Karimi v Nanayakkara
[2013] VCC 507
•9 May 2013
| IN THE COUNTY COURT OF VICTORIA | Revised (Not) Restricted |
AT MELBOURNE
COMMERCIAL LIST
GENERAL DIVISION
Case No. CI-11-03109
| HOSSEIN KARIMI | Plaintiff |
| v. | |
| JAYAMINDA NANAYAKKARA | Defendant |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24, 26, 29 and 30 April 2013 | |
DATE OF JUDGMENT: | 9 May 2013 | |
CASE MAY BE CITED AS: | Karimi v. Nanayakkara | |
MEDIUM NEUTRAL CITATION: | [2013] VCC 507 | |
REASONS FOR JUDGMENT
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Catchwords: Partnership – Business arrangements between two individuals structured as a Trust - “Business Agreement” executed by the individuals many months after the business commenced to operate – Claims brought as though one party had obligations as a partner to the other - Claims dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. Naidu | Amani Lawyers |
| For the Defendant | Mr M. Clarke | MCK Legal |
HIS HONOUR:
1Hossein Karimi (“the plaintiff”) and Jayamind Nanayakkara (“the defendant”) went into business together in 2008 selling satellite television equipment from premises in Dandenong South. On 20 July 2009, the parties executed a document described as a “Business Agreement” which had been drawn up by the defendant’s wife Dushanti Kariyapperuma. The agreement described the relationship of the plaintiff and defendant as a partnership.
2On 8 August 2008, the parties had established a different structure for their business. They executed a Deed of Trust establishing the Trust with the defendant as the appointer, the plaintiff and the defendant as the beneficiaries, the plaintiff’s accountant, Mr Esha Denkha as the settlor and the company, Selverline International Pty Ltd as the trustee. The company was incorporated by Mr Denkha with the plaintiff and the defendant as the sole directors and as equal shareholders. The business traded under the name Satellite World View (“the business”).
3The plaintiff made four claims in the proceeding:
a.the payment of $30,000 which, pursuant to clause 4 of the Business Agreement, the defendant was to make as a capital contribution to the partnership business;
b.payment of a share of the profits of the business, which the plaintiff submitted could be ascertained by reference to financial accounts of the trust prepared by Ms Kariyapperuma for the year ended 30 June 2009 and part of the following year and by accounts prepared by Mr Denkha from MYOB records of the business for the years to 30 June 2009, 30 June 2010 and the period 1 July 2010 to 30 September 2010;
c.payment of an equal share of the value of the stock of the business when trading ceased on 27 September 2010;
d.damages for losses the plaintiff sustained as a result of the defendant setting up a business in Sydney in competition to the plaintiff’s interests. Plaintiff’s counsel did not address any submissions in support of this claim and conceded that there was no evidence of any financial consequences to the plaintiff from the establishment of the business in Sydney.
4 The issues for determination in the proceeding were:
a.in relation to the claim for the $30,000 capital contribution;
i.whether the contribution was contingent upon the plaintiff supplying stock to the value of $100,000 to the business;
ii.whether the claim could only be brought by Selverline International Pty Ltd as trustee of the Trust;
iii.whether the plaintiff could demonstrate that he had personally suffered loss as a consequence of the defendant’s failure to make the capital contribution;
b.in relation to the claim for a share of profits;
i.the efficacy of the financial accounts prepared by Ms Kariyapperuma and Mr Denkha upon which the plaintiff relied;
ii.whether the business made profits;
iii.whether the calculation of profits should exclude part of the income of the business from sales made for more than the listed sale price;
iv.whether the defendant was responsible for the plaintiff not receiving a share of any profits;
v.whether any action should more properly have been brought against Selverline International Pty Ltd as trustee of the Trust;
c.in relation to the claim for a share of the stock when trading ceased;
i.whether the plaintiff or a company in which he was interested, Masda International Pty Ltd (“Masda International”), was entitled to any stock;
ii.whether stock had been obtained from other sources, independent of the plaintiff;
iii.whether the claim should have been brought against Selverline International Pty Ltd as trustee of the Trust;
iv.the value of the stock and whether any of the stock was obsolete;
v.whether the plaintiff had taken stock from the business before or after it ceased trading;
vi.the effect of the plaintiff ignoring offers by the defendant that he should come and pick up any stock he claimed was his.
The business relationship
5The business was conducted by Selverline International Pty Ltd, as trustee from premises at 2/493 Hammond Road, Dandenong South, Victoria. The premises had been purchased jointly by Mr Karimi and Ms Kariyapperuma and were rented to the business by a partnership between Mr Karimi and Ms Kariyapperuma. The plaintiff did not seem to understand that a partnership was involved although his personal tax return for the year to 30 June 2009 included his 50% share of the profits from renting the premises to the business.
