of the goodwill.

KIEFEL J:   It is truly notional.  All you can say is that there has been a payment to her by the partnership.  How that is dealt with in the books of account is probably by the by.  But in truth, the goodwill which might be achieved on a sale of the partnership has not been altered in any way by the payment to her.

MR FLYNN:   Your Honour is absolutely right, but the amount reflected by the revaluation is, we would say, not merely a notional amount.  It is an addition to partnership capital, but it is not itself goodwill.

KIEFEL J:   It is a payment by either the partners or the partners acting in their new capacity as – sorry, as the existing partners absent her or in their personal capacity, but if it is in the capacity as partners, they are drawing some funds from somewhere, it does not really matter where, to pay for something.

MR FLYNN:   You are absolutely right.  The exact capital account which that payment was allocated is not particularly relevant.

KIEFEL J:   It does not matter.  No.

MR FLYNN:   It is not relied upon by us.

KIEFEL J:   It is really.  It is to show that their interest, their equitable chose, if the partnership assets were sold up a week after partnership two came into existence, would not achieve the same amount, and that is not correct, depending on how they have raised the $6 million.  Sorry, at least in relation to goodwill, that is not correct.

MR FLYNN:   Your Honour, at page 295 where Chief Justice Doyle sets out the tables, at point 10 there is a break up of the capital.  Let us say for argument’s sake that instead of debiting the distribution to the goodwill revaluation, they debited it to the trading stock revaluation, our argument would be exactly the same.

KIEFEL J:   That still 6 million has gone out?

MR FLYNN:   It has gone out and that the capital has been reduced by that amount and that upon a winding‑up after Mrs Henschke had withdrawn, each partner would receive exactly the same amount as they would have received before her retirement.

KIEFEL J:   But the underlying assets remain the same and the ability to regenerate the amount of $6 million pay remains by reference to those assets.

MR FLYNN:   The underlying assets have changed in that $6 million of cash has been distributed, so they have changed, but the interest that the partners had in the underlying assets has not changed because they did not actually own one‑sixth of the goodwill – Mrs Henschke did not own one‑sixth of ‑ ‑ ‑

KIEFEL J:   Yes, I understand all of that.

MR FLYNN:   Yes.

HEYDON J:   Mrs Henschke got a cheque for $5 million‑odd, presumably ‑ ‑ ‑

MR FLYNN:   $5.9 million, I think, your Honour.

HEYDON J:   Strictly speaking, would that not have come out of cash assets?

MR FLYNN:   It would have come out of the cash assets.

HEYDON J:   Why is that not reflected in the balance sheet.  Forgive my ‑ ‑ ‑

MR FLYNN:   It may have come out of – they may have borrowed, it may have been an increase in liabilities.

HEYDON J:   You appeal to Bolton v Federal Commission of Taxation.  Sir Victor Windeyer uses quite a number of disapproving adjectives which might be applicable to these transactions - devious dealings.

MR FLYNN:   Your Honour, what actually happened was there was a contract of sale.  This was a part of a number of different transactions that occurred at a time when Stephen Henschke, effectively, bought out his relatives, including Mrs Henschke and some other brothers and sisters.  The documents were all provided to the revenue office and so there was never an effort at concealment of any sort.

HEYDON J:   But in relation to this particular argument where you take the 35 million and say one‑sixth of that is equal to one‑fifth of 29 million, is there not something a little fictitious about that when the money actually either came out of a bank account or was generated by further borrowings?  It was not really generated by any reduction in goodwill at all.  No one got poisoned by drinking Henschke wine, no customers were alienated or anything.  It was saleable for the same price on one day as the next.  It might have been an incorrect figure; it might have been too low or too high, but it would not have changed.

MR FLYNN:   Your Honour, the Henschkes’ argument has never rested upon the fact that the distribution was debited to a revaluation created from the goodwill.  If the trading stock revaluation had been sufficient it could equally well have been debited to that account.  The argument does not depend upon the label given to the particular capital account and the argument has never been put on that basis.  The reason for simply highlighting the fact that the actual amount did not change is because on our side we say it is really a misconception to think that because an interest in capital went from one‑sixth to one‑fifth it necessarily entails a greater interest in any partnership property.

