Kas and Co Accountants Pty Ltd v Falconer, Ian Stuart

[2009] VCC 829

IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE

GENERAL DIVISION OF THE COMMERCIAL LIST

Case No. CI-08-01648

KAS & CO ACCOUNTANTS PTY LTD	Plaintiff
(ACN 125 694 528)
v
IAN STUART FALCONER	Defendant

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JUDGE:	HIS HONOUR JUDGE SHELTON
WHERE HELD:	Melbourne
DATE OF HEARING:	19 to 22 May and 2 June 2009
DATE OF JUDGMENT:	24 June 2009
CASE MAY BE CITED AS:	Kas & Co Accountants Pty Ltd v Falconer, Ian Stuart
MEDIUM NEUTRAL CITATION:	[2009] VCC 0829

REASONS FOR JUDGMENT

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Catchwords: Agreement to merge accountancy practices – mutual abandonment – Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279 – Summers v The Commonwealth (1918) 25 CLR 144 – Ryder v Frohlich [2004] NSWCA 472.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M J Corrigan	Rose Mary Brondolino & Co
For the Defendant	Mr B Carew	Legal Rite
HIS HONOUR:

Introduction

1          This proceeding concerns a breakdown in the professional relationship between two accountants.

2          In February 2007, Kurt Albert Sawatzki (“Sawatzki”) carried on business as an accountant under the name of KAS Business & Taxation Services from a unit at Southgate. In that month he placed an advertisement in the Age newspaper stating that he was interested in purchasing an accounting practice. The defendant, who carried on business as an accountant at 55 Stanley Avenue, Mt Waverley (“Stanley Avenue”) under the name of Falconer AccounTax responded to the advertisement. There was an age difference of approximately twenty years between Sawatzki and the defendant, with Sawatzki being aged in his late thirties and the defendant being aged in his late fifties. Following a number of meetings between Sawatzki and the defendant, they decided to merge their practices. This was effected by a series of agreements.

The Agreements

3          Firstly, there was the shareholders’ agreement dated 30 June 2007 (“the shareholders’ agreement”). The parties to the shareholders’ agreement were the defendant, Sawatzki and the plaintiff, a company incorporated on 30 May 2007 to carry on the merged accounting businesses.

4          The shareholders’ agreement recited that the plaintiff would carry on business as Falconer AccounTax from 1 July 2007 with the defendant and Sawatzki as its directors and shareholders. They were both to sell and transfer all the right, title and interest in their current practices to the plaintiff. The plaintiff was to issue 280,000 $1 shares to the defendant and 60,000 $1 shares to Sawatzki, reflecting the turnover of their respective practices. Sawatzki was to purchase 110,000 shares from the defendant on or before 30 June 2007 based on a sale price of 92.5 cents per share, making a total purchase price of $101,750. Upon the purchase of these shares, the defendant and Sawatzki would each hold 170,000 shares in the plaintiff. The plaintiff was to conduct the merged business from 1 July 2007.

5          The defendant leased Stanley Avenue from his wife and the shareholders’ agreement recited that he was to assign his leasehold interest in Stanley Avenue to the company.

6          The shareholders’ agreement provided what was to occur should the defendant or Sawatzki wish to retire from the venture:

“6.	In the event that either party shall retire or die or wish to sell their shares during the course of this agreement the remaining or surviving party shall have the right within thirty (30) days of such event to exercise in writing to acquire the shares of the other.
In the event that such exercise of such right shall occur in the 2007/2008 year then the price of such acquisition shall be determined by reference to the price paid by the company for the purchase of the businesses enabling the company to commence trading as at the 1st July 2007 and apportioned appropriately.
Upon any later occurrence of retirement or death then the purchase price shall be as agreed in the case of a retirement or if there is no agreement then the shares shall be valued by a qualified valuer and the Purchaser shall be bound by the valuation and pay the appropriate price to the other party or to his legal personal representatives.
… .”

7          The agreement was dated 30 June 2007 but it was common ground that it was not executed until 24 August 2007.

8          Secondly, there was a contract of sale of business between the defendant and the company dated 1 June 2007 but again only executed on 24 August 2007 (“the defendant’s sale contract”). It provided for payment of the sum of $280,000 by the plaintiff to the defendant on 30 June 2007. This was satisfied by the issue of shares.

