MW Corp Pty Ltd v Sabata Lalita Nominees Pty Ltd

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

GENERAL LIST

Case No. CI-16-03458

MW Corp Pty Ltd (ACN 105 718 938) ATF The Wood Family Trust and Anor	Plaintiffs
v
Sabata Lalita Nominees Pty Ltd (ACN 005 367 788) ATF The Wilson 2000 Trust	Defendant

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JUDGE:	Judicial Registrar Burchell
WHERE HELD:	Melbourne
DATE OF HEARING:	7-9 June 2017
DATE OF JUDGMENT:	28 June 2017
CASE MAY BE CITED AS:	MW Corp Pty Ltd & Anor v Sabata Lalita Nominees Pty Ltd
MEDIUM NEUTRAL CITATION:	[2017] VCC 832

REASONS FOR JUDGMENT
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Subject: Taking of accounts

Catchwords: Real estate partnership – winding up – taking of accounts – entitlement to commissions – adjustment to partners’ capital accounts – ss 42, 46 and 48 of the Partnership Act 1958

Legislation Cited: Partnership Act 1958

Cases Cited:Manley v Sartori [1927] 1 Ch 157, Fry & Ors v Oddy [1998] VSCA 26, Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd & Ors [2010] 242 CLR 508, Grizonic v Ranken Suttor & Ors [2011] NSWSC 471, Powell v Powell (1932) 32 NSWSR 407

Judgment: [2017] VCC 832

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	D A Klempfner	Sladen Legal
For the Defendant	A R Kirby	Nicholas O’Donohue & Co

JUDICIAL REGISTRAR:

Introduction

This proceeding concerns how a real estate sales partnership operated by the parties is to be wound up. On 23 March 2017, at the first day of trial before Judge Cosgrave, the parties consented to orders that the partnership should be wound up under the relevant provisions of the Partnership Act 1958 (Vic) as opposed to a formula contained in the partnership agreement.

On 23 March 2017, Judge Cosgrave made declarations, by consent, that:
1. The real estate sales partnership operating under the name Wilson Real Estate between the First Plaintiff, the Second Plaintiff and the Defendant (the Sales Partnership) was dissolved on 31 August 2015.
2. As at 31 August 2015, the Sales Partnership was constituted by the First Plaintiff, the Second Plaintiff and the Defendant.
The proceeding was then referred to me for the taking of accounts of the Sales Partnership in accordance with the Partnership Act 1958 (Vic). His Honour reserved the following questions for determination:
1. whether commissions payable on contracts which were conditional at the date of dissolution of the Sales Partnership but subsequently received form part of the property of the Sales Partnership. [Answer: Yes.]
2. whether commissions payable on contracts entered into after the date of dissolution of the Sales Partnership but negotiated prior to the date form part of the property of the Sales Partnership. [Answer: Yes but with an appropriate apportionment.]
In my view, the questions required an enquiry as to whether the defendant had carried on business since 31 August 2015 using any capital or assets of the Partnership and, if so, what share of profits made by that party since that date is attributable to the use of the Sales Partnership capital or assets.

Factual Background

The Wilson Real Estate partnership consisted of a partnership between MW Corp Pty Ltd (ACN 105 718 938) as trustee for The Wood Family Trust, DGH Properties Pty Ltd (ACN 130 104 586) as trustee for The DG Harris Family Trust and Sabata Lalita Nominees Pty Ltd (ACN 005 367 788) as Trustee for the Wilson 2000 Trust.

It was common ground between the parties that the proceeding involved the taking of accounts of a partnership which existed up until 31 August 2015 between the respective family trustee companies of Mr Matthew Wood, Mr Daniel Harris and Mr Mark Wilson. The partners are hereby referred to as the individuals rather than their companies.

In late August 2015, Messrs Harris and Wood informed Mr Wilson that they no longer wanted to work in partnership with him. Mr Wilson held the view that Messrs Harris and Wood were effectively retiring as partners of the Sales Partnership pursuant to the Sales Partnership Agreement and he determined to continue the partnership of the business following the notification from Messrs Harris and Wood. Mr Wilson did not realise at the time that you “cannot have a partnership of one”. Where two out of the three partners seek to bring a partnership to an end, the whole partnership must be wound up. That is, Red Diamond Pty Ltd (Red Diamond) (the partnership’s manager) trading as Wilson Real Estate, the partnership’s bank accounts and unfinished transactions needed to be wound up as a consequence. It was incumbent on Mr Wilson on the dissolution of the partnership to enter into fresh Exclusive Sales Authorities with each of the vendors on the Partnership’s client list and obtain a new ABN and Tax File Number. Instead, Mr Wilson continued the partnership business after dissolution using the Exclusive Agent Authorities entered into with Red Diamond trading as Wilson Real Estate.

Despite negotiations between the former partners, an agreement as to their respective entitlements under their Sales Partnership Agreement could not be reached. In September 2015, Sinclair Wilson, the partnership’s accountants, undertook a valuation of the Sales Partnership as at 31 August 2015.

From the parties’ expert reports, it was evident that there were three areas of dispute between the parties:

(a) The accounting for commissions from contracts that were conditional as at 31 August 2015;

(b) The allowance made in respect of the Richardson contract in the sum of $40,340; and

(c) The adjustments to the loan and capital accounts for the three partners.

Judge Cosgrave’s orders and the plaintiffs’ written outline of submissions expanded the scope of the accounting for commissions, in particular, commissions on sales which were conditional as at 31 August 2015 but which were ultimately settled, together with commissions in respect of sales entered into after 31 August 2015 pursuant to Exclusive Sales Authorities entered into between Red Diamond and clients.

