Milevski v Paltos

[2022] NSWSC 261

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Milevski v Paltos [2022] NSWSC 261

Hearing dates:

1, 2, 3, 4, 10 February 2022

Date of orders:

14 March 2022

Decision date:

14 March 2022

Jurisdiction:

Equity

Before:

Parker J

Decision:

See [221]-[228]

Catchwords:

PARTNERSHIP – partnership accounts – value of partnership assets – goodwill – family law practice – assets taken over by one former partner – files with future fee-earning potential – “established workforce” – practice manual with precedents – whether amounting to transfer of goodwill of partnership practice – basis and method of valuation – “fair value” – partners’ obligations on dissolution – Partnership Act 1892, ss 38 and 39

EQUITY – accounts and receivers – dissolution of partnership – unpaid liabilities exceed realised assets – form of account – application to have former partners pay monies to put receivers in funds to discharge partnership liabilities – former partners’ responsibility for receivers’ fees

Legislation Cited:

Legal Profession Uniform Law (NSW), Part 6.4

Partnership Act 1892 (NSW), ss 6, 38, 39

Cases Cited:

Alcock v Robb (1978) 2 BPR 9625

Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158

Boghani v Nathoo [2011] 2 All ER (Comm) 743

Chan v Zachariah (1984) 154 CLR 178

Chia v Ireland [2000] SASC 047

Colin D Young Pty Ltd v Commercial and General Acceptance Ltd (Supreme Court of New South Wales – Court of Appeal, Hope JA, Hutley JA and Glass JA, 24 September 1982)

Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605

Eastlake v Eastlake [2015] NSWSC 1772

Friend v Brooker (2009) 239 CLR 129

Geraghty v Minter (1979) 142 CLR 177

Old v Hodgkinson; Old v McInnes [2008] NSWSC 697

Old v McInnes and Hodgkinson [2011] NSWCA 410

Page v McKensey (Supreme Court of New South Wales, Windeyer J, 17 December 1993)

Page v McKensey [1995] NSWCA 351

Syers v Syers (1876) 1 App Cas 174

Trego v Hunt [1896] AC 7

Walker v Martin (Supreme Court of South Australia – Full Court, King CJ, Millhouse J and Olsson J, 23 December 1993)

Texts Cited:

Banks, R I, Lindley & Banks on Partnership (12th ed, 2017, Thomson Reuters)

Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, LexisNexis Butterworths, 2014)

Category:

Principal judgment

Parties:

Main proceedings
Peter Milevski (Plaintiff)
Dennis Paltos (Defendant)

Motion filed 9 August 2019 (as amended 1 February 2022)
John Maxwell Morgan and Geoffrey Robert Davis (Applicants)
Peter Milevski (First Respondent)
Dennis Paltos (Second Respondent)

Representation:

Counsel:
Main proceedings
CD Wood SC (Plaintiff)
E Holmes (Defendant)

Motion filed 9 August 2019 (as amended 1 February 2022)
J Shepard (Applicants)
CD Wood SC (First Respondent)
E Holmes (Second Respondent)

Solicitors:
Main proceedings
Harris Freidman (Plaintiff)
Polczynski Robinson (Defendant)

Motion filed 9 August 2019 (as amended 1 February 2022)
Harpur Phillips (Applicants)
Harris Freidman (First Respondent)
Polczynski Robinson (Second Respondent)

File Number(s):

2016/118930

Publication restriction:

Nil

Judgment

1. This judgment arises out of the dissolution of a partnership. The liabilities of the partnership exceed its assets. The judgment concerns the state of the partnership accounts as between the former partners, and the receivers who were appointed to wind the partnership up.

2. The partners were Dennis Paltos, the defendant, and Peco (also known as Peter) Milevski, the plaintiff. Both of them were (and are) solicitors. They formed the partnership in 2010 and at the time of dissolution were practising under the name “Paltos Milevski Family Lawyers”. As its name suggests, the firm specialised in family law. Mr Paltos owned a seventy per cent share of it and Mr Milevski thirty per cent.

3. The dissolution of the partnership was triggered by two strokes which Mr Paltos suffered in late 2015. As a result of the strokes, Mr Paltos was unable, for the time being, to contribute to the running of the practice. It also emerged that he was significantly indebted to the partnership as a result of excess drawings on the partnership account. There were negotiations between the partners about one buying out the other but these came to nothing.

4. The partnership was dissolved by order of the Court in these proceedings in April 2016, on Mr Milevski’s application. The Court appointed John Maxwell Morgan and Geoffrey Robert Davis as receivers and managers of the partnership business. Mr Morgan and Mr Davis are accountants with BCR Advisory. I refer to them as the “Receivers”.

Issues for determination

5. The April 2016 orders made by the Court included (order 7):

7.   An order that the Partnership business and assets including the goodwill thereof be realised by the receivers and managers and that either party be at liberty to purchase from the receivers and managers any Partnership asset.

6. At the time of the Receivers’ appointment, Mr Milevski had set up his own firm, Milevski Family Lawyers Pty Limited (“MFL”), so as to practise on his own account. Mr Paltos had also signalled his intention of conducting his own family law practice when he had recovered from his strokes.

7. The Receivers did not attempt to sell the partnership practice as a going concern. Instead, they made informal arrangements with Mr Milevski and Mr Paltos which resulted in them (separately) taking over most of the assets used in the practice and the liabilities associated with those assets.

8. As part of the arrangements made by the Receivers with Mr Milevski, nearly all the active files of the partnership practice were handed over to MFL. MFL also took over the employment of most of the practice’s staff. The practice telephone number and website were diverted to MFL.

9. The Receivers retained the benefit of fees billed to clients of the partnership practice prior to the dissolution, but unpaid. All work in progress current up to the date of dissolution was also billed. Mr Milevski’s solicitors proposed a formal agreement covering the transfer of the files but it was never signed. Nevertheless, MFL collected (where possible) the fees due to the partnership up to dissolution, and accounted for those fees to the Receivers.

10. The funds collected by the Receivers have covered some of the costs of the administration. But substantial undischarged partnership liabilities remain. The most significant of these is the partners’ liability to Westpac Banking Corporation.

11. As at the date of dissolution, the partnership had a business loan of $300,000 from Westpac together with an overdraft facility with a limit of $180,000. According to Mr Milevski (and there now appears to be no dispute about this) $215,000 of the money borrowed had been applied for Mr Paltos’ private benefit. It had been agreed between the parties that, as between them, Mr Paltos would bear sole responsibility for repayment of those monies.

12. In December 2016 Mr Milevski paid $92,000 to Westpac. According to Mr Milevski, this discharged his share of the liability (30% of the debt above $215,000). But no payment appears to have been made by Mr Paltos.

13. In July 2017 Westpac brought debt recovery proceedings in the District Court against Mr Paltos and Mr Milevski. The amount claimed was about $460,000. A month later, Mr Milevski brought separate proceedings against Mr Paltos in this Court (matter 2017/246841, to which I will refer as the “2017 proceedings”) seeking indemnity.

14. For his part, Mr Paltos complained about the handover to Mr Milevski, effectively for nothing, of (as he described it) the “entire assets, undertaking and goodwill” of the partnership practice. He alleged that the intangible value of what was handed over was very substantial, so substantial indeed that his 70% share of it exceeded the liability to Westpac. He therefore owed Mr Milevski nothing.

15. In September 2017 a cross-action was filed for Mr Paltos against Mr Milevski in the 2017 proceedings. The Receivers were also named as cross-defendants. The cross-claim sought orders that would result in Mr Milevski accounting to the partnership for the intangible value of the assets transferred to MFL, and the Westpac debt then being paid out of the augmented partnership funds.

16. In his initial statement of claim in the cross-action, Mr Paltos did not make any claims against the Receivers. All he sought was an order that Mr Milevski pay their fees. But in February 2018 an application was made by way of notice of motion to amend Mr Paltos’ statement of claim to allege breach of fiduciary duty on the part of the Receivers in handing over assets to MFL without requiring proper payment for their value in return.

17. The merits of Mr Paltos’ complaint against the Receivers have not been determined. In fact the amendment motion has not been dealt with. In June 2018 the motion came before Lindsay J. His Honour noted that Mr Paltos proposed to make an application in these proceedings to have the Receivers removed from office, and stayed the amendment motion until the determination of that application. A removal application was filed but was then effectively discontinued (dismissed without prejudice) in August 2018. Since then, the 2017 proceedings have been treated as having been stayed until the present proceedings are determined.

18. Mr Paltos’ complaint has also held up the payment of remuneration to the Receivers. His position was that the Receivers had failed to undertake their task properly, and their fees should be disallowed, in whole or part, as a result. The Receivers had drawn about $40,000 in fees from the funds they had realised in the administration. The final withdrawal was made in February 2018. Since then, no further withdrawals have taken place.

19. In August 2019, a notice of motion was filed on the Receivers’ behalf in these proceedings seeking to have the Court fix the quantum of their remuneration and make directions as to payment. This was opposed by Mr Paltos. The notice of motion was amended over time as more work was done, but remained undetermined.

20. The April 2016 orders made by the Court in these proceedings had, in the usual way, contemplated the taking of partnership accounts. Orders 9 and 10 were:

9.   An order that upon the sale of the business assets of the Partnership and after the discharge of the debts of the Partnership (or so much of them as can be discharged from the assets of the Partnership), the proceedings be referred to a Judge of the Equity Division of the Supreme Court for the taking of accounts of the Partnership to determine the net profit or loss of the Partnership and inquiry into the amount, if any, payable on the taking of accounts.

10.   An order that the proceedings be reserved for further consideration and, after the determination by the Judge of the account, the parties cause the matter to be re-listed for orders as to the distribution of profits and losses and interest on any amount payable.

21. Apparently, no formal order was made referring the proceedings for the taking of accounts as contemplated by order 9. But the parties and the Court have in effect proceeded as if such an order had been made. In August 2018, directions were made fixing a timetable.

22. The process was delayed by a number of factors, including the supervening illness and subsequent death of an expert who had been briefed for one of the parties. Then the proceedings were effectively put on hold to allow Mr Paltos to pursue his professional negligence claim against the solicitors who acted for him prior to the dissolution (I refer to this claim in more detail later in the judgment). That claim was not finally resolved until last year.

23. While all of this was taking place, Westpac proceeded to obtain judgment in its debt recovery proceedings against Mr Paltos and Mr Milevski. But the bank has not so far taken any enforcement action under the judgment.

24. The proceedings were fixed for hearing in February this year with the intention that the partnership accounts would be completed and the partners’ liabilities determined inter se. The Receivers’ remuneration motion was to be determined at the same time.

25. The hearing does not cover the 2017 proceedings. Counsel for Mr Milevski accepted, however, that for practical purposes the relief claimed by him in those proceedings would be subsumed within the relief sought in the present proceedings. Mr Paltos’ cross-claim remains effectively stayed.

