II Developments Pty Ltd v II Developments JV Pty Ltd
[2017] ACTSC 408
•22 December 2017
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | II Developments Pty Ltd v II Developments JV Pty Ltd |
Citation: | [2017] ACTSC 408 |
Hearing Date: | 22 September, 7 November 2017 |
Date of Last Submissions: | 24 November 2017 |
DecisionDate: | 22 December 2017 |
Before: | Mossop J |
Decision: | See [50] |
Catchwords: | CORPORATIONS – WINDING UP – Joint-venture company – role of company at an end – breakdown in the relationship between the shareholders – it is just and equitable that the company be wound up |
| PARTNERSHIP – DISSOLUTION AND WINDING UP – application for the dissolution of a partnership and the appointment of receivers – whether appropriate to order dissolution of a partnership – whether appropriate to appoint receiver to partnership – capacity of receiver to resolve substantive disputes between parties – receiver appointed pending determination of mechanism for resolution of disputes | |
Legislation Cited: | Corporations Act 2001 (Cth), ss 461(1)(e), 461(1)(k) Court Procedures Act 2004 (ACT), ss 63, 63(2), 63(3) Uniform Civil Procedure Rules 2005 (NSW) r 20.20 |
Cases Cited: | Cuming v Hennessy [2005] NSWSC 1219 Daniels v Smith [2006] NSWSC 1424 Tate v Barry (1928) 28 SR (NSW) 380 |
Parties: | SC 280 of 2017 II Developments Pty Ltd (ACN 149 395 380) (First Plaintiff) Ivan Bulum (Second Plaintiff) II Developments JV Pty Ltd (ACN 149 369 577) (First Defendant) Ivan Ivankovic (Second Defendant) SC 281 of 2017 II Developments Pty Ltd (ACN 149 395 380) (Plaintiff) I & M Ivankovic Pty Limited (ACN 008 578 292) (Defendant) |
Representation: | Counsel P Walker SC and W D B Buckland (Plaintiffs) M Hassall (Second Defendant (SC 280 of 2017) Defendant (SC 281 of 2017)) |
| Solicitors Trinity Law (Plaintiffs) Just Dispute Resolution (Second Defendant (SC 280 of 2017) Defendant (SC 281 of 2017)) | |
File Numbers: | SC 280 of 2017 SC 281 of 2017 |
MOSSOP J:
Introduction
In proceedings SC 280 of 2017 by originating process filed 2 August 2017 II Developments Pty Ltd (‘IID’) and Ivan Bulum seek orders that II Developments JV Pty Ltd (‘the Joint-Venture Company’) be wound up pursuant to s 461(1)(e) or (k) of the Corporations Act 2001 (Cth). The first defendant is the Joint-Venture Company and the second defendant is I & M Ivankovic Pty Limited (‘I & M’). At the hearing, the application under s 461(1)(e) was not pressed. Consequential orders were also sought. Section 461(1)(k) permits the Court to order the winding‑up of a company if “the Court is of opinion that it is just and equitable that the company be wound up”.
In proceedings SC 281 of 2017 IID has sought an order pursuant to s 40(1)(f) of the Partnership Act 1963 (ACT) that the partnership formed by the Partnership Agreement dated 23 June 2011 be dissolved and that two named insolvency practitioners, Frank Lo Pilato and Jonathon Colbran, be appointed jointly and severally to wind up the partnership. Consequential orders were also sought. I & M is the defendant in these proceedings. Section 40(1)(f) of the Partnership Act provides that when “circumstances have arisen which, in the opinion of the court, render it just and equitable that a partnership be dissolved … the court, may, on the application of a partner in the firm, order that the partnership be dissolved”.
In both proceedings the plaintiffs, IID and Ivan Bulum in the first proceedings and IID in the second proceedings (‘the Bulum interests’), relied upon the following affidavits:
(a)Affidavits of Anthony Hinwood sworn 2 August 2017 and 18 September 2017;
(b)Affidavit of Maurice Falcetta sworn 19 August 2017 and 19 September 2017;
(c)Affidavit of Ellie Blyton sworn 19 August 2017.
