F C Perkins Nominees v Gardmac Nominees & Ors No. Scgrg-97-197 Judgment No. S6810
[1998] SASC 6810
•21 August 1998
F C PERKINS NOMINEES v GARDMAC NOMINEES & ORS
[1998] SASC 6810
Full Court: Doyle CJ, Millhouse & Nyland JJ
DOYLE CJ
The issues
This is an appeal against a decision by a Master of the Court.
The Master decided two issues that arose on a contribution notice issued in proceedings in this Court.
Each issue arose in the winding up of a partnership that conducted an accountancy practice.
The first issue is whether interest credited to current accounts in the name of the partners, prior to dissolution, continues to be payable after dissolution of the partnership and until payment is made to the partner.
The second issue arises because, upon dissolution, the two partners agreed that each of them would take with him the files of his own clients, and hence, in the ordinary course of things, the business of those clients. The issue which arises from that, the partners not having made any arrangement, is whether each partner must account for the goodwill value of the business of those clients.
The facts
Mr Perkins and Mr Macks were partners. They practised as accountants. There was no written partnership agreement. Mr Macks terminated the partnership agreement. There was no agreement between the partners as to the terms upon which the partnership was to be dissolved. Accordingly, the dissolution is to be governed by the terms of the Partnership Act.
Partnership accounts were prepared from time to time. The balance sheet recorded the amount of the partners’ “current accounts”. There is a note to the accounts which explains how the amount of the current accounts is arrived at. That note identifies the amount of “fixed capital” attributable to each partner. As well, for each partner it records an opening balance, the share of profit or loss for the year in question, the amount of drawings, interest paid or payable (depending upon the state of the account), and a closing balance.
The accounts disclose that no interest has been credited to the fixed capital account. As I have already said, while the partnership operated interest was credited (or debited) to the account to which profits were credited and losses were debited. The partners must be taken to have agreed to that process.
They are the facts that were before the Master. There is not much to go on.
The first issue is whether interest is payable on balances recorded in the current account from the time of dissolution until the time of payment. There is no dispute between the parties that if the balance of the current account is to be treated as an advance or loan to the partnership, it should carry interest from the time of dissolution until the time of payment. Likewise, there is no dispute that if the balance is to be regarded as a subscription of further capital, then, even though interest was payable on balances while the partnership was in existence, interest ceases to be payable upon dissolution.
The second issue arises from the fact that the partners divided their files between them. Goodwill was not valued as an asset in the partnership accounts. Mr Perkins and his previous partner had agreed that goodwill would not be valued upon entry of a partner into the partnership, or upon withdrawal from the partnership, but Mr Macks was never informed of that agreement. Of course, he was aware that the annual accounts did not value goodwill. In that context, and the partners having made no arrangement when they each took their own files and clients, the question is whether each of them must now bring to account the goodwill value of the business that each took with him.
Interest on current account
The issue is whether the balance of the current account is to be regarded as an advance or loan to the partnership, or as a subscription of further capital.
The Master took the view that, as a matter of principle, ordinarily
“... the use by the partnership of moneys arising from an accumulation of a partner’s profits was to be characterised as a use of capital.”
The Master drew this principle from the decision of the Court of Appeal in Chancery in Wood v Scoles (1866) LR 1 Ch App 369. He also drew some support from s24(c) of the Partnership Act which provides:
“a partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which the partner has agreed to subscribe, is entitled to interest at the rate of seven per centum per annum from the date of the payment or advance;”
He took the view that this provision was a reference to a loan or advance, and with that I agree. He reasoned that the reference to “actual payment or advance” did not refer to a mere accumulation of profits, and the inference he drew was that a mere accumulation of profits would not carry an entitlement to interest unless there was an agreement to that effect. To put it a little differently, he appears to have reasoned negatively that a partner who allows his profits to remain in the business will not be regarded as making an advance to the partnership, in the sense of a loan, unless there is an agreement to that effect.
