Mochkin v Klein (No 2)
[2022] VCC 1835
•28 October 2022
| IN THE COUNTY COURT OF VICTORIA AT Melbourne | Revised Not Restricted Suitable for Publication |
Case No. CI-20-05675
| Yosef Mochkin | Plaintiff |
| v | |
| Yechiel Klein & Ors | Defendants |
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JUDGE: | Her Honour Judge Burchell | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3 October 2022 | |
DATE OF JUDGMENT: | 28 October 2022 | |
CASE MAY BE CITED AS: | Mochkin v Klein & Ors (No 2) | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 1835 | |
JUDGMENT
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Subject:EQUITY AND TRUSTS
Catchwords: whether constructive trust in favour of the partnership should be declared over assets of business – whether pressed at trial – whether claim can be abandoned by inference – “benefit” – “profit” – whether findings limited to account of profits
Legislation Cited: Partnership Act 1958 ss4 and 33(1)
Cases Cited:Mochkin v Klein & Ors [2022] VCC 1385; Cresswell v Cresswell [2017] VSCA 272; Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; Bluescope Steel Ltd v Kelly (2007) 72 IPR 289; Warman International Ltd v Dwyer (1995) 182 CLR 544; Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; Ancient Order Of Foresters In Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited & Anor (2018) 360 ALR 1; Mirboo Ridge Pty Ltd v Minister for Resources [2019] VSCA 304; Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7; Birtchnell v Equity Trustees (1929) 42 CLR 384; Chan v Zacharia (1984) 154 CLR 178; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Giumelli v Giumelli (1999) 196 CLR 101; Browne v Dunn [1893] 6 R 67; Barnes v Addy (1874) LR 9 Ch App 244
Texts Cited:Graeme S Clarke KC, Breach of Fiduciary Duties in Commercial Cases: Recent Developments
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Ravech | Rotman & Morris Lawyers |
| For the Defendants | Mr A Ounapuu | Rosendorff Lawyers |
HER HONOUR:
Introduction
1On 29 August 2022, the Court delivered its reasons for decision in this proceeding.[1] The parties were invited to prepare draft orders and to make submissions to give effect to those reasons.
[1] Mochkin v Klein & Ors [2022] VCC 1385 (“Mochkin No 1”).
2The only area of dispute between the parties in relation to the final declaration and orders sought is whether the Court ought to make a declaration that the WilliamKlein Business itself is a “benefit” within the meaning of s33(1) of the Partnership Act 1958 (Vic) (“the Partnership Act”) such that there is a constructive trust over the assets of the WilliamKlein Business for the benefit of Mochkin (50%), Klein (30%) and Segman (20%).
3Mochkin contends that it is equitable to order that the defendants account to the Partnership for the total capital value of the WilliamKlein Business.
4The defendants submit that the declaration should not be made because:
(a) despite pleading a claim for a constructive trust,[2] and adverting to that claim in the list of issues,[3] Mochkin’s case at trial did not contain any mention of an asserted constructive trust over the assets of the WilliamKlein Business.
(b) properly construed, the meaning of “benefit” in s33(1) of the Partnership Act does not permit the Court to make a declaration encompassing all of the property of the WilliamKlein Business; and
(c) the Court’s findings were limited to an account of profits only – it would be beyond the scope of those findings to now declare the existence of a constructive trust.
[2] Further Amended Statement of Claim dated 26 June 2020, prayer for relief J.
[3] Issue 8(b).
5For the following reasons, the declaration sought by Mochkin for a constructive trust over the assets of the WilliamKlein Business ought to be made.
No constructive trust pressed at trial
6It was common ground between the parties that orders should be made in relation to the taking of accounts of the historical profits of the WilliamKlein Business from 11 August 2018 to the date of the final settlement of the accounts of the Partnership, described as “the fruit of the tree” in the parties’ oral submissions. The defendants opposed orders that “any benefit derived” requires the disgorgement of “the tree” itself, being the WilliamKlein Business.
7The defendants contended that Mochkin had abandoned, or not pressed, the constructive trust claim or that the WilliamKlein Business itself constituted a “benefit” at trial. They relied on:[4]
(a) paragraphs 147–159 of the Court’s reasons which do not list the WilliamKlein Business as part of the assets that constituted the property of the Partnership;
(b) paragraphs 202–203 where the Court accepted Mochkin’s submissions that the profits of the WilliamKlein Business constituted a “benefit” within the meaning of s33(1) of the Partnership Act and the defendants contended for a discounting for different categories of items sold by the WilliamKlein Business. The defendants submit that the reasons support the taking of accounts of “the fruit” but not “the tree”;
(c) paragraph 228 in which the Court finds that the WilliamKlein Business was facilitated by the funds and labour of Mochkin’s contribution to the Partnership such that the WilliamKlein Business could exist. The Court accepted that, where Mochkin provided the foundation, Klein and Segman built the walls of the new business. The defendants contend that the Court’s findings does not necessarily mean that the WilliamKlein Business could not exist but for the contributions of Partnership assets;
(d) paragraphs 234 in which the Court applied the principles in Grimaldi v Chameleon Mining NL (No 2) (“Grimaldi”)[5] in which it was found that Mochkin was entitled to an order against the defendants for an account of profits with appropriate deductions for skill, efforts, property and resources;
(e) although paragraphs 11–13 of the further amended complaint proposed equitable relief, the defendants claimed that the relief of a constructive trust over the assets of the WilliamKlein Business was not argued during the hearing and was not sought by the plaintiff at trial.
[4] Mochkin No 1.
[5] (2012) 287 ALR 22 (“Grimaldi”).
8The defendants further relied on paragraph 1 of Mochkin’s written outline of opening submissions which did not set out the declaration, now sought, and provided as follows (footnotes omitted):
“In this proceeding, the plaintiff (Mochkin) seeks the following relief:
(a) A declaration that the business carried on by Mochkin, the first defendant (Klein) and the second defendant (Segman) in partnership under the name “Shop Ozstore” (the Partnership) was dissolved on 10 August 2018.
(b) A declaration that the profits of the business carried on under the name “WilliamKlein” (the W K Business) by Klein and Segman:
(i) in partnership; and
(ii) through the third defendant (Getafix),
constitute property of the Partnership and are held on a constructive trust for the benefit of the Partnership.
(c) A declaration that the Partnership owes Mochkin the sum of $30,485.63 for moneys lent by him to the Partnership, together with interest on that sum calculated at the rate of 7 per cent per annum from 7 August 2018, being the date upon which the last increment of the moneys was advanced, until payment.