In both proceedings I & M and Ivan Ivankovic (‘the Ivankovic interests’) relied upon the following affidavits along with their associated exhibits:
(a)Affidavits of Ivan Ivankovic affirmed 7, 13, 20 September 2017.
(b)Affidavit of Bede Webster affirmed 7 September 2017.
A number of exhibits were also tendered.
Mr Bulum and Mr Ivankovic have known each other for 40 years. They both have experience in the building industry. In 2011 they established a partnership (‘the Partnership’) and, as a vehicle for that partnership, the Joint-Venture Company, to conduct the business of “acquisition, management, potential redevelopment and sale” of land located in Harrison which became known as the Hudson Square development.
The partnership agreement was dated 23 June 2011 (‘Partnership Agreement’) and was executed between IID (as trustee of the II Developments Trust) and I & M (as trustee for the Ivankovic Family Trust) as partners. Mr Bulum and Mr Ivankovic were identified as “Key Persons” under the Partnership Agreement.
Features of the Partnership Agreement which are relevant for present purposes are that it included:
(a)obligations of honesty to the other partners and Key Persons as well as obligations to give a true and candid account to the other partners in matters relating to the partnership and its business: cl 4.1;
(b)a regime for resolution of disputes which included a mandatory mediation following the notification of a dispute: cl 10;
(c)a provision that made the administration of the partnership the responsibility of IID and IID was entitled to charge “reasonable fees at market rates” for that service: cl 6.2.
Mr Bulum and Mr Ivankovic were shareholders in and directors of the Joint-Venture Company. A shareholder agreement dated 23 June 2011 provided that the business of the Joint-Venture Company was to act as nominee and bare trustee of the Partnership. The Joint Venture Company became trustee of the land the subject of the joint venture as a result of a trust deed dated 23 June 2011 (‘Trust Deed’). The beneficiaries of the trust were the two partners under the Partnership Agreement. The Trust Deed provided that the Joint Venture Company held a 50% interest for each beneficiary and compelled the Joint Venture Company to deal with the property as directed by the beneficiaries.
Construction of the development on the land commenced in 2014 and was completed in January 2016. The last unit was sold in November 2016.
Mr Ivankovic was the holder of the builder’s licence permitting the construction of the development on the land. As at the date of the hearing on 22 September 2017 he continued to undertake rectification work required by the statutory warranties which were applicable to the relevant work. There is no separate written agreement in place between the partners or with the Joint Venture Company in relation to his remuneration for his work as builder or in relation to the rectification work. Apart from this, what was necessary at the date of the hearing in order to finalise the business of the partnership was the preparation of accounts, payment of outstanding creditors and distribution of any remaining profits to partners. There were creditors owed approximately $721,541 by the Partnership including $150,894 owed to the Australian Taxation Office (‘ATO’). Mr Ivankovic had (in his affidavit of 7 September 2017) consented to the payment of the ATO although as at the date of the hearing in September 2017 this had not occurred. There may be grounds to dispute two of the creditors’ claims.
Mr Ivankovic, through his solicitor, expressed concern in relation to a number of payments or transfers of funds from the partnership accounts totalling approximately $9.1 million which he contended were not paid out in accordance with the terms of the Partnership Agreement, in particular, without Mr Ivankovic’s authorisation. These include:
(a)$1.3 million to discharge a liability in relation to a property purchased by another company controlled by Mr Bulum in Ivanhoe, Victoria;
(b)a loan of some $230,000 to a Mr Elias Taleb the person behind the formwork contractor for the project;
(c)more than $2.4 million so as to permit another company controlled by Mr Bulum to purchase a property in Northcote, Victoria;
(d)$4.4 million paid to “Bulum Financial Services” which is not explained in the accounting records of the Joint-Venture Company.
He was also concerned about the overall cost overrun having regard to the quantity surveyor’s report that estimated the costs of the project at approximately $18.5 million whereas actual costs were over $21 million.
The books and records of the company do not provide a full explanation of the nature and purpose of these payments. The payment of $1.3 million was paid in order to assist a company controlled by Mr Bulum to discharge a liability in relation to a development in Ivanhoe, Victoria, unrelated to the Harrison project. As a result of actions taken by I & M (which are not necessary to recount in detail) that money was ultimately returned to the bank account of the partnership. As a consequence there was at the date of the hearing in excess of $1.8 million in the partnership’s bank account, more than enough to pay the outstanding external creditors.
