Rowella Pty Ltd v Abfam Nominees Pty Ltd

[1989] HCATrans 112

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Bribane No BS9 of 1988

B e t w e e n -

ROWELLA PTY LTD

Applicant

and

ABFAM NOMINEES PTY LTD & ORS

being all of the special partners

of THE ROWELLA PTY LTD·& ORS

LIMITED PARTNERSHIP (RECEIVERS

& MANAGERS APPOINTED) other than

WROB PTY LTD

Respondents

Application for special leave

to appeal

>

Rowella
DEANE J	!
TOOHEY J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 12 MAY 1989, AT 11.02 AM

· Copyright in the High Court of Australia

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MR P.D. ROBIN QC:  If Your Honours please, I appear with

my ±earned friend, MR W.V. VITALI, for the applicant.

(instructed by Bowdens)

MR P.H. MORRISON:  May it please the Court, I appear for the

respondent in this matter. (instructed by Chambers,

McNab, Tully & Wilson)

MR ROBIN:  This case concerns more Queensland legislation.

In this case, section 47(2)(d) of the PARTNERSHIP ACT which has counterparts in identical terms in all of

the other jurisdictions. Although the partnership

in question is a limited partnership constituted

under the Queensland MERCANTILE ACTS by section 5(3)

of the PARTNERSHIP ACT, its provisions apply to

limited partnerships.

The purpose of section 47(2) of the PARTNERSHIP

ACT is to provide for the settling of accounts between

partners upon a dissolution of partnership. The order

for employment of the assets at that stage is by

subparagraph (a):

In paying the debts and liabilities of the

firm to persons who are not partners therein;

Next, to pay to the partners:

Rateably what is due from the firm to -

them -

for advances as distinguished from capital;

Thirdly, by:

(c) In paying to each partner rateably what

is due from the firm to him in respect of

,	capital;
ultimate residue directed to:	Th~ crucial subparagraph is (d) which deals with the

be divided among the partners in the proportion

in which profits are divisible.

There is no definition of that term "profits" but it

appears amply established by the authorities and common

sense that profits may signify either trading profits

representing the success of a partnership in a

particular trading period or it may refer to capital

profits such as the appreciation in value of the

partnership's assets or it may refer to a combination

of both trading profits and capital profits.

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MR ROBIN (continuing):  The case of the applicant is that

any of those descriptions of profits may be supplied

in subparagraph (d) to give a meaning to that

word "profits". The provision which applied here,

in that regard, is clause lO(d) of the partnership

deed which Your Honours can find at pages 8 and 9

of the record. It is part of a longer clause

beginning on page 7 which defines "net profits"

as:

profits as determined by the general partner

in accordance with generally accepted accounting

principles.

The general partner is, by lO(b), given authority

to employ profits or, indeed, any other assets
of the partnership in meeting expenses. And then

we come to (c) which stipulates that the

"distributable profits", which are what is left

over after the exercise in (b) is completed -

the distributable profits go, by lO(c)(ii), as

to:

forty percent (40%) thereof to the general

partner, and as to the remaining sixty percent

(60%) thereof to the special partners, each

of whom shall be entitled to receive that

proportion of the remaining balance of the

distributable profits as bears to that amount

the same proportion that the number of units
held by that special partner bears to the

total number of units issued to all special

partners.

There were 92 special partners in this partnership

who had contributed $1.5 million or sum very

close to that in units of $10,000. The following

provisions suggest that a quarterly calculation

of profits was required and a quarterly distribution.

,	The leading judgment in the Full Gour½ which
r~versed a determination in favour of the applicant

by Mr Justice Carter at first instance, noted,

at pge 64 line 1 of the record, that paragraph lO(c)

of the partnership deed:

By its terms it provides for the distribution

of profits and it is not to the point that

the special partners have provided capital

whereas the general partner has not.

Mr Justice Kelly's judgment was agreed in

by Mr Justic~ Demack and Mr Justice McPherson

wrote a separate judgment and he appreciated

the simple point made by the applicant, and accepted

by Mr Justice Carter, at page 75 line 26, where

His Honour said:

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Rowella naturally fastens on the prov1s1on

in cl. lO(c) (ii) providing for the payment
of the balance of distributable profits

in the proportion 40% to the general partner

and 60% to the special partners.

The Full Court held that the assets of this

limited partnership fell to be distributed not
in accordance with section 47(2)(d) but in accordance

with a dictum of Sir George Jessel, Master of the Rolls,

in GRIFFITH V PAGET in 1877. At page 65, having

set out the passage from GRIFFITH V PAGET at

page 6 4 , the senior pu is n e j us t ice at 1 in es 1 2 to 1 3 ,

purports to apply the section but, as I hope

. to demonstrate to Your Honours, His Honour really

did not do so. At line 11, page 65, His Honour

said:

Consequently s. 47(2)(d) is to be applied and in my opinion in its application those

profits are to be divided in proportion

to the capital.