6The business was effectively operated by the defendant. Ms Kariyapperuma did the bookkeeping, apparently with some assistance from the plaintiff’s wife. The plaintiff and the defendant had regular weekly meetings to discuss the operation of the business. The plaintiff had two other businesses which occupied much of his time; the company Masda International which imported equipment from China and a partnership with Mr Tang which also conducted a business involved with satellite television equipment.
7Whilst the business operated, stock was initially supplied by Masda International for sale upon consignment. The business also purchased stock from China which was immediately transferred to the plaintiff’s warehouse. Some of this stock was paid for by Masda International and some by the Tang partnership. The stock held by the plaintiff for the business was apparently collected from the plaintiff by the defendant on an “as needs” basis. The business sold to customers throughout Australia.
8In 2010, the defendant was concerned when the plaintiff established a shop in Sydney, under the name Sydney World View, which competed with the business. On 21 September 2010, the plaintiff’s solicitors sent a letter to the defendant informing him that the plaintiff had appointed a manager who would conduct the business and have authority over the defendant. On 23 September 2010, the defendant’s wife registered the company Digitronic International Pty Ltd which in December 2010 commenced a business in Sydney with the defendant’s involvement.
9On 27 September 2010, the plaintiff attended the business and removed the business computer and hard drive and carried out a stock take with Mr Denkha and the new manager of the business appointed by the plaintiff. There is a dispute as to whether, at this time, the plaintiff also removed other financial records and stock from the business premises.
10Attempts to resolve the disputes between the parties were unsuccessful. The stock was removed by the defendant into storage and later sold as scrap. There was a forced sale of the business premises. No tax return was filed for the Trust other than for the year ended 30 June 2009. The trustee, Selverline International Pty Ltd was deregistered in April 2012.
$30,000 Capital Contribution
11 Clause 4 of the Business Agreement provided:
CAPITAL ACCOUNTS
The partners shall make an initial investment of capital, contemporaneously with the execution of the agreement as follows:
Partners and Capital
For Business Premises: Own by Partners
Jayaminda Nanayakkara: Capital Contribution – 50%, Ownership – 50%
Hossein Karemi: Capital Contribution – 50%, Ownership – 50%
For Business: Investment as below
J. Nanayakkara: AUD 30000.00
Hossein Karimi: Financial Investor
Stock – Stock will be supplied to business on consignment basis until terminates the agreement. Stock will not count as capital. Minimum requirement AUD 100000.00
Return of Capital Contribution:
No party shall have the right to withdraw his or her capital contributions of demand or receive the return of his or her capital contributions or any part thereof, except as otherwise provided for in this Agreement.
The parties shall not be personally liable for the return of capital contributions or any part thereof, except as otherwise provided in this Agreement.
The parties shall not pay interest on capital contributions of any circumstances unless agreed in written [sic].
12The defendant did not make the capital contribution to the business. He said that he did not make the contribution because the plaintiff had not provided $100,000 worth of stock, but only $70,000. The plaintiff said that he did not provide the remaining $30,000 worth of stock because of the “retained profits” in the business of which his share was at least $30,000. Without accepting that the argument has validity, it would appear to equally justify the non-payment of the defendant’s capital contribution as there was no suggestion that the defendant had taken money out of the business.
13In fact, the argument highlights the defendant’s contention that the capital contribution was to be made to the business and any action to recover or enforce payment should properly have been made by the trustee for, and on behalf of the Trust.
14The plaintiff based the claim upon the obligation of the defendant in the business agreement. A breach of the relevant clause of the agreement might entitle the plaintiff to bring an action for damages. The plaintiff did not however, attempt to establish that he had personally suffered a loss of $30,000 or any other sum.
15In the circumstance, there is no basis upon which the plaintiff can succeed in this claim.
Share of profits
16The plaintiff relied upon financial statements prepared by Ms Kariyapperuma showing that the business had a net profit in the year ended 30 June 2009 of $39,000, for the period July to December 2009 of $43,000 and later for the 11 months to 31 May 2010 of $94,000.
17The financial statements for the year to 30 June 2009 and for July to December 2009 were provided to the plaintiff by Ms Kariyapperuma as an attachment to an email dated 5 January 2010. An email from Ms Kariyapperuma to Mr Karimi on 12 January 2010 made it clear that the financial statements were provided to Mr Karemi, “only for your purpose, not for tax”.
18Alternatively, the plaintiff relied upon financial statements prepared by Mr Denkha at the plaintiff’s request in 2012 using the data from MYOB obtained from the computer hard drive taken by the plaintiff from the business premises in September 2010. Mr Denkha’s statements showed net profit of $38,543.72 for the year ended 30 June 2009, $99,666.17 for the year ended 30 June 2010 and $31,857.04 for the period 1 July 2010 to 30 September 2010.
19However, Mr Denkha conceded in cross examination that the net profit figure was not accurate because it did not take into account a number of factors which would first need to be deducted, such as the cost of goods sold calculated by reference to stock on hand at the beginning and end of the period and the purchases during the period, provision for doubtful debts, depreciation and the writing down of obsolete stock.
