L and H New Developments Pty Ltd v MYR Investments Pty Ltd (No 2)
[2015] VSC 89
•13 March 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
LIST A
S CI 2012 02002
| L & H NEW DEVELOPMENTS | Plaintiff |
| v | |
| MYR INVESTMENTS PTY LTD | Defendant |
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JUDGE: | DALY AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 and 19 August and 1 September 2014 |
DATE OF JUDGMENT: | 13 March 2015 |
CASE MAY BE CITED AS: | L & H New Developments Pty Ltd v MYR Investments Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2015] VSC 89 |
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PARTNERSHIP - Order for the taking of accounts - Reference of preliminary questions to an associate judge for determination prior to referral to a special referee – Application to vary original order in respect - Whether answers to preliminary questions an interlocutory or final order – Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd [2006] VSC 170 applied – Not in the interests of justice to re‑open order.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P D Corbett QC | Hall & Wilcox |
| For the Defendant | Mr C W R Harrison QC | Cyngler Kaye Levy (until 24 November 2014) and Aitken Partners from 24 November 2014 |
HER HONOUR:
Background and summary of issues in dispute
The plaintiff (‘LHND’) and the defendant (‘MYR’) were, until March 2012, partners in a property development business spanning some nine years. The partners were in dispute about a number of matters concerning the finances of the partnership, and in particular, the size of the loan balances of the two partners in the partnership accounts, and the amounts owing to Furman Constructions Pty Ltd (‘Furman Constructions’), a company associated with Mr Moshe Furman, the principal of MYR, which was the builder engaged by the partnership to construct the various development projects undertaken by the partnership.
On 17 August 2012, Almond J made orders for a number of questions concerning the financial affairs of the partnership to be referred to an associate judge for determination prior to there being a final taking of accounts for the partnership (‘17 August orders’). Four of these questions were determined following a hearing in 2013 (‘2013 hearing’), with reasons published on 12 December 2013 (’12 December ruling).[1] By reason of the manner in which the 2013 hearing was conducted, the making of orders consequent upon the 12 December ruling was deferred until after a hearing on 31 March 2014 (’31 March hearing’). At the 31 March hearing, MYR was invited to make submissions as to why I should not find that MYR was bound by the 2009 accounts of the partnership (‘2009 accounts’), given that I had found that there had been an agreement between the partners regarding the process to investigate the financial affairs of the partnership and to resolve disputes between them about the balances of the partners’ loan accounts, which culminated in Mr Moshe Furman signing the 2009 accounts on behalf of MYR in December 2010.
[1]See [2013] VSC 689.
On 11 April 2014,[2] I made a ruling (’11 April ruling’) to the effect that I was not persuaded that MYR had demonstrated why, by reason of any errors in the accounts of the partnership, MYR should not be bound by the 2009 accounts, and orders were made on that day providing answers to the first four questions, and making directions for the hearing and determination of the remaining questions.
[2]The date of the orders was erroneously expressed to be 31 March 2014, instead of 11 April 2014.
The following questions were to be heard and determined at the further hearing, which was fixed for 18 August 2014:
(a) whether the expenses deducted by MYR from the past rents received by it from units 3, 4 and 13 of 97-103 McDonald Road, Mordialloc (‘Mordialloc property’) were expenses properly and actually incurred by MYR on behalf of the partnership (‘question (e)’);
(b) whether the unpaid invoices for professional services rendered by Green & Sternfeld dated 31 March, 30 June, and 30 September 2011 totalling $36,025 were fees properly and actually incurred by the partnership (question (f));
(c) whether any monies paid to LHND by the Australian Taxation Office as GST credits are payable to the partnership and referable to partnership projects (excluding amounts paid to Westpac account 033 000 232232); and, if the answer is ‘yes’, various subsidiary questions (‘question (g)’); and
(d) whether MYR should be liable to pay penalty interest and any charges that have accrued on the Westpac Banking Corporation (‘Westpac’) bill facility by reason of any failure on the part of MYR or Mr Furman to provide further security and/or a guarantee to Westpac for that facility (‘question (h)’).
Prior to the hearing on 18 August 2014, agreement was reached between the parties regarding the answers to question (g). The parties did not reach agreement on the question on whether MYR should be liable to pay the penalty interest charged by Westpac between 2012 and 2013 (‘Westpac penalty interest’), but agreed that the amount concerned was $141,268.97.
Therefore, what remained to be determined at the hearing commencing on 18 August 2014 (which concluded, after a short adjournment, on 1 September 2014), were the following matters:
(a) MYR’s accounting for the expenses said to have been incurred by it in relation to the Mordialloc property;
(b) the partnership’s liability to pay the unpaid invoices rendered by Green & Sternfeld;
(c) whether MYR should be liable to pay the Westpac default interest; and
(d) the renewal by MYR of its application to demonstrate material errors in the 2009 accounts which would justify a re‑opening of those accounts.
Each of these questions are addressed in the following sections.
Question (e): Accounting for expenses from Mordialloc properties
One issue in dispute between the parties was whether MYR had properly accounted for the monies retained by it from the rentals received from unsold units in the Mordialloc properties said to be construction and/or partnership expenses, totalling approximately $25,293.29.
MYR relied upon an affidavit sworn by Mr Furman on 13 August 2014 in support of its contention that the deduction of $25,293.29 from the rents received by it from the Mordialloc properties were properly incurred by MYR. Mr Furman’s affidavit in turn relied upon an exhibit to an affidavit affirmed by Mr Jack Cyngler, MYR’s then solicitor, on 5 August 2014 (‘5 August affidavit’) and a report prepared by Grant Thornton in July 2014 (‘third Hockley report’). MYR also relied upon a further affidavit of Mr Cyngler affirmed on 13 August 2014, which deposed as to a meeting he held with Mr Furman on 8 August 2014 and a spreadsheet he prepared in relation to expenses incurred with respect to the Mordialloc properties,[3] and exhibited a bundle of invoices with respect to the expenses for Mordialloc properties.
[3]‘JC-14’ to the 5 August affidavit.
Based upon the evidence filed and served by MYR, LHND accepted the documents and explanation provided on behalf of MYR in relation to the expenses claimed for the Mordialloc properties, save for expenses claimed in the sum of $6,489.40. This amount was calculated as follows: $4,730.00 claimed in respect of an invoice rendered by Nacha Moore Land Surveyors Pty Ltd in relation to the Plan of Subdivision for the Mordialloc property (‘Nacha Moore invoice’), a claim for $410.34 which Mr Furman could not recall the nature of, and $1,949.75 for bookkeeping expenses paid to ING Bookkeeping Services.
In my view, the answer to question (e) ought to be “Yes, save for $5,140.34”. Mr Furman has verified on oath that the bookkeeping expenses referred to above related to the Mordialloc properties, and there is no basis for disbelieving him. However, there is evidence, by way of an entry in the partnership general ledger[4] and an entry in the bank statements for LHND,[5] that MYR had been reimbursed for the Nacha Moore invoice. Indeed, in the second Hockley report, the expert retained by MYR verified that MYR had been reimbursed for the Nacha Moore invoice (see p 13, para 36(d)). As for the sum of $410.34, Mr Furman candidly admits that he has no recollection of the nature of this expense.
[4]Exhibit A.
[5]Exhibit B.
Question (f): Green and Sternfeld invoices
A further issue in dispute is whether the partnership is liable to pay three invoices rendered to it in 2011 by Green & Sternfeld, the partnership’s former accountants, relating to services said to have been provided by Green & Sternfeld prior to the termination of their engagement as the accountants for the partnership.