Legal Framework

Paragraph 46 of the Partnership Act 1958, relevantly, provides as follows:
Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate then in the absence of any agreement to the contrary the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the court may find to be attributable to the use of his share of the partnership assets or to interest at the rate of seven per centum per annum on the amount of his share of the partnership assets: … [Emphasis added]
Both parties relied on Manley v Sartori [1927] 1 Ch 157, which dealt with a partnership business which was, after the death of one of the partners, carried on for a further period under the management of the plaintiff who was one of the surviving partners. Justice Romer at 162-165 held that:
Where, in such a case, the surviving partners, instead of realizing the assets and distributing the proceeds amongst the parties in accordance with their rights and interests, choose to carry on the business and make profits by virtue of the employment of any of the partnership assets, then, subject no doubt to making a proper allowance to the surviving partners for their trouble in so carrying on the business, such profits belong to all the persons interested in the partnership assets by means of which the profits have been earned in accordance with their rights and interests in those assets; that is to say, proportionately to their interests in those assets. …
… it does not necessarily follow that because the surviving partners have been carrying on the business the profits or the whole of the profits are attributable to the use of the partnership assets. …
… it may well be that in a particular case profits have been earned by the surviving partner not by reason of the use of any asset of the partnership, but purely and solely by reason of the exercise of skill and diligence by the surviving partner or it may appear that the profits have been wholly or partly earned not by reason of the exercise of skill and diligence by the surviving partner; or it may appear that the profits have been wholly or partly earned not by reason of the use of the assets of the partnership, but by reason of the fact that the surviving partner himself provided further assets and further capital by which the profit has been earned. [Emphasis added]
In Fry & Ors v Oddy [1998] VSCA 26, Brooking JA observed at [33]-[34] that section 46 of the Partnership Act did not alter the law of equity and the early authorities indicated that each case depends on its own facts because “[s]ometimes the skill, industry, credit and reputation of the continuing partners will be of particular importance in the generation of profits and the assets employed in the business will be of less importance” (see also Ormiston JA at [54] and Callaway JA at [65]). His Honour noted at [40]-[41] that the prima facie view is that profits are attributable to the use of partnership assets and referred to Manley v Sartori as follows:
By that I understand the learned author to mean that where surviving partners continue to carry on the business, prima facie they are carrying it on by reason of their possession of the assets of the partnership; and the executors of the deceased partner are prima facie entitled to a share of the profits proportionate to his share in the assets of the partnership. It is for the surviving partners to show, if they can, that the profits have been earned wholly or partly by means other than the utilization of the partnership assets. … It is consistent with the practice of courts of equity in partnership cases before the Partnership Act of taking an account of profits made by the use of the property and making a just allowance for the exertions of the continuing partner. [Emphasis added]
Justice Brooking observed at [43] that an account of profits required:

(a) a robust and practical approach to what is a very difficult task;

(b) a broad brush approach.

Justice Ormiston in Fry v Oddy at [49] considered the authorities and stated that:
… what is to be fairly attributable to the retiring partner’s appropriate share of the subsequent profits is largely a matter of estimation and impression …But in whichever way one approaches the matter, it is not an exercise capable of producing a sum by way of share of profits which will be capable of being verified as unquestionably right or wrong, for there will be no mathematical or other means of checking its correctness. … As has been said in relation to the taking of an account of profits …. “The ultimate process is one of judicial estimation of the available indications.” [Emphasis added]
The High Court in Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd & Ors [2010] 242 CLR 508 at [22]-[25] identified “that the interest of each partner can be ascertained finally only upon completion of the liquidation and the identification of any surplus share.”

Justice Brereton in Grizonic v Ranken Suttor & Ors [2011] NSWSC 471 at [18] opined that:
… the authorities favour the view that where one partner carries on the partnership business between dissolution and winding up and, in doing so, incurs debts, those debts are to be considered “necessary to wind up the affairs of the partnership” for the purposes of the section. … Upon dissolution, the partner’s rights and duty to wind up the partnership’s affairs, and the surviving (or continuing) partners are entitled and obliged not only to complete all unfinished operations to fulfil contracts still in force … but also to realise the partnership property, and for that purpose to carry on the partnership business in the meantime … Although [In re Bourne [1906] 2 Ch 427] concerned the powers and duties of a surviving partner after death of another, there is no apparent distinction … between that situation and the position of a partner in whose hands the business is left following dissolution inter vivos. One reason for the continuing authority of a surviving or continuing partner is to avoid the necessity for an application in every case for the appointment of a receiver … The underlying rationale is that someone must carry on the business pending winding up to preserve its value for the benefit of both parties, that the partner who does so is acting in the interests of both in preserving the business and its value, so that the other partner is bound by the acts of the continuing partner for that purpose. [Emphasis added]
In Grizonic (at [19]), following the dissolution of the partnership, in that case declared to have taken effect on 8 December 2003, Mr Grizonic continued to manage the restaurant business until receivers and managers were appointed on 5 February 2004. As such, he preserved the value of the business until the appointment of the receivers which was then ultimately realised for the benefit of both partners.

Justice Long Innes in Powell v Powell (1932) 32 NSWSR 407 at 415-416 considered the authorities and noted that there are various ways of dissolving a partnership but that “community of interest remains … until the affairs are wound up; and that required, that what was partnership property before shall continue, for the purpose of a distribution, not as the rights of the creditors, but as the rights of the partners themselves require” (quoting Lord Eldon LC in Ex parte Williams (11 Ves 3, 5)) [Emphasis added]. And again citing Lord Eldon LC in Wilson v Greenwood (1 Swan 471, 480) that “[w]hen a partnership expires, …. in all cases, the partnership is considered, in one sense, as determined, but in a sense also as continued, that is, continued till all the affairs are settled.” [Emphasis added]

Issue 1: The accounting for commissions from contracts that were conditional as at 31 August 2015
Conditional contracts as at 31 August 2015

Messrs Harris and Wood conceded that there was a point of difference between the report of Mr Patterson (their expert accountant) from an accounting perspective and the equitable principles in relation to the treatment of the contracts that were conditional as at 31 August 2015.

As an accounting exercise, Mr Patterson said that if Contracts were unconditional as at 31 August 2015 [except for Logan’s Lots (in the sum of $72,785.27) which was subject and conditional upon registration of the plan and Lot 3 Cruits Road (in the sum of $8,721.04) which was subject to finance] he did not include them as an asset of the sales partnership at the date of dissolution. Mr Mallia, Mr Wilson’s expert accountant opined that the commissions from conditional contracts should not be included as an asset in the balance sheet because the monies by their definition and from their very nature were conditional or contingent and may never be received, that is, there was no present entitlement.