20Ms Kariyapperuma’s figures were provided for specific purposes. The figures used to support the plaintiff’s application for bank finance were requested by the plaintiff’s wife in an email dated 16 February 2010 to be, “the higher the better”. The calculations in the accounts prepared by Ms Kariyapperuma do not include the items Mr Denkha agreed would ordinarily be deducted when calculating net profit.
21The plaintiff’s tax return for the year ended 30 June 2009 does not include income from the business. A copy of the tax return and the financial statement of the business were subpoenaed from the plaintiff’s accountant. The financial statement showed the business not making a net profit and, presumably, it was on that basis the plaintiff’s accountant prepared his tax return.
22The plaintiff conceded that the defendant was entitled to keep a portion of the sale price of equipment sold by the business if the price exceeded the agreed list price. Clause 6 of the Business Agreement, provided that, “The profit make [sic] by the goods are sold above the minimum price, can be taken by first party and this portion does not count to business activities or to profit distribution”. There was credible evidence that the defendant made many sales in excess of the agreed list price. The defendant had not withdrawn any money from the business because the extra, over the list price, was not separately invoiced or paid for by customers and the business did not have the capacity to make the payments.
23The business was used as the vehicle for purchasing stock from China, not only for itself but also on behalf of Masda International and the Tang partnership. The defendant and his wife did not draw wages from the business and Ms Kariyapperuma needed to resume other part time employment soon after the business commenced.
24In these circumstances, it was probably unrealistic for the plaintiff to expect any distribution of profits until the business was well established. In the financial statements prepared by Esha Denkha & Associates for the year ended 30 June 2009, the net profit is shown as $38,543.72. That sum is reflected in the balance sheet as a liability, with the beneficiary loan accounts of both the plaintiff and the defendant debited with $19,271.86, being 50% of the net profit. This reflects what the defendant submitted was the reality, that any net profit would need to be distributed by the company and would ordinarily be reflected in the loan accounts of the plaintiff and defendant, as debts owing by the company to them.
25In fact, the company was acting as a trustee and it is more likely that, upon strict legal analysis, any profit would be available for distribution pursuant to the trust deed. The trust is a discretionary trust and it is unlikely that any rights would accrue to the beneficiaries unless and until an actual distribution were made.
26I do not consider that there is any basis upon which it can be asserted that the defendant failed in any duty he owed to the plaintiff to have ensured that a distribution of profit was made from the business to the plaintiff. For these reasons, the plaintiff’s claim can not succeed.
Value of stock at the cessation of business
27The plaintiff’s company, Masda International had originally provided stock valued at about $70,000 to the business for sale on consignment. It may be that at the cessation of business in September 2009, some of that stock would have been held in the business and would have remained the property of Masda International. The plaintiff did not identify any particular item of stock in this category. In any event, any right of action for its return, or value, would have been Masda International’s not the plaintiff’s and may have been affected by the plaintiff’s failure to collect any stock he laid claim to, so that further storage charges could be avoided.
28There was a conflict of evidence about:
a.whether the plaintiff removed stock from the business premises on a number of occasions without accounting to the business for it;
b.whether the stocktake performed by the plaintiff with assistance from Mr Denkha and Rajid on 27 September 2010 accurately recorded quantities of items and whether the items had retained their value as saleable stock.
29I do not intend to further examine the evidence given on these matters as I do not consider it necessary to come to a concluded view. It is clear however that the value placed on the stock by the plaintiff, following the stocktake of $70,000, was its maximum value.
30 It is not clear however:
a.how much of this was stock originally provided by the plaintiff through Masda International for sale on consignment;
b.how much was part of the purchases of stock (over $200,000 in the year to 30 June 2009 and almost $300,000 in the following year) by the business from the Chinese suppliers and from the local supplier, Strong. A number of Strong items were listed in the stocktake sheets;
c.whether any of the stock was obsolete and, therefore, whether it should have been written off or its value written down.
31The stock was held by the business. The business was operated by the company on behalf of the Trust. After 27 September 2010, the defendant did not consider that he could continue to run the business. Despite the notification of the appointment of an alternative manager by the plaintiff’s solicitors, the plaintiff did not take over the business. The plaintiff refused to collect the stock from the business premises unless it was part of a comprehensive resolution of all matters in dispute, including issues concerning the business premises.
32In these circumstances, it is difficult to see any basis for a successful claim by the plaintiff against the defendant or even against Selverline International Pty Ltd, as the entity which conducted the business on behalf of the Trust. This claim must also fail.
Order
33The plaintiff’s claim is dismissed with costs, including any reserved costs, to be taxed in default of agreement.
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Certificate
I certify that the preceding 8 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 9 May 2013.
Dated: 9 May 2013
Philippa Gilkes
Associate to His Honour Judge Anderson
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