Green & Sternfeld rendered the following invoices to the partnership for services rendered to the partnership for the period 1 January 2011 to 30 September 2011 (‘relevant period’), as follows:
(a) 31 March 2011: $8,250;
(b) 30 June 2011: $13,750; and
(c) 30 September 2011: $14,025.
Mr Robert Lebovits, a director of Green & Sternfeld, affirmed an affidavit on 14 July 2014 which, among other things, exhibited three documents titled ‘G&S _WIP by Client by Activity by Employee ‘for the relevant period (‘WIP reports’), which was extracted from Green & Sternfeld’s electronic records, and record time entries specifying the time spent by Mr Lebovits and other Green & Sternfeld staff in providing accounting services to the partnership pursuant to its engagement (‘partnership retainer’).
Mr Lebovits deposes that four of the entries in the WIP report for August 2011 totalling $4,030.00 related to work which was carried out for LHND alone, not the partnership, and that the value of those entries were excluded from the amount billed to the partnership in the 30 September 2011 invoice. Mr Lebovits’ affidavit also exhibited the Green & Sternfeld file held by it in relation to accounting services provided by them during the relevant period of the partnership retainer, which showed the nature and the extent of work done by Green & Sternfeld pursuant to the partnership retainer.
At the hearing on 18 August 2014, Mr Lebovits was cross-examined by counsel for MYR. During the course of cross-examination regarding how the entries in the WIP reports (or at least those relating to work said to have been done by him) came into existence, Mr Lebovits gave evidence that the entries were entered into Green & Sternfeld’s billing system by his secretary by reference to handwritten entries made in a diary by Mr Lebovits, which showed, typically, on any particular day, the file number assigned to the partnership retainer, a line setting out a particular task or tasks, and a time amount. Further, these entries in Mr Lebovits’ diary were in turn derived from contemporaneous notes made by him on a ‘flip-over’ desk calendar whenever he dealt with a particular task.
The cross-examination of Mr Lebovits was adjourned to enable him to produce his diaries, redacted to exclude references to other clients, for inspection by MYR’s legal team. Mr Lebovits gave evidence that the desk calendar referred to above had been discarded.
Counsel for MYR submitted that I should not be satisfied that the invoices rendered by Green & Sternfeld related to work done for the partnership, on the basis that the dates upon which Mr Lebovits charged time to the file did not reconcile with the documents on the files and the narrations in the diary, and the WIP reports were either non-existent or rudimentary. He submitted that there was no supporting evidence at all to verify the amount charged by other Green & Sternfeld staff in respect of services said to have been rendered to the partnership.
In my view, the evidence supporting the amounts charged by Green & Sternfeld in the 2011 invoices is satisfactory, such that I can be satisfied that the partnership is liable to pay those accounts. I do not consider that I need to embark upon a process akin to that of a taxation of legal costs in order to be able to be so satisfied. Rather, it is sufficient that I be satisfied that Green & Sternfeld’s time recording and billing system is of sufficient integrity so that I can be satisfied that if an amount is invoiced by Green & Sternfeld, that amount is reflective of the actual work done for the partnership. Mr Lebovits gave evidence that the entries in his diary were, in effect, summaries of contemporary notes he made at the time he was doing tasks. He was alert to the need to separate the billing of the work he did for the partnership on partnership affairs from work he did for LHND on partnership affairs. That much is shown by the reduction in the amount charged in the September 2011 invoice to reflect an error he had made in charging for work done by Green & Sternfeld for LHND. The summary of work done by Mr Lebovits in relation to the partnership retainer[6] showed that while the diary entries were not necessarily made on the same day that the work was done, there was a substantial amount of work done on partnership matters during the relevant period.
[6]Exhibit 4.
I have no reason to doubt Mr Lebovits’ evidence that he approached the task of calculating the amounts to be invoiced to clients very carefully. It is noteworthy that during the relevant period, the amount actually billed to the partnership fell short of the sum of the time entries in the WIP records, although the reduction in the September 2011 invoice is explicable by some time being attributable to work carried out for LHND alone. While there is limited evidence to support the entries made by Green & Sternfeld staff other than Mr Lebovits, Mr Lebovits gave evidence that Mr Doug Black prepared the cash books for the partnership, as he did not do that work himself. It is unremarkable that administrative staff of Green & Sternfeld would be engaged on activities concerning the partnership retainer.
Accordingly, I am satisfied that the partnership is liable to pay the invoices rendered by Green & Sternfeld in the relevant period, and see no basis for a reduction in the amount due and payable in respect of those invoices.
Question (h) Westpac penalty interest issue
The partnership business was substantially funded by commercial bill facilities provided by Westpac (‘Westpac bill facilities’), with the amount owing to Westpac increasing as properties were purchased and construction was underway, and decreasing as properties were sold and the proceeds applied to the reduction of the amounts borrowed. The Westpac bill facilities were secured by the partnership properties and guarantees executed by LHND and MYR.
On 14 November 2011, MYR’s directors, Mr Furman and his wife, executed a guarantee to support an amount of $1,615,000, which was also secured by mortgages over the partnership properties at Hastings and Croydon. This bill facility was due to expire on 5 July 2012.
On 16 May 2012, the partnership’s relationship manager at Westpac, Mr Jimmie Dalaris, wrote to Mr New at LHND, stating, among other things:
If the bank has not received instructions as requested [regarding restructuring debt by way of alternative supporting security’, the Commercial Bill may be rolled into the company operating cheque account … as at 05/07/2012.
This will result in an rearranged debt in the company cheque account … and affidavit interest charges as at 14/05/2012 is 17.80% per annum may occur thereafter.
On 14 May 2012, the solicitors for MYR, Cyngler Kaye Levy (‘CKL’) wrote to Mr Dalaris, stating that:
We advise that the Commercial Bill was taken out by L&H and we are instructed that the Commercial Bill provides no benefit to the partnership between L&H and MYR. As such, MYR and Mr Furman are not prepared to provide a continuing guarantee of the Commercial Bill.
On 1 June 2012 the solicitors for LHND, Hall & Wilcox (‘H&W’), wrote to CKL, referring to the above letter, and providing an explanation as to why the Westpac bill facility was a liability of the partnership. The letter ended with the following statement:
Our client will reserve all its rights against your client and Moshe Furman if the commercial bill is not extended after its expiry on 5 June 2012 due to your client and/or Mr Furman’s failure or refusal to provide a continuing guarantee to Westpac (including in relation to any loss or damage suffered or incurred by our client arising from such failure or refusal).
On 1 August 2012 CKL wrote to H&W regarding a number of matters in dispute between the parties, stating, in respect to LHND’s application to appoint a receiver to the partnership:
Moshe Furman has indicated that he is prepared to continue to guarantee the Westpac Commercial Bill line, and even if he did not Westpac has adequate security in the partnership properties.
However, no guarantee was provided. Indeed, nothing further transpired until August 2013, after I had reserved my decision following the 2013 hearing. On 22 August 2013, CKL wrote to H&W, noting that the question of whether MYR was liable for the Westpac bill facility was reserved for determination, and then stated:
Without prejudice to our clients’ position, and with an express denial of liability, our client is prepared to sign a guarantee for 12 months in order to quarantine the penalty interest on the $1.615 million liability (“Bank Liability”) presently being charged by the Westpac Bank. As your client is the burrower, [sic] please arrange for your client to contact, Mr Jimmie Dalaris of Westpac to arrange a twelve month bank bill in respect to the Bank Liability.