(d) An order that pursuant to sections 43, 46 and 48 of the Partnership Act 1958 (Vic) (the Act) there be a taking of accounts in relation to the Partnership and the Partnership property, and a fair distribution to each partner of his respective share of the Partnership property and profits. In the taking of such accounts, there must be proper allowance made for any money, assets or property taken from the Partnership property by any partner or partners for his or their own use and for any private profits made by any partner or partners for which he or they have not accounted to the Partnership.
(e) An order that an account be taken of the profits made by the W K Business with liberty reserved to Mochkin to apply to re-open the accounts and/or to falsify.
(f) An order that accounts be taken in relation to the Partnership pursuant to sections 43, 46 and 48 of the Act and that Mochkin, Klein and Segman pay to each other all sums due to the other in relation to the Partnership and the Partnership property.
(g) An order that Klein and Segman pay Mochkin’s costs of the proceeding.
(h) An order that the counterclaim be dismissed with costs”.
9Mochkin did not seek an order that the special referee not be bound by the accounts of the defendants in light of the defendants’ concession in their submissions regarding the final orders that this issue can and should be ventilated before the special referee if necessary.
10The defendants further relied on the following passages of Mochkin’s written outline of opening submissions which focussed exclusively on the statutory remedies under the Partnership Act:
(a) paragraph 28 which listed the assets that constituted the Partnership Property for the purpose of taking of accounts. Again, the defendants noted that the WilliamKlein Business was not listed as an asset that constituted Partnership Property.
(b) paragraph 31 which made submissions that all the profits of the WilliamKlein Business fall within the scope of s33(1) of the Partnership Act.
(c) paragraphs 32–34 concern the liability of Getafix to account to the Partnership as a constructive trustee under the first limb of Barnes v Addy[6] for all the profits received by it from the WilliamKlein Business.
[6] (1874) LR 9 Ch App 244 (“Barnes v Addy”).
11The defendants referred to the plaintiff’s oral opening submissions at trial,[7] which only referred to constructive trusts in the context of Getafix as the alter-ego of Klein and Segman, as directors and equal shareholders, being fixed with their knowledge, so that Getafix is knowingly receiving and is liable as a constructive trustee under the first limb of Barnes v Addy so as to impose a duty on Getafix to account to the partnership as a constructive trustee.
[7] Transcript pp6–51.
12The defendants addressed the written outline of closing submissions of Mochkin and question 8(b) of the list of issues in the context of an account of profits under s33(1) of the Partnership Act and an entitlement to an order for an account of profits against Getafix directly without any need to establish accessorial liability under Barnes v Addy.
13In the circumstances, the defendants contend that Mochkin implicitly abandoned the claim for a constructive trust over the WilliamKlein Business as a whole at the trial and that it cannot now be pressed.
14The defendants claim that had the remedy of constructive trust been pressed, then the defendants:
(a) would have adduced evidence, and made submissions, relevant to any applicable equitable defences;
(b) Klein and Segman would have been cross-examined on that topic or at least been the subject of Browne v Dunn[8] “puttage”;
(c) Klein and Segman would have adduced expert evidence relevant to the application of the “springboard doctrine” and the proportions in which the assets were to be held on constructive trust.
[8] [1893] R 67.
15Mochkin argues that the equitable relief pleaded in paragraphs 11-13 and prayer for relief J of the complaint and the constructive trust set out in the list of issues in paragraph 8(b) had never been abandoned by the plaintiff. He says that:
(a) the defendants did argue their equitable defences at the trial and lost. The defendants claimed in their defence that the equitable relief sought by Mochkin ought to be disentitled because of the “Mochkin Conduct”, that Mochkin be estopped from denying the terms of the Settlement Agreement, alternatively, that due to the “Mochkin Conduct” that there be limits to the extent to which the defendants be required to account to Mochkin;
(b) the witnesses had been cross-examined on the topic of being liable to account to the plaintiff for all benefits derived by them arising out of the use of the Partnership Property;
(c) the WilliamKlein Business is not listed as an asset of the Partnership, but rather, is a benefit that the defendants must account to the Partnership as a benefit derived by them or private profits;
(d) the time for adducing expert evidence had long passed in the pre-trial directions and the defendants had filed the reports of Mr Simonetti and Mr Ferrier in the proceeding;
(e) profits can be a “benefit” as it is not to be construed in an accounting sense. Rather, the WilliamKlein Business was derived from the Partnership Property and the assets of the Partnership which were used by WilliamKlein to create the Business in a s33(1) sense.
16The plaintiff contended that the hearing as to final relief was the time by which the defendants could make their submissions in relation to the appropriateness of the relief sought. The defendants declined to re-open their case to adduce further evidence in support of their defences.
17In my view, unless a party expressly states that it abandons or does not press part of their case, a party cannot do so by inference. The constructive trust is pleaded in the complaints and the prayer for relief such that it is clear that Mochkin sought declarations of a constructive trust of both the profits and the capital of the WilliamKlein Business. My construction of prayer for relief paragraph J of the plaintiff’s amended complaint is the value of Partnership Property and the assets of the Partnership received by Getafix is the value of the WilliamKlein Business. I accept Mochkin’s argument that, given the relief of the constructive trust over the assets of the WilliamKlein Business, it is a remedy sought by the plaintiff if successful on the issues of liability. Therefore, it is appropriate in the circumstances of this case that the plaintiff press for the remedy at the point in time of fashioning the final orders arising from the Court’s reasons for decision.
18This is a different case to the case of Cresswell v Cresswell,[9] which was a dispute between parents and their son in relation to the purchase of a property by the parents to which the son contended he had made contributions. The son’s statement of claim included pleadings of an agreement, reliance on the agreement, common intention and constructive trust. The prayer for relief included a claim for specific performance. The trial judge held that there was a contract between the parties which was enforceable by specific performance. The Court of Appeal allowed an appeal on the basis that a claim in contract had not been sufficiently and clearly raised in the statement of claim.[10]
[9] [2017] VSCA 272.
[10] Ibid at [71].
19In the present case, the defendants were squarely put on notice of Mochkin’s relief sought and the trial was not presented or conducted in a manner in which the plaintiff had abandoned this, so as to conclude that the defendants had no proper opportunity to defend it. The defendants made arguments in relation to equitable defences and lost. Although the “springboard doctrine” was alluded to in pre-trial correspondence from the defendants’ solicitor on 14 May 2022, the defendants did not raise it during the trial or seek to include the doctrine in its amended pleadings during the hearing.
20The parties were given a timetable and hearing to make arguments and present submissions in relation to the appropriateness of the final orders. The defendants were asked if they wished to re-open their case and they refused. Any further expert reports and submissions on the issue of valuation of the WilliamKlein Business can be made by the parties to the special referee. There is no breach of procedural fairness or a denial of a fair trial.