26. The stalemate over the quantum of the Receivers’ remuneration was broken at the hearing. Mr Paltos withdrew his objection to the quantum of the Receivers’ fees being approved by the Court (and paid, to the extent there are funds available). The Receivers agreed, however, that this will not prevent Mr Paltos, if so minded, from pursuing his application to amend his cross-claim in the 2017 proceedings so as to claim compensation against the Receivers. On 2 February I made orders approving the remuneration sought by the Receivers and noting this agreement.

27. During the hearing I allowed the parties several adjournments to try to reach agreement on as many of the accounting issues as possible. It remains necessary to determine the dispute as to the intangible value (if any) of the practice assets transferred to MFL. But all other issues about the value of assets taken over by the parties, and the quantum of the partnership liabilities discharged by them, have been resolved. There is also now no dispute about the state of the partners’ capital accounts as at the date of dissolution. The parties have also agreed on the current quantum of the unsatisfied partnership liabilities, and the partners’ responsibility inter se for those liabilities.

28. In the course of the hearing, I expressed concern about the delay in discharging the partnership’s liabilities to external creditors (including, for this purpose, the Receivers’ fees). I indicated that I would consider an application by the Receivers for orders requiring the partners to contribute the funds necessary to meet those liabilities, so that the Receivers could discharge them now.

29. The Receivers amended their notice of motion to seek such orders. In the end, for reasons which will emerge, they did not seek any payment from Mr Paltos. They confined their application to an order that Mr Milevski pay $89,000 to be used to satisfy fees and some of the unpaid creditors (excluding Westpac and other major creditors). I heard the evidence and submissions on this application, and decided to deliver my judgment on it at the same time as I deliver judgment on the accounting issues arising in the principal proceedings.

30. What this means is that my judgment must proceed on the basis that at most only some minor partnership creditors will be paid out by the Receivers. The liabilities to the remaining creditors will only be satisfied if one or other of the partners agrees to pay, or is compelled to do so. Even if that happens the ultimate quantum cannot be known at present. Furthermore, there will be some further work for the Receivers to complete their administration, and the ultimate quantum of their fees is therefore also unknown. Also, the Receivers have not formally accounted for the monies they have dealt with in the administration so far, and it is always possible that this process could result in claims against them to refund monies they have paid out.

31. Until all of these matters have been dealt with, the final figure owing between the partners inter se cannot be determined. The other question for me in this judgment is what orders I can, or should, make in the meantime to reflect the agreement the parties have reached on the liabilities as they currently stand.

Summary and analysis of evidence

Witnesses

32. Affidavits made in 2016 by Mr Milevski were read, which described the operation of the partnership and events leading up to its dissolution. In the end, Mr Milevski was not required for cross-examination and an affidavit from Mr Paltos which had been served in response was not read. Nor was there any cross-examination on the affidavits of Mr Davis and Mr Morgan about their work on quantifying the partnership liabilities. Thus, there are no conflicts of evidence between lay witnesses which need to be resolved.

33. On the valuation issue, Mr Paltos relied on expert evidence from Ms Rebecca Conoulty, who is an experienced forensic accountant. For Mr Milevski, Mr Paul Russell, another experienced accountant, was qualified as an expert. Mr Russell responded to Ms Conoulty’s report and she replied. In the usual way, there was an expert conclave with a joint report, following which Ms Conoulty and Mr Russell gave evidence concurrently.

34. Counsel for Mr Milevski challenged the validity of Ms Conoulty’s conclusions and indeed the admissibility of her opinions. In the end I have been able to resolve the points raised about the experts’ opinions without making any analysis of their respective qualifications, or the impressions they made in giving evidence.

Formation, operation and dissolution of partnership

35. Mr Paltos was the senior partner in the partnership practice. He had been practising since 1979 and had started his own firm in 2000. He had employed Mr Milevski as a law clerk, and then from October 2003 as an employed solicitor. At the time the partnership was formed, the practice was named “Paltos & Co, Solicitors”.

36. The parties signed three documents when entering into the partnership. Each was dated 29 June 2010. The documents were:

1. Heads of Agreement;

2. Deed of Agreement of Partnership Terms; and

3. Put & Call Option Agreement.

37. The most important, and elaborate, of these agreements was the Put & Call Option Agreement. It provided for the sale by Mr Paltos to Mr Milevski of a thirty per cent interest in the practice of Paltos & Co. The purchase was to take place in three tranches, each of ten per cent, on 1 July 2010, 2011 and 2012. The total consideration was $232,000.

38. The Put & Call Option Agreement also provided, on the death or total and permanent disablement (“TPD”) of one of the partners, for the purchase of that partner’s interest by the other partner. This was achieved by conferring on the affected partner (or his legal personal representative in the event of his death) a put option, and conferring on the other partner a call option. TPD was defined as a partner’s inability to undertake his usual working activities, due to illness or injury, for a consecutive period of six months.

39. Upon either option being exercised, the affected partner’s interest was to be sold at “market price”. This was calculated as a weighted average figure for one year’s earnings of the practice, multiplied by 3.4. The weighting was fifty per cent of the practice’s net income in the financial year preceding the exercise of the option; thirty per cent of the net income in the financial year before that; and twenty per cent of the net income in the financial year before that.

40. The arrangements for the initial purchase of the thirty per cent interest by Mr Milevski in substance reflected provisions in the Heads of Agreement which it is unnecessary to set out. The Heads of Agreement also contained a provision stating that Mr Milevski would be entitled to a “notional salary” of $150,000 and thirty per cent drawings on the net income of the practice. Mr Paltos was to be entitled to a “notional salary” of $215,000 plus seventy per cent drawings on the partnership profits. The Deed of Agreement of Partnership Terms contained some simple provisions for the management of the partnership which are not relevant for the purposes of this judgment.

41. The partnership presumably began trading on 1 July 2010. In January 2011 it adopted a new name, “Paltos Briggs Family Lawyers”. The name “Paltos Milevski Family Lawyers” was adopted in 2014.

42. The partnership practice had several employed solicitors. For management purposes, files were allocated to one or other of the partners for supervision purposes. The file was, it seems, usually allocated to the partner responsible for bringing the matter to the firm.

37. The partnership proved profitable. Income and expenditure figures for the financial years ending 30 June 2012 to 30 June 2015 are in evidence. They show gross revenue ranging between $2.04 million and $2.23 million and net profit ranging between $785,000 and $1,014,000.

38. Mr Paltos suffered his strokes on 23 December 2015. As a result, he was hospitalised. Although able to communicate, he ceased to attend the practice and was unable to undertake legal work. Mr Milevski took over the supervision of his files.

39. According to Mr Milevski, in January 2016 he discovered, in Mr Paltos’ absence, that Mr Paltos had made substantial unauthorised withdrawals of partnership funds for his own purposes. These amounts had been debited to Mr Paltos’ capital account with the partnership, so that rather than being in credit, as Mr Milevski’s account was, Mr Paltos actually owed money back to the partnership. Mr Milevski confronted him about this and asked him where the money had gone. Mr Paltos said that he had gambled it away. This evidence was not contested.

40. Mr Paltos apparently foreshadowed making some sort of proposal to Mr Milevski about the future of the practice. After chasing Mr Paltos up unsuccessfully, Mr Milevski retained his current firm of solicitors, Harris Freidman, to act on his behalf.

41. On 22 February, Mr Jonathon Harris of Harris Freidman wrote to Mr Paltos. By this time Mr Paltos had delivered his proposal (which does not appear to be in evidence) but it was unacceptable. Mr Harris stated that there were “very serious issues to be addressed and resolved if the partnership [was] to continue”. These included Mr Paltos’ indebtedness to the practice and Mr Paltos’ management of the practice, both in the past and for the future. Mr Harris stated that these issues would not be resolved by correspondence or telephone discussions. He proposed a mediation.

42. Following receipt of this letter, Mr Paltos retained his own firm of solicitors, Bartier Perry (“BP”). No mediation took place, but some without-prejudice correspondence was exchanged between the solicitors and there was a without-prejudice meeting between the parties on 11 April. No agreement was reached.

43. On 18 April, these proceedings were commenced by Mr Milevski, seeking dissolution of the partnership. At about this time BP ceased to act for Mr Paltos. Urgent hearings took place on 18 April, and on the following Monday, 21 April, before Sackar J. On 21 April his Honour made the orders to which I have referred, dissolving the partnership and appointing the Receivers.

44. At the time the orders were made, Mr Milevski had already incorporated MFL, and he told the Receivers he intended to continue to practise. He established (or had already established) an office in Castlereagh Street, not far from the partnership practice’s Pitt Street office (see below). It seems that Mr Paltos was also foreshadowing that he would be establishing and carrying on his own practice in the future.

45. The Receivers were conscious that, as non-lawyers, they were not able to operate the practice themselves. As at the date of their appointment, the practice had eight employed staff. On the afternoon of 21 April, the Receivers terminated the employment of all of the practice’s employees, except for one staff member who was kept on temporarily to pack up. The employees who were terminated were immediately employed by Mr Milevski through MFL, with MFL taking on responsibility for their leave entitlements.

46. Over the following few days, the Receivers rapidly came to the conclusion that they needed to transfer the current matters to Mr Milevski for him to look after those matters (if the clients were content with that). The transfer was put into effect over the next few days.

47. According to Mr Davis, he discussed the transfer with Mr Paltos on 28 April, after having been unable to make contact with him earlier. Mr Paltos was unhappy about Mr Milevski getting the files, but he was obviously not in a position to manage them himself at that stage, and there was no suggestion of the practice continuing to operate.

48. It is unnecessary for the purposes of this judgment to go into the merits of the Receivers’ decision. Nor is it necessary to go further into the details of the Receivers’ dealings with Mr Milevski and Mr Paltos, other than to record that the question of payment for the transfer to MFL of the files and other potentially fee-earning assets of the practice was not the subject of any agreement, at the time or later.

49. Before its dissolution, the partnership practice operated from office premises in Pitt Street, in the Central Business District of Sydney. The premises were owned by corporate entities associated with Mr Paltos and the arrangements for occupation were informal. Following dissolution, Mr Paltos’ companies resumed occupation of the premises by arrangement with the Receivers. The office equipment leases were taken over by Mr Milevski (through MFL) and Mr Paltos.

50. At the time of the dissolution, there were 149 open files. Of these, 145 were transferred to MFL. The other four went to Mr Paltos, apparently because the clients were family or other close connections of his. All apart from a handful of the deed packets held by the partnership practice were also handed over to MFL.

51. A written collection of procedures and precedents (which I will refer to collectively as the “practice manual”) had been developed for use in the partnership practice before its dissolution. Copies of the manual were provided by the Receivers to Mr Milevski. So too was a copy of the practice’s computer server, containing all of the practice’s computerised records. Archived client files were transferred to MFL, which assumed the cost of storing them.

52. The Receivers were asked by Mr Milevski to agree to the partnership practice’s telephone number being transferred to MFL. Not having any ongoing use for the number, the Receivers agreed and signed the necessary paperwork. The partnership website was also diverted so that hits on it were automatically referred to MFL’s website. This appears to have been done by someone at MFL but the Receivers did not object.