We do note that the bank is holding adequate security including the Hastings property and the property at Croydon. In all the circumstances, we believe that the bank should waive the penalty interest it has charged since the previous bank bill was not renewed. Our clients’ position is that this is a matter for your client to negotiate with the bank.
On 28 August 2013, H&W wrote to CKL agreeing to approach Westpac to renew the Westpac bill facility, stating, among other things:
In relation to the penultimate paragraph of your letter, Mr Dalaris stated that he has already informed your client that Westpac would not waive any penalty interest that has already been imposed by it on our client as borrower (and that this remains the banks position). As is known to your client, we also note that a request was previously made on behalf of our client to Westpac for it to waive such interest. The bank responded in the negative to that request.
It is astonishing in these circumstances (and given that such interest was imposed as a consequence of your clients’ refusal on two occasion to sign guarantees required by Westpac) that your clients’ position is that it is ‘a matter for [our client] to negotiate with the bank’ in relation to the waiver of such interest. As is stated in the preceding paragraph, Westpac is clearly not agreeable to doing so.
The renewed Westpac bill facility was approved on 1 November 2013. The parties have agreed that the amount of penalty interest charged by Westpac is $141,268.97. The issue in dispute is whether this should be treated as an ordinary expense of the partnership, and thus be borne equally between the partners, or whether it ought to be borne by one of the partners. LHND asserts that MYR’s refusal to guarantee the Westpac bill facility was manifestly unreasonable, and as such, the whole of the amount of the penalty interest ought to be borne by MYR (presumably to be effected by a reduction in MYR’s loan account balance in the partnership accounts).
Senior counsel for MYR submitted that the question of whether the responsibility for the penalty interest is really a question of damages, and was not really an ‘accounting’ exercise within the scope of this inquiry. As a matter of principle, I would agree, but the 17 August orders were made by consent, and as such the parties agreed that this question was a proper matter for determination by the Court within the scope of this reference.
Senior counsel for MYR also submitted that the question of whether MYR ought to be liable for the penalty interest ought to be linked to the question of whether to re-open the 2009 accounts. MYR’s current position is that by reason of the partnership borrowing funds to acquire partnership properties, rather than using the profits from the Charman Road joint venture to fund the purchase of partnership properties, the partnership has systemically ‘over-borrowed’, and implicit in the submissions advanced on behalf of MYR, the responsibility for the over-borrowing rests with LHND. It is not entirely clear from MYR’s submissions whether MYR asserts that it should be excused from any responsibility for the penalty interest (such that it should be treated as an ordinary partnership expense, and thus borne equally between the partners) or whether LHND alone ought to bear the responsibility for the penalty interest.
LHND relied upon an outline of evidence of Mr Dalaris of Westpac. MYR did not require Mr Dalaris to attend Court to be cross-examined. The evidence of Mr Dalaris can be summarised as follows:
(a) between November 2010 and May 2014 he was employed by Westpac as a relationship manager, and in that capacity he managed the banking relationship between Mr New and his related companies with Westpac, including the Westpac bill facility;
(b) he summarised the correspondence between Westpac and the parties regarding the proposed rollover of the Westpac bill facility in 2012;
(c) sometime between 7 March 2012 and 13 May 2012 Mr Furman called him to tell him that neither he or MYR would sign any guarantee with respect to the Westpac bill facility because MYR was not a borrower under the facility. Mr Dalaris explained to him that if that were the case, Westpac would not renew the bill facility, and default interest would be charged on the amount owing;
(d) on or around 23 August 2013 he had a telephone conversation with Mr McMahon of H&W whereby Mr McMahon informed him that MYR would guarantee the Westpac bill facility, and explained to Mr McMahon what Westpac’s requirements were in order for it to consider whether to do so. Mr Dalaris also told Mr McMahon that ‘under no circumstances would Westpac agree to waive the penalty interest’; and
(e) following exchanges of correspondence and documents, the Westpac bill facility was renewed with effect from 30 November 2013.
In my view, MYR acted unreasonably in refusing to guarantee the Westpac bill facility on 5 July 2012, and the unreasonableness of that conduct caused the partnership to incur expenses that it would not otherwise have done. Mr Furman well understood the purpose of the Westpac bill facility, and the consequences for the partnership of refusing to guarantee the bill facility. At the time that he refused to execute the guarantee, his complaint was that LHND was the borrower, not the partnership, and the partnership obtained no benefit from the Westpac bill facility. That position was disingenuous at best, given that he had on a number of previous occasions executed guarantees on behalf of MYR, no doubt at least in part because the funding from Westpac was not only used to fund the purchase of the partnership properties, but to fund the construction works carried out by Furman Constructions for the partnership. Further, the assertion that the Westpac bill facilities were not a liability of the partnership was made after Mr Gideon Rathner of Lowe Lippman on MYR’s behalf had undertaken a comprehensive review of the financial affairs of the partnership, including a reconciliation of all interest payments made under the Westpac bill facilities, and as such, clearly understood that the Westpac bill facilities funded the partnership business.[7]
[7]See paragraphs 146, 161, and 200 of the 12 December ruling.
Of course, it is correct that at the time MYR refused to execute the guarantee the issue of whether there was some ‘double counting’ in the partnership accounts was still a live issue, in that MYR asserted that the size of the LHND loan account was excessive. The evidence and the findings in the 12 December ruling were against MYR on that issue, but I am prepared to accept that, at least for current purposes, that this concern was genuinely held at that time.
However, regardless of the validity or otherwise of those concerns, in my view such concerns did not justify Mr Furman’s refusal to execute the guarantee. If, as he contended, the amount of the Westpac bill facility ought to be ‘netted off’ against the LHND loan account in the partnership accounts, that matter was ultimately going to be resolved by way of agreement or judicial determination, and could be effected by a relatively straightforward adjustment in the partnership accounts if MYR’s contentions were found to be correct. Instead, MYR, for whatever reason, chose to jeopardise the partnership’s financial position by deliberately allowing the partnership to go into default, not only causing the partnership to incur unnecessary expense, but also potentially creating the risk that Westpac might seek to realise its securities. Such conduct, in these circumstances, amounted to a clear breach of the duty of good faith owed by partners to each other.
I do not accept the position currently advanced by MYR that the determination of this question ought to await either the outcome of any review of the affairs of the partnership, or any determination of any issue about ‘over-borrowing’, that is, whether the partnership borrowed more funds than it truly needed to borrow. This was not the reason advanced by MYR for refusing to guarantee the Westpac bill facility, and in my view, MYR should not be able to ‘reverse engineer’ a justification for doing what it did in 2012 and 2013.
Accordingly, I consider that MYR ought to be liable for the entirety of the penalty interest, and that the MYR loan account balance in the partnership accounts ought to be adjusted accordingly.
The application by MYR to re‑open the 2009 accounts
In relation to the question of whether MYR should be able to re‑open the 2009 accounts, the following extract from the 11 April ruling explains the context in which the 31 March hearing took place and the 11 April ruling was made:
1.On 19 December 2013, I made orders which, among other things, provided an opportunity for the parties to file further evidence and submissions in relation to two matters, namely:
(a)whether the existence of any errors in the 2009 partnership accounts should cause me to depart from, or qualify the finding that I made at the conclusion of the hearing convened for the purpose of determining the answers to questions (a) to (d) of the preliminary questions (“hearing”), that MYR was bound by the 2009 partnership accounts (“2009 Accounts”); and
(b) the costs of the hearing.