Mr Mallia noted that Tait Legal held the commissions in relation to the Logan’s Lots pending the outcome of the dispute as to entitlement to them. Mr Mallia gave evidence that he had not “actually sat down and thought about” how the funds should be distributed. He saw this as a separate issue to an accounting policy of including the conditional contract as an asset as at 31 August 2015. Mr Patterson noted that Tait legal has incurred costs in holding the funds on trust, which is a liability of the Sales Partnership. Mr Patterson believed that if the Sales Partnership had ceased and the business did not continue to operate then the commissions on the conditional contracts would have ultimately become income for the Sales Partnership at a later date, which was why he included them in his report.

Mr Wilson relied on the partnership’s accountant’s report dated 24 September 2015 which made no allowance for the potential commissions from conditional contracts as at the date of dissolution and that:
… an unconditional contract would be required for the commission to become payable and that, until that point, the commission would be too contingent to satisfy the test for recognition as an asset.
The Sinclair Wilson report attached a balance sheet and valuation that excluded potential commissions from conditional contracts. This conformed with their practice over the years of not recognising the commissions from conditional contracts as assets of the partnership. This included the treatment of conditional contracts at the change of each partnership on 1 July 2008 and 31 December 2013. When the incoming partners joined the Sales Partnership, they received the benefit of the conditional contracts as at that point in time. Each time that the partnership changed, even though new partnership agreements were drawn up, the partnership balances were never brought to zero, and the new partnership was formed on a continuing basis.

Mr Patterson gave evidence that the difference in how Sinclair Wilson treated conditional contracts in the past is that they were reporting on a business which was ongoing, so the commissions on conditional contracts have been brought into account when they were received. In the present case, the Sales Partnership had dissolved.

I accept that, as an accounting exercise, in preparing the balance sheet and valuation of the partnership as at 31 August 2015, conditional contracts are not an asset of the partnership. This is consistent with the AASB Standard 15 “Revenue from Contracts with Customers”, December 2014, pp 13-14. However, both experts agreed that given that the partnership was dissolved as at 31 August 2015, what would ordinarily happen is that the bank accounts of the partnership would be frozen and all assets should have been brought into account and liabilities paid out and the balance disbursed. Instead, Mr Wilson continued to use the assets of the business and funds were still flowing into the Sales Partnership’s accounts subsequent to the date of dissolution.

In my view, if the commissions on conditional contracts which were actually paid into Red Diamond’s account post dissolution but prior to winding up are not included as an asset of the Sales Partnership, then it would be inequitable for Mr Wilson to enjoy those commissions to the exclusion of Messrs Harris and Wood.

Further, I conclude that in circumstances where the continuing partner carries on the partnership business after the date of dissolution, using capital or assets of the Sales Partnership, then there needs to be an account of the share of profits made by that party since 31 August 2015 that is attributable to the use of the Sales Partnership assets. Therefore, commissions payable on contracts which were conditional at the date of dissolution form part of the property of the Sales Partnership.
Paragraphs 9 and 10 of Judge Cosgrave’s orders
Mr Wood gave evidence in relation to the conditional contracts, unconditional contracts, and other types of listings with potential clients of the partnership as at 31 August 2015.

The “listings” book recorded the situation where a client had signed an Exclusive Sale Authority with Red Diamond to sell their property and the partnership was in the process of listing the property for sale. Mr Wilson conceded that listings have real value and gave evidence that:
If you draw the analogy to a shop. If we don’t have stock, we don’t have a shop. … Stock is listings. Listings, more particularly exclusive listings, are stock for a real estate agent. We need to have stock. …
… we treat a sale as when we get a listing. The rest is process. So the gaining of a listing is tantamount to a real estate agent’s business.

Mr Wilson’s evidence in relation to listings is consistent with Young CJ in Eq’s observations in Southern Cross Financial Group (Newcastle) Pty Ltd v Rodrigues [2005] NSWSC 621 at [40], as follows:
A client list is something that courts come across in all sorts of businesses, most commonly real estate agents’ rent rolls. However, what they really represent as saleable property to the purchaser is the likelihood that an income stream will be produced if the purchaser has access to that list.
When the listing had turned into a sale because there was a signed contract of sale/offer to purchase or verbal agreement, this was entered into the partnership’s “sales” book.

When the sale had been signed and exchanged by both solicitors with all conditions met, the partnership had a right to deduct its commission from the deposit monies held and remit the balance back to the vendors and this was listed in the “exchanges” book.
Listings Book
As at 31 August 2015, Mr Wood estimated that the number of properties listed by the partnership which had not been turned into sales, was approximately 154. Despite request, Mr Wilson failed to provide copies of contracts entered into after 31 August 2015, therefore the Court must do the best that it can on the material before it. The listings book contains 84 properties that either had an Exclusive Sale Authority that expired before 31 August 2015 or had no date entry (See Annexure A).

If these Exclusive Sale Authorities had indeed expired, or were never exclusive, it could then be open to any real estate agent, including the parties, to re-sign an authority. Therefore, I find that 70 of the properties contained in the listings book involved a client who had signed an Exclusive Sale Authority with Red Diamond to sell their property with an expiry on or after 31 August 2015, and the partnership was in the process of listing the property for sale (See Annexure B). Messrs Wood and Harris would not have been able to re-sign these vendors as they were still bound by the Exclusive Sale Authority with Red Diamond. I find that the listings contained in Annexure B are assets of the Sales Partnership.

Mr Wilson gave evidence that after the dissolution of the partnership he offered to work in conjunction with Messrs Wood and Harris until they were able to acquire a licence with the Estate Agents Board. He said that if they were able to transact a sale in the time that they were not licensed, he was willing to enter into a rebate arrangement of 20%.

Mr Wilson gave evidence that at the date of dissolution the partnership had a 45% list to sale ratio and, in 2015, the average fee was $9,856 per sale. I find that there were 70 properties that were listed by the partnership with current Exclusive Sale Authorities as at 31 August 2015 with a value of $310,464 based on 45% of properties selling and a fee of $9,856 per sale. This is an asset of the Sales Partnership that needs to be taken into account for the benefit of the Partnership.