53. The diversion of the website was a temporary one which lasted only for a period of weeks or months. But once it expired, the Receivers had no use for the website and ceased to make the maintenance payments on it. Similarly the business name “Paltos Milevski Family Lawyers” was not taken over by either partner. Its registration was presumably allowed to expire.

Professional negligence claim by Mr Paltos against his solicitors

60. In October 2017 Mr Paltos commenced proceedings against BP. This was one month after his cross-action in the 2017 proceedings was filed (see [15] above). His complaint was that BP failed to advise him properly about his rights under the Put & Call Option Agreement in the period prior to the dissolution of the partnership.

61. At the time of dissolution Mr Paltos had been unable to work for almost four months. In June he reached the six month disablement period specified in the TPD definition in the Agreement. It was contended for Mr Paltos that, although this was after the dissolution order had been made, his right to exercise his TPD put option survived the making of that order. Mr Paltos alleged that had he been properly advised, he would, after satisfying the definition, have exercised the option. He would thus have been entitled to require Mr Milevski to buy his share of the practice in accordance with the formula in the Agreement (which would have yielded $1.41 million).

62. The claim was vigorously defended by BP both on liability and quantum grounds. One of the points raised by BP on quantum was that Mr Paltos would eventually be entitled, upon completion of the partnership account in these proceedings, to recover a seventy per cent share of the intangible value of the assets transferred to Mr Milevski. BP contended that this amount had to be deducted from any damages awarded against it should it be found liable for negligence. In this regard, BP relied upon the expert reports which had been served on behalf of Mr Paltos in these proceedings, including the first report from Ms Conoulty.

63. Mr Paltos’ professional negligence proceedings against BP were fixed for hearing in May 2019. Not long beforehand, an application was made by BP to have the professional negligence proceedings dealt with at the same time as, or after, the accounting proceedings. This would avoid there being any uncertainty in the professional negligence proceedings about Mr Paltos’ partnership entitlements on completion of the account.

64. This application was allocated to me for hearing. It was opposed by Mr Paltos (and Mr Milevski). It would have resulted in the trial of the professional negligence claim being vacated and there was no proper explanation for why the application had been made so belatedly. I therefore refused it.

65. The hearing of the professional negligence claim went ahead and Rothman J delivered his main judgment the following June: Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705. His Honour found that Bartier Perry was negligent in failing to advise Mr Paltos of his entitlement to exercise his put option under the Put & Call Option Agreement. The entitlement survived the making of the dissolution order, and had Mr Paltos been properly advised he would have exercised the option once he had satisfied the TPD definition. But the amount recovered for goodwill in these proceedings would have to be credited against Mr Paltos’ damages.

66. In a subsequent judgment, delivered in December 2020, Rothman J considered the form of, and made, final orders: Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706. His Honour dealt with the uncertainty about quantum by awarding Mr Paltos the full damages of $1.41 million (plus interest from July 2016), but accepting an undertaking from him to pay back to BP anything he recovered for goodwill through these proceedings.

67. BP appealed. The Court of Appeal delivered judgment in August last year: Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158. The Court upheld Rothman J’s finding of liability against BP. But the Court considered that his Honour had been wrong to award full damages and accept the counter-undertaking from Mr Paltos. The proper method of dealing with the uncertainty was on a Malec v Hutton basis.

68. Based on its analysis of the evidence, the Court deducted $469,000 from Mr Paltos’ verdict. This figure was calculated as the value of Mr Paltos’ share of the goodwill ($670,000, being the average of the figures given in the valuation reports in evidence before Rothman J), with a 30% deduction to reflect the uncertainty of recovery. The result was to reduce Mr Paltos’ judgment to $943,000. Mr Paltos received an order for his costs of the proceedings at first instance, on an ordinary basis. There was no order as to the costs of the appeal.

Receivers’ calculations

69. In this section of the judgment I summarise the accounting calculations presented by the Receivers at the trial. The calculations fall into two parts.

70. First, there are the assets of the partnership as at the date of dissolution and the partnership liabilities discharged by the partners. The calculations include, among the liabilities, the obligations assumed by Mr Paltos and Mr Milevski under the partnership equipment leases (less the capital value of the assets the subject of the leases). They also include the capital account balances of the partners as at the date of dissolution, and the value of other assets transferred to the partners.

71. The Receivers’ calculations are summarised in the table below.

Table 1

DP	PM	Total
Owed by (to) partners on capital account	367,715	(266,847)	100,868
Owed to partners for net partnership liabilities assumed	(60,501)	(86,039)	(146,540)
Net shortfall on capital account	(45,672)
Partners’ shares of net shortfall (70:30)	31,970	13,702
Partners’ obligations (entitlements) inter se	339,184	(339,184)
Claimed intangible value of assets transferred to Mr Milevski	723,640	723,640
Partners’ share of claimed intangible value (70:30)	(506,548)	(217,092)
Total partners’ obligations (entitlements) inter se	(167,364)	167,364

72. Apart from the claimed intangible value of the assets transferred to Mr Milevski, all figures are agreed. It follows that if those assets had no intangible value, Mr Paltos owes Mr Milevski $339,184. At the other end of the range, if the intangible value of the assets was $723,640 (this is the midpoint of Ms Conoulty’s range of goodwill valuations: see [99] below), Mr Paltos is owed $167,364 by Mr Milevski.

73. The second part of the calculations deal with unpaid partnership liabilities. They are summarised in the following table.

Table 2

Amount	DP	PM
Westpac debt	(424,935)	(424,935)
Other creditors	(258,702)	(181,092)	(77,611)
Receivers’ fees	(86,823)	(60,776)	(26,047)
Cash held by Receivers	42,646	29,852	12,794
Total	(727,814)	(636,951)	(90,864)

74. The Receivers’ fees have been approved only for the period up to 21 January this year. The figure in the table includes an estimate for further fees of $7,700. The cash figure represents the monies held by the Receivers as at 22 January.

75. There is no dispute about the liabilities included, or the current values attributed to them by the Receivers. Nor is there any dispute that Mr Paltos is solely responsible for the Westpac debt.

76. The figures in Table 2 can be added to the figures at the bottom of Table 1 to derive a single overall figure for the amount owed inter se, assuming a full discharge of all partnership liabilities. The best case for Mr Paltos would still see him having to pay $470,000 towards discharging the partnership liabilities with Mr Milevski paying the remaining $258,000. On Mr Milevski’s best case, Mr Paltos would be required to discharge all of the outstanding partnership liabilities ($728,000) and pay Mr Milevski $248,000 on top of that.

Intangible value of assets transferred to MFL

77. The case for Mr Paltos on the valuation issue was based on the opinions expressed by Ms Conoulty. Counsel for Mr Paltos invited me to adopt Ms Conoulty’s methods and the resulting valuation figures.

78. In response, it was contended that Ms Conoulty’s approach was unsound. This contention was advanced by Mr Russell in his evidence. It was also advanced by way of submission by counsel for Mr Milevski. The result, in counsel’s submission, was that Ms Conoulty’s opinions were largely or completely inadmissible. Even if admissible they had no weight.

Ms Conoulty’s valuations

79. Ms Conoulty’s brief required her to value what she described in her report as the “Transferred Assets”. These were identified in her report as including the employees of the practice; its files (both current and archived); the procedure manual; and equipment such as the leased photocopier.

80. Some of the assets, such as the equipment, may have had a tangible value. But that was not Ms Conoulty’s concern. Her focus was on the intangible value of the assets, taken as a whole, and in particular their ability to generate future fee income.

81. In this regard, Ms Conoulty adopted the following description of the way in which work had been referred to the partnership practice:

… family law practices are generally not supported by recurring clients. Client relationships are typically initiated by referrals from a variety of sources including but not necessarily in order of significance, commercial and other solicitors, previous clients, accountants, financial advisers, a practitioner’s personal network and human resources departments. Some work is also derived from advertising and promotions and free seminars ...

82. In her reports, Ms Conoulty undertook valuations of the Transferred Assets in two different ways. The first was a valuation of the partnership business as a whole. I will refer to this as the “practice goodwill” valuation. The second was a valuation of specific assets, in particular the current matter files transferred to MFL and the copy of the procedure manual which MFL received.

83. Practice goodwill valuation: This was Ms Conoulty’s preferred method of valuation, and the one undertaken in her main report. It was based on the premise (expressed as an opinion by Ms Conoulty) that, following the transfer of the Transferred Assets, “Mr Milevski carried on substantially the same business within [MFL] as was previously operated” by the partnership. This was because of the continuity of the files, staff, procedure manual, telephone number and internet presence. It was however subject to some “exceptions” to which I will return shortly.

84. The first step was to determine the basis on which the business was to be valued. Ms Conoulty’s instructions left this up to her. She considered that the appropriate basis was what she described as “fair value”. Ms Conoulty explained (at paragraph 43 of her first report, footnotes omitted):

43.   The 2011 International Valuation Standards Framework (2011 IVS Framework) defined Fair Value as the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. With respect to Fair Value the 2011 IVS Framework also states as follows:

(a)   Fair value requires the assessment of the price that is fair between two identified parties taking into account the respective advantages or disadvantages that each will gain from the transaction;

(b)   It is commonly applied in judicial contexts;

…

(d)   Fair value is a broader concept than market value. Although in many cases the price that is fair between two parties will equate to that obtainable in the market, there will be cases where the assessment of fair value will involve taking into account matters that have to be disregarded in the assessment of market value, such as any elements of special value arising because of the combination of the interests; and

(e)   Examples of the use of fair value include:

(i)   determination of a price for a shareholding in a non-quoted business, where the holdings of two specific parties may mean that the prices that is fair between them is different from the price that might be obtained in the market; and

(ii)   determination of a price that would be fair between a lessor and a lessee for either the permanent transfer of the leased asset or the cancellation of the lease liability.

85. Ms Conoulty continued (at paragraph 46 of her first report):

For the purposes of this matter, I have adopted fair value as the appropriate measure of value. I consider this measure of value to be the most appropriate because:

(a)   I am being asked to consider the value of the business and assets actually transferred from the Partnership to one particular former partner Mr Milevski. The parties are therefore not “hypothetical” parties, as required in a market value definition and the transaction is not a hypothetical one; and

(b)   In this matter there will be special value that exists for Mr Milevski that would not be present for other hypothetical market participants due to the fact that he was a named partner of the former Partnership. In my opinion there would have been additional benefits or value for Mr Milevski that would not have existed for other hypothetical market participants, including the following:

(i)   Mr Milevski had an existing relationship with his current clients and therefore those clients were more likely to remain with him in the new partnership [sic; the practice conducted by MFL];

(ii)   Mr Milevski had an existing relationship with the current staff and therefore they were more likely to remain in the new partnership. Mr Milevski would therefore avoid the time it would take to employ new solicitors and the employment agency fees that would otherwise be incurred;

(iii)   Mr Milevski is a named partner of the previous partnership and therefore Mr Paltos’s clients were more likely to remain with him in the event Mr Paltos was no longer able to service those clients; and

(iv)   Given Mr Milevski was effectively going to increase his ownership from 30% to 100%, he was transforming his ownership from a minority interest position to a position of control. In my experience, premiums for control often exist and by effectively taking over the remaining 70% of the business and gaining control, Mr Milevski also increased the value of his previous 30% interest.