2.The orders referred to in (a) above were made in the context of a ruling I made during the course of the hearing on 22 April 2013 (before the parties called any witnesses) that MYR would not be able to rely upon a late filed expert accounting report, but that if, on the basis of the lay evidence given during the course of the hearing, I determined that, MYR was prima facie bound by the 2009 Accounts, MYR would have an opportunity to lead evidence and make submissions on the question of whether there were material errors in the 2009 Accounts that justified a re‑opening of those accounts.
3.This ruling was made in the context of there being a number of potential bases upon which I could potentially find that MYR was bound by the 2009 Accounts, based upon the Statement of Facts and Contentions and the affidavit evidence. These included simple contract, accord and satisfaction, estoppel, a settled account, or the general equitable jurisdiction of the Court. In the event that the plaintiff successfully established that the 2009 Accounts were binding upon MYR in equity, the existence or magnitude of any errors would be relevant to the question of unconscionability, or the Court’s general discretion.
4.As it happened, after the hearing, and the consideration of the evidence as tested at the hearing, I determined that MYR was bound by the 2009 Accounts by reason of an agreement at law between MYR and LHND regarding the process by which the financial affairs of the partnership would be investigated, reviewed, and any claims considered and compromised, culminating in the signing of the 2009 Accounts by both parties. Accordingly, I indicated in my reasons that in order to displace my prima facie view that MYR was bound at law by the 2009 Accounts, MYR would need to establish that there were grounds for setting aside that agreement, noting that there was nothing immediately apparent from the evidence that such a course was warranted. However, during the course of the hearing, counsel for MYR indicated that MYR would, at the further hearing scheduled for 31 March 2014 (“31 March hearing”), submit that I should permit MYR to re‑open its case on the basis that I had found there was an agreement in different terms to that contended for by LHND. That submission was ultimately not pressed at the 31 March hearing.
5.What was pressed at the 31 March hearing, on the basis of rather late evidence filed on behalf of MYR, was that the 2009 Accounts should be re‑opened on the basis of certain identified “errors”, namely:
(a)the failure of the 2009 Accounts to account for the Poath Road development, given that I have found that the Poath Road development was conducted in partnership (“Poath Road accounting issue”);
(b)a discrepancy between the profit figures for the Poath Road development calculated by MYR’s expert witness, Mr Hockley, and the figure calculated by the partnership accountants, Green Sternfeld, back in 2008 (a difference of approximately $35,000) (“Poath Road profit issue”); and
(c)an assertion by MYR and Mr Hockley that LHND (on behalf of the partnership) had borrowed excess funds from Westpac to finance the purchase and development of one of the partnership properties (“Westpac over borrowing issue”).
6.MYR also alleged that the 2009 Accounts should be re‑opened in order to determine the amount payable by the partnership to Furman Constructions Pty Ltd on account of management fees. However, this was not pressed at the 31 March hearing, on the basis that Furman Constructions Pty Ltd would continue to press its claim for allegedly unpaid management fees in separate proceedings already commenced by it in both this Court and the Victorian Civil and Administrative Tribunal.
7.Counsel on behalf of LHND protested against the attempt by MYR to rely upon late filed evidence in relation to the accounting for Poath Road, the Poath Road profit issue and Westpac over borrowing issue. However, I allowed MYR to rely upon the evidence, and to call Mr Hockley, after I refused MYR’s application for an adjournment of the 31 March hearing.
8.In relation to the question of whether my preliminary answer to question (d) ought to be revisited in the light of the errors identified by MYR, counsel for MYR did not point to any evidence which suggested that the agreement ought to be set aside by reason of any vitiating conduct on the part of LHND. Essentially, the submissions of MYR could be reduced to a single premise: that even where there is a settled account, when the parties are in a fiduciary relationship, they may be vitiated by error, even when unaccompanied by fraud.
9.This principle is uncontroversial. However, MYR’s reliance upon this principle overlooks my findings that there was a binding agreement between Mr New and Mr Furman regarding the process to be followed with respect to the investigation, compromise and adjustment of the financial affairs of the partnership, a process which encompassed the matters raised by MYR in its evidence and submissions at the 31 March hearing. Further, MYR relied upon the evidence of Mr Hockley regarding the Poath Road accounting issue, the Poath Road profit issue, and the Westpac over borrowing issue. Notwithstanding the fact that I have no cause to doubt Mr Hockley’s expertise or integrity, I concluded, consistently with the submissions made on behalf of LHND, that the evidence of Mr Hockley was of limited utility, because of the lack of precision about what documents he was briefed with and/or relied upon. In particular, it was apparent from his evidence that he had not been briefed with documents which in my view would be critical for him to review in order for him to discharge his duty as an expert, in particular the extensive affidavits of Mr Robert Lebovits, the accountant for the partnership.
10.In any event, two of the matters complained of (the Poath Road accounting issue and the Poath Road profit issue) were dealt with during the course of Mr Rathner’s review in 2009 and 2010, and the other matter, the Westpac over borrowing issue, is not something that can be characterised as an error in the accounts. There is no dispute that the actual amount borrowed from Westpac is accurately reflected in the 2009 Accounts as a liability, and that the interest paid on those borrowings is recorded as an expense. Rather, MYR’s complaint, whether justifiable or not, is that LHND borrowed more money than was required to fund the cost of the relevant development, being greater than the sum of the purchase price of the land and the cost of construction and other development costs.
11.It is impossible on the evidence available to me to determine whether MYR’s grievance regarding the Westpac over borrowing issue is legitimate, or whether there were sound commercial reasons for the transaction. For current purposes, assuming that MYR does have a legitimate grievance, then what MYR would have is a claim that LHND, as one partner, had somehow breached its duty towards the other partner, MYR, by entering into an improvident transaction. However, while not wanting to encourage yet another avenue of disputation, it is a claim that cannot be characterised as an error in the accounts as such.
12.Returning to the issues concerning the Poath Road development, MYR’s evidence and submissions in respect of these matters appear to have been advanced without regard to the evidence advanced in the hearing and the findings I made with respect to the agreement between Mr Lebovits and Mr Rathner on behalf of the parties that the amounts calculated by Green & Sternfeld as owing to MYR on account of the Poath Road development were correct. Further, I accepted the evidence of Mr Lebovits that while the Poath Road project was originally accounted for in the books of LHND, in or about August 2009 he made adjustments to the accounts of both LHND and the partnership to record the profits made on the Poath Road project (which by that time was well and truly complete) in the accounts of the partnership.
13.Accordingly, I see no basis to depart from my finding (as set out at paragraph 82 of my reasons), that any anomalies in the treatment of the Poath Road development would not justify the re‑opening of the 2009 Accounts.