9          General Condition 2.4 required the defendant to transfer the business name Falconer AccounTax to the plaintiff and also to transfer the chattel mortgage of the defendant’s computer system to the plaintiff. General Condition 10 was a restraint of trade clause which restrained the defendant from carrying on a similar business within a radius of 5 kilometres of Stanley Avenue for a period of two years. The goodwill of the defendant’s practice was stated to be $280,000.

10        The defendant’s sale contract contained the following special conditions:

“SPECIAL CONDITIONS

1.       The parties agree that the contract price of $280,000.00 is based on the estimated earnings for the following 12 month period commencing the 1st July 2007 and discounted by 7.5% per cent.

2.       Further, the parties agree to adjust the contract price if required at the completion of the financial year for the 30th June 2008.

3.       The parties may adjust the contract price as follows:-

(i)	based on a turnover attributable to the Vendor’s business exclusive of G.S.T. for the financial year 2007/2008 and discounted by 7.5% the parties agree to accept the calculations as the fees paid to the purchaser for that financial period;
(ii)	in the event that the turnover attributable to the Vendor for the 2007/2008 year and adjusted as aforesaid then such figure shall be the amended contract price;
(iii)	in the event of the amended price is greater than $280,000.00 subject to the abovementioned adjustment of 7.5% then the Vendor shall be entitled to be paid the difference;
(iv)	in the event that the figure shall be less than $280,000.00 and discounted accordingly the vendor shall refund to the purchaser the difference; and
(v)	in calculating the turnover of the business in the 2007/2008 year for any file where there are multiple years’ work and bills rendered upon completion in the year 2007/2008 then such bills shall be averaged for the purposes of the calculation of turnover.

4.       In calculating the fees for 2007/2008 it is agreed that the parties shall not include the work in progress or the debtors’ list for the year ending 30th June 2007.

5.       The vendor further agrees that prior to the 31st July 2007 to provide to the purchaser an appropriate work in progress and debtors’ list as at the 30th June 2007.

6.       In the abovementioned calculations neither the vendor nor the purchaser shall include a G.S.T. component when calculating such figures.”

11        Thirdly, there was a contract of sale of business between Sawatzki and the plaintiff pursuant to which Sawatzki sold his business to the plaintiff for the sum of $55,500.00 payable on 30 June 2007 (“the Sawatzki sale contract”). This contract of sale was again dated 1 June 2007 but was not executed until 24 August 2007. It contained the same six special conditions as the defendant’s sale contract except that in Special Conditions 1 and 3(iii) and (iv) the sum of $280,000 is replaced by the sum of $55,000.

12        Finally, there was a transfer of lease of Stanley Avenue which was to take effect on 1 July 2007.

Operation of the Plaintiff’s Business at Stanley Avenue

13        Sawatzki commenced working from Stanley Avenue on 2 June 2007. It appears that there were early tensions in the relationship between the defendant and Sawatzki. Sawatzki gave evidence that on or about 11 August 2007, the defendant became concerned that Sawatzki had not executed the documentation and changed the locks to Stanley Avenue. At this time, the sum payable by Sawatzki of $101,750 was negotiated down by Sawatzki to $80,000 since Sawatzki had by then formed the view that the turnover of the plaintiff was to be somewhat less than anticipated. Once agreement was reached on this reduction to the sum of $80,000, the defendant provided the plaintiff with a new key. As mentioned, the documentation effecting the merger of the practices was signed on 24 August 2008 and Sawatzki’s cheque for $80,000 was paid on that day.

14        Before long, Sawatzki became concerned at the level of invoices being rendered by the defendant as compared to invoices rendered by him. Taking account of unrendered work in progress and the defendant’s absence from the plaintiff’s practice while he was overseas from late August until late September 2007, perhaps the real issue was not so much that the defendant was not “pulling his weight” but rather that he was somewhat slack in rendering invoices to clients.