86. Ms Conoulty expressly stated that she considered the “fair value” of the Transferred Assets, as between Mr Milevski and Mr Paltos, was higher than their open market value. Mr Milevski could afford to pay more because of his familiarity with the clients and the staff. This meant he was taking less risk than a hypothetical third-party purchaser.

87. Ms Conoulty identified two possible approaches to the valuation task (a third possible approach, based on cost, she put aside). One was a “market-based” approach, derived from figures from comparable sales. The other was an “income-based” approach, calculated according to a formula based on the income derived from the business. In turn, two different income-based methods were identified. One was discounted cash flow (“DCF”). The other was CME (capitalisation of maintainable earnings).

88. Ms Conoulty adopted the CME method. This, as its name suggests, applies a multiple to the future maintainable earnings (“FME”) of the business, based on its previous earnings. In the following paragraphs, I summarise Ms Conoulty’s calculations. Following some comments and criticisms from Mr Russell, Ms Conoulty changed some of those calculations in her supplementary report. What follows incorporates those changes.

89. Ms Conoulty considered that FME should be calculated by reference to the business’ earnings before interest and tax (“EBIT”). The practice’s financial statements did not include any drawings for the partners, and therefore did not make any allowance for the cost of work done personally by them. Ms Conoulty addressed this by including in the expenses the “notional salary” for each of Mr Paltos and Mr Milevski as set out in the June 2010 Heads of Agreement (see [40] above), each case indexed according to the CPI. For the last full financial year before the dissolution, 2014-2015, the resulting figures were: revenue $2,229,000; expenses excluding interest $1,574,000; EBIT $655,000.

90. I have already mentioned Ms Conoulty’s acknowledgement that the proposition that substantially the whole business of the practice had been transferred to MFL was subject to “exceptions”. The most important of these was that Mr Paltos did not participate. The MFL practice was also operating out of different premises.

91. Ms Conoulty considered that an adjustment needed to be made to reflect the fact that in MFL’s hands the practice “would no longer enjoy the income generated by Mr Paltos”. Ms Conoulty saw the income foregone as limited to fees generated personally by Mr Paltos, that is, for himself. She observed:

Given the Partnership website and telephone were diverted to Milevski Family Lawyers, Mr Paltos had suffered two strokes and was not physically capable of providing advice to clients in the short term (or due to his health and age, potentially permanently), client referrals from the Partnership referral sources referred to in [the paragraph quoted at [81] above] would continue to be referred to Milevski Family Lawyers.

92. In order to exclude Mr Paltos’ personal billings, Ms Conoulty focussed on the months of February and March 2016. During those months Mr Paltos was absent from the practice. Ms Conoulty used the figures for those months to determine an average monthly revenue. She extrapolated the resulting figure to produce an adjusted annual revenue.

93. Ms Conoulty then made a further adjustment to this revenue figure. She stated:

I have applied a discount of 10% to this revenue … to allow for:

(a)   an assumption that some of Mr Paltos’ clients would not transfer to Mr Milevski. However, I consider this percentage would have been low given Mr Paltos was not capable of servicing those clients due to his health. This is supported by the fact that, of the $921,000 in fees received and billed by Milevski Family Lawyers relating to the Partnership transferred files, $505,102 related to clients where Mr Paltos was the partner prior to his stroke; and

(b)   an element of personal goodwill attributable to Mr Milevski which should not be allowed for in the valuation.

This reduced the adjusted annual revenue to $1,313,000.

94. Ms Conoulty also adjusted the prior expenditure figures on the ground that the assumed expenditure profile of MFL in conducting the business would be different. She reduced the allowance for rent to reflect the lower rent being paid by MFL in its office premises (which were smaller than those of the partnership practice). She carried the salaries of the transferred employees across as well as the indexed “notional salary” for Mr Milevski (see [89] above). She also made proportional reductions in insurance and overhead costs.

95. The result was notional expenditure of $1,090,000 and EBIT of $223,000. Ms Conoulty observed (apparently to demonstrate conservatism) that this was only thirty-four per cent of the 2014-2015 figure.

96. To complete the calculation, it was necessary to determine the multiple to be applied to the adjusted EBIT figure. Ms Conoulty settled on a range of multiples from 3 to 3.5. This was derived from a wider range of multiples taken from data published by an organisation known as “Biz Exchange”. It seems that this organisation publishes data on the sale of businesses in Australia (the sources of this information are not revealed by the evidence).

97. The Biz Exchange data is apparently organised into different classes of business. Ms Conoulty used a class described as “professional, scientific and technical services”. She adopted a figure in the higher part of the range, explaining:

In assessing the appropriate multiple to apply to the Transferred Assets, I have considered the factors listed at [sub-paragraphs (b)(i) to (b)(iv) quoted at [85] above]. In my opinion, this indicates that there are lower risks for Mr Milevski achieving my estimated level of FME, which correlates to a higher EBIT multiple.

98. Ms Conoulty’s valuation method was similar to the method prescribed in the Put & Call Option Agreement for determining the “market value” payable for the outgoing partner’s share of the practice. Ms Conoulty specifically noted that the multiple specified in the Put & Call Option Agreement, 3.4, fell within her range of multiples.

99. The low end of Ms Conoulty’s range of earnings multiples yielded a valuation for the partnership business (to the extent transferred to MFL) of $667,975. The high end of the range was $779,304.

100. Valuation of individual assets: In her supplementary report, Ms Conoulty presented what she described as an “asset-based valuation”. This attributed separate (intangible) values to individual Transferred Assets. Again the basis for valuation was said to be “fair value”.

101. Ms Conoulty initially appeared to be putting forward her “asset-based valuation” as a means of cross-checking her practice goodwill valuation. But by the time of the hearing the “asset-based valuation” was presented as a fully-fledged alternative valuation if for some reason the practice goodwill valuation was rejected.

102. Ms Conoulty’s valuation was made up of valuations of three particular assets. There were: the active files taken over by MFL; the employees who transferred to MFL (also referred to as the “established workforce”); and the practice manual. Ms Conoulty considered that all of the other Transferred Assets either had no value or could not, on the information available to her, be valued.

103. Active files: On Ms Conoulty’s valuation, by far the largest asset by value was the active files. Ms Conoulty valued these files by reference to the income subsequently derived from them by MFL. Her rationale was that this reflected their “fair value” to Mr Milevski. She stated:

In my opinion, the revenue actually earned in the years following the transfer of assets to MFL would have been able to have been estimated by Mr Milevski at the date of transfer with a high degree of accuracy as he would have been able to estimate the average fees from a family law matter and would have been able to determine the degree to which each matter had progressed and the percentage of completion.

Whilst there may have been more uncertainty as to the number of Mr Paltos' clients who would continue with Mr Milevski, in my opinion, given Mr Paltos' serious illness, together with the dissolution of the Partnership and the transfer of the employees to MFL, it would be reasonable to assume that those of Mr Paltos' clients who had already incurred significant fees with the Partnership, would likely transfer to Mr Milevski rather than transferring their file and starting again with a new firm.

104. Due to what she considered was a high degree of predictability of the income from the transferred files, Ms Conoulty considered it appropriate to value that income using the DCF method. Again, there was some modification of her calculations as a result of debate with Mr Russell. I set out below the figures which she ultimately presented as an annexure to the experts’ joint report.

105. Records of MFL showed the fees later billed by it on active files transferred from the partnership. Between the transfer and 31 March 2018 the amount billed was $1,309,000. There were no figures for income after that date. I was told that the practice failed and Mr Milevski is now in Perth, so it may be that there was no further income.

106. Ms Conoulty then applied a fifty-five per cent discount. This was intended to reflect the cost of earning the fees and was derived from the cost ratio previously achieved by the partnership practice. This resulted in a net figure (described by Ms Conoulty as “EBIT”) of $719,000.

107. For her DCF calculation, Ms Conoulty assumed that all of the revenue would have been collected by 21 April 2018. This was twenty-one days after the end of the period for which the billings information related, and two years after the date of dissolution. Ms Conoulty then discounted the fees back from their assumed date of receipt to derive a present value as at the date of dissolution. The interest rate she used for discounting purposes was 7.18 per cent. This was made up of 2.18 per cent, being the “risk free” government bond rate, plus a five per cent risk premium. The result was a calculated value of $672,786.

108. Established workforce and practice manual: In using the term “established workforce”, Ms Conoulty was referring to the fact that the existing employees of the partnership were transferred to MFL as a working team of staff experienced in their employment roles. Ms Conoulty reasoned that if this transfer had not taken place, Mr Milevski would have had to put together such a team for MFL himself.

109. Ms Conoulty accepted that it was not possible to put a market value on such an “established workforce”. She considered it was appropriate to value it by reference to the cost of establishing it afresh. There were three components to her valuation: recruitment costs (calculated as a percentage of salary); training costs (which were relatively minor); and “reduced efficiency” costs, representing the new workforce’s presumed inexperience, which Ms Conoulty assessed as forty per cent of their first year salary costs.

110. After making some adjustments, Ms Conoulty’s figure was $147,000. She considered, however, that this figure was subsumed within the valuation of the active files. It thus did not need to be considered separately if that active file valuation was accepted.

111. Finally, Ms Conoulty considered that the practice manual had a value to Mr Milevski. Again the idea was that if he had not had the manual from the partnership practice it would have been necessary to create one. Again, Ms Conoulty valued this according to the cost of producing a new practice manual. Ms Conoulty adopted a figure of $25,000. Unlike the “established workforce” she did not consider that this was subsumed within the valuation of the files.

Practice goodwill

112. By arrangement between the parties, counsel for Mr Milevski addressed first. Mr Milevski was of course the plaintiff. But in the course of submissions I raised a question of onus with counsel for the parties. I asked them who, if anyone, bore the onus of establishing the intangible value of the assets transferred to Mr Milevski.

113. Counsel for Mr Paltos submitted that he bore no onus on this issue. Counsel pointed out that in the course of the administration the Receivers commissioned a report as to the value of the assets which concluded that the value of the partnership goodwill was substantial. Counsel submitted that if Mr Milevski wanted to contend to the contrary, the onus lay on him to establish that the partnership had no intangible value.

114. Counsel for Mr Paltos submitted that the proper method of valuing the goodwill in the present case was very much a matter for the discretion of the Court and depended upon the circumstances of the case. A critical factual element in the present case was what counsel characterised as the appropriation of the partnership business, or a substantial portion of it, by Mr Milevski. Counsel pointed out that Mr Paltos opposed the making of the dissolution order before Sackar J and later objected to Mr Milevski taking over the partnership files.