MYR relied on the 5 August affidavit and the third Hockley report in support of its application to re‑open the 2009 accounts. The third Hockley report responded to nineteen questions put to Grant Thornton by CKL based upon alleged errors in the 2009 accounts. Mr Cyngler deposed, in summary, as follows:
(a) that between April 2012 and March 2014 MYR has sought discovery of various documents from LHND, but that has been resisted by LHND, as has MYR’s attempts to obtain documents from Westpac by way of subpoena;
(b) he recounted the chronology of certain events during the course of this proceeding, including the late service of the first Hockley report on 17 April 2013, my subsequent refusal of MYR’s application to adjourn the 2013 hearing, the consequent non‑admission of the first Hockley report into evidence at the 2013 hearing, the orders I made on 19 December 2013, and the unsuccessful application by MYR to adjourn the 31 March hearing;
(c) he explained the reasons for making the application to adjourn the 31 March hearing, namely the unavailability of counsel briefed by MYR for the hearing, and the need to brief new counsel for the 31 March hearing, three weeks prior to the hearing date;
(d) he explained that the decision of counsel briefed by MYR for the 31 March hearing not to include ‘errors resulting from profits from Charman Road not used for partnership expenses’, and not to rely upon the second Hockley report dated 17 February 2014 was made, in part owing to lack of time, and in part owing to some difficulties of communication between Mr Furman and MYR’s legal team;
(e) that following the 31 March hearing and upon further analysis of the first and second Hockley reports, further errors in the accounts were identified, and MYR’s lawyers concluded that ‘there was no impediment in including errors resulting from profits from Charman Road not being used against partnership expenses’;
(f) on or about 27 June 2014 MYR’s solicitors commissioned Grant Thornton to produce the third Hockley report, and further documents and instructions were provided to Grant Thornton on 3 July 2014 and 31 July 2014;
(g) the third Hockley report was delivered on 5 August 2014 which ‘highlights that the 2009 financial accounts of the partnership feature significant errors’;
(h) MYR contends that there are a number of potential errors identified in the third Hockley report which cannot be determined without discovery of the relevant bank statements of L & H New (presumably Mr and Mrs New’s personal bank accounts), bank statements for Overleigh Pty Ltd, and supporting documentation in respect of the original deposit paid in respect of the Caulfield property; and
(i) the total cost to MYR of commissioning the three reports from Grant Thornton was $249,381.
Senior counsel for MYR submitted that it ought to be permitted to make an application to re‑open the 2009 accounts on the grounds that the 11 April ruling was interlocutory, not final, and there was no order upon which an appeal could be based.
In my view, that submission was somewhat misconceived, albeit no doubt in part influenced by the erroneous date endorsed on the orders made on 11 April 2014. They were orders made consequent on the 11 April ruling, not on 31 March 2014. I accept that I made no order expressly rejecting MYR’s submissions that I re‑open the 2009 accounts: there was no such application on foot, rather, the 31 March hearing was the last step in a process put in place by my orders of 19 December 2013, which in turn arose out of the 12 December ruling. However, the orders made on 11 April 2014 included the answers I gave to questions (a) to (d), and the answer to question (d) was given having considered the submissions made and the evidence relied upon by MYR during the course of the 31 March hearing, and rejected for the reasons set out in the 11 April ruling, as reproduced in paragraph 38 above.
However, while there were orders made as a consequence of the 11 April ruling, I am prepared to accept, at least for the purposes of entertaining MYR’s application to re‑open the 2009 accounts, that the orders made on that date could be characterised as interlocutory, not final, in nature. On one view, in a proceeding such as this, where I am dealing with a reference from the managing judge to answer preliminary questions prior to the final taking of an account, all orders made by me are interlocutory until the final account has been taken and the proceeding dismissed. Further, given the nature of the reference and the scope of the discretion granted to me to control matters of practice and procedure by reason of the 17 August orders, I would be loath to shut MYR out by reason of an overly technical approach, particularly in circumstances where I have not held the parties to the usual rules governing pleadings.
Accordingly, I will deal with MYR’s application to re‑open the 2009 accounts as seeking to renew an application for interlocutory relief. I consider that the appropriate test to adopt is that propounded by Hargrave J in Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd, being:
…that the correct approach to apply to second or subsequent interlocutory applications is that … the overriding principle governing the approach of the Court should do whatever the interests of justice require in the particular circumstances of the case.[8]
[8][2006] VSC 170 at [46].
Of course, the interests of the parties and the public interest in finality in litigation is a substantial consideration to take into account in determining what the interests of justice require in a particular case, and a significant hurdle for MYR to overcome in renewing its application to re-open the 2009 accounts.
The approach of Hargrave J in Tenth Vandy represents a more liberal approach to subsequent interlocutory applications than that adopted by this Court in the past. Traditionally, the Court would strike out such an application as an abuse of process where the additional evidence sought to be adduced was available to the applicant at the time of the first application, in the absence of any satisfactory evidence as to why the additional evidence had not been put forward. Counsel for MYR submitted, in any event, this was not such a case, because new material had been put forward, and an explanation had been given for why it was not available before 31 March hearing. In circumstances where the third Hockley report has identified substantial errors in the 2009 accounts, it would be unjust to shut MYR out of re‑agitating those issues, and from investigating further potential errors where Mr Hockley has identified that further documentation is required.
As might be expected, LHND vigorously opposed MYR’s application to reopen the 2009 accounts, on the following grounds:
(a) the orders made on 11 April 2014 were final, insofar as they were a final determination of questions (a) to (d);
(b) in any event, regardless of whether these orders could be categorised as ‘interlocutory’ or ‘final’, they were made after a nine day hearing, and after MYR had been provided with an opportunity to file further evidence and made further submissions with respect to the 2009 accounts. The evidence as to why these matters were not before the Court at the 31 March hearing was unsatisfactory. It is in the interests of the parties and in the public interest that there be finality in litigation;
(c) MYR seeks to re‑agitate the issue of how the profits from the 12 Charman Road joint ventures were utilised, which I had already identified in the December ruling as being a matter between the joint venture parties, not the parties to this proceeding. In any event, I had found that all of Furman Construction’s claims in respect of the Charman Road joint ventures had been compromised during the course of the process of investigation and negotiation agreed between the parties and undertaken over the course of 2009 and 2010 (‘Rathner review’). In any event, the allegations made with respect to the Charman Road properties were contained in the second Hockley report, and the evidence of MYR’s solicitor was that counsel briefed by MYR chose not to pursue these matters at the 31 March hearing, and as such, MYR has made an irrevocable election;
(d) any difficulties MYR has had in preparing for the 31 March hearing and beyond are entirely due to problems in their own camp. The first and second Hockley reports were prepared by Grant Thornton without recourse to the numerous and significant documents exhibited to the affidavits sworn by Robert Lebovits, which were not provided to Grant Thornton until on or around 3 July 2014. The issues raised by Mr Cyngler regarding discovery and subpoenas could have been agitated at any time since August 2012, but have never been pressed;
(e) there is very little in the third Hockley report that has not previously been articulated during the course of the dispute between the parties and to the extent that the issues raised are ‘new’, they go to matters of form, rather than substance; and
(f) to the extent that the ‘errors’ relate to allegedly unpaid management fees, these are the subject of the proceeding brought by Furman Constructions against the partnership (‘Furman Constructions proceeding’).
Senior counsel for LHND submitted that the reference by the third Hockley report to needing to reconstruct the partnership accounts on a project by project basis, and the alleged errors in respect of legal expenses for Poath Road are prime examples of MYR relying upon matters of form over substance. Other matters had been the subject of the first and second Hockley reports and had been exhaustively identified and agreed as part of the Rathner review.
I reject MYR’s application to set aside my order of 11 April with respect to question (d), and to re‑open the 2009 accounts. I do so on the following grounds:
(a) first, the explanation as to why the material put before me on the current application was not available to be put forward at the hearing on 31 March 2014 was inadequate, and, to the extent that an explanation was provided, the difficulties experienced by MYR seem to be as a result of resource allocation decisions and forensic decisions made by MYR and its legal representatives rather than unforeseen events or circumstances beyond their control, or any conduct on the part of LHND;
(b) none of the evidence or submissions relied upon by MYR squarely address the findings made in the 12 December ruling that there was a binding agreement between the partners with respect to the validity of the 2009 accounts. No evidence is before me that that agreement is void or voidable on the grounds of fraud, misrepresentation, duress, or unconscionable conduct. I do accept that the Court has a general equitable jurisdiction with respect to the affairs of the partnership, but my finding that there was an agreement between the parties is a significant consideration in determining whether to exercise that jurisdiction; and
(c) further, upon close analysis, the “errors” summarised in paragraph 30 of the 5 August affidavit, which in turn are derived from the third Hockley report, do not justify the exercise of the Court’s equitable jurisdiction to re‑open the accounts. The “errors” include matters which are not errors at all, but potential claims, are matters of form rather than substance, relate to matters which were the subject of review and compromise during the course of the Rathner review, or are of such monetary insignificance that they do not warrant the Court exercising its jurisdiction to re‑open the 2009 accounts.