15        The relationship between the defendant and Sawatzki was clearly deteriorating. At a director’s meeting between them on 2 October 2007, Sawatzki suggested that on account of the greater rendering of invoices by him, their drawings from the plaintiff should not be on an equal basis and that the defendant should take a 50 per cent reduction in drawings. He states that the defendant did not appear averse to this suggestion and that he would think over Sawatzki’s proposal. Sawatzki stated that over the next few weeks he asked the defendant three or four times his response to the proposal that he take reduced drawings, and the defendant answered on each occasion that he would come back to him with an answer.

16        At the next directors’ meeting on 7 November 2007, when the issue of the defendant taking lesser drawings was raised, the defendant stated that as they were in partnership, they had “to take the good with the bad” and he was not going to take any lesser drawings.

17        Further, there was ongoing friction in October and early November between the defendant and Sawatzki over what outsiders should be involved in the establishment of a financial advice branch of the plaintiff’s business.

18        Matters came to a head on 9 November 2007. The evidence of the defendant and Sawatzki as to what occurred on this day was generally similar.

19        The defendant stated that he arrived at Stanley Avenue that day at approximately 5.30 am. He noted that there was an appointment in Sawatzki’s diary for 3.00 pm the previous day to see his solicitor in a computerised diary which was accessible to him. He assumed that Sawatzki was seeing his solicitor with a view to terminating their relationship. Sawatzki stated that he in fact had to leave the office to collect his children from crèche but did not wish the defendant to know this and so stated that he was seeing his solicitor.

20        The defendant stated that prior to Sawatzki’s arrival at Stanley Avenue at about 8.00 am, he prepared accounts for work he had done in his business prior to 30 June 2007 and also electronically transferred money from the plaintiff’s bank account to his for various personal expenses. Sawatzki checked the plaintiff’s bank balance on arrival and found that there was approximately $4,000 withdrawn. He raised the matter with the defendant who indicated that he had withdrawn monies to pay his personal bills, including “an estimate” of the amount owing to AGL and Telstra. Sawatzki stated that he asked the defendant to produce invoices in support of the monies he had withdrawn, and that the defendant responded: “Well, it sounds like you don’t want to be in this business. Let’s finish it up.” Sawatzki stated that he responded: “If you want to finish it up, then you have to return my $80,000” and that the defendant agreed to this and asked for Sawatzki bank details so that he could pay monies directly in his account. He gave the defendant his bank details. The defendant recalls that about this time he went into Sawatzki’s office and said words to the effect: “It looks like we cannot continue to work together”. He stated that Sawatzki then demanded his $80,000 contribution be repaid.

21        Sawatzki stated that he then rang his wife to tell her that his business relationship with the defendant was over. He also telephoned a colleague to tell him that his business relationship with the defendant was at an end. He then started packing his work papers into his car.

22        On the way to the bank the defendant states that he decided there should be something in writing between the parties and so he drafted an agreement. He then decided to obtain a bank cheque for $80,000 and returned to the office at about 10.15 am and prepared a short agreement which provided, in effect, for the relationship between the defendant and Sawatzki to come to an end. The defendant stated that on his return he told Sawatzki that he would not hand over the bank cheque for $80,000 until he had the agreement signed. Sawatzki stated to the defendant that he did not want to sign it without having his solicitor look at it. He gave evidence that he was concerned that if he left Stanley Avenue to see his solicitor, the defendant might change the locks, as had occurred previously, and so he would not have access to the electronic files of the plaintiff’s clients which were stored on the computer server.

23        Sawatzki stated that he therefore contacted a friend, Jason, requesting that he attend at Stanley Avenue to assist him to remove the computer server. Jason arrived at about 11.00 am. Sawatzki stated that he then told the defendant that he would leave Stanley Avenue if the defendant gave him the cheque for $80,000. The defendant stated he would only do so if Sawatzki signed the agreement. Sawatzki refused to do so. Sawatzki then disconnected the computer server and started carrying it from Stanley Avenue. The defendant tried to stop him from doing so and Jason, at his request, restrained the defendant who was moving to prevent Sawatzki from removing the computer server. He states that Sawatzki again demanded $80,000 which he said he would not hand over until the agreement was signed and that Sawatzki said: “You’re screwed, you’re screwed” and walked out and then left. Sawatzki put the computer in his car and told the defendant that the computer server would be returned when he was paid $80,000. There has been no personal communication between the defendant and Sawatzki since.