In my opinion the Master has misread the decision in Wood v Scoles. I do not agree that, in that case, Turner LJ intended to lay down a general principle. In that case he said (at 378) that
“... moneys which were brought by him into the partnership, and were not derived from the accumulation of profits ... ought, I think, to be considered as loans to the partnership, and as debts due from it ...”
However, in my opinion he reached that conclusion as a matter of construction of the partnership articles in question, and did not purport to state a general principle.
I agree with the Master that if a partner makes an “actual payment or advance” to the partnership, beyond the amount of capital that the partner has agreed to subscribe, ordinarily such a payment or advance would be treated as a loan. I am now referring to the actual introduction of funds into the partnership by a partner. But, in my opinion, it does not follow from that that profits that are allowed to accumulate cannot constitute a loan or advance to the partnership.
In the end, on these very limited facts, one comes back to the status of the amount standing to the credit of a partner in the current account, or the status of a debit balance in that account. As one of the leading texts observes it is extremely difficult to decide this issue when the parties have not turned their minds to it: see Lindley & Banks On Partnership (16th ed, 1990) paras 17-07 and 20-30. The parties having agreed nothing about the status of those moneys, but having credited and debited interest to the balance in the accounts of the partnership, what status is to be ascribed to those moneys?
In my opinion the balance of such an account is to be regarded as capital, although not “fixed capital” simply because there is nothing to indicate that the balance is to be regarded as a loan or as an advance. I consider that the natural inference is that the balance is to be attributed to capital, albeit capital able to be withdrawn, unless the evidence indicates that the partners have agreed that the balance is to be regarded as an advance or as a loan. I consider that the more likely inference is that undrawn profits are simply intended to be available to the partnership as working capital, unless there is evidence of a contrary intention or agreement.
It is not particularly satisfactory to reach a result on such a basis. But the parties have given the Court no more material to work with, than the material that I have described. Neither party sought to put any expert accounting evidence before the Court. The Court must do the best it can. My approach, which is very close to that of the Master, is that there must be evidence from which the Court can conclude that the parties, expressly or by implication, agreed that profits left in the business are to be treated as an advance to the partnership, before they will be so regarded.
Goodwill
The Master referred to the fact that goodwill was not taken into account in the accounts of the partnership. He then said:
“Upon dissolution Mr Macks and Mr Perkins agreed that they would each take their files with them. No mention was made of any financial adjustment between the two of them according to which clients they took and the source of those clients. In my view they must be taken to have agreed, in those circumstances, that there would be no financial adjustment according to the clients that they took.”
I agree with the submission, by counsel for the respondent, that the fact that no value was attributed to goodwill during the partnership, does not mean that there was an agreement that no value would be attributed on dissolution of the partnership. To the contrary, on dissolution of the partnership the goodwill must be sold unless the partners agree otherwise: Lindley & Banks On Partnership (16th ed, 1990) para 10-157.
In my opinion the question is whether, in the present case, the partners have agreed otherwise. The Master has made a finding of fact, for which there is support in the conduct of the parties. This Court is in as good a position as the Master to reach a conclusion on the matter. However, I can find no reason to differ from the view that the Master took. I agree that a sharing of assets as between the partners does not necessarily lead to the conclusion that no account was to be taken of the value of those assets. But it is capable of leading to that conclusion. In the present case I would have thought that if either partner had intended that goodwill be valued, that would have been referred to when the partners went their respective ways. There is no suggestion that anything was said about the matter. It was open to the Master to reach the conclusion that he did reach, and while it is open to me to substitute my own view, I would do so only if I found a basis for differing from the conclusion that the Master reached. I can find no such basis, and accordingly I am not prepared to disturb the Master’s conclusion.
Conclusions
In my opinion the appeal and the cross-appeal should be dismissed.
MILLHOUSE J
I agree.
NYLAND J
I agree with the reasons of the Chief Justice. I agree that the appeal and cross-appeal should be dismissed.
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