I accept that in carrying on the partnership business between dissolution and winding up, Mr Wilson has incurred expenses such as insurances, registration for car fees, salaries, superannuation, long service leave and accrued annual leave. However, no evidence was provided in relation to the quantum of such expenses and what amounts were attributable to the winding up of the Sales Partnership affairs as opposed to any new business generated by Mr Wilson as a sole operator.

It was common ground between the parties that, for some vendors, most of the work is undertaken prior to the listing of the property in obtaining the signed Exclusive Sale Authority (for example, keeping in contact with potential vendors for years to list the property when a client wishes to put their property on the market for sale). However, there are some cases where the majority of the skill and labour is undertaken during the sales campaign (known as a “Santa Clause listing”).

There was no evidence before me of the work in progress for each of the listed properties as at 31 August 2015, who should get the credit for the relevant work, or how much allowance I should make for the exertions of Mr Wilson in finalising the contracts. I find that an appropriate discount must be made to take into account the skill and diligence exercised by Mr Wilson and the expenses incurred in completing the unfinished contracts of the Sales Partnership.

I find that an allowance of 70% is an appropriate proportion for Mr Wilson’s exertions in finalising the 70 listings and for any expenses incurred. Therefore, 30% of the sum of $310,464 is to be taken into account as part of the Sales Partnership assets, being $93,139.20.
Sales Book
Annexure C sets out the sales book entries (or the conditional sales), which I include as assets of the Sales Partnership consistent with my reasons set out above.

The Liebig Street properties, Wendy’s Gateway and 3/24 Dooley Street have been removed from the list as the evidence before me is that the property development did not go ahead in the case of Liebig Street and all properties were taken off the market.

Mr Wilson gave evidence that, in his experience, 10-15% of contracts subject to finance would “fall over”. The parties gave evidence that the work required to finalised the conditional contracts as at 31 August 2015 could range from simply handing over the keys, arranging for the vendor to countersign the contract of sale, right up to having to locate a new purchaser in circumstances where the initial sale did not go ahead. Therefore, I will discount the quantum of conditional sales set out in Annexure C by 15% to reflect Mr Wilson’s exertions to finalise the conditional contracts to avoid this risk and any expenses incurred. Therefore 85% of the conditional sales commissions of $149,420.02 are assets of the Sales Partnership, being $127,007.00.
Exchanges Book
Annexure D sets out the exchanged contracts which were due to settle in the sum of $265,764.00. For the reasons set out above, as these were unconditional contracts, I conclude that these contracts are assets of the Sales Partnership as set out in each of the three iterations of the Sinclair Wilson reports.

Issue 2: The allowance made in respect of the Richardson contract in the sum of $40,340

All parties agreed that there was a claim brought by a former client of the partnership for a refund of their commission.

At 31 August 2015, Red Diamond had received advice from its legal representatives (dated 27 August 2015) that the partnership had failed to comply with sections 49A and 50 of the Estate Agents Act 1980 (Vic) and Red Diamond had no entitlement to retain the $35,425 commission, which had to be repaid.

Further, the 27 August 2015 letter of advice informed Red Diamond that there was a $5,000 plus GST excess applicable to the Richardson claim under its policy. Red Diamond’s legal representatives advised that they expected to receive instructions from CGU to collect the sum of $5,000 plus GST shortly thereafter.

Mr Mallia (and Mr Patterson in oral evidence) agreed that as advice had been received on 27 August 2015 that the commission had to be repaid, together with the insurer’s excess of $5,000, these amounts were a liability as at 31 August 2015. Similarly, Sinclair Wilson allowed for a liability in the sum of $40,000 attributable to the “Richardson Court Case” in each of its three versions of its valuation of the partnership.

Again, from an accounting perspective the accountants are correct in recording the liability from the Richardson legal case as at 31 August 2015. However, as at the date of winding up of the partnership, the books and records show that the payment had not been made by the Sales Partnership. It is the evidence of Mr Wilson that the Richardsons have since made no further claim to the commission and it is unlikely to ever be made by Red Diamond “but someone paid it”.

Mr Patterson and Mr Basil Brock of Sinclair Wilson gave evidence that if an adjustment to the net liabilities of the Sales Partnership is required in light of new factual information post-balance date, they would have no hesitation in amending the balance sheets if instructed. Mr Brock said that Sinclair Wilson’s standard practice would be to make it clear that it is an “amended balance sheet”.

In my view, as at the date of winding up, the Richardson commission and related excess are not liabilities of the partnership.

Issue 3: The adjustments to the loan and capital accounts for the three partners (the “equalisation” of the loan accounts)

The 24 September 2015 report prepared by Sinclair Wilson showed that the partners’ loans and capital accounts contained imbalances. The valuation as at 31 August 2015 provided for the partner funds as follows:
Wilson 2000 Trust         $32,467.45
Wood Family Trust        $97,931.40
DG Harris Rental Trust    $109,143.48
Mr Wilson gave evidence that at a meeting held on 29 September 2015 at Sinclair Wilson, the three partners agreed that the partners’ loan and capital accounts “should be equal”. Mr Wilson relied on his email dated 5 October 2015 to Messrs Wood and Harris and the Sinclair Wilson balance sheets dated 15 October 2015 and 24 February 2017. The effect would be that in order to “equalise” the loan accounts, a simple line entry in the balance sheet would provide for $68,453.42 in partner funds each in lieu of the amounts set out above.

Mr Wood said that at the 29 September 2015 meeting, Mr Wilson was not happy with the loan account figures provided in the Sinclair Wilson report of 24 September 2015. Mr Wood gave evidence that Mr Wilson asked them whether they “anticipated or expected that the capital accounts would have been varied or whether we expected them to be all the same.” Mr Wood said that he anticipated the capital accounts to be equal and that he did not agree with Mr Wilson that the capital accounts ought to be adjusted to be equal. Mr Wood understood the term “equalisation” to mean the distribution of partners’ equity to be 1/3 each.

Mr Harris gave evidence that he recalled Mr Wilson calling the 29 September 2015 meeting because he wanted “an explanation into why the capital accounts weren’t equalised”. Mr Harris said that he assumed “everything would be divided by three” and that his “naivety in regard to some of the accounting … practices” meant that he did not know what the term “capital accounts” meant before this proceeding. Mr Harris said that his job was “to make sales” and “we paid someone to take the accounts”.