24        The defendant stated that he changed the locks on Stanley Avenue at about 4.30 pm that afternoon and that he did not intend allowing Sawatzki into Stanley Avenue without his being there.

25        I was told that there were various discussions between the parties’ legal advisors in the days following. The only correspondence from this period before me is a letter from the defendant’s solicitors, Legal Rite, to the plaintiff’s solicitors, Rose Mary Brondolino & Co., dated 14 November 2007 which puts forward a proposal to resolve matters. It certainly does not suggest that the relationship between the defendant and Sawatzki should resume.

26        Sawatzki took the computer to his suite at Southgate and has since been continuing to practice there in the name of the plaintiff.

27        The defendant continued practising at Stanley Avenue under the name Falconer AccounTax, which had not been transferred to the plaintiff, until late May 2008 when he transferred his business outside the 5-kilometre radius from Stanley Avenue.

28        There was evidence before me which was not in dispute, that most of the clients of the defendant’s practice, and therefore of the plaintiff, lived in the south-eastern suburbs of Melbourne, closer to Stanley Avenue than to Southgate.

The Parties’ Claims

29        The plaintiff calculates the turnover attributable to the defendant’s business for the financial year ending 30 June 2008, discounted by 7.5 per cent, at $45,954.19. In accordance with Special Condition 3 of the defendant’s sale contract, it claims the sum of $234,045.81, being the difference between $280,000.00 and $45,954.19. In respect of the restraint of trade clause which it alleges it was breached, it claims $45,000 by way of damages. It also seeks a transfer of the business name, Falconer AccounTax.

30        The defendant alleges that the plaintiff breached the shareholders’ agreement on 9 November 2007 by refusing to allow the defendant to participate in the plaintiff’s business and that the plaintiff can now not benefit from this breach. Alternatively, it submits that the parties mutually abandoned all continuing obligations they had at 9 November 2007 under the shareholders’ agreement and the defendant’s sale contract. He disputes that any monies are owing to the plaintiff.

Discussion and Conclusions

31        I consider firstly whether the parties mutually abandoned their continuing obligations under the shareholders’ agreement and the defendant’s sale contract on 9 November 2007.

32        In Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279, Ryan J stated:

“Whether there has been an abandonment by both parties of a contract formerly subsisting between them turns on whether the acts and omissions of each party, viewed objectively in the light of the circumstances of the contract, give rise to an inference that the parties to the contract have agreed to discharge it. …”

33        At paragraph 40, Kiefel J (as she then was) stated:

“… Abandonment may be seen as a conclusion that parties have no further interest in a contract continuing, even though they may have said nothing to that effect. It may nevertheless be clear that they both regard it as at an end. This can more readily be discerned where one or more of the parties have ineffectively attempted to bring the agreement to an end and both behave as if it was ended …”

34        Mr Carew, who appeared for the defendant, submitted that the plaintiff, through Sawatzki, attempted to bring the relationship between the plaintiff and the defendant to an end by his conduct on 9 November 2007 but that this was not a lawful termination.

35        In Summers v The Commonwealth (1918) 25 CLR 144, at 152, Isaacs J held that the parties had by their conduct mutually abandoned their contract where:

“… Informally, but effectively, the parties have so acted in relation to each

other as to abandon or abrogate the contract.”

36        In Ryder v Frohlich [2004] NSWCA 472, McColl JA stated, at paragraph 135:

“Where it is plain from the conduct of parties to a contract that neither intends that the contract should be further performed the parties will be regarded as having so conducted themselves as to abandon or abrogate the contract. …”

And at paragraph 136:

“Whether there is abandonment or abrogation of a contract is a matter of fact to be inferred from an objective assessment of the conduct of the parties. …”

37        Although, as Her Honour stated, at paragraph 137:

“The underlying premise of the abandonment cases is that a period of time elapses during which neither party to the contract manifests any intention to perform the contract, leading to the inference that the contract has been abandoned. …”,

in that case, McColl JA did not require a lengthy period of time to elapse to
find that there was mutual abandonment. She stated, at paragraph 138:

“In this case where Mr Ryder evinced an immediate intention to abandon his obligation under the partnership by taking the position at Salomons which Mr Frohlich accepted and thereafter assumed all the duties the two men had hitherto performed, I am of the opinion that the partnership agreement was abandoned on 2 March 2001.”