115. Counsel for Mr Paltos urged me to adopt the “fair value” basis of valuation used by Ms Conoulty. Counsel acknowledged that this involved taking into account the special value of the assets transferred to Mr Milevski (which would be higher than open market value: see [86] above). But in counsel’s submission that was entirely appropriate in the circumstances of the case.

116. The dissolution of a partnership does not terminate it with immediate effect. The Partnership Act 1892 (NSW) (“PA”) provides, in s 38:

Continuing authority of partners for purposes of winding-up

After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise: …

117. PA s 39 specifies that, in a winding up, the former partners are entitled to have the assets of the partnership realised for the purpose of meeting the partnership liabilities and distributing any surplus. It follows that the former partners are obliged to co-operate in the realisation of the partnership assets so as to maximise the amount recovered, in the interests of all former partners. That obligation is a fiduciary one which continues until the partnership has been wound up: Chan v Zachariah (1984) 154 CLR 178 at 197.

118. Where the partnership business has developed a significant goodwill, the former partners therefore owe ongoing fiduciary obligations to protect the value of that goodwill for the purposes of its realisation in the winding up. But there is a question as to how far this obligation prevents former partners from plying their own trade. It might be argued that, in principle, the obligation should extend to providing non-competition covenants to assist with the sale. The law has not, however, developed in that way.

119. The relevant rules were laid down in England in the second half of the nineteenth century. The key decision was Trego v Hunt [1896] AC 7. The case concerned a fixed term partnership between Mrs Trego (and another partner who, for simplicity, I will omit reference to) and Mr Hunt. The partnership agreement provided that the goodwill of the partnership was to belong to Mrs Trego. Towards the end of the partnership term, Mr Hunt had a clerk copy out the names and other particulars of the customers, with a view to soliciting their business for himself after the expiry of the partnership agreement. Mrs Trego moved for a non-solicitation injunction.

120. It was common ground that, in agreeing that the partnership goodwill should belong exclusively to Mrs Trego, Mr Hunt had placed himself in the same position as a vendor of business goodwill. As such a vendor he could not detract from his grant. It was argued for Mrs Trego that this implicitly required him not to derogate from the sale by competing with the business.

121. That proposition had some appeal in principle (see Lord Herschell at 19-20; Lord Macnaghten at 25), but it was too broad. The existing law of restraint of trade had already firmly established that the vendor of a business had the right, unless an express covenant to the contrary was given, to set up immediately in competition with the purchaser.

122. Nevertheless, Mr Hunt could be restrained from soliciting the firm’s customers. Lord Herschell stated (at 20-21):

If a person who has previously been a partner in a firm sets up in business on his own account and appeals generally for custom, he only does that which any member of the public may do, and which those carrying on the same trade are already doing. It is true that those who were former customers of the firm to which he belonged may of their own accord transfer their custom to him; but this incidental advantage is unavoidable, and does not result from any act of his. He only conducts his business in precisely the same way as he would if he had never been a member of the firm to which he previously belonged. But when he specifically and directly appeals to those who were customers of the previous firm he seeks to take advantage of the connection previously formed by his old firm, and of the knowledge of that connection which he has previously acquired, to take that which constitutes the goodwill away from the persons to whom it has been sold and to restore it to himself. It is said, indeed, that he may not represent himself as a successor of the old firm, or as carrying on a continuation of their business, but this in many cases appears to me of little importance, and of small practical advantage, if canvassing the customers of the old firm were allowed without restraint.

123. It is notable that this reasoning was not limited to the use of partnership information in the form of the customer lists. The order (see at 30) enjoined Mr Hunt from making any direct contact with any customers of the partnership to solicit their business. This applied irrespective of any personal dealings he might previously have had with them.

124. As well as providing that rights and obligations continue as between the partners for the purpose of winding up the affairs of the partnership, s 38 provides for those rights and liabilities to continue for the purpose of completing “transactions begun but unfinished at the time of dissolution”. The authorities on the equivalent United Kingdom enactments were summarised by Morritt C in Boghani v Nathoo [2011] 2 All ER (Comm) 743; see also Lindley & Banks at [10-230], [13-63]-[13-67]. The following propositions emerge from those authorities.

125. Section 38 recognises that, the dissolution of a partnership does not of itself terminate, or otherwise affect, existing partnership contracts with third parties. In the usual case where the contract has been made in the name of the firm (see PA s 6(1)) all of the partners will remain jointly and severally liable to the third party for the performance of the firm’s obligations under the contract.

126. Furthermore, the section has the consequence that, despite dissolution, the partners remain under fiduciary obligations to each other to do what is necessary to “complete” unfinished “transactions”. This may extend to entering into new contracts. For example, if a partnership firm has entered into a contract to build a bridge and the building work has not been completed at the date of the firm’s dissolution, the partners’ obligations under s 38 prima facie extend to entering into the necessary contracts for purchasing the further supplies required to complete the work: Boghani at [28].

123. Enforcement of the partners’ obligations inter se may however be another matter. Where the former partners are unwilling to do what is required to complete the contract, the court may be unable to make mandatory orders to compel them to do so, if that would require an impermissible degree of supervision: Meagher Gummow & Lehane at [20-065]. The firm may simply lack the resources to complete the contract, in which case the court will not order the impossible: Meagher Gummow & Lehane at [20-140]. As the decision in Boghani shows, the court will have a strong preference for novating the contract in question to a purchaser if that can be done, to avoid problems of this sort.

124. Returning to the specific issue in this case, in Page v McKensey (Supreme Court of New South Wales, 17 December 1993) Windeyer J had to determine the value of the goodwill of a partnership for the purpose of taking partnership accounts following its dissolution. His Honour said (at pp 10-11):

On a dissolution of partnership the value of assets must be determined at the date of dissolution having regard to the terms of any agreement among the partners. Here there were no such terms. It follows that goodwill must be valued on the basis that it could be purchased by an outsider or one or more of the former partners. Any outside purchaser of goodwill would take into consideration the facts that:-

a.   the former partners would be free to practise in the immediate vicinity;

b.   the former partners would be free to deal with any former clients and free to make their new circumstances known, but not free to solicit former clients of the dissolved partnership;

c.   the former partners would be free to take over any existing files of the dissolved partnership if the clients so wished and fees for work to the date of dissolution were paid to the old firm.

d.   the former partners would not be free to sue the name of the former partnership or a name so close to it that it would be likely to be confusing or to mislead people to think it was a continuation of the old partnership.

… Former partners purchasing goodwill would do so with knowledge of these matters and their likely effect on outside buyers.

129. The case concerned an accounting partnership. There were six partners. As noted in the passage quoted from his Honour, there was no written partnership agreement. Notice was given to the plaintiff, Mr Page, purporting to require him to leave the partnership. It was found that this notice had the effect of dissolving the partnership as at 30 June 1992.

130. Mr Page set up business on his own account, taking with him clients whose gross annual billings for the year ended 30 June 1992 were $200,000 (out of total partnership billings of $3 million). The other five partners continued to trade under the firm name. They “to all intents and purposes … continued the partnership business”.

131. The valuer called in Mr Page’s case produced a valuation calculated by reference to the earnings of the partnership in the year 30 June 1992 (after deduction of $200,000 to represent the clients taken by Mr Page). But it emerged in cross-examination that this valuation was based on the assumption that the “usual covenants”, including non-competition covenants, would have been given by the partners to an incoming purchaser of the partnership business. In fact, as the passage I have already quoted makes clear, there was no obligation on the partners to give any such covenants. His Honour concluded that this invalidated the valuer’s opinion. He awarded only $150,000 for goodwill based on the uncontentious value of the partnership name.

132. Mr Page appealed: Page v McKensey [1995] NSWCA 351. The issue on appeal was whether Windeyer J had correctly understood Mr Page’s valuer to have conceded in cross-examination that if the “usual undertakings” were not given his opinion would not apply. The Court of Appeal held that his Honour’s understanding had been correct. The appeal therefore had to be dismissed.

133. Windeyer J’s statement of principle (as quoted at [128] above) was not questioned in the appeal. Indeed, it was said ([1995] NSWCA 351 at p 3) to have been “unexceptionable”. In subsequent decisions of the Court of Appeal it has been quoted with approval: Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158 at [228].

134. Windeyer J’s statement of principle is, of course, not a statute. It must also be read in the light of the more general principles established by previous case law. In particular, there may be a question as to how far a former partner may go “in making his circumstances known” without infringing the prohibition on solicitation referred to by his Honour in sub-paragraph (b): see also Lindley & Banks at [10-241]-[10-242]. His Honour also did not, in sub-paragraph (c), refer to the implications of the continuation of existing partnership contracts (see [124]-[127] above and [177]-[179] below).

135. Potential qualifications of this type do not arise for consideration in the present case. Counsel for Mr Paltos did not argue that Windeyer J’s statement of principle needed modification. Counsel did, however, submit that Page was distinguishable. Counsel pointed out that both Mr Page and his former partners were free to compete against each other and in fact did so. Counsel submitted that Mr Paltos was not in that position.

136. Counsel for Mr Paltos also relied on the South Australian Full Court decision in Chia v Ireland [2000] SASC 047. That case concerned a partnership between four doctors which was dissolved as a result of a falling-out. Eventually, in partnership accounting proceedings, the departing partner was awarded one-quarter of the goodwill of the partnership, as determined by a valuation based on the earnings of the business. This valuation was upheld on appeal. Counsel submitted that, similarly, it would be well open to me to adopt Ms Conoulty’s “fair value” valuation.

137. The Full Court in Chia did not refer to Windeyer J’s statement of principle in Page. As we have seen, that statement of principle has been expressly approved by the Court of Appeal of this State. Therefore, it is questionable whether it would be open to me, sitting at first instance, to adopt reasoning inconsistent with that statement of principle. But in any event, I think that the Chia decision is not relevant here.

138. Williams J, who gave the leading judgment of the Full Court, started by noting that on dissolution of a partnership, the usual order is that the partnership assets are realised by sale. But his Honour drew a distinction between a general dissolution, where the partnership business ceases or is sold to a third party, and a “technical” dissolution, where one partner retires, leaving the partnership business to be conducted by the remaining partners. In such a case the remaining partners may seek an order requiring the departing partner to sell his or her share to them at valuation (referred to by his Honour as a Syers order, after Syers v Syers (1876) 1 App Cas 174). The continuing partners are not, however, obliged to seek such an order; they may instead allow the administration to proceed on its usual course to a third party sale or winding up.

139. Williams J pointed out that in Chia, the dissolution had been a “technical” one. The partnership business had been carried on by the remaining partners while a protracted debate took place between them and Dr Chia about the valuation of partnership assets. Williams J considered that there had been a tacit agreement that the remaining partners would pay Dr Chia a one-quarter share of the value of the practice’s goodwill.