Mr Wilson said that when he received the Sinclair Wilson 24 September 2014 report, he “was staggered” by the imbalance in the capital accounts. Mr Wilson called the 29 September 2015 meeting to seek his former partners’ understanding of, if there were any imbalances, how it eventuated as it “was news” to him. Mr Wilson wanted to “clear the air” that he did not owe his former partners “any money whatsoever other than was has been enumerated in the contra accounts”.

The loan balance working paper prepared by Sinclair Wilson for the years 2009 to 2015 indicates that Mr Wilson took drawings from the partnership in 2014 and owed the partnership $3,597.19 by taking drawings in advance of payments being made. Messrs Wood and Harris on the other hand were foregoing their distributions and left monies in the partnership.

If Mr Wilson’s position is accepted, the practical effect would be that the outgoing partners would be called upon to forego their entitlements to their partnership funds in circumstances were Messrs Wood and Harris requested the preparation of the 24 September 2015 Sinclair Wilson report to work out the partners’ respective entitlements.

In my view, there could not be an enforceable agreement between the parties that the loan accounts were to be equalised to $68,453.42 each. I find that during that meeting, the term “equalise” was being used in two senses. On the one hand, to work out the partners’ respective entitlements to equalise the payments out by deducting liabilities from assets to realise owners’ equity in their 1/3 share each (Messrs Wood and Harris’ position). On the other hand, that the partners’ funds should be equalised (Mr Wilson’s position).

I find that all three partners were surprised about the imbalances in the loan accounts. Any money that was not part of the daily running of the partnership, whether it be personal or forward drawings or loans would be accounted for in the partners’ funds. The partnership was set up to have even drawings for each of the three partners. If a partner wished to draw in advance then that was recorded in the loan accounts. Mr Wood said that Mr Wilson regularly drew in advance from partnership funds for personal use and he thought that the loan accounts had been cleaned up in recent years. Mr Wood gave evidence that over a long period of time the loan accounts were “misbalanced completely” and they had tried to get them “under some sort of control” and looking “a lot more neutral”.

On 5 October 2015, Mr Wilson sent an email to Messrs Wood and Harris asserting that the only issue between them was the treatment of “conditional” and “unconditional” sales and that it had been mutually agreed that the section of partners funds was equalised.

Messrs Wood and Harris did not personally respond to the 5 October 2015 email but instructed their legal representatives to reply by letter dated 26 October 2015. That letter relevantly provided:
… our client does not agree with much of the content of your email of 5 October…
We are instructed that our clients have never agreed to the equalisation of the partners funds in the balance sheet of the partnership. We are instructed that the accounts accurately reflect the inequity of drawings which took place over a period of time, and have formed the underlying basis of the partnership accounts for many years without dispute.

64 The 15 October 2015 letter from Sinclair Wilson to Mr Wilson and Ms Christine Steere of W and CL Pty Ltd as trustee for the Steere Rental Trust referred to the email of 5 October 2015 and updated the valuation according to the instructions contained in Mr Wilson’s email. The letter relevantly stated:

We will forward a copy of the revised valuation to Danny [Harris] and Matthew [Wood], noting your instructions.
Please note that whilst we are able to update the valuation for balance sheet balances etc, as instructed by the partners, given that the parties to the dissolution now appear to be in dispute we note that we cannot and will not be providing any advice as to the appropriateness of the valuation (or the dispute generally) to any party to the dispute.

Mr Wilson relied on the 24 February 2017 letter from Sinclair Wilson which provided a third iteration of the valuation of the partnership which equalised the loan account and relevantly provided:
Further to the questions of fact raised by you [Mr Wilson] Friday morning: -
…Pursuant to a subsequent meeting (on September 29, 2015) between all partners at Sinclair Wilson, we took the following instructions and updated the valuation …
We were further advised by the parties at that meeting that the loan accounts (then comprising of $205K) were to be equalised ($68K apiece), which we effected. …
Please note that there has been no variation to the valuation methodology in the above attached adjustments, only a correction of fact (subject to agreement by all parties). [Emphasis added]
The 24 February 2017 letter was only ever sent to Mr Wilson following his queries made of Sinclair Wilson. Further, the letter was drafted by Mr Brock of Sinclair Wilson who was not present at the meeting of 29 September 2015. The matters set out above are his assumptions based on instructions from Mr Wilson and Ms Steere.

Mr Mallia relied on the letter of 24 February 2017 as an assumption in his report to that there was an agreement by the partners to make an accounting equalisation of the partners’ capital accounts, without any payment of money. Mr Mallia conceded that if the assumption was that there was no agreement as to the equalisation of the accounts pursuant to the 24 February 2017 letter, then the calculations set out in the Sinclair Wilson working paper dated 24 September 2015 were accurate.

Mr Patterson agreed that if all the parties agreed to the equalisation of the capital accounts, then the balance sheets could be changed to reflect those instructions. However, Messrs Harris and Wood did not agree with the equalisation of the capital accounts. The evidence of Mr Harris was that there was never any agreement, he did not know what a capital account was and although no one stormed out of the meeting, it was clear that the former partners “were involved in a dispute and one that we were unlikely to be able to settle ourselves.”

There was a submission made on behalf of Mr Wilson that the loan equalisation was consideration by Messrs Harris and Wood for their increase by 8.33% each for Mr Lucas Wilson’s share of the Sales Partnership when he left in December 2013. I accept the parties’ evidence that the redistribution was a gift by Mr Wilson so that the three remaining partners would have equal shares in the partnership.

In my view, the use of the phrase “the partners’ funds should be equal” is consistent with Mr Wood’s position that his expectation was that “they had been cleaned up”. This is not to be confused with an agreement that the loan accounts for the three partners should be adjusted to $68,453.42 apiece, whereby Mr Wilson would gain $35,985.97 and Messrs Wood and Harris would give up $29,477.98 and $40,690.06 respectively.

In the circumstances, I find that the appropriate amounts for the loan and capital accounts are the sums set out in the Sinclair Wilson working paper dated 24 September 2015.

