FC Perkins Nom P/L v Gardmac Nom P/L & Ors No. Scgrg-97-197 Judgment No. S6559

[1998] SASC 6559

F C PERKINS NOMINEES PTY LTD  V 
GARDMAC NOMINEES PTY LTD & OTHERS

ACTION NO 197 OF 1997

Judge Burley

In this action the defendant Macks has brought contribution proceedings against the defendant Perkins.  The defendants have sought the determination of two issues raised by the contribution proceedings which relate to the winding up of an accountancy partnership which formerly existed between the defendants but which both the defendants now acknowledge has been dissolved.  The two issues are:

1. Whether interest paid on current accounts prior to dissolution continues to be paid after dissolution until payment; and

1. In the finalisation of the partnership accounts whether each of the defendants have to account to the partnership for any value or goodwill as a result of clients of the partnership becoming clients of the partner after dissolution:

(a).... where the client was a client of the partner when he joined the partnership, or

(b).... where the client became a client of the partnership during its existence.

There are no material disputes of fact and accordingly the matter has been able to proceed in the summary way on affidavit so that a final determination of these issues is reached.

It is first necessary to set out the relevant facts.  From 1984 to 1989 Mr Perkins and Mr Michael Mount practised as accountants under the firm name of Michael Mount & Co.  Mr Macks joined the partnership in July 1989 and they practised under the name Michael Mount & Co until November 1991 when the trading name was changed to Michael Mount PPB.  No written partnership agreement was entered into by the partners at any time.

Prior to Mr Perkins joining in partnership with Mr Mount, he had worked for Price Waterhouse and some of the clients for whom he had acted when he was with that firm came to be clients of Michael Mount & Co.  When Mr Perkins joined the partnership it was agreed between Mr Mount and him that neither of them would receive any consideration or benefit or credit in the partnership of Michael Mount & Co on account of any goodwill for clients introduced or otherwise.  That was noted in the records of the partnership.  When Mr Mack became a partner he was not aware that such an agreement had been struck between Mr Perkins and Mr Mount.

Mr Perkins was responsible for the production of the partnership accounts both before and after Mr Macks joined the partnership.  No amount for goodwill has ever been included in the partnership accounts and Mr Macks acknowledges this fact.

Mr Perkins and Mr Mount had also agreed that capital accounts would carry no interest but that partners’ current accounts would carry interest at one per cent above the rate of bank overdrafts charged by the partnership’s bank calculated at monthly rests.

Before and after Mr Macks joined the partnership, interest was always credited to the partners’ current accounts at the appropriate interest rate.  Mr Perkins contends that interest is payable on the partners’ respective current accounts after the dated of dissolution until payment.  Mr Macks contends to the contrary, although he does not dispute that the appropriate interest adjustment was and is required to be made up to the date of dissolution.

As to goodwill, Mr Perkins said at paragraph 18 of his affidavit of 3 October 1997:

“18... Peter Macks maintains that I must account to the partnership for the value of goodwill in respect of clients who have followed me to Bentleys (Macks affidavit paragraph 7).  In exhibit PIM 3 to the Macks affidavit, Peter Macks has ‘ticked’ the names of the clients in respect of which he says that I must account.  Some of those clients followed me from Price Waterhouse to Michael Mount & Co and some remain clients when I subsequently practised on my own account and followed me to Bentleys and some did not.  I have caused to be prepared a list of the client’s [sic] which Peter Mack maintains I have taken with me with notes as to those who came with me from Price Waterhouse and those which actually followed me to Bentleys.  At the time of dissolution Peter Macks suggested that we each take our own files and clients.  There was no suggestion of payment.  Now produced and shown to me and marked FCP 7 is a copy of the list...  As the business of Michael Mount PPB was neither sold to either Peter Macks nor myself nor to any third party I am advised and maintain that I have no obligation to account to the partnership with respect to the value of any goodwill in respect of these clients.”

Mr Wilkinson, counsel for Mr Perkins, argued that the relationship between the former partners is governed by a number of provisions of the Partnership Act which apply to the extent that the parties did not agree to the contrary. He referred to s19 of the Partnership Act which is as follows:

“19... The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing.”

INTEREST

As to interest on the capital and current accounts, both parties were in agreement as to the extent to which interest was to be calculated in respect of capital and current accounts up to the date of dissolution.  It did not apply to capital accounts but the course of dealing between the partners up to the date of dissolution was that interest, at an agreed rate, was calculated in respect of partners’ current accounts (whether in debit or in credit) up to the date of dissolution.