Legal Principles
21It is well established that an account of profits is designed to strip profits made in breach of equitable obligations, to prevent a wrongdoer profiting from his own wrong. Third party participants in fiduciary breaches may also have to account for profits made. The essence of a plaintiff’s complaint, in seeking an account of profits, is that the defendant has usurped a profit-making opportunity that should have come to the plaintiff. In turn, that justice requires the profit made be removed from the defendant and directed to the plaintiff in accordance with its entitlement.
22However, critically, an account of profits is not designed to punish the defendant and, as with all equitable remedies, it is designed to do corrective justice between the parties. Therefore, generally only net profits are to be stripped from the defendant.[11] The focus is on profits made through the defendant’s wrongdoing and, therefore, allowances must sometimes be made, not referrable to the wrongdoing, but instead, to personal input or “sweat equity”.[12]
[11] Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 at 369–71.
[12] Bluescope Steel Ltd v Kelly (2007) 72 IPR 289.
23The High Court in Warman International Ltd v Dwyer (“Warman”)[13] noted the following in respect of an account of profits:[14]
(a) the assessment of an account of profits is difficult in practice;
(b) liability to account does not depend on detriment to the plaintiff, or dishonesty or lack of good faith on the part of the defendant;
(c) a fiduciary is usually ordered to account for the profits made within the scope and ambit of its duty;
(d) there can be a distinction between situations where a fiduciary acquires a specific asset within the scope of its obligation and where a fiduciary establishes and operates a business to exploit an opportunity;
(e) where a fiduciary establishes and operates a business to exploit an opportunity it may be inappropriate to require the fiduciary to account for the whole of the business profits for an indefinite period of time especially where part of the profits is attributable to the fiduciary’s own inputs;
(f) the defendant bears the burden and onus of proving that it should not account for the whole of the profits;
(g) generally a court will not apportion the profit made between the fiduciary and the principal however where it is inequitable to account for the whole of the profits, the court will make necessary allowances for skill, effort and expenses.
[13] (1995) 182 CLR 544 (“Warman”).
[14] Ibid at 558, 560, 561, 562; See also Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22 at [523]–[536] (“Grimaldi”).
24Both parties relied on the academic paper of Graeme S Clarke KC.[15] The parties relied on the Full Federal Court decision in Grimaldi[16] in relation to the general principles concerning a fiduciary’s liability to account to the plaintiff as follows:
“513 The principle that a fiduciary is liable to account for a profit or benefit obtained in breach of his or her duty as a fiduciary is integral to the formulation of the fiduciary principle itself, as is evident in the formulations of it by Deane J in Chan at 198-199 and of Mason J in Hospital Products at 107-108. The relief which is appropriate to effectuate this liability can take a variety of forms – the imposition of a constructive trust on an asset which constitutes the benefit in question; compensating the fiduciary’s principal for the loss inflicted on it, that loss being the commensurate with benefit derived; the avoidance of a transaction between the two; an account of profits; etc. In determining what is the appropriate relief and its extent require two questions to be answered: (i) what is the breach of fiduciary duty – the misappropriation of “trust” property; the improper diversion of an opportunity; an undisclosed personal interest in a sale or purchase, etc?; and (ii) what is the profit or benefit which the fiduciary has made in consequence of that breach: Hospital Products at 110.
514 There is an established jurisprudence which informs the answering of these questions both in general, and for particular contexts. As to the former, there are some well accepted propositions. Among these, are:
(i) the liability is not penal: Vyse v Foster (1872) LR 8 Ch App 309 at 333; “equity does not … punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of duty”: Hospital Products, 109; see generally Harris v Digital Pulse per Heydon JA;
(ii) it is no answer to the liability that the fiduciary’s principal suffered no actual loss as a result of the breach of duty; or that it was unwilling or unable to obtain the benefit or gain itself; or that it was not the fiduciary’s duty to acquire the profit or benefit as an incident of his or her duty to the principal; Hospital Products, at 108; Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Boardman v Phipps [1967] 2 AC 144;
(iii) of fundamental importance, the remedy must be fashioned to fit the nature of the case and the particular facts: Warman, at 559. By way of corollary, a particular remedy will not be granted where it is inappropriate (eg a constructive trust: John Alexander’s Clubs, at [129]) or where “it would be unconscientious to assert it” (eg an account of profits): Chan at 204-205; and
(iv) the stringent rule requiring a fiduciary to account for profits ought not be carried to extremes: “the liability … should not be transformed into a vehicle for the unjust enrichment of the plaintiff”: Warman, at 561”.
[15] Breach of Fiduciary Duties in Commercial Cases: Recent Developments, March 2020 pp 47–52.
[16] Grimaldi at [513]–[514].
25Both parties also referred to the High Court decision in Ancient Order Of Foresters In Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited & Anor (“Foresters”).[17] This case concerned a breach of fiduciary duty between two former employees of Lifeplan Australia Friendly Society Limited, Woff and Corby. Through its subsidiary, Funeral Plan Management Pty Ltd (“FPM”), Lifeplan provided products to meet the cost of pre-arranged funerals. Ancient Order of Foresters was also involved in the funeral products business. Its market share was significantly smaller than Lifeplan’s and unprofitable. Woff and Corby were employed by Lifeplan in management positions at FPM. They approached Foresters with a five-year plan to divert Lifeplan’s existing funeral products business to Foresters, using Lifeplan’s confidential information and business records. They incorporated a business called Funeral Planning Australia Pty Ltd while still employed by Lifeplan. Foresters’ profit increased significantly, whereas Lifeplan suffered an almost identical loss of profit over the same period. The High Court found that the knowing assistant of a dishonest and fraudulent breach of fiduciary duty was required to disgorge the total capital value of the business it acquired by reason of the breach.
[17] Ancient Order Of Foresters In Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited & Anor (2018) 360 ALR 1 at [23]–[24] (“Foresters”).
26The principles in relation to an account of profits in Foresters[18] is stated as follows by the majority (footnotes omitted):
“23 It is well established that a liability to account for profits will include profits that have been made. However, Foresters submitted that this was the limit of the profits for which it could be called to account. In particular, Foresters submitted that the net present value of funeral bond contracts was an assessment of anticipated future profits rather than actual profits, and was therefore irrecoverable.
24 This submission is not consistent with principle or authority. As to principle, to confine the account in this way would sever the process of accounting for, and disgorgement of, profit from its rationale in the principle of ensuring that the wrongdoer should not be permitted to gain from the wrongdoing. As to authority, the liability to account for a profit was described in Warman as concerned with "a profit or benefit" in language divorced from a confined conception of benefit as accrued profit in narrow accounting terms. In any event, it is artificial to require disgorgement of realised profits but not to allow unrealised profits that will be realised upon performance of the relevant contract where there is no reason to expect that performance will not occur”.