I & M, through its solicitor, had issued a notice of dispute in relation to these payments. However, notwithstanding the apparent willingness of Mr Bulum and his company to participate, as required by the Partnership Agreement, in a mediation in an attempt to resolve or narrow the matters in dispute, Mr Ivankovic raised various objections to participation in a mediation and to the identity of the mediator with the effect that a mediation had not taken place prior to the hearing.
So far as the evidence discloses, notwithstanding their obligations under the Partnership Agreement (see [8](a) above) neither Mr Bulum nor IID has provided any detailed explanation of the nature of, or reasons for, the transactions about which concerns have been raised, despite being asked to do so. Neither have they provided any explanation of how the payments were consistent with the terms of the Partnership Agreement.
In relation to the creditors who were awaiting payment there was no unconditional agreement that they should be paid. Mr Ivankovic consented to them being paid but on condition that Mr Bulum warranted that the amounts are properly payable.
There were other issues in dispute including:
(a)the entitlement of I & M to be paid for building services, a building licence and rectification work undertaken pursuant to Mr Ivankovic’s obligations under statutory warranties;
(b)the failure to pay amounts to Mr Ivankovic shown to have been distributed to him in the accounts which have generated substantial tax liabilities for him and members of his family;
(c)the extent of payment due to IID for administering the affairs of the partnership; and
(d)the extent of interest payable to IID or other entities related to Mr Bulum for sums advanced to the partnership in excess of the capital contributions advanced by I & M .
There were also other issues which had not been fully investigated but were identified as matters which may give rise to a claim between the partners. They include the nature of the payments made to Mr Taleb and his company, Class 1 Form Pty Ltd.
There was evidence that there are defects in the construction of the development relating to the colour of the architectural concrete pre-cast panels supplied by Hanson Precast Pty Ltd, the bowing of some of those same panels and the location of window penetrations. These defects have been assessed and the cost of rectification work estimated at in excess of $724,000.
On 21 September 2017, the day before the hearing of the proceedings, I & M commenced proceedings against IID and another company, NCV (ACT) Pty Ltd, seeking a declaration that certain land in Victoria was held by the second defendant as a trustee for the plaintiff and the first defendant under a resulting trust. This claim was based upon the allegation that the property was purchased using partnership funds drawn from the bank account of the partnership.
Submissions as at 22 September 2017
The Bulum interests contended that in the circumstances it is appropriate that the partnership and company be wound up largely because there has been a breakdown in the working relationship between the partners and hence the affairs of the partnership will not otherwise be able to be concluded.
The Ivankovic interests contended that the plaintiffs lacked clean hands because it is their conduct, in particular the withdrawal of funds from the partnership, which has caused the breakdown in the relationship. They referred to the decision in Ruut v Head (1996) 20 ACSR 160 to support the proposition that where a party has caused the breakdown in the relationship of trust between parties that party should not be rewarded by the dissolution of the partnership in circumstances where there were other alternatives available. It contended that another available option was for IID to sell its interest in the partnership to I & M in accordance with cl 8 of the Partnership Agreement. It contended that an agreement to pay the creditors would remove the need in the short term for the appointment of receivers to the partnership business. In the event that a receiver was appointed it submitted that it was neither necessary nor appropriate to order dissolution of the partnership or the winding up of the Joint-Venture Company at this stage.
By the end of the hearing on 22 September 2017 the position of I & M had changed so that it said that a receiver should be appointed but could not really identify what the purpose of the appointment of the receiver was apart from the taking of accounts. The submissions of the defendant did not make clear what practical benefit would be achieved by adopting this course but stopping short of the dissolution of the partnership and its winding up.
The evidence did however disclose that payments had been made for the purposes of transactions which were unrelated to the partnership. Senior counsel for the plaintiffs was unable to explain how this was a legitimate payment under the relevant clause. He made submissions which emphasised the differential in contributions to the partnership but this did not provide a basis for non-compliance with the control on payments-out. I & M made the reasonable point that had this money not been paid out then other liabilities of the partnership could have been paid when they were due.