140. I think the intervention of the Receivers makes the present case quite different. Whether in substance Mr Milevski carried on the same practice as had been carried on by the previous partnership is an issue I will address in more detail below. But even accepting for the sake of argument that he did so, this was not part of any agreement between the parties, tacit or otherwise. In fact, as already noted, Mr Paltos objected to the Receivers handing the practice files to Mr Milevski.

141. In my view, there is no relevant distinction between the facts of this case and the facts of Page. It is true that Mr Paltos, at the time of dissolution, was temporarily incapable of conducting legal practice. But there was no legal obstacle to his doing so, and Mr Paltos was vigorously foreshadowing that he would be doing that very thing. He did in fact subsequently take up practice on his own account. There would have been no reason for a purchaser not to take into account the possibility of Mr Paltos resuming practice in due course.

142. I also reject the submission by counsel for Mr Paltos about onus. While it is true that the Receivers commissioned a report which apparently expressed the opinion that there was a substantial value to the practice’s goodwill, that report is not in evidence before me and at the hearing the Receivers took no position on the issue. Mr Milevski has made no concession and as a result the question of onus must be considered according to principle.

143. In a conventional account of administration, the accounting party sets out the receipts and expenditure claimed. The opposing party may then “falsify” by challenging expenditure or “surcharge” by contending that further items of income should have been received. Where there is a falsification, the onus lies on the accounting party to justify the expenditure. But where the opposing party alleges a surcharge, then it is up to that party to demonstrate that the income should have been received: Eastlake v Eastlake [2015] NSWSC 1772 at [49]-[51]. This is only a conventional application of the maxim that “he who alleges must prove”.

144. If the Receivers were presenting an account of the assets that they had realised, then Mr Paltos’ allegation that they should have obtained more would clearly be a falsification and the onus would lie on him. Although that is not precisely the context for the present account, in my view, it is substantially the same. Mr Paltos wishes the Court to find that Mr Milevski has had an additional benefit, in the form of intangible value, from the transfer of the assets, beyond that which Mr Milevski is prepared to accept. In principle, the onus of demonstrating the existence of that alleged benefit lies on Mr Paltos. That is clearly the approach which Windeyer J took in Page.

145. Against this background, I return to Ms Conoulty’s “fair value” valuation of the partnership business. In the first place it is unclear exactly what Ms Conoulty meant by “fair value”. The definition she quoted, with its reference to reflecting the “interests” of the parties, and to its use in “judicial proceedings”, is question-begging if not circular. But clearly, indeed expressly, “fair value” included the special value to Mr Milevski based on a continuation of the practice by him. Again, expressly, “fair value” exceeded market value.

146. In these proceedings I am not conducting an account of profits based on some breach of duty by Mr Milevski. I am valuing an asset of the partnership at a particular date. That can only mean asking what the asset would have fetched if sold on the open market on that date. That is the approach specified in Page. No Syers order was made in this case, but I note in passing that the valuation conducted under such an order is said by Lindley & Banks (at [19-13]) to be a market valuation.

147. I do not accept that a “special value” valuation is justified by any of the factors referred to by Ms Conoulty in her report (see [85] above). If I were to have regard to the “interests” of Mr Paltos and Mr Milevski, that would not alter my conclusion. Mr Paltos was entitled to require the practice and its goodwill, if saleable, to be sold by the Receivers. That was all. He was not entitled to require Mr Milevski to buy it from them. Still less was he entitled to insist that Mr Milevski pay more for it than it was worth to a third-party purchaser in a competitive bidding process.

148. Ms Conoulty did discount her valuation to reflect the loss to the practice of fees earned by Mr Paltos. She also made a further deduction to account, among other things, for Mr Milevski’s “personal equity”. But this deduction was completely arbitrary. Moreover, what was essential was to take into account the effect on a third-party purchaser of the possibility of competition from Mr Milevski (and Mr Paltos, in due course). This was not something Ms Conoulty’s valuation took into account. Indeed, so far as competition from Mr Milevski was concerned, her valuation was conducted on the opposite basis.

149. For these reasons, like the valuation considered by Windeyer J in Page, Ms Conoulty’s valuation was conducted on an incorrect basis. This however was not the only problem.

150. Ms Conoulty did not refer to any prices paid for the sales of comparable legal practices. The valuation method she used was instead to apply a multiple to the prior earnings (adjusted in certain respects) of the partnership practice. But I think a note of caution should be sounded about the use of income-based valuation methods in proceedings such as the present.

151. It may be reasonable to suppose that there is a rough relationship between the earnings of a business and how much prospective purchasers will be willing to pay. But the key question is what are the maintainable earnings. That must be highly dependent on the nature, history and prospects of the particular business.

152. And relying on a multiple of net earnings makes things more complicated still. It is particularly difficult for overhead expenses, where different purchasers will have different levels of existing overheads and different savings they can make from integrating the business into their existing business.

153. I question, for instance, how realistic it was, in calculating EBIT, to take into account the rent paid by the partnership when there was no formal lease commitment, and then to adjust the maintainable EBIT, as Ms Conoulty did, based on the actual amount paid by MFL at its new premises. I have already made the point that the question was the market value of the partnership practice, not its value to Mr Milevski.

154. In short, the circumstances of each business, and the factors influencing what purchasers will pay, are highly variable. It is only in a market which is deep enough for these individual variations to cancel each other out that it may be possible to discern a rule of thumb based on earnings (or net earnings). Otherwise, it seems to me, the only credible valuation method may be to observe the prices actually paid in the market.

155. There was in fact no evidence before me that there was at the time any market for practices of the type operated by the partnership, whether the former partners were subject to restraint on competition or otherwise. The only component of Ms Conoulty’s valuation which contained a market element was the selection of a multiple based on figures for “professional scientific and technical services”. This is a very broad category of businesses; too broad in my view to give any real guidance for the multiple which might be paid for a generic solicitors’ practice, let alone a family law practice.

156. I add the reference to a family law practice because of the submission by counsel for Mr Milevski. Counsel accepted that some types of solicitors’ practice involving repeat business might be amenable to Ms Conoulty’s valuation method. An example given by counsel would be a debt recovery business with established client relationships. But counsel submitted that a practice specialising in family law matters would not expect repeat business.

157. This argument cannot be pressed too far. Although a family law practice could not expect to build its future on repeat business from past clients, it would still be possible to develop a reputation of skill and competence which would assist with referrals. But counsel’s point is still well taken. It underlines how unsound it is to apply a generalised earnings multiple to a highly specialised individual practice.

158. In the end Ms Conoulty’s valuation is a desktop analysis. It does not satisfy me that in April 2016 third-party purchasers would actually have been prepared to buy the partnership practice for prices in the range calculated by her. The practice may have had some market value but on the evidence I am unable to make any reliable determination of what that market value was.

159. Counsel for Mr Milevski raised an even more fundamental objection to Ms Conoulty’s valuation. Counsel challenged the conclusion (or assumption) underlying Ms Conoulty’s valuation that the goodwill of the partnership practice had been transferred to MFL.

160. The starting point for counsel’s submission was the principle that goodwill is inherent in, and cannot be separated from, the conduct of a business. The principle is fundamental. It was reaffirmed by the High Court in Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; see at [15]-[22].

161. Stephen J explained in Geraghty v Minter (1979) 142 CLR 177 at 193:

Goodwill of a partnership business is an inseverable whole unless, of course, it consists in fact of a series of separate goodwills, each applicable to distinct areas in which the one business operates or to distinct business activities which the one business entity carries on. When sold, proceeds of goodwill may be divided up readily enough, but, because goodwill is "the benefit and advantage of the good name, reputation and connection of a business" [citation omitted], it is inherently inseverable from the business to which it relates. It may cease to exist or may be purloined by one who falsely represents his own business as the original business, but it cannot be disposed of separately from the business which created it nor can it survive the cessation of that business. The reason is simple: since it reflects and is dependent upon the reputation of that business, to sever it from the business destroys it.

162. Counsel pointed out that following dissolution of the partnership Mr Milevski was not subject to any restraint in acting for clients of the partnership practice (and nor was Mr Paltos). The practice name was not transferred to him. The employees were not chattels who could properly be described as assets of a business (as they were described by Ms Conoulty and by counsel for Mr Paltos). The diversion of the telephone number and website were temporary.

163. Counsel submitted that, in these circumstances, upon dissolution the partnership practice had effectively ceased to exist. Any goodwill in it had been lost. Counsel relied on the following statement by Needham J in Alcock v Robb (1978) 2 BPR 9625 at 9630:

… once a business comes to an end goodwill in it can no longer exist. If the former partners so desire, they can sell the assets of the business, including goodwill, but such a sale would prevent any of them from soliciting the custom of the former clients of the firm. They may, alternatively, sell the business to one of their number. In that case, an allowance for goodwill would be proper. If, however, the former partners decide to give up the business and go their separate ways, it seems to me that they destroy the goodwill of that business. Each of them would be liable to restraint if it were to be suggested that they were carrying on the old business. … the goodwill which each of the former partners builds up is his own goodwill, ie the goodwill of his new business. It cannot be equated or identified with a portion of the former goodwill.

164. For her part, counsel for Mr Paltos relied on the South Australian Full Court decision of Walker v Martin (Supreme Court of South Australia – Full Court, King CJ, Millhouse J and Olsson J, 23 December 1993). That case concerned a medical practice operated in partnership by four doctors. One of the doctors resigned so as to set up practice on his own near the partnership practice. He took with him a key doctor employed in the practice. Dr Martin then decided to withdraw from the partnership practice as well (he continued to practise as a doctor, but elsewhere, not in competition with the partnership practice). The two remaining doctors, Dr Walker and Dr Wilson, retained the premises, records and other employees of the former partnership practice and informed the remaining patients that they would be continuing that practice.

164. There was no agreement between the parties that Dr Martin would receive anything for goodwill. It was contended for Dr Walker and Dr Wilson that their ongoing practice was quite different from the previous partnership practice. Nevertheless, it was held that Dr Martin was entitled to a one-quarter share of the goodwill of the partnership practice, determined by way of valuation based on its earnings (the minority judge, Olsson J, would have discounted the figure to reflect the “fragmentation” of the practice).

165. The Full Court decision was considered by Young CJ in Eq in Old v Hodgkinson [2008] NSWSC 697, a case involving a partnership of patent attorneys. There were three partners: Mr Hodgkinson, Mr Old and Mr McInnes. The firm operated under the name “Hodgkinson Old & McInnes” (“HOM”). Mr Old left the firm to establish a patent attorney practice of his own nearby, under his own name. He took with him 400 of the practice’s 10,000 files, and his dictaphone. Mr Hodgkinson and Mr McInnes retained the partnership premises, the employed staff, and all of the other partnership assets. They continued to practise under the name “Hodgkinson & McInnes”.

166. Mr Old claimed a one-third share of the goodwill of the partnership business. The issue was referred to a referee, whose report upheld the claim. The referee calculated the goodwill, apparently by reference to the earnings from the partnership files, and then allowed an adjustment calculated by reference to earnings from the files taken by Mr Old. The credit was about 16%.