It reflects a change in capital percentages and profit percentages, but it does not actually represent any change in what they were entitled to in terms of the property because – and I know I have said this before, but all that they had was an interest in surplus upon winding‑up.  That surplus had gone down now by $6 million and so anything you realise from the sale of the goodwill, an extra 6 million would now have to go to pay liabilities, so once it is ‑ ‑ ‑

KIEFEL J:   Their interest is always properly called a future interest.

MR FLYNN:   Exactly.

KIEFEL J:   The only thing that is altered is that there is now not another interest called “Mrs Henschke”.

MR FLYNN:   That is correct, yes, your Honour.

GUMMOW J:   Can you just explain to us the relationship between the sale and purchase agreement and the retirement deed?

MR FLYNN:   The retirement deed was a schedule to the sale and purchase agreement.  Settlement of the sale and purchase agreement occurred on the same day as the ‑ ‑ ‑

GUMMOW J:   Well, clause 4 of the sale and purchase agreement on page 49 seems to pick up that schedule.

FRENCH CJ:   There was a delay in giving effect to that, was there not?

MR FLYNN:   Yes, there was a delay of one day.  I think it was executed on ‑ ‑ ‑

FRENCH CJ:   The deed of retirement I mean.  The deed of retirement is dated 23 December ‑ ‑ ‑

MR FLYNN:   It was executed on the 23rd, the date of her retirement.

FRENCH CJ:   The sale and purchase agreement contemplated her retirement on 30 June, did it not, 2003?

MR FLYNN:   That is correct.  She retired as from 30 June and, indeed, as happened in McCaughey’s Case so that the partners as between themselves the agreement became effective on 30 June.

FRENCH CJ:   Yes.

MR FLYNN:   The agreement itself, the contract of purchase, was executed on 8 December 2004.  In the statement of agreed facts there is an explanation about the background to this, that there was a mediation between the parties.  It was originally contemplated it would take place 12 months earlier, the price was adjusted to take into account the profits that had accrued in the meantime.

GUMMOW J:   Now, there were shares being dealt with in the ‑ ‑ ‑

MR FLYNN:   There were shares dealt with, stamp duty was paid on the transfers of shares.

GUMMOW J:   There were leases to be granted of real property?

MR FLYNN:   Yes, it was a complex transaction, series of transactions, of which this is one element.

GUMMOW J:   The subject matter, the sale and purchase agreement, was not partnership assets, was it?

MR FLYNN:   That is correct, your Honour.  The partnership actually did not own any of the vineyards or ‑ ‑ ‑

GUMMOW J:   Yes, there is an agreed fact about that.

MR FLYNN:   Yes.

GUMMOW J:   Now, if, contrary to what you have been submitting, there was a conveyance, do you then say there was not – accepting that, if you have to, that there was not a conveyance on sale?  Is there any distinction between these two expressions?

MR FLYNN:   There is a distinction between the two expressions.  In the courts below we have not argued that there was not a conveyance on sale.

GUMMOW J:   If there was a conveyance.

MR FLYNN:   If there was a conveyance.

GUMMOW J:   Yes, that seems right.

MR FLYNN:   We took the view that it was a schedule to the contract of sale, so we probably stand or fall really on the conveyance point.

GUMMOW J:   Yes, I understand. 

MR FLYNN:   I should just point out if one goes to appeal book 176 there is a letter dated 22 February 2005 from Finlaysons to the Commissioner of State Taxation and it summarises the whole transaction.  So if the Court is interested in reading a convenient summary of the entire transaction it is set out in that letter.  Indeed, there were a number of different opinions obtained from the Commissioner and duty was paid on some aspects of the transaction.  Subject to one matter, those are the submissions for the respondents.  The one matter is we do want leave to hand up this copy of the passage from Lindley on Partnership.

FRENCH CJ:   Yes, that is all right.  Yes, Mr Solicitor.

MR HINTON:   If the Court pleases, I have nothing in reply.

FRENCH CJ:   Thank you.  The Court will reserve its decision.  The Court adjourns until 10.15 am tomorrow morning.

AT 12.18 PM THE MATTER WAS ADJOURNED