Mediation
At the conclusion of the hearing on 22 September 2017 I directed that the parties participate in a mediation. There was then further disputation between the parties as to the identity of the mediator. The parties ultimately agreed on a mediator and the mediation was ultimately thought to have been successful. However, on 7 November 2017 the parties indicated that they could not finalise an agreement as a result of the mediation. They therefore requested the Court to determine the proceedings.
Position as at 7 November 2017
The only change in position since the hearing in September 2017 was that a further distribution of funds had been made to the parties so as to permit Mr Ivankovic to meet some taxation obligations arising from distributions recorded in the accounts as having been made and the obligation of the partnership to the ATO had been satisfied as a result of the ATO taking action to enforce the obligations arising from an assessment. There was no evidence as to whether any of the other liabilities of the partnership have been discharged.
Consideration
The relationship between the partners and the natural persons standing behind them has broken down.
The allegations made in relation to the withdrawal of funds from the partnership are serious ones. In the absence of any explanation or justification for the withdrawals, which, I interpolate, could have been given, these are serious matters requiring investigation.
While, prior to the hearing, there had been a lack of cooperation on the part of the Ivankovic interests in relation to following the dispute resolution procedures required by the Partnership Agreement, a mediation process has now been undertaken pursuant to an order of the Court and that process has not been successful in resolving the disputes between the parties. No party contended that the existence of dispute resolution provisions in the Partnership Agreement, the Trust Deed or the Shareholders Agreement now provides any impediment to the Court making orders.
There are only a limited number of creditors outstanding, although there may be a need for some form of dispute resolution in relation to some of their claims. While at the hearing the defendants expressed agreement to payment of all of the creditors except two, in relation to which it anticipated that there was a dispute, there was no evidence as to whether or not creditors other than the ATO had been paid as at 7 November 2017.
The proceedings commenced by I & M in relation to the use of funds to purchase a Victorian property may be significant in determining the scope of the assets of the partnership.
There may be other significant issues that need to be resolved about the assets or liabilities of the partners, specifically, liability to various creditors and whether the partnership is liable to indemnify Mr Ivankovic in relation to rectification activities.
So far as the Joint-Venture Company is concerned, its principal role was to hold the title to the land and to comply with the directions of the members of the joint-venture. Having regard to the sale of the land following the completion of the development and its unit titling, the role of the company appears to be at an end. In the light of the breakdown in the relationship between the shareholders in the company it is just and equitable that the company be wound‑up.
The position in relation to the partnership is more difficult. It is clear that the business of the partnership is approaching its conclusion. It is also clear that, having regard to the level of distrust that exists as between the Ivankovic interests and the Bulum interests and the fact that under the partnership agreement the responsibility for day-to-day administration and record-keeping lies with IID, the preparation of accounts so as to finalise the affairs of the partnership will need to be undertaken either by the Court or by an independent third party. The issue is whether it is just and equitable to dissolve the partnership at this point or whether it is appropriate to make orders which anticipate the ultimate dissolution of the partnership but do not involve that step at this stage.
Any decision about that must be taken in the light of the fact that the Joint-Venture Company is to be wound up and that it is desirable that the liquidator have access to the books and records of the partnership so as to most efficiently wind‑up the company.
Submissions of the parties initially contemplated a process whereby a receiver would be appointed (with or without the dissolution of the partnership) in order to finalise the accounts of the partnership and that those accounts would then bind the parties. I sought further submissions as to the basis for such an order which led to some refinement of the parties’ positions. Those submissions did not disclose any agreement by either party that it would be bound by the accounts prepared by the receiver.
In a case like this the position in relation to the appointment of a receiver is as follows. In an ordinary case where a partnership is to be wound-up the authority of the surviving members of the partnership continues unabated to the extent necessary to wind-up the affairs of the partnership and to complete the transactions begun but not concluded at the time of dissolution: Partnership Act, s 44(1). However, in order to vindicate their rights in a winding-up a partner may apply to the Supreme Court to wind‑up the business and affairs of the partnership: s 45(2). This may be done by the Court appointing a receiver to wind‑up the affairs of the partnership. Under s 63 of the CourtProcedures Act 2004 (ACT) the Court may appoint a receiver if it considers that it is appropriate to do so: s 63(2). Such an appointment may be on conditions: s 63(3). Where it is not possible to appoint a partner, for example because of the nature of the dispute between the partners, to the office, an impartial outsider will be appointed.