167. Mr Hodgkinson and Mr McInnes challenged the referee’s conclusion. His Honour was referred to Walker but said the decision was plainly wrong. In particular it was inconsistent with the requirement, subsequently emphasised by the High Court in Murry, that goodwill has no existence independent of the conduct of a business. His Honour regarded the two successor firms as businesses different from the former partnership business: see at [23]-[48]. He also rejected a submission that the circumstances were analogous to a situation where one partner retired or died and the business was carried on by other partners.

168. His Honour’s decision was the subject of an appeal: Old v McInnes [2011] NSWCA 410. The leading judgment in the Court of Appeal was given by Meagher JA. His Honour decided the issue on a narrower basis than had the Chief Judge. He distinguished Walker without discussing whether it was inconsistent with High Court authority. The ground of distinction appears from [86]:

In this case the partners by their conduct, and in particular by the written communications between themselves and to the clients of the HOM partnership (see [78] , [79] and [80] above) agreed as to the following: first, that the HOM partnership should be dissolved effective from 30 June 2003; secondly, that thereafter they would conduct different and competing practices under different names; thirdly, that the clients of the HOM partnership would be divided between them according to the wishes of the client as to which of the new practices the client chose; and finally, that other assets used in the HOM partnership would be acquired by Mr McInnes and Mr Hodgkinson. These agreements were inconsistent with the preservation and sale of the goodwill of the HOM partnership for the benefit of all of the partners.

170. In the present case, the transfer of the files and staff of the former partnership business was carried out by the Receivers. They had been specifically directed by the Court to realise the goodwill, if any, of the partnership business. There was no agreement between Mr Paltos and Mr Milevski at all, let alone an agreement of the type made in Old which was inconsistent with the preservation and sale of the goodwill of the partnership for the benefit of all the partners.

171. In Murry, in the context of the sale of a business to a new owner, the High Court (see at [29], [45]) defined goodwill as:

the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have in the past attracted custom to the business.

172. In this definition the word “substantially” is significant. Identity of manner and means between the business under its former ownership and its new ownership is not required.

173. It is true that the employees of the partnership practice were not indentured servants who could properly be described as “assets”. But their employment contracts gave the partnership the means, so long as their employment lasted, of servicing the needs of the practice. This effectively passed unchanged to MFL. So too did the means of receiving instructions and referrals from the business’ phone and website, even though the website was not formally transferred. MFL did not take over the partnership’s business premises, but no-one suggested that the location from which the practice was conducted made any difference. It is thus fair to say that substantially the whole of the partnership business infrastructure was transferred to MFL.

174. But by far the most important element in the business was the conduct of legal work for clients. Counsel for Mr Milevski submitted that, for practical purposes, where the former partners were not subject to any ongoing restraint, any goodwill of the partnership practice must necessarily have ceased to exist on dissolution.

175. Counsel did not put this as an absolute proposition which applied wherever a partnership was dissolved. In this I think counsel was, with respect, correct. There are two features of partnership arrangements which show why that is so.

176. First, inherent in any partnership are the obligations of the partners, while the partnership subsists, to devote themselves to the conduct of the partnership business and not to compete with it. In the case of a “technical” dissolution where one partner leaves but the other partners continue in partnership the successor partnership continues to have the benefit of those obligations among the continuing partners. Even if the departing partner is not subject to such obligations, that may be insufficiently substantial in the scheme of things to mean that a new business has come into existence. Thus, the former Chief Judge may have gone too far in Old in suggesting that if the HOM partnership had consisted of a hundred partners, Mr Old’s departure would still have destroyed the goodwill in the former partnership business (see at [47]-[48]).

177. The other feature is this. As I have explained, dissolution does not necessarily discharge partnership contracts, and the remaining partners (or receivers appointed by the court) retain the benefit of a departing partner’s obligation to assist with the completion of “transactions” undertaken by the partnership. This may be an obstacle (in addition to the departing partner’s non-solicitation obligation) to the departing partner taking on existing client matters.

178. The obligation to assist with completion of unfinished partnership “transactions” could be of particular significance in a legal practice. Retainers in litigious matters are generally undertaken for the duration of the litigation. If the practice continues or is to be sold, it may be that the departing partner can be required to continue to work on the matter, at least to allow a reasonable time for the remaining partner(s) or a purchaser to make more permanent arrangements to continue to discharge the firm’s obligations.

179. In theory it might be possible for this to be given an express contractual basis in the practice’s retainer agreements with clients. For instance, the agreements might expressly allow the partnership firm to specify the lawyers who were to work on the matter, or even expressly permit the firm to novate the retainer to a successor partnership or a third party purchaser.

180. These possibilities did not feature in the present case. The Receivers seem to have assumed that they had no entitlement to require the former partners to continue to work on current matters, even if only for a relatively short period to permit them to undertake some sort of competitive sales process (Mr Paltos was at that time not capable of doing so anyway). In the proceedings before me, both parties proceeded on the basis that it was simply a matter for clients to decide whether they wanted one or other of the former partners to continue to represent them.

181. So while the dissolution of a solicitors’ partnership does not in every case end the partnership practice as a business, it may. I have accepted that the practice infrastructure passed to MFL. MFL also had the benefit of Mr Milevski’s services. But MFL did not have the benefit of enforceable obligations against Mr Paltos.

182. There were of course only two partners; and Mr Paltos was the founder of the firm and its senior partner. It may be argued that the loss of the ability to require him to devote his efforts to the conduct of the practice, and not to compete with it, itself represented such a substantial change that the Murry test of business continuity was not satisfied.

183. On one view, that was implicitly accepted by Ms Conoulty. If substantially the whole of the partnership business passed to MFL, then, because the goodwill must be equated with that business, the value of that goodwill in MFL’s hands should have been the same. But Ms Conoulty made significant deductions in her valuation of the goodwill in MFL’s hands to take account of Mr Paltos’ absence (even though the deductions were, I think, insufficient).

184. Such an argument may be difficult to reconcile with the outcomes in the South Australian Full Court in Walker and Chia (as already noted, Young CJ in Eq thought that Walker was inconsistent with Murry). But it might not be necessary to go that far. Even though there was no agreement between the partners to go their separate ways, the practical reality was arguably that they did so.

185. In these circumstances, I am inclined to think that counsel for Mr Milevski was correct in submitting that the goodwill of the partnership practice was not transferred to MFL. But in view of the conclusions I have already reached it is not necessary to make a final decision on this point.

Active files

186. This brings me to Ms Conoulty’s alternative “asset-based” valuations. The first of those is the valuation of the active files.

187. Ms Conoulty’s valuation method treated the transfer of the files as equivalent to the transfer of the opportunity to continue to act and earn fees on the matters to which the files related. It can be accepted that such an opportunity existed but the question is what value it had, given the Receivers’ (and it seems the parties’) acceptance that the clients were free to transfer their files elsewhere and MFL was immediately free to accept those files.

188. Again I think that the “fair value” method adopted by Ms Conoulty created a fundamental difficulty with her valuation. Ms Conoulty rightly acknowledged that any purchaser would have had to be confident of actually earning further fees on the matters before paying for the privilege of taking them over. By asking what Mr Milevski could have been confident of earning from the files, Ms Conoulty asked the wrong question. The real question was what a third party purchaser, facing potential competition from Mr Milevski (and, after a period of time, potentially from Mr Paltos) would have expected to earn.

189. I doubt that the revenue later actually derived by MFL from the active files is a good guide to what Mr Milevski would have expected as at the date of dissolution. It is certainly no guide to what a third-party purchaser would have expected to earn. Ms Conoulty’s approach exposed the problem but then did not deal with it. Again, the earnings stream from the files may have had some intangible economic value but on the evidence the selection of some figure or other to represent that value would be guesswork.

Established workforce and practice manual

190. Ms Conoulty did not, as I have noted, set out to determine the value of the partnership’s “established workforce” by asking what a purchaser would pay for that workforce. Instead, she based her valuation on the cost to Mr Milevski of building up an equivalent workforce from scratch.

191. This may or may not have been a consequence of the “fair value” basis used by Ms Conoulty, which I consider to have been inappropriate. But on any view, I think it is unsound. Ms Conoulty herself said that she did not use a comparable sales basis of valuation because of a lack of sales data. To my mind the lack of sales data tends to indicate that such a workforce, considered as an asset separate from the business in which it is employed, has no market value.

192. Even if that is wrong, and the replacement cost of the workforce is some indication of its market value, Ms Conoulty did not claim to have any relevant knowledge or experience of the hiring or training of law firm staff. No doubt there are costs, but I am not satisfied that Ms Conoulty’s figures for those costs are the product of any relevant expertise.

193. Similar observations apply to Ms Conoulty’s valuation of the practice manual. Again there was no evidence that such a manual had a market value to a third-party purchaser, and even if replacement cost was a proper guide to market value, Ms Conoulty lacked the expertise necessary to say what that cost was.

Conclusion

194. For the reasons I have given, I consider that the valuation opinions expressed by Ms Conoulty in her reports were either beyond her expertise, or derived from valuation methods which were inappropriate to the circumstances of the case. This may, strictly speaking, render them (and Mr Russell’s opinions to the contrary) inadmissible. But I do not propose to go through the reports so as to rule on what is admissible and what is not. Even if admissible, the opinions have no weight. Given the conclusions I have reached, it is not necessary to go into the remaining debates between Ms Conoulty and Mr Russell about quantum.

195. Counsel for Mr Paltos pointed out that the Court of Appeal judgment in the BP proceedings quoted extensively from Ms Conoulty’s first report and in effect accepted her conclusions for the purposes of assessing damages. But I do not think that that is of any significance for the resolution of these proceedings. The Court specifically stated ([2021] NSWCA 158 at [177]) that findings in its judgment were not intended to, and would not, bind the parties for the purposes of these proceedings.

196. The result is unfortunate for Mr Paltos, given that his damages were docked by almost $500,000 for the value of intangible assets which I have now found to have had no value. But the Court of Appeal judgment repeatedly emphasised (see at [160(1)], [171], [177]) that the way in which the issues have been presented to the Court for decision was the product of forensic choices made by Mr Paltos.

Receivers’ motion for payment

197. Initially, the Receivers’ application sought payment from Mr Milevski and Mr Paltos of an amount sufficient to pay off all of the unpaid creditors of the partnership. Counsel for Mr Paltos, however, foreshadowed opposition to this course, on the ground that her client lacked ready funds to make the payment. I therefore held off hearing the application to allow evidence of Mr Paltos’ financial position to be put before the Court.

198. Although an affidavit from Mr Paltos was served, it was ultimately not read. Updated evidence from the Receivers, however, incorporated a summary of Mr Paltos’ financial position given by his solicitors to the Receivers’ solicitors. According to that summary, Mr Paltos’ current liabilities exceed his current assets by hundreds of thousands of dollars. It was in these circumstances that the Receivers abandoned their foreshadowed claim and limited their claim to a claim for payment by Mr Milevksi (only) of a sum sufficient to pay minor unpaid partnership debts, and their fees.