The capital of this partnership was contributed

solely by the special partners; the general partner,

my client, Rowella Pty Limited, having provided

none of it. Its contribution to the partnership

was to manage it and under the terms of the

MERCANTILE ACT, in particular section 54, to

bear sole responsibility for payment of creditors

of the partnership.

(Continued on page 5)

> >

!!

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MR ROBIN (continuing):  The advantage to investors which the

limited partnership form offers is that the special

partners are liable in any event for no more than

loss of their capital contributions, but

the general partner's liability is unlimited.

So, Your Honours might well think that is a just

recompense to the general partner, for the risk

that it takes and for the services that it provides,

that in addition to earning 40 per cent of trading

profits, if there are any in particular periods,

it should also earn 40 per cent of capital

appreciation.

Mr Justice McPherson, at page 73 line 26 of

appeal book, said this:

It is to be seen that, in the last of the extracts from GRIFFITH V PAGET the

learned Master of the Rolls says that when

the partnership comes to an end, assets are,

after providing for profits earned up to

dissolution, to be distributed "in

proportion to the partners' shares of

partnership capital".

DEANE J:  Mr Robin, is not the main thing you need to

demonstrate this, that the decision of the Full Court

turns upon the statutory provision which, of course,

is a very common form of statutory provision, rather than upon the particular terms of this particular deed?

MR ROBIN;	Yes, indeed, Your Honour.
DEANE J:	Well, perhaps you might do what you can to

demonstrate that that is so.

MR ROBIN:  Your Honour, we say there are two deficiencies 1n

the approach of the Full Court in its interpretation

, ,	of section 47(2)(d).
.,, "

DEANE J: -Now, can you take us to those in terms of the

judgments.

MR ROBIN:  Yes, Your Honour. The first is that Their Honours held

that clause lO(c)(ii) was a provision dealing with

trading profits only and Their Honours thought that
that did not suffice to satisfy section 47(2)(d) of
the Act, which Their Honours regarded as satisfied

not by a provision in a partnership deed which merely

allocated trading profits, but required a provision

in the partnership deed allocating also capital

profits .

DEANE J:  But what if the deed had said, "Trading profits

will be distributed 60 per cent and 40 per cent,

capital profits will be distributed 100 per cent

· to the equity partners"?

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MR ROBIN:	In that event my client would fail.
DEANE J:	Well, that is what my questions are directed to

and that is why is it not that this case turned

upon the construction of the deed?

MR ROBIN:  Well, Your Honour, in this deed there is no

provision dealing with distribution of capital

profits, so it would be necessary to find that matter

dealt with by implication or by some process which

would make GRIFFITH V PAGET applicable.

DEANE J:  But your point is that in the context of

(2)(c)r- (2)(d) must be concerned with capital

profits?

MR ROBIN:  No, Your Honour. Our point about (2)(d) is

that it will seize on any provision in the

partnership deed dealing with distribution of profits,

whether the provision in the partnership deed deal

with distribution of trading profits or

distribution of capital profits or distribution of

a combination of the two, and we have in our deed,

in clause lO(c)(ii), such a provision.

(Continued on page 7)

;!

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MR ROBIN (continuing): In our submission, it does not

matter greatly which it is, and even if the

Full Court's approach be right that it was

a provision.dealing with trading profits only,

that is still sufficient to satisfy the

requirement of 47(2)(d), which is a provision in

the partnership deed dealing with distribution

of profits.

We would be forced to concede that if

there:wa:s an independent provision in the

partnership deed dealing with distribution

of capital profits there would be a difficulty

because the specific provision overrides the

general rule established by section 47.

DEANE J:  I do not quite follow why you resist my

suggestion that subsection(2Xd) is primarily

concerned with the distribution of capital

profits.

MR ROBIN:	It directs a distribution of capital profits.
Perhaps there is a twin aspect to it, with respect to Your Honour. If there are capital
profits section 47(2)(d) deals with the
question of who gets them, but in identifying
who it is who gets them, it looks to the
partnership agreement in an inquiry as to who receives the profits.

Your Honours would recall from the papers

that this partnership dealt in gold mining

and in a sense its sole activity involved

selling off its assets, whether they be gold

extracted from leases, or mining leases themselves.