However appointment of a receiver is certainly not automatic as a privately‑organised winding‑up will ordinarily be simpler and more cost‑effective. It used to be the case that appointment of a receiver would be made almost as a matter of course: Tate v Barry (1928) 28 SR (NSW) 380 at 382–383. More recently the approach has been somewhat more circumspect, recognising the cost and disadvantages associated with such an appointment: Cuming v Hennessy [2005] NSWSC 1219 at [7]–[11] and emphasising the court’s discretion: Morkaya v Parkinson [2008] NSWSC 1050 at [20]. The issue of cost is particularly important when the partnership has only modest assets: Liquor National Wholesale Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 392 at [50]. However where the partners are in serious dispute or the partnership assets are in danger a receiver will be appointed: Rowlands v MacDonald [2002] NSWSC 282 at [30]; Daniels v Smith [2006] NSWSC 1424 at [10], [12]; Lising Nominees Pty Ltd v Monkton Pty Ltd [2017] ACTSC 336 at [7].
Where a receiver is appointed, the assets of the partnership are sold and its debts paid. Accounts are taken and an enquiry is held before a Master or Associate Judge as to the assets, liabilities and interests of each partner. One mechanism by which the involvement of the Court may be reduced is by the appointment of the receiver as a referee under court rules: Daniels v Smith at [13] and [14].
In the present case, at least as at the last occasion when the position was the subject of evidence, the parties were unable to cooperate in relation to the payment of the liabilities of the partnership, some of which may be the subject of legitimate dispute. I & M and Mr Ivankovic had alleged that partnership funds had been wrongly paid‑out for the purposes of a development in Victoria and continue to allege in separate proceedings (SC 369 of 2017) that partnership funds have been paid out to the entities related to Mr Bulum and used to acquire other property in Victoria. This has occurred in circumstances where IID has been responsible for the day-to-day administration of the partnership business.
This case falls into the category of case where it is likely that the partnership will be dissolved. That is because the project for which the partnership was formed is substantially complete and relations between the partners have broken down. It is a case where, having regard to the nature of the disputes between the parties and the respective roles of the parties in relation to the keeping of accounts, it will be necessary, notwithstanding the cost of the exercise, to appoint a receiver. This much was common ground. The area of dispute related to whether that should be done in the context of the winding‑up of the partnership or merely in anticipation of that occurring. Further, in either case it would be necessary to determine the extent of the powers of the receiver and, in particular, the extent to which decisions made by the receiver as to the entitlements of the respective partners was binding upon its partners. While initially parties were attracted to orders which contemplated that the receiver might use the capacity to seek directions from the Court to resolve substantive disputes between them they subsequently accepted that such a process was not appropriate. See: In re TTC (SA) Pty Ltd (in liq) (1983) 32 SASR 532 at 535; Re GB Nathan and Co P/L (in liq) (1991) 24 NSWLR 674 at 680 and Korda v Silkchime [2010] WASC 155; 243 FLR 269 at [31]–[37].
I do not accept that the making of an order for the dissolution of the partnership should be made at this stage. Rather, I consider it appropriate to appoint a receiver to the property of the partnership and determine subsequently whether or not to appoint that receiver as a referee for the purposes of the taking of accounts or adopt some other method of finalising the partnerships affairs. The reason that I have adopted this approach is because it will permit the parties to identify to the receiver any areas that are likely to involve remaining areas of dispute and then, in the light of the progress of the receivership, to determine whether it is appropriate to either: appoint the receiver as referee, have the accounts of the partnership taken before the Associate Judge or adopt some other mechanism. It is not possible to make that determination at this stage because:
(a)it is not clear whether the substantial disputes between the parties do in fact extend beyond the subject matter of SC 369 of 2017;
(b)it is not clear whether any other significant disputes would be appropriately resolved by the receiver in the first instance; and
(c)the parties have not made submissions which properly address the mechanism for the taking of accounts.