[18] Foresters see also Gageler J at [88]–[94].
27The High Court confirmed that the causal test applying to an account of profits for breaches of fiduciary duty is a liberal one, and that this extends to assistance of dishonest and fraudulent breaches. It is not necessary that the breach be the sole cause of the profit.[19]
[19] Ibid Kiefel CJ, Keane and Edelman JJ at [9], Gageler J at [79]–[80], Nettle J at [178].
28The majority found that “any benefit” received “as a result of” participation in a dishonest breach of fiduciary duty is recoverable, and business connections constitute such a benefit.[20] It is sufficient to show that the profit would not have been made but for dishonest wrongdoing. A defendant cannot argue that profits made by a dishonest breach could have been made honestly and therefore are unavailable. The participation of Foresters in the breach was fundamental to the acquisition of Lifeplan’s business.[21]
[20] Ibid Kiefel CJ, Keane and Edelman JJ at [5]–[7].
[21] Ibid at [4], [10]–[12].
29Similarly, Gageler J found that the Foresters obtained an entire business by reason of its participation in the breach. He stated (at [88]):[22]
“A causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained “but for” the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the “but for” connection will be sufficient even though other contributing causes might be in play. That the fiduciary’s breach of fiduciary obligation is dishonest and fraudulent is also good reason for treating a sufficient causal connection as existing if the dishonest and fraudulent breach can be concluded to have played a material part in contributing to the benefit or gain of the fiduciary or knowing participant even in circumstances where it cannot be concluded that the benefit or gain would not have been obtained but for the breach”.
[22] Foresters.
30The majority held that once causation is established, the onus is on the defendant to show that they should not disgorge the full profit.[23] The defendants may argue that an allowance for skill and effort should be applied or contend that the profit was “beyond the scope” of the wrongdoing such that it would be inequitable for the defendant to account for it.[24]
[23] Ibid per Kiefel CJ, Keane and Edelman JJ at [13], Gageler J at [91].
[24] Ibid per Kiefel CJ, Keane and Edelman JJ at [15]–[16], Gageler J at [91].
31The defendants argue that, although equitable relief is flexible, it depends on the circumstances of each case. They say that they have been denied the opportunity to argue that the remedy of a constructive trust over the assets of the WilliamKlein Business is inappropriate or that it is unconscientious to assert it per Grimaldi.[25] They say that they have been denied procedural fairness to meet the argument because Mochkin now claims that the relief sought is part of the fundamental principles of equitable relief.
[25] Grimaldi at [514(iii)].
32Mochkin’s prayer for relief at paragraph J does list “[a]n order that [Getafix] holds all Partnership Property and assets of the Partnership received by it on constructive trust for the benefit of the partnership”.
33At paragraph 11(a) of the further amended complaint, the plaintiff seeks relief whereby Segman and Klein are liable to account to Mochkin for all benefits derived by them arising out of the use of partnership property.
Whether “benefit” entails ownership of assets
34The defendants claim that Mochkin now seeks to advance a strained construction of the term “benefit” under s33 of the Partnership Act to not only include the profits of the WilliamKlein Business but also the business’ assets themselves.
35The defendants contend that the word “benefit” is to be read using the ordinary principles of statutory construction.[26] The defendants rely on the heading of s33 which is “[a]ccountability of partners for private profits” (emphasis added). Sub-section 1 provides that a partner must account for any benefit “from any transaction concerning the partnership or from any use by him of the partnership property, name or business connexion”. The defendants claim that the words suggest a distinction between the “benefit” that has been obtained, on the one hand, and the partnership property, name or business connexion, on the other and that it would be strange if sub-section 1 was intended to mean that the “benefit” to be accounted for from the use of partnership property could include, in effect, that property itself.
[26] Mirboo Ridge Pty Ltd v Minister for Resources [2019] VSCA 304 at [32].
36The defendants rely on s4 of the Partnership Act, which provides that “[t]he rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act”. They say that if s33(1) was intended to override or replace the law in relation to remedial constructive trusts, one would have expected it to expressly say so.
37It was common ground between the parties that there are no authorities concerning s33(1) of the Partnership Act which consider the meaning of “benefit”. The defendants relied on the High Court in Commissioner of State Revenue v Rojoda Pty Ltd (“Rojoda”)[27] concerning the meaning of a partner’s interest in partnership property which stated as follows:
“The interests of partners in relation to partnership assets is not an interest in any particular asset but is an indefinite and fluctuating interest in relation to the assets, being the right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership”.
[27] [2020] HCA 7 at [21] (“Rojoda”).
38The defendants contend that in light of the observations in Rojoda the word “benefit” should be limited to profits realisable from assets rather than including those assets themselves. To adopt Mochkin’s more expansive meaning would be to trespass upon the legal fiction of a partnership and, in effect, impose some more concrete or apportionable interest in partnership property upon partners.
39Mochkin submits that what the defendants have attained as a result of their breach of fiduciary duty is the WilliamKlein Business itself. The profits are “the fruit” of the breach and the Business asset is “the tree” of the breach. Mochkin says that the defendants cannot get a windfall from their breach.
40Mochkin relies on the following passages of the Court’s reasons as findings that support the relief that he now seeks:[28]
(a) paragraph 200 where the Court records the plaintiff’s submissions that the defendants have misappropriated Partnership Property, the acquisition of which was financed by Mochkin, and that they have used it to establish and grow the WilliamKlein Business for their own profit to the exclusion of Mochkin.
(b) paragraph 228 that the WilliamKlein Business could not exist without the funds and contribution of the Partnership Assets because the defendants did not otherwise have the money to establish it.
[28] Mochkin No 1.
41Mochkin relies on the authorities of Warman[29] and Foresters[30] in support of his argument that a fiduciary must account for a benefit obtained “by reason of” a breach of fiduciary duty, and that a benefit is so obtained if it would not have been earned “but for” the breach.
[29] Warman at 557 and 565.
[30] Foresters at [85]–[88].
42Mochkin argues that where the benefit obtained by a fiduciary by reason of the breach is the establishment of an ongoing business, such as the WilliamKlein Business in this instance, the fiduciary may be liable to account for the total capital value of the business.[31]
[31] Birtchnell v Equity Trustees (1929) 42 CLR 384 at 395–397 and 408–409; Chan v Zacharia (1984) 154 CLR 178 at 199–200 and 205.
43Mochkin submits that it is not necessary to demonstrate that the breach was the sole cause of the benefit because it is sufficient to show that the benefit obtained by the defendants, namely the WilliamKlein Business, would not have been obtained at all “but for” their breach of fiduciary duty.[32]
[32] Foresters at [9], [79] to [80] and [178].