It was in a sense always necessarily selling of

its capital. We concede that the term "profits"

may mean any of the three things which I indicated

at the opening of the submission.	-
,7

McHUGH J: But is your point. not that the Full Court has

interpreted section 47(2)(d) as not applicable

to a division of trading profits:- - -

MR ROBIN:	That is so, yes, Your Honour, and we say that -
McHUGH J:	- - - while the partnership is a going concern?
At page 78y_line 12, His Honour said:

The direction in clause l0(c)(ii) that as

between general partner and special partners

profits are to be distributed in the

proportion 40:60 consequently does not, in
the terms of s.47(2)(d) of the PARTNERSHIP ACT,

prescribe "the proportion -

MR ROBIN: ·Yes, Your Honour, and that is the second respect

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Rowella

in which we say the Full Court made a

fundamental error.	The Full Court, disregarding
that - - -

DEANE J:  Mr Robin, I think we might at this stage hear

what Mr Morrison has to say.

MR ROBIN:	Yes, Your Honour, thank you.
MR MORRISON:	May it please the Court, in my respectful

submission, the point recently raised by

Your Honour Justice McHugh does not follow

as a matter of proper reading of the judgments.

All His Honour was intending to say there, if

one follows through what he has already said

about the construction of clause 10 is that the

parties, as a matter of contract between partners,

provided specifically for an element of profits,

namely trading profits. That specific provision

was that trading profits would be dealt with in

each financial year in a particular way, which is

to give some - if I may say it - significance to the	.
concession made_below by my learned friends that section 47(2)(d),
when it talks of profits, includes trading profits
as well as capital profits.

(Continued on page 9)

; f

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MR MORRISON (continuing):  It was contended below by

the respondent here that profits in 47(2) (d)

meant capital profits. A concession was made

that the term includes capital profits which

is why His Honour Mr Justice McPherson said

that the concession, as far as it went, was

rightly made. All that His Honour, at page 78,

is saying, in my respectful submission, is

not that 47(2)(d) excludes trading profits

but that in the context of this particular fact

situation, that is so, because the parties

themselves, by contract, have taken it out of

47(2)(d). And my primary submission to

Your Honours is that that is what makes this

case an inappropriate vehicle for the
determination of the points that my learned

friends urge on you.

DEANE J:  Mr Morrison, what would you say about the

proposition that this case turns upon the

conclusion that if under a partnership deed

you have a division of trading profits, but
no division of capital profits, 47(2)(d) is not

applicable?

MR MORRISON:  Your Honours, with respect, I would adopt

that. But that is not, with respect, to go as

far as Your Honour Justice McHugh was suggesting

Mr Justice McPherson went.

DEANE J:  But if the case does turn on that and that is

what it decides, is that not a matter of general

importance in view of the fact that, as I
understand it - well it is certainly the case so
far as New South Wales is concerned - that

47(2)(d) is quite a standard provision?

MR MORRISON:  Your Honours, I think it is a standard

provision in other States as well;	I do not draw
away from that.	My submission is that 47(2)(d)

!!by its terms is only applicable subject to

agreement otherwise. And i~ as my learned

friends urge on Your Honours, 47(2)(d), when it

says "Profits" can include trading prof its

solely; capital profits solely, or a combination

of both then, with respect, it should follow

that the partners can contract, as a matter of

their agreement in the deed, to extract one of

those categories from the prima facie

application of 47(2)(d) and, really, that is

all the Full Court was saying.

McHUGH J:  But is not the difficulty that the only

provision in this agreement dealing with profits

was that dealing with the 40-: 60 distribution? and operate?

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MR MORRISON:  In my respectful submission not.

Your Honours,below the Full Court determined

that the parties intention as a matter of

contractual intention was that the division

of trading profits 60:40 was a provision applicable only to trading profits and no

further. That finding is not challenged in the

proposed appeal. The applicants here do not

contend that that construction was wrong - and

that was a unanimous construction - by the

court below .

DEANE J:	But, what could be put against you on that approach
would be that 47(2)(d) will have no operation
unless partnership terms providing for the distribution of profits are confined.
MR MORRISON:	I am sorry, I am not following Your Honour.

Are confined?

DEANE J:  I mean, if you have a term in the partnership

that "all profits, be they trading or capital,

will be distributed in these shares", there is

no room for 47(2)(d) because it is surplus to

that capital. It is only when the term,

"providing for the distribution of profits" is confined, for example, to trading profits that there will be scope for the operation of 47(2)(d).

(Continued on page 11)

,

, ..

...

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MR MORRISON:  I accept that, Your Honour, on its face value, but

that is not a surprising result, with respect, because

that simply means that 47(2)(d) might have operation

as to capital profits, a category of profit, otherwise

being excluded by agreement, which is the way in which

47(2)(d) approaches the case, that:

the following rules - ·

in 4 7 at the openins words -

shall, subject to any agreement, be observed.

McHUGH J:  There must be agreement about how the ultimate residue

is to be determined, must not it?	The Full Court
seems to have taken the view that	unless the provisions
such as clause 10 was intended to	deal with capital
profits, then it is excluded from	the operation of
section 47(2)(d).