38        Here, in my view, applying these principles, there has been mutual abandonment on 9 November 2007 of the shareholders’ agreement and the defendant’s sale contract with the plaintiff, through Sawatzki and the defendant each going their own ways. I rely on a number of factors which are conveniently set out in the Particulars to paragraph 9E of the defendant’s Amended Defence to the Amended Statement of Claim, dated 22 May 2009:

On the plaintiff’s part:

ƒ The plaintiff’s act of vacating Stanley Avenue on 9 November 2007 and moving its business premises to suite 89, 1 Riverside Quay, Southbank (“the Southbank premises”);

ƒ The failure to request the defendant at any time subsequent to 9

November 2007 to “carry on the accountancy practice” (referred to in recital A of the Shareholders’ Agreement;

ƒ The action of removing the computer system and server from Stanley

Avenue on 9 November 2007;

ƒ	The lack of any objection made to the defendant’s resignation on or about 12 December 2007 (notwithstanding recital G of the Shareholders’ Agreement;
ƒ	The failure to request the defendant to move to the Southbank Premises at any time subsequent to 9 November 2007;
ƒ	The failure of the plaintiff to pay the defendant any salary subsequent to the time on or about 30 September 2007;
ƒ	The failure of the plaintiff to assert any right to exclusive occupation of Stanley Avenue pursuant to the lease it had with the landlord subsequent to 9 November 2007;

And additionally:

ƒ	The changing of the registered office of the plaintiff to the Southbank suite;
ƒ	The plaintiff never sought to find alternative premises in Mount Waverley, closer to the plaintiff’s clientele than Southgate.

On the defendant’s part:

ƒ The acceptance of the plaintiff’s action of vacating Stanley Avenue;

ƒ The acceptance of the plaintiff’s action in carrying on “the accountancy

practice” (referred to in recital A of the Shareholders’ Agreement) without

him;

ƒ The acceptance of the plaintiff’s action in removing the computer system
and server from Stanley Avenue;

ƒ His resignation as director of the plaintiff tendered on or about 12

December 2007;

ƒ The action of the defendant in commencing to work for himself subsequent to 9 November 2007 rather than in the “accountancy practice” referred to in recital A of the Shareholders’ Agreement.

39        There was no evidence before me that after 9 November 2007 either party had contacted the other with a view to continuing their business relationship. In view of the above matters, I have no difficulty in concluding that each of Sawatzki and the defendant accepted, after 9 November 2007, that they were no longer practising together in the plaintiff’s name.

40        Mr Corrigan submitted that the conduct of the defendant over the months leading up to 9 November 2007 virtually brought the relationship between him and Sawatzki to an end. It may well have been that the defendant was somewhat lax in rendering accounts to clients, even perhaps not “pulling his weight”. In the witness box the defendant struck me as being over defensive of his position. These matters however, are not to the point so far as mutual abandonment is concerned.

41        It seems clear from the outset there was tension between Sawatzki and the defendant and their relationship was doomed. Sawatzki however, if he was unhappy with the decision he made to merge the two practices, had the opportunity to retire and sever the relationship pursuant to paragraph 6 of the shareholders’ agreement. Alternatively, he could have waited until 30 June 2008 and then sought an appropriate adjustment pursuant to Special Conditions 2 and 3 of the Special Conditions forming part of the defendant’s sale contract and Sawatzki’s sale contract. He chose not to follow either of these steps.

42        Mr Corrigan submitted that I should find that the sum of $80,000.00 contributed by Sawatzki to the plaintiff was held on trust by the plaintiff for him. In my view, it is inappropriate to do so, Sawatzki not being a party to this proceeding. Obviously, no claim is pleaded by the plaintiff with respect to the sum of $80,000. By finding that there has been mutual abandonment, I am not concluding that there is a return to the status quo ante, as submitted by Mr Corrigan.

43        The result of my finding that there has been mutual abandonment at 9 November 2007 of the shareholders’ agreement and the defendant’s sale contract means that the plaintiff’s claim fails.

44        There will be judgment for the defendant.

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