44Mochkin argues that the focus of the Court should be on the overall effect of the defendants’ wrongful conduct and the benefit which they gained from it. Notwithstanding that:
“the purpose of the remedy is not to punish, consideration of what is just in the context of the equitable obligation to be vindicated by the remedy cannot exclude consideration of the severity of the breach of the fiduciary obligation and the extent of the [Defendants’] own involvement and culpability in it”.[33]
[33] Ibid at [94].
45Mochkin contends that the benefit or gain which the defendants obtained by reason of Klein and Segman’s breaches of fiduciary duty was the WilliamKlein Business. He relies on the Court’s reasons (at [228]) that the WilliamKlein Business was “facilitated by the funds and labour of Mochkin’s contribution to the Partnership such that [it] could exist” and (at [197]) that “[a]part from some office equipment, the $19,819.16 stock held at the McLeod Road Apartment and the eBay sales history, Klein and Segman held the rest of the Partnership Property… [and] were able to grow the business from the profits from sales”.[34]
[34] Mochkin No 1.
46As alluded to by parties and noted in these reasons, there is limited authorities or explanation on the ambit and scope of what constitutes a “benefit” under s33(1) of the Partnership Act.
47For the following reasons, I agree with the plaintiff’s submission that the primary judgment found that the WilliamKlein Business itself was a “benefit” obtained by the defendants.[35]
[35] Ibid.
48Section 33(1) of the Partnership Act provides that, in the absence of the consent of the other partners, a partner who uses any partnership property, name or business connexion to derive a personal or private benefit will be required to disgorge that benefit to the partnership for the enjoyment of all the partners jointly.
49The judgment clearly concludes on this point that the profits of the business carried on under the name of WilliamKlein and by Klein and Segman, in partnership initially and then through Getafix, constitute “benefits” within the meaning under s33(1) of the Partnership Act.
50Further, that the profits generated from the PPE equipment should be caught under s33(1) of the Partnership Act and that he should be entitled to a share of the profits in Klein and Segman’s new business.
51The unrealised profits of the WilliamKlein Business will be realised because of the contributions of Mochkin, otherwise there would be no profits to realise. “Benefit” is profit which is the value of the net assets of the WilliamKlein Business. Net assets includes the intellectual property and goodwill which is used to generate profit. As such, it is not a stretch to broaden the conclusion that the “benefit” under s33(1) of the Partnership Act means historical profit and the present value of the WilliamKlein Business.
52For the above reasons, I accept Mochkin’s submission that the defendants’ gain was the plaintiff’s loss in circumstances where:
(a) The benefit obtained by the defendants, in breach of their fiduciary duties and through a misappropriation of Partnership Property, was the Partnership Business which they grew into the WilliamKlein Business.
(b) That benefit represents Mochkin’s loss because, but for the Partnership Business, which was funded by Mochkin and misappropriated by the defendants, the WilliamKlein Business would not exist.
(c) The defendants ought to account to the Partnership in equity for the total capital value of the WilliamKlein Business because only an order to that effect will reflect the true measure of the benefit derived by the defendants and the uncompensated loss suffered by Mochkin.[36]
[36] Foresters at [92]–[97].
53Section 4 of the Partnership Act provides that “[t]he rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act”. There being no judicial consideration of the meaning of “benefit” in s33(1) of the Partnership Act, the High Court’s decision in Foresters is instructive. I do not apply the observations in Rojoda as that case concerns the meaning of a partner’s interest in partnership property. The issue before the Court is not in respect of partnership property but rather the disgorging of ill-gotten gains by reason of a breach of fiduciary duty.
54The majority in Foresters, citing Consul Development Pty Ltd v DPC Estates Pty Ltd,[37] provides (at [7]) that:
“the liability to account and to disgorge benefits encompasses "any benefit" received by the knowing participant in a breach of fiduciary duty "as a result of" that participation. The benefit of a business connection is such a benefit. Foresters' submission fails to come to grips at all with the fact that the benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty by Woff and Corby was not sporadic deposits from retail customers; it was the business connections of Lifeplan and FPM”.
[37] (1975) 132 CLR 373 at 397.
55The majority in Foresters rejected the submission that the liability to account for profits is limited to the profits that had been made.[38] The majority stated at [24] that:[39]
“This submission is not consistent with principle or authority. As to principle, to confine the account in this way would sever the process of accounting for, and disgorgement of, profit from its rationale in the principle of ensuring that the wrongdoer should not be permitted to gain from the wrongdoing. As to authority, the liability to account for a profit was described in Warman as concerned with “a profit or benefit” in language divorced from a confined conception of benefit as accrued profit in narrow accounting terms. In any event, it is artificial to require disgorgement of realised profits but not to allow unrealised profits that will be realised upon performance of the relevant contract where there is no reason to expect that performance will not occur”.
[38] Foresters at [23].
[39] Ibid.
56Justice Gageler also observed (at [75]) that:[40]
“Although commonly referred to as an “account of profits”, there is no reason why a benefit or gain to be made the subject of an account must answer the description of a “profit” in conventional accounting terms. Nor is there any reason why that benefit or gain must answer the description of “property” or must have sufficient certainty as to be capable of forming the subject matter of a trust. The benefit or gain can be expectant or contingent. Indeed, it is commonplace that a benefit or gain the subject of an account might encompass an ongoing business. And it is commonplace that the benefit or gain to be made the subject of an order to account might extend to the whole of the ongoing business or be limited to a part of the business identified by reference to both a specified scope of commercial activities and a specified period of commercial activities which need not be confined to a past period but may be a period which extends into the future”.
[40] Ibid.
57The plaintiff relies on Foresters to argue an account for the total capital value of the WilliamKlein Business.
58In Foresters, in respect of general principles applying to breach of fiduciary duty and accessorial liability, Gageler J noted that employees owe a fiduciary duty of loyalty to employers, which include duties not to conflict and not to profit.[41] The intensity of the remedies imposed will vary according to the dishonesty and fraud involved. Those who assist in a dishonest and fraudulent breach may also be liable in the same way as the fiduciary.[42]
[41] Foresters at [67]–[69].
[42] Ibid per Gageler J at [70]–[71].
59Critically, a knowing assistant is liable as a “constructive trustee” but this simply means the assistant may be imposed with the same remedies as if he were a fiduciary, principally an account of profits or equitable compensation.[43]
[43] Ibid at [74] and [77].