In the 12 December ruling I made findings that there was an agreement between the parties with respect to the 2009 accounts. Arguably, by reason of the fact there was no actual payment of money by one partner to another, this agreement gave rise to a settled account in equity rather than an account stated at common law. As stated by Sifris J in Jane v Bob Jane Corporation Pty Ltd and anor:[9]
[9]Meagher, Gummow & Lehane Equity: doctrine and Remedies (4th ed) at [25]-[050].
The general rule is that the Court will open the account and not merely surcharge and falsify where:
(a) the account has been shown to be erroneous to a considerable extent, both in amount and in the number of items; or
(b) fiduciary relations exist and a less considerable number of errors are shown; or
(c) fiduciary relations exist and one or more fraudulent omissions or insertions are shown.
Further, his Honour stated:[10]
It has been long established that, if the accounts are treated as settled, then it is incumbent upon the Plaintiff to point out in his pleading some distinct error, and establish that error by proof before liberty is given to surcharge and falsify.
[10][2013] VSC 406, at [123].
Accordingly, in the current proceeding, MYR must go beyond mere assertions of error, and advance cogent evidence to establish the existence, nature, and possible magnitude of errors in the 2009 accounts.
Turning to the alleged errors in paragraphs 30 and 31 of the 5 August affidavit, Mr Cyngler deposed as follows:
30.The current report highlights that the 2009 financial accounts of the partnership features significant errors, and a number of potential errors. The errors in summary are as follows:
(a)Failing to include in the 2009 financial accounts the capital arising from the Charman Road project profits attributed to the Partners, resulting in an understatement of the Defendant’s loan balance of between $32,128 and $129,368 depending on the scenario (see Table 6a, page 4).
(b)The consequential interest impact on the Defendant of the failure to include contribution of capital from the Charman Road project profits in the 2009 financial accounts in an amount of $17,121 to $21,263 (see Table 6b, page 4).
(c)$6,974.51 Interest Expense.
In the current report at Q2 page 10, Darryn Hockley states:
In my opinion based on documents available to me and my analysis at Section 3 it was not necessary for LHND to incur the interest of $6,974.51.
(d)$64,485 Loan in the LHND financial statements as at 30 June 2003.
In the current report at Q3 page 10, Darryn Hockley states:
Based on the timing of the sale of Charman Road developments (and realisation of profits) these profits were available for capital contribution towards the Poath Road purchase at the time the L&H New loans (as recorded in LHND) were deposited into the LHND bank account.
(e)$280,400 Loan from Overleigh.
In the current report at Q4 page 10, Darryn Hockley states:
Based on the timing of the sale of the 121 Charman Road development (and realisation of profits) these profits were available for capital contribution towards the Poath Road development at the time the initial $500 loan and subsequent $280,000 loan (as they are recorded in LHND) were deposited into the LHND bank account.
Based on the 121 Charman Road profits of $233,424 (Green & Sternfeld Calculation) or $273,259 (MYR Calculation) there was insufficient profits from this project to treat the full amount of the above ‘loans’ from Overleigh as capital contributions for the Poath Road development attributed to the profits of the Charman Road developments (specifically 121 Charman Road).
(f)General Expenses Error $12,599.
In the current report at Q6 page 11, Darryn Hockley states:
Based on the instructions and invoices provided the impact on the profits of Poath Road is an increase in profit by $12,599…
(g)Legal Expense Error $45,893.
In the current report at Q7 page 12, Darryn Hockley states:
Based on the instructions and invoices provided the impact on the profit of Poath Road is an increase in profit by $45,893…
(h)Grant Thornton was unable to determine the consequences of the adjusted net funds figure of $499,135, identified in Question 8, without further source documents. See paragraph 95 at page 48 of the current report.
(i)$77,000.00 loan from LHND for Takapuna.
In the current report at Q9 page 13, Darryn Hockley states:
Based on my instructions and analysis, if the Charman Road profits had been received as a capital contribution, the funds from LHND may not have been required under either Charman Road profit scenarios.
(j)$48,043.00 loan from LHND for Hastings.
In the current report at Q10 page 13, Darryn Hockley states:
Based on my instructions and analysis, if the Charman Road profits had been received as a capital contribution, the funds from LHND may not have been required under either Charman Road profit scenarios.
(k)Additional interest expense incurred due to investment in commercial bill investments $18,240.
In the current report at Q12 page 14, Darryn Hockley states:
Based on my instructions and analysis at Section 3, provided in the table below is the net impact on Partnership profits (increase of $18,240) assuming the funds invested in commercial bill investments were instead offset against commercial bill loan facilities.
(l)Error in the amounts recorded as receipted as progress payments by Furman Constructions.
In the current report at Q14 page 15, Darryn Hockley further states:
Based on the above, the difference in the adjusted total cash receipts ($9,810,489) and the total cash payments incurred for construction of Partnership projects (10,984,287) is $1,173,798.
(m)Grant Thornton has advised in response to question 15, enquiring as to whether it was necessary for the partnership to borrow $541,777, that they are unable to answer this question, absent further source documents. This figure appears in the Hastings Project schedule prepared by Green & Sternfeld, see appendix 18 to the current report. However, they were able to conclude at paragraph 158 of the current report, that the Hastings project resulted in an estimated net surplus of $116,284. Darryn Hockley was unable to identify any receipts in relation to the interest expenses from L&H New, as noted on the Hastings schedule, see paragraph 159 d of the current report.
(n)Inclusion of the Furman Constructions GST refund amount.
In the current report at Q16 page 14, Darryn Hockley states:
Based on my analysis, I consider the adjustment of the $687,073 GST refund to be in error.
31.Further, it is the defendant’s contention that there are a number of further potential errors identified in the comments made by Grant Thornton in the current report which they cannot conclusively determine without further discovery. The documents required by Grant Thornton to provide a complete analysis on the errors in the accounts are as follows:
(a)Copy of relevant bank statements for L & H New;
(b)Copy of bank statements for Overleigh Pty Ltd for Bank of Melbourne Cash Management Account #10-9600 between 31 May 2002 and 26 August 2002; and
(c)supporting documentation in respect of the original deposit made to the vendors by L & H New for the Caulfield (Takapuna) project.
As can be seen from the above summary, a number of ‘errors’ are said to arise from the allegation that there was a failure to include in the partnership accounts the capital available from the profits made by the partners from the developments carried out by their related entities in Charman Road as joint venturers, and a failure to employ that capital for purchases of the Poath Road, Caulfield South and Hastings properties. The impact of this alleged failure is that the partnership borrowed more from LHND and Westpac to fund its development activities than it needed to borrow. Further, MYR disputes the amount of the profits made by the partners from the Charman Road developments. The relevant ‘errors’ in this category are referred to in paragraphs 30(a), (b), (c), (d), (e), (i) and (j) of the 5 August affidavit.
The contentions of MYR in relationship to these ‘errors’ ignores my findings in the 12 December ruling that, in relationship to the amount of the profits derived from the Charman Road developments, this dispute was compromised in the course of dealings between the parties prior to Mr Furman’s execution of the 2009 accounts.[11]
[11]see paragraphs [67], [77] and [80] of the 12 December ruling.