Conclusion

I propose to make the following orders:

The further hearing of the proceeding be adjourned to his Honour Judge Cosgrave on 17 July 2017 on the following:

a. The question of interest to be applied on the amount owing to the plaintiffs.

b. The question of final relief.

c. Final Orders.

d. Costs of the proceeding.

The Plaintiffs are to file and serve any outlines of submissions and any proposed form of orders by 4pm on 13 July 2017.

The Defendants are to file and serve any outlines of submissions and any proposed form of orders by 4pm on 14 July 2017.

The question of costs of the trial assessment to be reserved to his Honour Judge Cosgrave.

ANNEXURE A (2 pages)

84 listings that either had an Exclusive Sale Authority that expired before 31/8/2015 or had no entry date
#	Address	Price	Authority Expiry Date
1	8 Garden St, Warrnambool VIC 3280	$239,900.00	19/04/2015
2	8 Denneys St. Warrnambool VIC 3280	$245,000.00	31/10/2014
3	2 Mountain Ash Drive, Warrnambool VIC 3280	$345,000.00	14/08/2015
4	70 Nicholson St, Warrnambool VIC 3280	$749,900.00	15/05/2015
5	328 Hopkins Point Rd, Warrnambool VIC 3280	N/A	1/04/2015
6	2/30 Hopetoun Rd, Warrnambool VIC 3280	$134,990.00	3/03/2013
7	9 Karana Drive, Warrnambool VIC 3280	$215,000.00	2/06/2015
8	Lot 14 Spring Garden Estate, Warrnambool VIC 3280	$139,900.00	30/12/2010
9	Lot 17 Spring Garden Estate, Warrnambool VIC 3280	$150,000.00	30/12/2010
10	Lot 4 24 Dooley St, Warrnambool VIC 3280	$159,900.00	1/02/2011
11	Lot 10 Spring Garden Estate, Warrnambool VIC 3280	$160,000.00	30/12/2010
12	20 Garden St, Warrnambool VIC 3280	$169,990.00	19/02/2015
13	Lot 2 24 Dooley St, Warrnambool VIC 3280	$219,900.00	1/02/2011
14	Lot 1 24 Dooley St, Warrnambool VIC 3280	$225,000.00	1/02/2011
15	Lot 42 Logans Beach, Warrnambool VIC 3280	$325,000.00	15/11/2014
16	Lot 54 Logans Beach, Warrnambool VIC 3280	$325,000.00	15/11/2014
17	Lot 45 Logans Beach, Warrnambool VIC 3280	$325,000.00	15/11/2014
18	Lot 55 Logans Beach, Warrnambool VIC 3280	$325,000.00	15/11/2014
19	Lot 53 Logans Beach, Warrnambool VIC 3280	$350,000.00	15/11/2014
20	Lot 39 Logans Beach, Warrnambool VIC 3280	$350,000.00	15/11/2014
21	Lot 40 Logans Beach, Warrnambool VIC 3280	$365,000.00	15/11/2014
22	Lot 41 Logans Beach, Warrnambool VIC 3280	$365,000.00	15/11/2014
23	Lot 51 Logans Beach, Warrnambool VIC 3280	$375,000.00	15/11/2014
24	Lot 10 Logans Beach, Warrnambool VIC 3280	$385,000.00	15/11/2014
25	Lot 11 Logans Beach, Warrnambool VIC 3280	$385,000.00	15/11/2014
26	Lot 46 Logans Beach, Warrnambool VIC 3280	$385,000.00	15/11/2014
27	Lot 37 Logans Beach, Warrnambool VIC 3280	$385,000.00	15/11/2014
28	Lot 9 Logans Beach, Warrnambool VIC 3280	$425,000.00	15/11/2014
29	Rear 283 Timor St, Warrnambool VIC 3280	$499,900.00	6/04/2012
30	14 Gibs St, Caramut VIC 3274	$112,000.00	19/05/2015
31	102 Walton St, Penhurst VIC 3289	$120,000.00	19/05/2015
32	37 MacKinnons Bridge Rd, Noorat VIC 3265	$155,000.00	22/07/2015
33	4610 Hamilton-Port Fairy Rd, Macarthur VIC 3286	$169,990.00	3/06/2015
34	2 Little St, Camperdown VIC 3260	$174,999.00	9/05/2015
35	2 Swanston St, Terang VIC 3264	$179,990.00	1/06/2015
36	7 Curdievale Rd, Timboon VIC 3268	$189,000.00	27/07/2015
37	1 Jones St, Camperdown VIC 3260	$189,990.00	30/06/2015
38	High St, Macarthur VIC 3286	$189,999.00	19/04/2015
39	11 Dwarroon Rd, Cudgee VIC 3265	$214,990.00	21/11/2014
40	58 West St, Mortlake VIC 3272	$240,000.00	27/07/2015
41	19 Talbot St, Camperdown VIC 3260	$259,990.00	16/06/2015
42	12 Hopetoun St, Allansford VIC 3277	$295,000.00	17/03/2015
43	Lots 4-8 Recreation Rd, Dunkeld VIC 3294	$320,000.00	15/06/2015
44	1600 Warrnambool-Caramut Rd, Winslow VIC 3281	$335,000.00	2/06/2015
45	Lots 1-3 & 9 Recreation Rd, Dunkeld VIC 3294	$350,000.00	15/06/2015
46	3712 Great Ocean Rd, Nullawarre VIC 3268	$399,000.00	16/06/2015
47	217 Princes Highway, Bolwarra VIC 3305	$440,000.00	9/07/2015
48	395 Koroit-Port Fairy Rd, Koroit VIC 3282	$585,000.00	25/05/2015
49	205 Russells Rd, Mailors Flat VIC 3275	$624,900.00	1/07/2015
50	3 Shadys Lane, Mailors Flat VIC 3275	$762,000.00	4/07/2015
51	101 High St, Terang VIC 3264	$129,990.00	26/07/2015
52	22 Silvester St, Portland VIC 3305	$199,990.00	19/03/2015
53	Lot 5, 147-151 Bell St, Penhurst VIC 3289	$19,900.00	1/07/2011
54	Lot 11 Tea Tree Court, Mortlake VIC 3272	$19,990.00	25/08/2012
55	Lot 14 Boundary Rd, Mortlake VIC 3272	$24,990.00	19/06/2015
56	Lot 15 Boundary Rd, Mortlake VIC 3272	$24,990.00	19/06/2015
57	8, 147-151 Bell St, Penhurst VIC 3289	$29,900.00	1/07/2011
58	10, 147-151 Bell St, Penhurst VIC 3289	$29,900.00	1/07/2011
59	Lot 1, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
60	Lot 3, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
61	Lot 4, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
62	Lot 5, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
63	Lot 6, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
64	Lot 7, 34-38 Cobb St, Penhurst VIC 3289	$29,900.00	1/07/2011
65	Lot 13 Heard St, Mortlake VIC 3272	$35,990.00	6/10/2014
66	Lot 14 Heard St, Mortlake VIC 3272	$35,990.00	6/10/2014
67	Lot 1 Blandford St, Cobden VIC 3266	$69,900.00	27/10/2011
68	17 Kellys Rd, Kirkstall VIC 3283	$69,990.00	13/08/2015
69	20 Littles Lane, Terang VIC 3264	$70,000.00	13/05/2015
70	Lot 40 Mills Rd, Cobden VIC 3266	$75,000.00	20/08/2014
71	1 Parker St, Dunkeld VIC 3294	$79,990.00	3/04/2013
72	15 Kellys Rd, Kirkstall VIC 3283	$84,000.00	13/08/2015
73	Lot 18 Bellicourt Rd, Dunkeld VIC 3294	$85,000.00	21/01/2015
74	3497 Grampians Rd, Dunkeld VIC 3294	$89,990.00	3/06/2015
75	2 Broughtons Access, Glenes Creek VIC 3233	$109,990.00	2/01/2015
76	Lot 6, 8283 Princes Highway, Allestree VIC 3305	$119,990.00	16/12/2013
77	12 McCue St, Port Campbell VIC 3269	$145,000.00	20/02/2015
78	5 Pleasant Drive, Port Campbell VIC 3269	$149,990.00	14/07/2015
79	Koroit-Port Fairy Rd, Koroit VIC 3282	$157,000.00	8/06/2015
80	Lot 3 Caravan Park Rd, Narrawong VIC 3285	$249,950.00	17/05/2015
81	100 Carrolls Rd, Allansford VIC 3277	$300,000.00	29/04/2015
82	91 Officers Lane, Koroit VIC 3282	$350,000.00	18/07/2015
83	8/145 Timor St, Warrnambool VIC 3280	$299,900.00	4/02/2015
84	39-41/15-19 Llebig St, Warrnambool VIC 3280	$339,900.00	30/04/2015
TOTAL:	$18,607,848.00