60In respect of the quantification of the account of profits, the majority held that once causation is established, the onus is on the defendant to show that he should not disgorge the full profit.[44] There are two ways of doing this, either to argue that an allowance for skill and effort should be applied (which was not relevant in this appeal) or to say that the profit was “beyond the scope” of the wrongdoing, in that it has no reasonable connection with the wrongdoing, such that it would be inequitable for the defendant to account for it.[45]
[44] Ibid per Kiefel CJ, Keane and Edelman JJ at [13], Gageler J at [91].
[45] Ibid per Kiefel CJ, Keane and Edelman JJ at [15]–[16], Gageler J at [91].
61Gageler J at [94] held that it was relevant to consider whether the plaintiff’s loss reflected the defendant’s gain (as it did in this case) and to consider the dishonesty of the breach. The majority held that Foresters could not show any reason why it would be inequitable for it to account for its full profits.[46]
[46] Ibid.
62In respect of actual and future profit, the majority held that future losses (unrealised profits) may be encompassed by an account of profits, and in this case they should be awarded.[47]
[47] Ibid per Kiefel CJ, Keane and Edelman JJ at [23]-[24], Gageler J at [75].
63Conversely, Nettle J held that it was true that accounts of profits generally encompassed actual profits “up to a point” (at [202]).
64Nettle J continued (at [202]) stating:
“But that said, it does not mean that it is impermissible or inappropriate to assess the benefit derived by reason of a knowing involvement in a breach of fiduciary duty as being the net present value of profits likely to be derived by reason of the knowing involvement in the breach of fiduciary duty”.
65Consequently, he found that it was permissible to account for profits by reference to the net present value of profits of the business. [48]
[48] Ibid per Nettle J at [203].
66Applying the principles set out above, in my view, there is no reason to adopt a constrained interpretation of the meaning of “benefit” for the purposes of s33(1) of the Partnership Act. The decision of Foresters indicates that “benefit” can encompass profits realisable from assets and the assets themselves. In circumstances where the causal test applying to an account of profits is a liberal one and where any benefit received as a result of participation in a dishonest breach of fiduciary duty is recoverable, then a taking of accounts under s33 of the Partnership Act may also extend to the total capital value of a business acquired by reason of a breach of fiduciary duty.
67I further accept Mochkin’s position that the relief sought by the plaintiff is available to him arising from the Court’s reasons.[49] In particular (at [165]), where the Court sets out the plaintiff’s submission that:
(a) s33(1) of the Partnership Act prescribes a remedy applicable in circumstances of an errant partner who derives “any benefit” from a breach of the duty to not obtain any private profits.
(b) consistent with Warman,[50] the defendants ought to account for the full benefit they obtained, including anticipated future profits.
(c) Citing Foresters,[51] there is no justification, in principle, to limit an account of profits to realised profits and that unrealised profits were still profits.
[49] Mochkin No 1.
[50] Warman at [35].
[51] Foresters at [24].
68The partners in breach of their fiduciary duties must account to the other partner for the historical profits since excluding the other partner from the Business and then account for the value of the Business for future profits if the Business continues. This takes care of the future proportion of the value of the Business in which it continues to use, directly and indirectly, assets and property of the Partnership to make its profits. The only way to stop this use is to disentangle the plaintiff from the WilliamKlein Business by extracting his value from the future profits of the third defendant. But for the foundation provided by Mochkin, there would be no walls of a business to build.
69Finally, I agree with Mochkin that the description of “private profits” in the heading of s33 must not be constrained to conventional accounting terms. As Gageler J observed in Foresters (at [75]), the benefit or gain can be expectant or contingent and the subject of an account may encompass an ongoing business and it is commonplace that it may extend to the whole of the ongoing business.[52]
[52] Foresters.
Whether the entitlement should be a fixed and constant 50% share
70The defendants rely on the Court’s findings (at [231]) that “the value of the intellectual property and data files, with respect to the original Partnership Business, would diminish by 5 to 10% per year”.[53] They claim that there is no reason why, in accounting for the “benefit” comprised of the WilliamKlein Business, Mochkin’s entitlement should be a fixed and constant 50% in circumstances where the application of s33(1) of the Partnership Act to the goodwill, eCommerce platforms and intellectual property of the WilliamKlein Business are intrinsically linked to the effort of Klein and Segman in operating the Business. The defendants contend that an unfairness arises if 100% of the WilliamKlein Business is available in any valuation.
[53] Mochkin No 1.
71The value of assets (or capital) is a function of profit. For the value of a business to be redistributed, one must indirectly take into account the net assets that produced the profits. The relief sought by Mochkin in the taking of accounts requires the defendants to account to him of the profits derived since they excluded him from the use of the Partnership Assets and a taking of accounts of the value of the Partnership. This relief could be sought in relation to the value of the WilliamKlein Business moving forward because of Mochkin’s continued contribution to the value of the business into the future. This requires the continuing use by WilliamKlein directly and referrable to the assets of the OzStore partnership and the ongoing use of Mochkin's property.
72The orders sought by the plaintiff provide for the disentanglement of Mochkin in the WilliamKlein Business by extracting him from the value of WilliamKlein's future profits and Mochkin being granted 50% of the value of the WilliamKlein business as though it will operate in perpetuity. In circumstances where the Court is winding up OzStores, the future value of the WilliamKlein Business attributed to Mochkin on net tangible assets must be taken into account.
73The Court has allocated an entitlement on a diminishing scale by using the identification of new product/new supplier and new product/old supplier and that the value of the intellectual property and data files would diminish by 5 to 10% per year. It is a diminishing proportion and not a fixed and constant 50% in relation to the historical profits taking into consideration the Warman principles. The same analysis does not apply to the calculation of Mochkin’s share in the valuation of the WilliamKlein Business.
74Given my previous findings that the contribution of the Partnership’s intellectual property would diminish by 5-10% per year as the defendants revitalised and adapted the Business, the intellectual property, the photographs and the descriptions of the goods and where there is a diminishing historical profit over time for the new categories of products and suppliers, on the evidence at trial and in applying the principles set out in Foresters and Warman, the defendants have shown that the full profit or total capital should not be disgorged due to an allowance for their skill and effort. Further, in my view, to argue for an account of the total profit would be beyond the scope of wrongdoing and would be inequitable for the defendants to account. In those circumstances, Mochkin’s entitlement to the unrealised profit ought to be fixed at 37.5%, being the mid-point between the 50% share (and same product categories) and the 25% discount on historical profits for the new categories of products and not a fixed and constant 50%.
75The old partnership will cease to exist on payment of the residual of Mochkin’s loan and his share of the historical profits of WilliamKlein (if any) and his 37.5% share of the value of the WilliamKlein Business.
