M & S Kelly Investments Pty Ltd v Costin

[2001] QSC 489

THE SUPREME COURT

[2001] QSC 489

OF QUEENSLAND

BRISBANE  No S 10080 of 2001

BETWEEN:               

M AND S KELLY INVESTMENTS PTY LTD
  A C N:  065 197 257  

Applicant

AND:

ANTHONY GLEN COSTIN

JOANNE ELIZABETH COSTIN

JOHN EARNEST EDMOND PERHAM

PATRICIA PERHAM

Respondents

REASONS FOR JUDGMENT

B.W. Ambrose J.

Delivered the 30th day of November 2001

CATCHWORDS:                PARTNERSHIP – RECEIVERS AND MANAGERS   – application for appointment of receiver of partnership – where partnership dissolved – where conflict between former partners over outstanding debts and assets – whether independent receiver should be appointed

Counsel:   M Jarrett for the applicant
  A Heyworth-Smith for respondents

Solicitors:  Courtice Neilsen solicitors for applicant
  Georgeson & Company solicitors for respondents

Hearing Date:  16/11/2001

[1]      The applicant (“Kelly”) is a former partner in a signwriting business trading under the name of “Fender Signs”.

[2]      The first and second respondents (“Costin”) and the third and fourth respondents (“Perham”) were at material times members with Kelly of that partnership.

[3]      The partnership arrangement was a little unusual.   Initially Fender Signs was the business name under which Costin conducted a signwriting business.

[4]      In 1996 that business had financial problems.  Kelly was a trade competitor of Fender Signs.  Mr Perham was a retired businessman.

[5]      Apparently it was determined that Kelly and Perham would each purchase a 1/3 share in the Fender Sign business for the sum of $35,000 per 1/3 share.  It was agreed that Costin, Perham and Kelly would then conduct that business as partners, each having a 1/3 interest in the capital of the partnership and share net profit and losses in that proportion.  It was determined that each would also contribute $10,000 towards the initial running expenses of the partnership.  Although it is not entirely clear on the affidavit material filed in this matter, which is very lengthy and somewhat confusing in some respects, I infer that each of the partners under the Deed of Partnership executed on 9 September 1996 advanced $10,000 which was recorded in a loan account.  It is said that Kelly at least has been repaid that sum out of partnership profits.  Whether Costin and Perham were also repaid that sum does not emerge.  It is unnecessary for me to make any determination on that matter on the issues upon this application. 

[6]      It was agreed that the partnership commenced on 1 September 1996 and would be for a term of “not less than 5 years from that date”.

[7]      Towards the end of that 5 year period disputes arose between Kelly, Costin and Perham concerning a variety of matters which it is unnecessary to analyse.  Prior to 1 September 1996 Costin and Perham intimated that they proposed not to extend the term of the partnership beyond 1 September 2001.  Although as I have indicated the material is a little confusing, it seems that in fact the partnership did continue on after this date until a formal notice of dissolution was given by Costin and Perham to Kelly in October 2001.

[8]      Whatever may have been the date of dissolution of the partnership, it is common ground between Kelly, Costin and Perham that it had been dissolved prior to Kelly making this originating application on 12 November 2001.  The application supported (and opposed) by a great deal of affidavit material was heard on 16 November 2001.

[9]      Upon the application reference was made to a great deal of acerbic assertive and recriminatory material passing between the two firms of solicitors that have acted for Perham and Costin and the firm of solicitors that has acted for Kelly since matters in disputes came to a head in about August 2001.

[10]      Having regard to the relief sought upon this application it is unnecessary for me to analyse or consider in detail the various assertions contained in that correspondence.  It is sufficient to observe that it is asserted by Kelly that each of Costin and Perham has been guilty of grave breaches of the fiduciary duty owed to Kelly as a member of the partnership.  It is Kelly’s case that they have set out deliberately to exclude it from its entitlement as partner in the business Fender Signs which has really been taken over by them and carried on under the business name All State Signs in a building close to that in which the business of Fender Signs was conducted prior to its dissolution in September/October 2001.

[11]      It is the case for Kelly that long before the termination or purported dissolution of the Fender Signs partnership, Costin and Perham set about to acquire the goodwill of that business by channelling existing customers to a business that they set up between them called All State Signs. Some of the material indicates that, indeed, All State Signs is a business owned by Costin in which Mr Perham is only an employee.  Again I find the material insufficient to determine whether at law Costin and Perham are conducting the business All State Signs as partners.  It is unnecessary for me to determine this question in any event upon this application.