ANNEXURE B (2 pages)

70 listings that had an Exclusive Sale Authority that expired on or after 31/8/2015
#	Address	Price	Authority Expiry Date
1	125 Jubilee Park Rd, Warrnambool VIC 3280	$144,300.00	N/A
2	Eddington St, Warrnambool VIC 3280	$215,000.00	11/10/2015
3	Parker St, Warrnambool VIC 3280	$219,990.00	7/10/2015
4	8 Laverock Rd, Warrnambool VIC 3280	$254,999.00	15/10/2015
5	Lot 1, 7 Pertobe Ln, Warrnambool VIC 3280	$255,000.00	31/12/2015
6	7 Carole Cres, Warrnambool VIC 3280	$289,990.00	27/09/2015
7	10 Patterson St, Warrnambool VIC 3280	$299,900.00	N/A
8	1 Olway Rd, Warrnambool VIC 3280	$319,990.00	30/12/2015
9	7 Dennington Rise, Dennington VIC 3280	$340,000.00	21/11/2015
10	27 Peter St, Warrnambool VIC 3280	$360,000.00	31/10/2015
11	2 Wando St, Warrnambool VIC 3280	$369,990.00	30/12/2015
12	Halladale Place, Warrnambool VIC 3280	$374,990.00	30/09/2015
13	Brolga Court, Warrnambool VIC 3280	$420,000.00	30/09/2015
14	4 Lockett Drive, Warrnambool VIC 3280	$457,000.00	18/09/2015
15	5 Matthews Court, Warrnambool VIC 3280	$460,000.00	30/09/2015
16	8 Sharp Ave, Warrnambool VIC 3280	$495,000.00	23/12/2015
17	28 Mickle Cres, Warrnambool VIC 3280	$639,000.00	27/11/2015
18	11 MacDonald St, Warrnambool VIC 3280	$700,000.00	25/09/2015
19	2 Japan St, Warrnambool VIC 3280	$2,100,000.00	N/A
20	127 Skene St, Warrnambool VIC 3280	N/A	30/12/2015
21	38 Allan St, Warrnambool VIC 3280	N/A	16/10/2015
22	9 Morse St, Warrnambool VIC 3280	N/A	27/04/2016
23	4 Breton St, Warrnambool VIC 3280	N/A	22/11/2015
24	65 Moonah St, Warrnambool VIC 3280	$219,990.00	13/10/2015
25	Quest 1/15-19 Llebig St	$220,000.00	27/12/2015
26	Quest 5/15 Llebig St	$220,000.00	27/12/2015
27	2/20 Kimberly Rd, Warrnambool VIC 3280	$245,000.00	18/09/2015
28	Harbour Mews, Warrnambool VIC 3280	$309,990.00	30/09/2015
29	Maycarn Court, Warrnambool VIC 3280	N/A	14/11/2015
30	Gilles St, Warrnambool VIC 3280	$362,800.00	N/A
31	502 Barbro Terrace	$520,000.00	N/A
32	Lot 13 Flscalini Drive, Warrnambool VIC 3280	$155,000.00	25/11/2015
33	1 Pertobe Lane, Warrnambool VIC 3280	$275,000.00	29/10/2015
34	215 Merrivale Drive, Warrnambool VIC 3280	$299,000.00	16/10/2015
35	Lot 2, 370 Caramut Rd, Warrnambool VIC 3280	$450,000.00	N/A
36	Lot 3, 370 Caramut Rd, Warrnambool VIC 3280	$650,000.00	N/A
37	Lot 1, 370 Caramut Rd, Warrnambool VIC 3280	$650,000.00	N/A
38	81 Officers Lane, Koroit VIC 3282	$29,000.00	14/10/2016
39	McKenzies Rd, Caramut VIC 3274	$65,000.00	7/10/2015
40	81 Office, Koroit VIC 3282	$105,000.00	14/10/2015
41	19 Shaw St, Mortlake VIC 3272	$115,000.00	N/A
42	11 Mill St, Mortlake VIC 3272	$125,000.00	N/A
43	87 Webster St, Mortlake VIC 3272	$145,000.00	N/A
44	93 Webster St, Mortlake VIC 3272	$167,990.00	22/12/2015
45	5 Darlington Rd, Mortlake VIC 3272	$180,000.00	24/11/2015
46	1 Hopetoun St, Camperdown VIC 3260	$188,999.00	23/10/2015
47	6 Grey St, Terang VIC 3264	$219,900.00	19/11/2015
48	Watts Lane, Macarthur VIC 3286	$235,000.00	7/01/2016
49	47 Pitcher St, Port Campbell VIC 3269	$245,000.00	11/12/2015
50	17 Terang-Mortlake Rd, Noorat VIC 3265	$285,000.00	3/11/2015
51	63 Silvester St, Cobden VIC 3266	$330,000.00	N/A
52	27 Aire St, Kirkstall VIC 3283	$340,000.00	18/10/2015
53	8 Channing Drive, Koroit VIC 3282	$365,000.00	21/10/2015
54	8 McKenzies Rd, Bushfield VIC 3281	$379,990.00	4/09/2015
55	91 McLennon St, Glenthompson VIC 3293	$585,000.00	27/12/2015
56	63 Silvester St, Cobden VIC 3266	N/A	25/10/2015
57	Lot 3 Manifold St, Woolsthorpe VIC 3276	$64,990.00	30/12/2015
58	126 Boundary Rd, Mortlake VIC 3272	$65,000.00	17/10/2015
59	2098 Terang-Mortlake Rd, Mortlake VIC 3272	$69,990.00	25/09/2015
60	130 Boundary Rd, Mortlake VIC 3272	$69,990.00	17/10/2015
61	12 Murray St, Kirkstall VIC 3283	$84,000.00	18/12/2015
62	Lot 8 Tucks Rd, Naringal VIC 3277	$115,000.00	N/A
63	Lot 4 Noogee Rd, Terang VIC 3264	$159,990.00	16/09/2015
64	292 Lake View Rd, Koroit VIC 3282	$399,900.00	N/A
65	95-97 Dunlop St, Mortlake VIC 3272	$159,990.00	10/11/2015
66	Jubilee Hall Presbytherian Church 12a Manifold St	$399,900.00	N/A
67	Jubilee Hall Presbytherian Church 12 Manifold St	$599,900.00	N/A
68	78 Hanna St, Warrnambool VIC 3280	$1,500,000.00	2/12/2015
69	2-4 Whites Rd, Warrnambool VIC 3280	$529,900.00	N/A
70	8 Edina St, Warrnambool VIC 3280	$249,900.00	31/05/2016
TOTAL:	$21,866,258.00