As for the question of the deployment of the Charman Road profits, MYR’s position is that there was an agreement between Mr Furman and Mr New, representing the entities that carried out the Charman Road developments (none of which was LHND or MYR), that rather than distributing the Charman Road profits to the joint venture parties in cash, they would use the profits as a capital contribution to the partnership projects. The complaint seems to be that this was not done in a timely fashion (the implication being that these funds were retained by one of Mr New’s entities rather than being immediately made available for funding partnership projects). According to the third Hockley report, those funds were available from 2002, but were not accounted for in the books of the partnership until 2004, and therefore the partnership borrowed more than it needed to, and thus incurred additional interest.
The difficulty with this contention is, if it is correct, it is not an error in the accounts as such, in that it does not reflect any error in the quantum of the loan balances of the partners, but at its highest, might be the subject of a maladministration claim by MYR against LHND, which falls outside the scope of the terms of the 17 August orders. The same observations could be made with respect to the ‘error’ referred to at 30(k), where it is said that the partnership incurred additional interest of $18,240 by investing funds in commercial bill facilities instead of using them to reduce the indebtedness of the partnership to Westpac. Again, this amounts to a criticism of the manner in which Mr New administered the partnership affairs, not an error in the accounts as such.
The error described in paragraph 30(e) of the 5 August affidavit can be disposed of simply: the alleged discrepancy between the management fees payable to Furman Constructions Pty Ltd and the sum actually paid is the subject of a claim by Furman Constructions Pty Ltd and the partnership in a separate proceeding.[12]
[12]S CI 2012 03718.
Two alleged errors, referred to at paragraphs 30(f) and (g) of the 5 August affidavit, concern the Poath Road project. Even if I were to set aside the fact that the accounting for the Poath Road project was reviewed and agreed during the course of the Rathner review, I would not set aside my orders of 11 April 2014 based upon either of these alleged errors. Mr Hockley contends that the profits for Poath Road are understated by $12,599. Even if that is correct, it can hardly be in the interests of justice to re‑open the 2009 accounts on the basis of a potential discrepancy in MYR’s loan balance of $6,300.
In relation to the so-called legal expenses error, it appears that the legal costs incurred by the partnership in respect of other partnership projects (largely conveyancing costs, it appears) have been wrongly attributed to Poath Road alone. In circumstances where I have found that the Poath Road development has been accounted for in the accounts of the partnership,[13] and partnership accounts were prepared on an annual basis, rather than on a project by project basis, the inclusion of legal expenses incurred with respect to other partnership projects makes no difference to the financial position of the partnership or the balances of the partner’s loan accounts. From reviewing the description of the invoices referred to in the third Hockley report,[14] two relate to fees charged with respect to the purchases of partnership properties. The remaining two invoices are described as relating to the matter of ‘L&H New and Layrill Pty Ltd’. The evidence is that LHND only undertook partnership business, but the reference could refer to Mr and Mrs New personally. Subject to confirmation by LHND that these invoices were referable to partnership business activity, I see no basis for this “error” to be a justification for re‑opening the accounts, but rather, could be dealt with by way of a short explanatory affidavit.
[13]see [71], [72] and [76] of the 12 December ruling.
[14]see table 85 at page 45.
In relation to the alleged error identified at paragraph 30(h) of the 5 August affidavit, this relates to ‘the consequences of the adjusted net funds figure of $499,135’. The ‘adjusted net funds figure’ is said to arise in relation to a comparison of the accounting for the Poath Road project in accordance with the ledgers kept by Green & Sternfeld and the land and development costs calculated by Mr Rathner in the course of the Rathner review, adjusted by the revised legal expenses (see paragraph 59 above) and a $12,599 variance in general expenses. In fact, based upon the recalculation of sources and application of the funds for the Poath Road project in table 93 (page 48) of the third Hockley report, Mr Hockley contends that, taking into account management fees owing to Furman Constructions, the profit on the Poath Road project was $428,399.
But how is this an error, or at least an error of such material significance to justify re‑opening the 2009 accounts? From the evidence before me during the hearings concerning questions (a) to (d), the figure calculated by Green & Sternfeld as MYR’s share of profits for the Poath Road project was $203,800 plus GST. An invoice was raised by Furman Constructions for $224,180 in respect of MYR’s profit share, and MYR’s loan account in the books of the partnership was increasing by the same amount. It is unclear whether the calculations in table 93 of the third Hockley report are inclusive or exclusive of GST. On the assumption they are exclusive of GST, MYR would have been entitled to a profit share of $214,200 plus GST from Poath Road, compared with the invoiced sum of $203,800 plus GST. Even assuming that this is correct, a variance of approximately $10,000 hardly justifies the re‑opening of the 2009 accounts and the cost and inconvenience that this would entail. In any event, given that the variance in the profit calculation largely arises out of the reduction in legal expenses allocated to the Poath Road project, it is likely that any correction would simply result in the profit calculations for other partnership projects being reduced, with no net impact upon the financial position of the individual partners.
The final matter raised by the third Hockley report in relation to the Poath Road project concerns the source of funding for the Poath Road project. Mr Hockley states as follows:[15]
According to the annual general ledger and balance sheet of LHND, the funding of the initial shortfall in FY03 was mainly sourced from Overleigh of $280,500 and the News of $64,485. In order to verify if the origin of the funds to fund the shortfall were from Overleigh and the News, I require copies of the relevant bank statements of Overleigh and the News as outlined in Section 3 paragraphs 58i and 63i.
[15]At paragraph 95.
Having regard to the contents of paragraphs 58i and 63i of the third Hockley report and the surrounding paragraphs, there does not appear to be any dispute as to whether the source of these funds was Overleigh Pty Ltd and Mr and Mrs New. Rather, the enquiry seems to be directed at whether these funds were in turn sourced from the profits of the Charman Road projects. I would repeat my earlier observations at paragraphs 54 and 55 above, and add further that if in fact it was the case that the source of funding for the Poath Road project in the 2003 financial year was the profits from Charman Road, then this would completely undermine MYR’s contention that a delay in utilising these profits caused the partnership to undertake excessive borrowings and incur additional interest expense. In any event, a desire to ‘verify’ something does not, in my view, amount to an error.
In paragraph 30(m) of the 5 August affidavit, Mr Cyngler refers to the following question in the letter of instruction from CKL to Grant Thornton:
Please advise as follows:
(a) Whether the $541,777.98 was required to be borrowed from LHND by the partnership for the Hastings project?
(b) If the $541,777.98 was not required to be borrowed from LHND by the partnership for Hastings, might it have been necessary to borrow the $541,777.98 from LHND for any or all of the projects? If you can’t answer this question conclusively, please advise what further information and/or documents you require.
Given that Mr Hockley was instructed with a schedule prepared by Green & Sternfeld with respect to the Hastings project, which refers to that amount being borrowed from LHND, it does not seriously seem to be contended that the partnership accounts are incorrect. Once again, the question seems to be, in an opaque manner, addressed to the question of whether there had been over borrowing from Westpac. As such, I would repeat the observations made in paragraphs 54 and 55 above.
In any event, Mr Hockley does not, in paragraphs 155 to 159 inclusive of the third Hockley report, appear to come to such a conclusion. He states as follows:
155Based on the Hastings Schedule, the amount of $541,777.98 appears to comprise of the interest incurred on the commercial bill facility for the Hastings project.