[12]      Upon the evidence it seems that initially all partners of Fender Signs had agreed that the partnership business should be sold and the net proceeds of sale distributed equally between them.

[13]      It emerged, however, that it was decided then by Costin and Perham that a valuation of the business ought be obtained to be used in negotiations between them and Kelly for their acquisition of its share of the partnership business. 

[14]      Some of the material suggests that legal advice was then obtained by Costin and Perham which persuaded Costin that in any business which he and Perham conducted upon the dissolution of the partnership they could make use of partnership property and most importantly of the goodwill of that partnership measured by its client base and the reputation it had acquired over its five year period of operation (including of course any client base and reputation which Mr Costin’s business had before he sold 2/3 of it to Kelly and Perham.  Mr Costin then took the view to which he seems to still adhere that the goodwill of Fender Signs may be exploited by the new business All State Signs without hindrance from Kelly and without obligation to account to Kelly (except perhaps with respect to certain of the assets held by the partnership at date of dissolution).

[15]      In the course of preparing for the acquisition of Kelly’s share in the partnership in September/October 2001 Costin and Perham retained a valuer to ascertain the value of the partnership business if sold as a going concern.  However, Kelly was unprepared to accept this valuation and it seems equally clear from offers made by his other partners for his share that they were unwilling to rely upon it in negotiations.

[16]      It seems that it was at about this time that Costin and Perham received legal advice which they, or at least Costin, understood to indicate that “the goodwill of the partnership in terms of its customer base was almost entirely personal to myself” and that “there is no business to be sold as a going concern” and “the partnership business has not traded since 30 September 2001.”  Costin advanced those contentions upon this application.

[17]      In my view, such an analysis of the ownership of the goodwill of the partnership Fender Signs is quite insupportable.  It is however, consistent with assertions made by Kelly that when the partnership finally ceased to operate, whether on 30 September 2001 or at a subsequent time upon notice of dissolution being given, it was discovered that there was at that time no, or if any, very little pending work or orders for future work of the sort that is recorded in the partnership business records prior to the time when partnership disputes seem to have arisen – within a few months of its termination.

[18]      As a consequence of the attitude of one or more of Kelly, Costin and Perham, cheques forwarded to the former partnership have not been banked and trade creditors of the former partnership have not been paid.

[19]      There is sufficient money in a bank account held in the partnership name to meet all trade creditors even without depositing cheques already paid by trade debtors.

[20]      Apparently for reasons which remain unexplained, cheques drawn on the partnership account must be signed by Kelly, Costin and Perham.  Presumably, this was the arrangement made with the partnership bank.  If that is the explanation perhaps it reflects the lack of confidence of each partner in one or more of the other partners.  I say this because under Clause 9 of the Deed of Partnership it is agreed that the partnership bank is to be the ANZ Bank at Carina and that all cheques drawn on the partnership account “in the ordinary and regular course of the business activities shall be signed … by any two of – Costin, Perham and Kelly”.

[21]      Perhaps it was the lack of confidence in the reliability/integrity of any two of the three partners to draw on the partnership account which lead to a situation where any cheque drawn on that account needs the signature of all three partners.

[22]      One of the problems in the payment of partnership debts after the termination of the partnership has been the refusal by Kelly to sign cheques drawn in favour of trade creditors which have been signed only by Costin and Perham in the absence of an adequate inspection of company records to satisfy it that the money for which the cheques are drawn properly reflects the partnership indebtedness to the payee creditors.

[23]      Another problem which has arisen was the refusal of Costin and Perham to append their signatures to a cheque drawn on the partnership account for payment of rent in respect of the partnership premises which were closed down essentially by Costin and Perham in September/October 2001.  Understandably, Kelly took the view that if the partnership business was to be sold as a going concern, it would be of assistance if it could be sold with a lease (the duration of which could be extended by exercise of options) as part of the business.  It is asserted in the material that in fact Costin and Perham prior to the expiration of the lease and indeed prior to the partnership ceasing to pay rent under it, attempted to negotiate with the landlord for the granting of a new lease to All State Signs (presumably upon determination of the existing lease to Fender Sign.  Whether or not evidence will establish this should the dispute be taken to court, it emerges that Kelly in fact has paid the rent out of its own funds in the hope presumably, that in some fashion it might be treated as part of the partnership assets should it be possible to sell the partnership business.  One might suspect that had the business been put up for sale when the partnership was terminated in September/October 2001 with its customer base / clientele and reputation which existed in mid 2001 it would have added value to that business if a purchaser would have the right to extend the lease of the business premises used for the previous five years by the partnership and for long before that by Mr Costin when he conducted his own business under the partnership name. 