What orders reflect the Court’s reasons
76The defendants state that what the Court has called for is for the parties to produce orders reflecting the reasons for decision. They say that in those reasons, the Court determined that:[54]
(a) the profits of the business (emphasis added) carried on under the name of WilliamKlein and by Klein and Segman, in partnership initially and then through Getafix, constitute “benefits” within the meaning under s33(1) of the Partnership Act (at [202]); and
(b) Klein, Segman and Getafix must account for those profits in certain percentages (at [225]–[230]).
[54] Mochkin No 1.
77The defendants submit that the Court’s findings do not support a declaration of the sort now sought by Mochkin. They are all, in terms, limited to profits. They argue that the Court did not address, nor was it asked to address, what should occur in respect of Klein, Segman and/or Getafix’s ongoing ownership of the assets of the WilliamKlein Business given Mochkin’s election at trial to focus solely on the profits of the WilliamKlein Business.
78The defendants contend that the passages relied on by Mochkin to assert that the WilliamKlein Business was a “benefit” under s33(1) of the Partnership Act concern a benefit in the sense of not making a private profit. They submit that the defendants have not obtained a benefit to the cost of the partnership or debarred Mochkin from the opportunity to obtain the very benefit derived by the defendants as a direct result of the fiduciary breach. The defendants claim that given the breakdown in the Partnership on 11 August 2018, there is no reason to suppose that but for the breakdown in the Partnership, the Partnership Business would not have taken the opportunity presented by the pandemic to trade in PPE products which fell within the class of products that the Partnership sold.
79The defendants sought to distinguish the case of Foresters on the facts. They claim that Foresters involves employees, Woff and Corby, who owed fiduciary duties and they were not partners. There was a 5-year plan which Woff and Corby diverted to Foresters using Lifeplan’s confidential information and business records and they used the plan for themselves via FPA. The defendants argue that the remedy fashioned in Foresters must be different to the present case because the business was established using the confidential information and business records.
80In my view, it is not necessary for Mochkin to show that the Partnership could have made the profits itself. There is a deterrent principle behind compelling the disgorgement of the benefit or gain for which the fiduciary or knowing participant is to be ordered to account.
81Although the facts in Foresters are different to the present case, the equitable principles set out above are still applicable.
82A valuation of the Business’ assets is a function of profit – they are not separate concepts. The historical profits of the Business is preferable to the net assets that produced those very profits. Therefore, it is not a stretch for Mochkin to claim a constructive trust over the capital value of the WilliamKlein Business given the proposition that the current value of the Business is a function of profits in perpetuity. It is a claim over the future profits of the Business.
83I accept Mochkin’s submission that the WilliamKlein Business was a “benefit” obtained by the defendants in breach of their fiduciary duty not to make a private profit and their corresponding statutory duty prescribed under s33(1) of the Partnership Act and that, but for the funds and labour which Mochkin contributed to the Partnership, the WilliamKlein Business could not exist.[55]
[55] Mochkin No 1 see also [160]–[165] and [200]–[202] and [228].
JMEC
84The defendants submit that if a declaration of the sort sought by Mochkin is to be made, a corollary declaration concerning the “augoods retail” business should also be made. The Court’s findings concerning the “augoods retail” business were in near identical terms to its findings about the WilliamKlein Business (at [253]–[258]).[56]
[56] Ibid.
85Mochkin opposes orders that there should also be a constructive trust in favour of the Partnership over JMEC’s business. He says that the constructive trust for which the defendants contend is beyond the scope of the liability for which Mochkin should account to the Partnership because it has no reasonable connection with their breach of fiduciary duty.
86The Court found that JMEC sold stock on the same platforms that were used by the Partnership, sourced stock from a former supplier of the Partnership and had access to some office equipment, the McLeod Spreadsheet and some intellectual property that belonged to the Partnership.[57]
[57] Ibid at [253]-[254] and [255]-[257].
87Mochkin contends that these findings entitle the defendants to a proportion of the profits of JMEC’s business which were held to have a sufficient nexus with the wrongdoing, but it does not entitle the defendants to an equitable interest in that business which, in contrast to the WilliamKlein business, was neither “facilitated by the funds” of the Partnership such that it could exist, nor built on “the foundation” of the Partnership Business.
88Mochkin submits that his breach of fiduciary duty was neither deliberate nor designed to take advantage of his partners because he endeavoured, as he said in his evidence, “not to sell goods that competed with Klein and Segman”. Mochkin claims that this is contrasted with the defendants’ fiduciary breach, which was both deliberate and designed to achieve the outcome produced, namely, the benefit of the misappropriated Partnership Business which evolved into the WilliamKlein Business.
89The defendants say there is symmetry in the Court’s findings on the treatment of the profits. The defendants relied on the Courts reasoning (at [202]-[203]) in which the Court considered s33 of the Partnership Act and dealt with Mochkin’s submissions that the profits of the WilliamKlein Business constitute “benefits” within the meaning of s33(1) and the defendants’ contention that the new platforms and categories ought to be excluded from the taking of accounts.[58] The defendants note that similar findings were made in relation to JMEC (at [253]).[59]
[58] Mochkin No 1.
[59] Ibid.
90Similarly, the Court found that the defendants used Partnership Property, such as the rolling profits from Mochkin’s initial financial contributions, stock and the McLeod Spreadsheet in their endeavours in the WilliamKlein Business.[60] The Court held that JMEC used the same platforms used by the former Partnership, sourced stock from a Partnership supplier, the TIC Group, had access to some office equipment identified above, and the McLeod Spreadsheet in its endeavours in the JMEC Business.[61]
[60] Ibid at [226].
[61] Ibid at [254].
91The defendants further rely on the Court’s findings (at [227]–[230]) whereby the WilliamKlein Business used the same approach, language, key words, and photo setup as the Partnership Business, and a rolling profit, and knowledge of approach with the listings, which is directly derived from the Partnership. Discounting was applied for different categories of items. A consistent analysis was used for JMEC (at [255]–[257]) even without cash contributions from the defendants under the Partnership as JMEC used a supplier of the Partnership and the defendants contributed sweat equity. The Court (at [254]) held that JMEC did use Partnership Property in its business being the same platforms, a supplier and some office equipment, the McLeod Spreadsheet and intellectual property.[62]
[62] Ibid.
92Mochkin relies on the fact that Mochkin’s breach of fiduciary duty was neither deliberate nor designed to take advantage of his partners because he endeavoured, as he said in his evidence, “not to sell goods that competed with Klein and Segman”.[63] He says this is to be contrasted with the defendants’ fiduciary breach which was both deliberate and designed to achieve the outcome produced, namely, the benefit of the misappropriated Partnership Business which evolved into the WilliamKlein Business.
[63] Ibid at [251].