MR MORRISON:  Yes, that is so, Your Honours. That is not a

surprising result. Your Honour only has to postulate

the contrary which follows, in fact, from the
contentions urged on you by the applicant, to understand,

with respect, the difficulty of that contention, and

that is that parties who have agreed that their

arrangement will only govern trading profits, now by

their contention find that ultimate distribution

follows the same proportion. That would be a

curious thing to most contracting parties.

DEANE J:  What you are saying is this, is it, that (2) (d)

really just leads you to the stage of saying,

"Well, what is left is to be distributed as if it

were profits", and. sends you back to the deed?

MR MORRISON:  Yes, Your Honour. Not trading profit, I say,

Your Honour, capital profits. That is the distinction

I draw.

5

DEANE J:  Yes, but is not that an important question of general

interest throughout the country?

MR MORRISON: Well, I cannot speak for the rest of the country,

Your Honour. It might be, were the facts a little

better than this. For instance, had the deed simply

said, perhaps not in such specific terms and had

there not been a unanimous finding that the provision

as to trading profits was intended only to govern

trading profits. Had there simply been a term that·

said profits will go 60:40 without indicating that

that was only to be trading profits. That is the

difficulty, I submit to Your Honours, that makes

this case inappropriate because the unchallenged

construction is one which limits,. by its very

terms, the proportion that is urged in the appeal

to only one element of profits.

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DEANE J:  But does it not come to this, and I am pressing you

simply so we can identify.the problem: _if you~

construction of 47(2)(d) is correct, that is, it s1II1ply
brings you back to the agreement in terms of

surplus, then obviously you win.

MR MORRISON:  Yes, Your Honour.

DEANE J: If Your construction is incorrect, and 47(2)(d)

is to be construed as filling a gap where the

deed only, as it were, deals with the distribution

of trading profits or some other sort of profits,

do you not lose?

MR MORRISON:  Your Honour, it makes it harder for me, I would have

to say that.

DEANE J: And that being so, does not the case really raise the

question?

MR MORRISON: Well, in my respectful submission, it is not

appropriate to raise the question because of the fact

that it comes to Your Honours, or would go to

Your Honours on a, Full Bench, on the basis of

facts unchalleneged which severely constrain the

findings. As I submitted to Your Honours at the

outset, the foundation of the applicant's case

before the Full Court. was that clause 10 entitled it to

40 per cent of the residue. That is its contention

now.and it is a contention on appeal.

The unanimous and unchallenged finding is that

clause 10 only dealt with trading profits and nothing

else and was intended only to deal with trading

profits and nothing else. The unanimous finding

of the court below,again unchallenged, is that there

were no specific provisions dealing with capital ·

profits but there were specific provisions dealing

with the ownership of capital and capital entitlements,
t~y being clauses (S)(a) to (f) of the deed. !" (Continued on page 13)

C2T30/2/VH 12 12/5/89

Rowella
MR MORRISON (continuing): Because they have to, that

construction even though it was unanimously held

below is challenged, though nothing is really

offered to suggest why it was wrong.

Your Honours, in my submission, the difficulty

that the applicants have and the difficulty that the

question is that the applicants contention, really, Court might have were this to 9o on appeal for this

means or equates the word "profits" in 47(2)(d) only

to trading profits because their contention is that

a term that they do not challenge as applicable only

to trading profits none the less is the term governing

under section 47(2)(d) and so what they contend for is

not the wider question either. They contend, in fact,
for a very limited construction that 47(2)(d) applies
only to trading profits or is governed by a clause

applicable only to trading profits.

So, Your Honour, that brings me to a point which

I have made already that the case for the applicant,

then, depends on establishing that when parties agree
that a clause will only have a limited effect for
trading profit referable to a financial year, the

applicant's contention is that that should then

govern the residue which is why -I submit it is a

surprising result; it is one that most contracting

partners would not have thought would happen but it

means that the result in the Full Court does not

offend the equity of the matter at all. In fact,

it is in accord with long-standing and high authority

and the equity of the matter.

My learned friend at one stage urged on

Your Honours the apparent injustice of his client

having to do all the work and only getting a 60:40

split under clause 10. Under clause 8 of the deed,

his client can use up all my client's capital in

paging liabilities and so it contributes none itself,

uses up my client's capital and yet shares in the

capital which is a curious result. It is one of these

odd results that Mr Justice McPherson identified.

Your Honours, the sunn:nary of my point is that the

decision does turn on the peculiar construction of

one deed in a partnership now over and on constructions

which relevantly are not challenged by the applicants

here. Your Honours, those are my submissions.

DEANE J:	Thank you, Mr Morrison.	Mr Robin, you may have your
leave.

MR ROBIN: Thank you, Your Honours.

DEANE J: Special leave is granted.

AT 11.33 AM THE MATTER WAS ADJOURNED SINE DIE

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