[24]      In his affidavit Mr Costin at para 36 and 37 observes, that at date  of the application for appointment of the receiver “there is no business to be sold as a going concern” and that “the partnership business has not traded since 30 September 2001”.

[25]      It is unhelpful and unnecessary upon determination of this application to consider what relief there may be available to Kelly and/or Costin and Perham under the law relating to breach of fiduciary duty by a member or members of a partnership.

[26]      The only question to be determined is whether upon Kelly’s application, a receiver

of partnership assets ought be appointed with the usual powers and obligations.

[27]      All parties agree that it would be desirable if some person was empowered forthwith to bank partnership monies received and receivable by the partnership in respect of work performed prior to its termination.  Similarly it would desirable if that person could pay the just and properly incurred trade debts of the partnership upon an objective analysis of company records and if necessary an investigation of the basis alleged, if any, of partnership indebtedness.

[28]      All parties agree that this course should be adopted forthwith – whatever the outcome of any litigation that may arise between the former partners.

[29]      Kelly seeks the appointment as receiver of Bradley Vincent Hellen, a chartered accountant, and official liquidator.  He is a member of the firm of Calabro Partners and has had more then 16 years experience in a wide variety of commercial enterprises.

[30]      Costin and Perham oppose the appointment of Mr Hellen on the ground of the likely costs involved.  The costs indicated to obtain Mr Hellen’s services are less than the rates recommended by the Insolvency Practitioners Association of Australia.  The charge out rate for Mr Hellen, I assume, to be $285.00 per hour, but his senior assistants, who I assume, would spend most of the time involved in paying out trade creditors and depositing cheques received from trade debtors would seem to be from about a third to half of that rate.

[31]      For Costin and Perham it is contended that having regard to the simplicity of the winding up of this particular partnership, it would be appropriate for Mr Perham to be appointed as receiver.  He would perform the necessary duties at no charge.  Counsel for Costin and Perham indicated that they would have no objection indeed, if Mr Kelly was appointed to do the sorts of things that were urgently required - to receive monies from trade debtors and to pay out trade creditors. If it be determined appropriate not to have Mr Hellen appointed because of the costs involved and not to have Mr Perham appointed because Kelly opposes such an appointment, which is unsurprising having regard to the serious breaches of fiduciary duty alleged against both Costin and Perham with a likelihood of litigation ensuing, Mr Kelly will consent to be appointed receiver. 

[32]      This application for the appointment of a receiver has really been made by Kelly after months of acerbic recrimination passing between the solicitors for all parties involved.  Having read through that correspondence, I think it more than likely that if either Mr Kelly or Mr Perham were appointed to perform functions more usually performed in such situations by person completely independent of them, it is likely that there would be further complaint by one or more of the former partners of perceived impropriety based on conflict of interest.

[33]      A receiver appointed upon this application will be an officer of the court and in my view it would be quite undesirable for practical purposes to appoint any one of the waring former partners to receive the assets and discharge the liabilities of the former partnership and to make an independent report concerning the assets and liabilities of the partnership.

[34]      It will not be the function of the receiver to make any determination of matters relating to any breach of fiduciary duty on the part of any partner to the others.  It will be relevant however, for the receiver to obtain and/or prepare a valuation of the capital assets of the partnership at the date of termination which Costin asserts to be 30 September 2001.  Should it emerge upon a proper inquiry and investigation of records of partnership meetings or otherwise from studying the business records of the partnership that termination occurred at some other time then obviously the capital value of the assets and liability of the partnership and the value of many items of property would be determined at that time.  On the other hand, it will be a matter for the receiver and manager to determine having regard to recorded business cash flow and clientele as at 30 June 2001, or perhaps even earlier whether the information available at that time may not be more reliable than information available as at date of actual termination, having regard to the contentions of Kelly that Costin and Perham over the last few months of the operation of the partnership set about to appropriate for the benefit of the business now conducted under the style All States Signs the clientele of Fender Signs as well as other commercial benefits enjoyed by that partnership.

[35]      I therefore make an order appointing Bradley Vincent Hellen receiver and manager in terms of the draft order which is exhibit 2.  However, I make that order subject to amending paragraph 8 to include after (a) the following –

“(aa)The value of the partnership assets as at 30 June 2001 or as at such earlier time as examination of the business records of the partnership demonstrates the annual net partnership income from normal business operations conducted in accordance with the requirements of the deed of partnership.”