93In my view, applying the principles in Foresters (at [5]–[6], [88]), a corollary declaration for JMEC ought to be made. JMEC’s entire business was also obtained by reason of participation in a breach through sourcing stock from a former supplier of the Partnership, use of office equipment and use of the McLeod Spreadsheet and the Partnership’s intellectual property.
94There is a causal connection between Mochkin’s breach of fiduciary duty (even if neither deliberate or by design) and the Business would not exist (being the benefit or gain) but for the breach. Like the contracts in Foresters, the sourcing of stock from an existing supplier of the Partnership was fundamental to the JMEC Business. It is no answer to the liability that the defendants did not suffer an actual loss or that they were unwilling to obtain the benefit or gain themselves.[64] In those circumstances, it is appropriate that the total capital value of JMEC’s business should likewise be disgorged and the defendants are entitled to a 37.5% share for the reasons set out above.
[64] Foresters at [514(ii)].
Remedial Constructive Trust
95Mochkin referred to the Graeme Clarke KC article (at paragraphs 109–11) and the principles for a claim for a remedial constructive trust to prevent the dissipation of assets.[65] The defendants submitted that there is no evidence of dissipation of assets and such relief is not warranted or justified.
[65] Breach of Fiduciary Duties in Commercial Cases: Recent Developments, March 2020 pp 47–52; Giumelli v Giumelli (1999) 196 CLR 101 at [3]–[4].
96Mochkin conceded that, at present, there is no evidence of dissipation of assets and the plaintiff is monitoring the situation.
97I find that there is no evidence before the Court that there is a danger that any prospective personal judgment for an account of profits would not be satisfied due to a diminution of assets in the meanwhile such as to justify the granting of a remedial constructive trust.
Questions for the Special Referee
98By correspondence dated 14 October 2022, the parties provided a joint note to the Court setting the proposed Questions referred to in paragraph 6 of the Court’s proposed orders dated 7 September 2022.
99The parties proposed the following Questions, including question 3 in the event that the Court decides to make the declaration for which the plaintiff contends, pertaining to the total capital value of the WilliamKlein Business, which is declaration 5 of the proposed orders dated 7 September 2022, and a mirroring question 4, pertaining to the Augoods Retail Business:
“1. What is the value of the profits of the WilliamKlein Business:
(a) generated from all sales of stock during the period between 11 August 2018 and 10 August 2019;
(b) generated during the period between 11 August 2019 and the date of the Court’s orders (“the Final Settlement Date”);
(i) from sales of stock items previously offered for sale by the Partnership;
(ii) from sales of new stock items not previously offered for sale by the Partnership.
2. What is the value of the profits of the business carried on under the name ‘augoods retail’ (“the Augoods Retail Business”) generated during the period between 11 August 2018 and the Final Settlement Date:
(a) from sales of excess and unwanted stock, end of line stock and clearance stock supplied by the Tic Group and from sales of stock items previously offered for sale by the Partnership;
(b) from the sale of new stock items not previously offered for sale by the Partnership.
2A. In determining the profits of each of the WilliamKlein Business and the Augoods Retail Business, what amount should be allowed as an expense item for the wages/salary of:
(a) Klein and Segman, in respect of the WilliamKlein Business; and
(b) Mochkin, in respect of the Augoods Retail Business.
3. As at the Final Settlement Date what is the total capital value, expressed as a dollar amount, of the WilliamKlein Business?
4. As at the Final Settlement Date what is the total capital value, expressed as a dollar amount, of the Augoods Retail Business”.
100Paragraph 2A is sought by the defendants but opposed by the plaintiff.
101The defendants sought the inclusion of Question 2A because they contend that any assessment of the profits of each business must necessarily have regard to the expenses of the business, and the largest component of those expenses will be wages/salary.
102The defendants relied on the expert report of Mr David Ferrier, in which he stated that:
“it is my opinion that the profit generated by the WilliamKlein Business in this period did not reflect a reasonable allowance for the Defendants’ entitlement to a Commercial Remuneration. This means that their entitlement to profit reflects solely compensation for services provided, at a non-commercial rate, and no return on investment” (see [9.11]).
103The defendants submit that, conversely, Mochkin drew a salary of $56,395.00 and $79,827.00 from JMEC during the 2019 and 2020 financial years (see Appendix P).
104The defendants contend that:
(a) the question of whether or not an allowance for wages and salary ought to be included in the taking of accounts is one that ought to be settled by the Court and not left to the special referee to determine.
(b) the special referee can then proceed to determine what the appropriate allowance ought to be for each of the parties in their respective companies for the relevant period and consider the parties’ submissions in that respect.
(c) determining this issue up front will save time and money down the track when, inevitably, if the issue is raised later, the special referee will need to seek advice of the Court.
105The plaintiff did not dispute the defendants’ contention that “any assessment of the profits of each business must necessarily have regard to the expenses of the business”. However, the plaintiff opposed the proposed paragraph 2A on the grounds that:
(a) it is redundant because the parties can make submissions to the Special Referee on the question of wages/salary and any amount(s) allowed must be taken into account by the Special Referee in calculating the discrete dollar amount that is ultimately determined in answer to each of the other questions.
(b) The dollar amount for “profits” that the Special Referee determines, in answer to each of the other questions, must necessarily take account of, and exclude, any amount allowed for wages/salaries which would constitute an expense of the business, it is superfluous and unnecessary.
(c) There is no need to ask that question, because it serves no useful purpose, since any amount determined in answer to it will already be reflected in the amount determined in answer to each of the other questions.
106In my view, Question 2A is not required, as the issue of wages/salaries is an expense which is part of the exercise that the Special Referee must undertake to value the profit of the WilliamKlein Business and the Augoods Retail Business. I make the observation that the Special Referee is not required to assess the value of the Business to a third party but rather is assessing the value of the profits to the participants of the Business who in fact did not take any wages. It is further noted that the terms of the Partnership Agreement provided that the partners would split the profits of the Partnership in accordance with their respective shares. The profit was their wage.
Conclusion
107For the forgoing reasons, the Court will make a declaration of a constructive trust over the whole of the WilliamKlein Business for the benefit of Mochkin as to 37.5% and the Augoods Retail Business for the benefit of Klein and Segman as to 37.5% and the parties must account to the Partnership in equity for the total capital value of the respective businesses.
108The Questions that will be referred to the Special Referee as referred to in paragraph 6 of the proposed orders dated 7 September 2022 are Questions 1, 2, 3 and 4, as proposed by the parties.
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Certificate
We certify that these 32 pages are a true copy of the judgment of her Honour Judge Burchell delivered on 28 October 2022.
Dated: 28 October 2022
Nikki Thomson & Andrea Ko
Associates to Her Honour Judge Burchell
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