It may be that the subject matters of dispute are matters which might appropriately be resolved by a receiver as referee or it may be that discrete areas of dispute need to be litigated in this Court in the first instance so as to put the receiver in a position to finalise the accounts and wind‑up the affairs of the partnership. On the other hand it may be necessary to order an account to be taken and an inquiry held before the Associate Judge as to the assets and liabilities of the partnership and the entitlement of the partners (see Court Procedures Rules 2006 (ACT) rr 2720–2741; Daniels v Smith [2006] NSWSC 1424 at [15]). If the receiver is appointed as referee it may be necessary to depart from the default position under r 1534 which imposes the formality of an arbitration upon the conduct of the reference (cf Uniform Civil Procedure Rules 2005 (NSW) r 20.20).
However the appointment of a receiver will allow the property of the partnership including, most significantly its books and records, to be secured and consideration to be given by the receiver to the payment of some of the outstanding creditors of the partnership.
Costs
In relation to costs, the alternatives in each proceeding are:
(a)one or other of the contending parties pay the costs of the other party or parties;
(b)the costs of one or other or all parties be payable from the assets of the company or the partnership;
(c)there be no order as to costs.
The overall position is that the plaintiff in SC 280 of 2017 has achieved the winding up of the Joint-Venture Company which it sought over the opposition of the second defendant. The position in SC 281 of 2017 is that the defendant has successfully resisted, for the moment, the dissolution of the partnership but for somewhat different reasons than it advanced.
I do not consider that costs should follow the event. The positions adopted by both plaintiffs and defendants had some merits and demerits. A significant portion of the costs will have been incurred in relation to the court‑ordered mediation a process which under the various agreements the parties were obliged to engage in in any event. If costs are to be paid from the assets of the partnership then one or other party will bear an additional burden of the other’s costs. In this case, where the parties are in dispute over the winding‑up of the partnership, the extent of costs is likely to simply become another front in the overall war. I consider that it is preferable that each party bear its own costs and not bear a portion of the other party’s costs. There will therefore be no order as to the costs of the proceedings in relation to the partnership to date.
If costs of the winding‑up proceedings are ordered to be paid from the assets of the Joint-Venture Company is not clear whether that order would be of any value having regard to the role the company played. It may be that its only asset is an entitlement to indemnity from the partnership in which case, if that indemnity extended to the costs order, the costs order would, in substance, be satisfied by the partnership. That fact and the undesirability of the exercise of disentangling the cost of the winding‑up proceedings from the proceedings relating to the partnership lead me to the conclusion that there should also be no order as to costs in those proceedings also.
Orders
The orders of the Court are as follows.
In proceedings SC 280 of 2017:
1.II Developments JV Pty Ltd be wound up.
2.Frank Lo Pilato and Jonathon Colbran be appointed as joint and several liquidators of the first defendant.
3.There is no order as to the costs of the proceedings.
In proceedings SC 281 of 2017:
1.Pursuant to s 63 of the Court Procedures Act 2004 (ACT) Frank Lo Pilato and Jonathon Colbran be appointed jointly and severally as receivers of the property of the partnership formed by the Partnership Agreement dated 23 June 2011.
2.The receivers jointly and severally have all powers necessary or convenient for those receivers in the exercise of their discretion to take possession of the property of the partnership (including the books and records of the partnership) and to assess, and pay as the receivers think fit, the claim of any creditor or purported creditor of the partnership (other than a creditor which is, in the opinion of the receivers, associated with a partner in the partnership or Ivan Bulum or Ivan Ivankovic) including calling for further documentation or clarification from any such creditor.
3.The requirement for security under r 769 of the Court Procedures Rules 2006 is dispensed with.
4.The question of whether an order should be made for dissolution of the partnership and whether any alteration of the functions or powers of the receivers should be made are reserved for further consideration.
5.There is no order as to the costs of the proceedings to date (the intent being that each party shall bear its own costs).
6.The proceedings are adjourned for directions on Wednesday 31 January 2018 at 9:45 am.
| I certify that the preceding fifty [50] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Mossop. Associate: Date: 22 December 2017 |
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