156I note the Hastings Schedule provided is incomplete, as the calculations which comprise the amount of $541,777.98 are provided for the period from 29 August 2008 to 21 September 2006. Accordingly, the complete schedule with calculations prior to 29 August 2008 has not been provided.
157Based on the Westpac commercial bill facility letters and LHND Bank Account statements, the interest payments are predominantly [sic] funded through the LHND overdraft facility and from drawdowns of commercial bill facilities which are not transferred to the Partnership Bank Account.
158Based on my analysis of the source and application of funds for the Hastings project (refer table 133), the project has estimated net surplus funds of $116,284 (based on the land and development costs as per the Partnership ledgers) during the period FY04 to FY09. The analysis takes into the account an initial loan from LHND of $48,043 in FY04 (refer paragraphs 102 to 109) and total rental income of $367,00.
Conclusion
159I am unable to conclude on whether the amount of $541,777.98 was required to be borrowed from LHND, or alternatively, L&H New by the Partnership due to the following:
aI have not been provided a complete schedule which details the basis for the calculation of the amount of $541,777.98.
bThe amount of $541,777.98 appears to comprise of amounts accumulated over the period of the Hastings project and does not represent a single borrowing at a point in time.
cInterest incurred on the Hastings commercial bill facility is debited against the LHND Bank Account, the same account from which other Partnership projects’ interests were debited and therefore the source of funds for the interest incurred is unable to be determined.
dI have not identified any receipts from L&H New in relation to the interest expense as noted on the Hastings Schedule and I have not been provided bank statements for L&H New as per paragraph 58i.
The gist of the above is that Mr Hockley seems to accept that the loan from LHND reflects the fact that the interest payments from the Westpac bill facility were funded by LHND, but that the schedule provided by Green & Sternfeld does not provide a complete list of the interest payments, and he has not been able to confirm that the total amount is correct. Further, because interest was debited from the LHND account that funded all of the partnership projects, he has not been able to determine that the amount is correct. Further, he estimates there is a surplus of $116,284 on the Hastings project.
However, these statements do not, in my view, express a view that there is an error in the 2009 accounts. He has not undertaken a reconciliation of the interest payments made under the Westpac bill facility to the debits from the LHND accounts, although the table evidencing the reconciliation carried out on the instructions of Mr Rathner is annexed to the third Hockley report. However, as far as I understand, the solicitors for MYR have had access to all of the bank statements of the LHND bank accounts and Westpac bill facilities for a long period of time, which is all that would be required to conduct such a reconciliation. However, that would probably be unnecessary: the evidence in the hearing regarding questions (a) to (d) is that Mr Rathner undertook a comprehensive reconciliation of all of the interest payments made by LHND under the Westpac bill facilities, and was satisfied that the interest payments were properly recorded in the 2009 accounts.[16] There is no evidence that the estimated surplus of $116,284 differs from any calculation put forward by LHND.
[16]See paragraphs 136, 140, 143, 155, 192, 207, 213, 216, 219, 224, 229 and 232 of the 12 December ruling.
The final ‘error’ identified in the 5 August affidavit is referred to at paragraph 30(n) of the 5 August affidavit, and considered at pages 61 and 62 of the third Hockley report. Mr Hockley relies upon the Summary of Construction prepared by Mr Rathner as part of the Rathner review, which shows the sum of $687,073 of GST payments to Furman Constructions as cash received by Furman Constructions in respect of the partnership projects, including Poath Road.
Paragraph 167 of the third Hockley report states as follows:
Based upon my review of the financial statements of the partnership and the Rathner report in my opinion the inclusion of the GST amount as a separate cash receipt of FC is in error and an adjustment of $687,073.30 is required in favour of Furman Constructions.
Even setting aside the fact that Furman Constructions is not a partnership entity or a party to this proceeding, the third Hockley report seems to be saying that Mr Rathner, MYR’s forensic accounting expert, who spent over a year undertaking a detailed review of the construction costs and the partnership accounts, is wrong. Of course, that is a possibility, if only a slim one. However, I simply cannot comprehend, having reviewed the table showing construction costs, management fees, and the ‘GST position’ and the brief commentary in this part of the third Hockley report, how it is said that Mr Rathner was wrong. The statement of opinion is simply not supported by any comprehensible data or analysis, and, taken as a whole, this section of the third Hockley report is close to unintelligible. No attempt was made at the hearing to explain how this alleged ‘error’ arises, and how it is said that a payment made by the Australian Taxation Office to Furman Constructions refunding GST paid by Furman Constructions is not a cash receipt of Furman Constructions.
The final argument advanced in support of MYR’s application to re‑open the 2009 accounts is that there are a number of potential errors identified in the 2009 accounts which require further investigation, being copies of the relevant bank statements for Mr and Mrs New, copies of bank statements for Overleigh Pty Ltd for a three month period in 2002, and supporting documentation in respect of the initial deposit paid by Mr and Mrs New for the purchase of the property at Caulfield South.
The 5 August affidavit exhibited a large bundle of correspondence between the solicitors for the parties regarding discovery. What this correspondence reveals, in summary, is that:
(a) LHND has discovered substantial volumes of documents concerning the financial affairs of the partnership, much of which seems to have found its way into the evidence filed as part of this inquiry; and
(b) LHND has resisted discovery of the personal bank accounts of Mr and Mrs New, and documents concerning the Charman Road joint ventures. Despite ample time and opportunity to make an application for discovery, no such application was ever made.
In any event, the documents sought would not amplify matters to any great extent. The bank statements of Mr and Mrs New between September 2002 and February 2003 are sought in order to verify whether an amount of $64,485 recorded in the accounts of LHND was a loan from Mr and Mrs New to LHND, was sourced from Mr and Mrs New, or whether that was part of the funds realised from the sale of the Charman Road properties. I would repeat my observations regarding the complaints by MYR in respect of the Charman Road properties in relation to the significance of these documents, as well as the bank statements of Overleigh Pty Ltd.
As for the documents sought in relation to the Caulfield South property, the documents sought are apparently to verify the source of the funds to pay the deposit: that is, whether it is LHND or Mr and Mrs New personally. Some comment is made at paragraphs 98 and 99 of the third Hockley report regarding an apparent anomaly in the accounts of LHND and Mr and Mrs New regarding this transaction. I simply fail to see how transactions between LHND and its shareholders are relevant to determining whether there are errors in the 2009 accounts. However, it seems that the enquiry is also directed at determining whether a loan from LHND was necessary to fund the payment of the deposit, if the profits from Charman Road were able to be used to fund the payment of the deposit,. Once again, I would repeat my earlier observations in that regard.
Accordingly, the further discovery sought by MYR is of insufficient significance of itself to justify acceding to MYR’s application to re‑open the 2009 accounts.
In summary, an order to succeed in its application to re‑open the 2009 accounts, MYR would need to satisfy me that:
(a) there was a reasonable explanation for why the additional evidence relied upon by MYR, being the third Hockley report, was not available at the 31 March hearing; and
(b) this additional evidence should satisfy me that there were material errors in the 2009 accounts such that, notwithstanding my findings that there was a binding agreement between the partners which culminated in the signing of the 2009 accounts, I should exercise the equitable jurisdiction of the Court to re‑open the 2009 accounts, and refer the matter to a special referee.
As noted earlier in these reasons, the explanation provided on behalf of MYR was hardly satisfactory, and, in my view, the interests of the parties and the public in finality of litigation is a significant consideration. However, the primary reason for refusing the application is that, despite its best endeavours, MYR has not been able to advance evidence which would persuade me that there may be errors in the 2009 accounts which warrant their re‑opening.
I will hear further from counsel on the appropriate form of order and the question of costs.
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