Mr Wilkinson argued that a credit balance in the current account of a partner constituted an advance to the partnership and that, as a matter of law, in the circumstances of this case, an advance by a partner to the partnership carried interest until it was repaid.  He referred to Lindley & Banks on Partnership, 17th Edition at para 20-32 at page 580 which is as follows:

“Interest on advances.

Where a partner advances money to the firm over and above his capital contribution, the advance is, as might be expected, treated not as an increase in his capital but as a loan on which interest ought to be paid, and this is expressly recognised in the Partnership Act 1890.  [Section 24.III].  Accordingly, provided that the advance was made for partnership purposes, simple interest will be payable thereon at the rate of five per cent.  However, an agreement to pay a different rate may be inferred if interest at that rate has been charged and allowed in the books of the firm or, perhaps, where it is payable by the custom of the particular trade.”

Mr Randle, counsel for Mr Macks, argued that to the extent that a partner’s current account was in credit, that did not constitute an advance to the partnership, however it may have been described in the partnership accounts.  He contended that as a matter of law such an amount was to be regarded as part of a capital account and as such, even if interest was payable thereon during the currency of the partnership, the requirement to pay interest did not survive dissolution:  Barfield v Loughborough (1872) LR 8 Ch. App. 1.

I do not understand it to have been contended by either party (nor, in my view could it be) that the parties agreed, during the currency of the partnership (either expressly or impliedly), that partners' current accounts, when in credit, were to be regarded as either contributions of capital or advances of monies for partnership purposes. Thus there can be no question that, under s.19 of the Partnership Act, the parties have agreed to characterise a particular account contrary to the manner in which it would be characterised at law.

If the credit balance in the current account amounts to an advance such that a debtor and creditor relationship exists between the partner and the partnership, interest should be paid until the date of payment.  However, if the amount is to be characterised as capital, no interest is payable after dissolution even though interest might have been payable according to the agreement of the partners during the currency of the partnership:  Wood v Scoles (1866) 1 LR Ch. App 369; Barfield v Loughborough (supra) at 5 per Lord Selborne LC.

In Wood v Scoles (supra) at 378, Turner LJ made the distinction between contributions by a partner which were derived from an accumulation of profits as opposed to monies which were brought into the partnership apart from such a source. His Lordship was of the view that the latter ought to be regarded as loans to the partnership. In making the distinction it becomes apparent that his Lordship was of the view that the use by the partnership of monies arising from an accumulation of a partner’s profits was to be characterised as a use of capital. This seems to be consistent with wording in s.24.III of the Partnership Act which states:

“A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he 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:”

The reference to “actual payment or advance” seems to exclude an accumulation of profits because it is not an actual payment or advance.

It seems to me that, in the absence of an express agreement (whether written or oral) and in the absence of circumstances where such a term might be implied, the guidance afforded by Turner LJ in Wood v Scoles (supra) strongly indicates that the credit balance in the partners’ current accounts must be regarded as capital as opposed to a loan or advance which creates a relationship of debtor and creditor.  That being the case, my ruling is that interest on the partners' current accounts is not payable after the date of dissolution.

GOODWILL

I turn to the question of goodwill.  In my view this aspect of the matter is to be determined by reference to what occurred during the partnership between Mr Macks and Mr Perkins.  Although it is clear that Mr Macks, when he entered the partnership, was not aware of the agreement reached between Mr Perkins and Mr Mount that goodwill would not be taken into account in the accounts of the partnership, Mr Macks was nevertheless well aware after he joined the partnership that no account of goodwill was taken in the partnership accounts.  When that practise of the partners is considered in conjunction with what occurred on dissolution, it leads to the conclusion as a matter of necessary inference from the facts, that no account of goodwill would be taken upon the dissolution of the partnership.  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.  Whether this constitutes an agreement that goodwill would not be taken into account on the dissolution of the partnership probably does not matter.  The fact is that upon entry into the partnership and upon the exit therefrom (by dissolution) none of the partners was required to make any contribution in respect of goodwill.  In arriving at that conclusion I have taken into account cases such as Smith v Everett (1869) 27 Beav 446 which are to the effect that if a partner secures the benefit of the firm’s goodwill for himself after dissolution he can be compelled to account for its value. Such cases are in my view to be distinguished because of the existence, in the case at bar, of an unqualified agreement that each former partner would take his files with him upon dissolution.

My ruling therefore is that upon the dissolution of the partnership the partners do not have to account to one or another for any value of goodwill.