ANNEXURE C (1 page)

Conditional Sales (gross dollars)
#	Address	Total fee
1	8 Livingston Court	$9,587.00
2	Lot 44 Logans	$6,687.27
3	Lot 7 Logans	$6,000.00
4	Lot 43 Logans	$6,687.00
5	Lot 49 Logans	$8,787.00
6	Lot 50 Logans	$9,062.00
7	Lot 52 Logans	$9,062.00
8	Lot 47 Logans	$9,337.50
9	Lot 38 Logans	$8,375.00
10	Lot __ Logans + SL	$8,787.50
11	2/64 Fitzroy Rd	$7,179.71
12	Lot 3 Cruites Rd	$8,721.04
13	Lot 2 Whittons Lane	$11,164.00
14	2 Waggs Lane	$12,295.00
15	111 Dwarroon Rd	$7,760.00
16	49-51 Clarke St	$6,890.00
17	11 Goodwin	$13,038.00
Total:	$149,420.02

ANNEXURE D (1 page)

Conditional Sales (gross dollars)
#	Address	Sale $	Fees
1	18 Brown	$95,000.00	$5,665.00
2	60 Park Rd	$255,000.00	$9,610.00
3	40 Tilden St	$271,950.00	$9,846.00
4	1/30 Hopetoun Rd	$132,000.00	$5,788.00
5	32 McVicor St	$220,000.00	$8,340.00
6	3/192 Commercial Rd	$230,000.00	$8,630.00
7	3103 Hamilton Hwy	$35,750.00	$3,354.00
8	10 Anzac Ave	$229,990.00	$10,926.00
9	80 Balmoral Rd	$381,200.00	$13,015.00
10	169 Dwarroon Rd	$349,990.00	$12,255.00
11	66 Boorook St	$23,500.00	$2,876.00
12	75 Swanston St	$150,000.00	$7,810.00
13	25 Robson St	$290,000.00	$9,091.00
14	30 Cumery Cres	$192,000.00	$7,528.00
15	24 Roxburgh Court	$521,000.00	$15,000.00
16	35 Nicholson St	$232,500.00	$11,027.00
17	Lot 2-7 Pertobe	$191,370.00	$19,423.00
18	McCrae St, Terang	$110,000.00	$5,150.00
19	78 Ardlie St	$225,321.00	$8,494.00
20	196-202 Grampians Rd	$600,000.00	$25,360.00
21	59 Grey St, Terang	$280,000.00	$10,360.00
22	83 Davis St	$219,900.00	$10,536.00
23	Lot 8 Spring Garden Drive	$160,000.00	$4,000.00
24	8 Spenge St	$1,150,000.00	$34,500.00
25	2/64 Fitzroy Rd	$179,940.00	$7,180.00
Total for July and August 2015:	$6,726,411.00	$265,764.00
(c/f Mr Woods affidavit at [7(c)] in the sum of $273,461.34)

[2017] VCC 832

28 June 2017