199. The summary of Mr Paltos’ financial position provided by his solicitors was of course not tested. As I have recorded, Mr Paltos received the benefit of a judgment in his favour against BP in the sum of $943,000. No doubt there would have been costs payable to his own solicitors, which will only be partly recoverable under the costs order which Mr Paltos received against BP. Even so, the reported situation is surprising. But there is no other evidence before the Court.

200. In the exercise of their powers, the Receivers had been acting in the interests of the partners and for their ultimate benefit. Initially, it seemed to me that the Receivers might well be entitled to obtain an order for payment of the unsatisfied partnership debts through a right of indemnity from the individual partners, as discussed further in the next section of this judgment.

201. On reflection, I do not think that is correct. The assets of the partnership were vested in the Receivers but not its liabilities. The Receivers were entitled to use the assets in their possession to discharge the partnership liabilities but the partnership creditors had no legal rights against the Receivers personally. The creditors’ only legal rights are, on the face of it, those they have as a result of their dealings with the partners up to the point the partnership was dissolved.

202. On this view, the Receivers have no general law right to compel the partners to put them in funds to make payment. But this is not the end of their application.

203. The Receivers were appointed by the Court in the exercise of the Court’s power under PA s 39 to wind up the business of the partnership. The Court has a wide power to give directions to the Receivers and the parties for the purpose of undertaking the winding up. I see no reason why that would not have included, in appropriate circumstances, making an order against the former partners requiring them to put the Receivers in funds to allow them to discharge unsatisfied liabilities of the partnership.

204. Counsel for Mr Milevski did not, as I understood him, dispute the existence of this power. But he urged me not to exercise it. Although Mr Paltos now accepts that, as against Mr Milevski, he is solely responsible for discharging the debt to Westpac, he has taken no action to do so. The evidence about his financial position also reinforces the conclusion that he is most unlikely to discharge the partnership liabilities himself. Counsel submitted that, in these circumstances, the effect of the order sought by the Receivers would be to make Mr Milevski alone to discharge partnership debts on the basis that he can then claim a seventy per cent share of any payment he makes back from Mr Paltos. Counsel submitted this would be unfair to Mr Milevski. Indeed it would only encourage Mr Paltos further in his refusal to meet his just debts.

205. It is, to say the least, unfortunate that events should have reached this point. The Receivers have quite properly seen it as part of their function to identify and discharge partnership liabilities. No doubt this has involved negotiation with the creditors and perhaps investigations of their claims. Obviously that was the efficient course. If the creditors are now asked to take up their claims with the partners directly, the work done on their claims in the course of the administration may well prove to have been wasted.

206. Mr Milevski of course remains jointly and severally liable to meet unpaid liabilities of the partnership. If Mr Paltos is unwilling or unable to pay, the partnership creditors will still be entitled to proceed against Mr Milevski, leaving him to pursue a claim against Mr Paltos for indemnity or contribution in due course. In the end, for Mr Milevski to require the creditors to pursue him and Mr Paltos directly may only result in him incurring more interest and costs.

207. Nevertheless, Mr Milevksi obviously sees some potential commercial advantage in forcing the creditors to pursue their rights against him and Mr Paltos directly. They may, I suppose, encounter difficulty in proving their claims (noting that the dissolution of the partnership is now almost six years ago). Even creditors, who have established their entitlement to payment beyond doubt (such as Westpac) may be prepared to be accommodating given the difficulties in enforcement.

197. Ultimately I think it must be a matter of financial choice for Mr Milevski. I do not think that I should, over his objection, now require him to put the Receivers in funds to pay the partnership’s business creditors. But in so far as the application covers payment of the Receivers’ outstanding fees it gives rise to different considerations.

198. As I have mentioned, the Receivers’ activities have been undertaken for the ultimate benefit of the partners. In effect they are the agents of the partners for the purpose of winding up the business. There is no dispute that the partners are jointly and severally responsible for their fees. As officers of the Court, the Receivers are, in my view, entitled to its full assistance in compelling the partners for whom they are acting to pay the fees to which the Court has found them entitled.

199. The Receivers of course have some money in their possession which they could apply towards their outstanding fees. But they are also entitled to retain a sufficient sum out of that money to meet future expenses of the administration. I propose to enter judgment (jointly and severally against Mr Milevski and Mr Paltos) for the full amount of unpaid fees owed to the Receivers. They may choose to enforce the judgment for less than the full amount, on the basis that it can in part be satisfied out of the monies which they hold, while still leaving them enough to complete the administration. But this will be a matter for them.

Partnership accounts and unsettled liabilities

211. My conclusion that the assets transferred had no demonstrated intangible value means that, in accordance with the figures set out in the table at [71] above, Mr Milevski is entitled to judgment against Mr Paltos in the principal sum of $339,184. This covers the capital account of the partnership as at the date of dissolution, together with all realised assets and satisfied partnership liabilities.

212. Counsel for Mr Milevski urged me not to stop there. Counsel submitted that I should “certify the partnership accounts” fully. While it was not clear to me exactly what form of order counsel had in mind, the idea was that I should formally record the agreement between the parties as to the current quantum of, and responsibility, inter se for, the unsatisfied partnership liabilities. As I understood it, both parties could see the advantage in nailing this down now.

213. The parties’ liability for the Westpac debt has been established by judgment. It has been agreed between the parties that, as among themselves, Mr Paltos must indemnify Mr Milevski against his liability under that judgment.

214. At law, a judgment could not be obtained for indemnity or contribution unless the liability the subject of the claim had actually been satisfied. But in equity it has always been possible, once liability is established, to obtain an order requiring indemnity or contribution against that liability without the plaintiff having to pay it first: Friend v Brooker (2009) 239 CLR 129 at [55].

215. In the present case, I propose to make such an order in Mr Milevski’s favour with respect to the Westpac judgment. The form of the order will not be tied to the current amount of the liability as recorded by the Receivers. Mr Paltos will simply be ordered to indemnify Mr Milevski against that liability. The order will in effect require Mr Paltos to take whatever steps are necessary with Westpac to discharge the liability. As with an order for specific performance, there will be liberty to apply for directions in order to fill in the detail if there is any dispute about what is required.

216. Also like an order for specific performance, however, the order for indemnity will not require Mr Paltos to do the impossible (see [127] above). If Mr Paltos lacks the funds required to discharge the debt, and Mr Milevski eventually has to pay it in whole or in part, he will be entitled to obtain a judgment for a liquidated sum against Mr Paltos by way of indemnity in the usual way.

217. This leaves the other partnership creditors. But so far as I know no other creditor holds a judgment against Mr Paltos and Mr Milevski. The parties have agreed the nature and quantum of the partnership liabilities for the purpose of these proceedings. But the creditors are not parties and there is no binding determination between them and the partners. As I have pointed out, there still may be questions about whether the liabilities recorded by the Receivers are enforceable.

218. I think in these circumstances it is not open to me to make any further accounting order, or any order for contribution or indemnity. It may, however, be possible to make a declaration reflecting the terms of the agreement as to the existence of the liabilities and the parties’ percentage obligations to contribute, but without specifying the amount. I will leave this to the parties to consider after reading this judgment.

219. The partnership account will therefore be left incomplete. But this does not offend the principle that one cannot have an account “in little bits”: Hutley JA in Colin D Young Pty Ltd v Commercial and General Acceptance Ltd (Supreme Court of New South Wales – Court of Appeal, Hope JA, Hutley JA and Glass JA, 24 September 1982). There can only be an obligation to account for assets which have actually passed through the accounting party’s hands (or can be surcharged to the accounting party). Likewise, credit can only be obtained in an account for liabilities actually discharged. The Receivers’ obligation to account for monies held by them is conceptually separate and, as I have already pointed out, cannot be completed because the Receivers are not in a position to have their accounts passed.

220. In these circumstances, entering judgment between the partners based on their capital account balances, the liabilities actually discharged by them and the value of the assets appropriated by them is as far as I can go. If further partnership debts are satisfied by one or other of the partners, then at that point the account can be taken a stage further with another judgment.

Conclusions and orders

221. I have concluded that:

1. it has not been demonstrated that there was any intangible value in the assets transferred by the Receivers to Mr Milevski following dissolution of the partnership;

2. Mr Milevski is therefore entitled to judgment against Mr Paltos in the sum of $339,184, on account of the partners’ capital account balances as at the date of dissolution, and the value of partnership assets transferred to, and partnership liabilities discharged by, the partners;

3. Mr Milevksi is also entitled to an order that Mr Paltos indemnify him against his liability under the judgment obtained by Westpac; and

4. the Receivers are entitled to judgment, jointly and severally against Mr Paltos and Mr Milevski, in the sum of $79,123, on account of unpaid fees up to 21 January this year.

222. It is not clear to me whether there is any claim for interest on judgments (2) or (4). If so, the interest will need to be calculated. I will also consider, as I have mentioned, an application for declarations reflecting the parties’ agreement about the unpaid partnership liabilities apart from the Westpac judgment.

223. No doubt the parties will wish to be heard on the question of costs. Consideration should also be given as to what is to happen with the 2017 proceedings.

224. Before parting with the case I will make two final points.

225. First, with the benefit of hindsight, and without pre-empting Mr Paltos’ foreshadowed claim against the Receivers for breach of duty, the Receivers were placed in a very difficult position by being pitched into the running of a legal practice. They were obliged to try to realise the goodwill, but had no ability themselves to do the legal work required to keep the business going, even if only for a short time to see whether it could be sold through some sort of competitive bidding process. This was an obvious handicap to obtaining anything for any goodwill the practice might have had.

226. As I have explained, there may be arguments that receivers appointed to realise a legal practice conducted by a partnership are entitled to require the former partners to do more than billing the current matters up to the date of dissolution. But on any view it is debatable how far such an entitlement may go, if it exists at all. A better solution could be to ensure that at least one of the receivers appointed by the Court holds an unrestricted practising certificate. Alternatively, the Law Society might be asked at the same time to appoint a manager to the partnership practice, who would have full power to ensure that current legal work could be carried on: Legal Profession Uniform Law (NSW) Part 6.4.

227. The second observation, again with hindsight, is that a situation developed where the Receivers were continuing on with the receivership when the partnership liabilities exceeded the assets and funds were not being provided by the partners to cover those liabilities. By the time the Receivers made their application to have the partners put them in funds, it was too late. It would have been better if the application had been made much earlier. Alternatively, once it became clear that the outstanding partnership liabilities might not be met by the partners, the Receivers could have applied to retire, and ruled off their accounts at that point.

228. The orders of the Court are:

1. Adjourn the proceedings to 9:30 am on 25 March 2022 or such other time as may be arranged with my Associate.

2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

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Amendments

19 April 2022 - amend at [215] and [221(4)]

Decision last updated: 19 April 2022