Sawhney v Gap Realty Pty Ltd
[2021] VCC 462
•27 April 2021
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case No. CI-20-01526
| KINSHUK SAWHNEY | Plaintiff |
| and | |
| GAP REALTY PTY LTD | Defendant |
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JUDICIAL OFFICER: | Judicial Registrar Burchell | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 20‑21 April 2021 | |
DATE OF JUDGMENT: | 27 April 2021 | |
CASE MAY BE CITED AS: | Sawhney v Gap Realty Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2021] VCC 462 | |
REASONS FOR JUDGMENT
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Subject: Taking of Accounts
Catchwords: Partnership – Taking of Accounts – Real estate partnership - winding up – entitlement to commissions – profits – goodwill – ss 5, 13, 43 and 48 Partnership Act 1958 (Vic)
Legislation Cited: Partnership Act 1958 (Vic) – r52 of the County Court Civil Procedure Rules 2018 (Vic) – Fair Work Act 2009 (Cth)
Cases Cited:MW Corp Pty Ltd v Sabata Lalita Nominees Pty Ltd [2017] VCC 832; Melbourne Stadiums Ltd v Sautner (2015) 229 FCR 221
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APPEARANCES: | Counsel | Solicitors |
| For the plaintiff | Mr B Shaw | Dwyer Vlahos Legal |
| For the defendant | Ms A Carruthers | Allied Legal |
JUDICIAL REGISTRAR:
Introduction
This proceeding concerns a commercial dispute involving the profit and loss of a real estate agency partnership, the valuation of the partnership business and the commission entitlements of the plaintiff who was a partner in the partnership. The proceeding has now been reduced to a taking of accounts in what was initially a broader dispute.
The plaintiff claims that the partnership made a profit for the duration of the partnership and he has not been paid his full entitlements. The defendant contends that the partnership was unprofitable and seeks by counterclaim relief to claw back an alleged overpayment made to the plaintiff. The defendant relies on expenses that must be deducted from the revenue. The plaintiff says that such costs were not part of the partnership agreement and should not be included in the assessment.
The plaintiff seeks orders pursuant to r52.01(2) of the County Court Civil Procedure Rules 2018 (Vic) (“the Rules”) that the defendant pay the plaintiff the sum of $318,532.84 comprising $69,357.69 in outstanding profit; $48,258.75 for commissions owing and $200,907.40 being a 20% share for goodwill. The defendant seeks a declaration that there is no goodwill attributable to the partnership and that the plaintiff pay to the defendant the sum of $87,369.77, being the amount of $22,329.17 in overpayment of commissions and $65,039.60 in overpayment of partnership distributions.
By orders made on 19 March 2021, Judicial Registrar Muller made declarations by consent that:
a. Between 6 February 2017 and 1 February 2018, the plaintiff was engaged by the defendant in the position of salesperson (“Engagement”). It was a term of his engagement that he would receive a 50% commission for properties that he has listed and sold.
b. On 1 February 2018, the plaintiff's Engagement ended and between 1 February 2018 to 30 November 2019, the plaintiff and the defendant carried on in partnership the business of a real estate agency in Melton pursuant to a partnership agreement that was party [sic] written, party [sic] oral and partly to be implied (“Melton Partnership”).
c. There were relevantly, terms of the Melton Partnership agreement that:
i. the plaintiff would receive 60% of the gross commission for his listings and sales (which include superannuation but excluding any rent roll) (“Agreed Commission”);
ii. the plaintiff was entitled to a 20% share of the Melton Partnership (including sales but excluding any rent roll) (“Agreed Share”);
iii. the Agreed Share specifically included:
1. 20% of the profits generated by the Melton Partnership (to be determined and payable at the end of each financial year); and
2. 20% of the goodwill associated with the Melton Partnership.
d. The Melton Partnership was dissolved on 30 November 2019.
Judicial Registrar Muller further made orders that an account be taken before a Judicial Registrar of the Court pursuant to Order 52 of the Rules to determine:
a. any amount owing by the defendant to the plaintiff at the conclusion of the partnership in accordance with the above declarations and on account of:
i. the plaintiff's profit share entitlement in the Melton Partnership at the end of each financial year;
ii. the plaintiff's commission entitlements for the period of his Engagement and the period of operation of the Melton Partnership; and
iii. any entitlement of the plaintiff to goodwill in the partnership at the time of dissolution of the Melton Partnership;
b. any amount owing by the plaintiff to the defendant at the conclusion of the partnership in accordance with the above declarations and on account of:
i. any overpayment of the plaintiff's profit share entitlement in the Melton Partnership, including taking into account:
1. the plaintiff's share of establishment costs of the partnership; and
2. the plaintiff's share the losses of the partnership at the end of each financial year; and
3. any overpayment of the plaintiff's commission entitlements during the period of his Engagement and the period of operation of the Melton Partnership (“the Questions Reserved).
In my judgment, I am satisfied in the circumstances of the expert evidence before the Court that the defendant owed the plaintiff the sum of $8,743.00 being an underpayment in commissions and the plaintiff owed the defendant the amount of $63,533.59 in overpayments of partnership distributions in accordance with my calculations contained in Annexure A. For the reasons set out below, there is no allowance for goodwill. My reasons in respect of each ground are set out below.
There will therefore be judgment for the plaintiff by counterclaim in the proceeding in the sum of $54,790.59, together with interest pursuant to statute. There will also be an order that there be no order as to costs up to 19 March 2021 and thereafter that the costs of and incidental to the proceeding shall be costs in the dissolution of the partnership, unless either party has a basis for seeking a different order as to costs. I will invite the parties to prepare draft orders to give effect to these reasons, and will determine any issue concerning costs on the papers.
Background Facts
The defendant operates Biggin & Scott Wyndham and Biggin & Scott Melton; two real estate agencies in Melbourne. The plaintiff was engaged to work for the defendant from February 2017 until February 2018 as a real estate agent at Biggin & Scott Wyndham. The plaintiff was remunerated on a commission only basis.
In February 2018, the parties entered into a partnership to run Biggin & Scott Melton. According to the partnership agreement, the plaintiff was entitled to commission from his listings and sales, and 20% profit of the partnership.
10. It is common ground that the partnership was dissolved on 30 November 2019 and that the partnership agreement dated 27 September 2018 was a very brief document. The partnership agreement provides inter alia that the plaintiff’s pay structure will be 60% of gross commissions for all his listings and sales, which includes superannuation; he is entitled to a 20% share of the Melton office profits and profits will be divided at the end of every financial year.
11. The trial assessment was a battle of experts.
12. In relation to the commission, the key documents included the employment agreement, franchise agreement and partnership agreement.
13. The key questions for determination included whether there was an over or underpayment of commission, whether partnership distributions must take into account expenses as part of the equation as it relates to profit and what is the goodwill, if any, (and 20% of that amount pursuant to the agreement).
14. The plaintiff relied on the expert and supplementary reports of Mr Peter Landers dated 15 March 2021 and 7 April 2021. The defendant objected to the admissibility of the plaintiff’s expert’s reports. The defendant relied on the expert and supplementary report of Mr Tarun Aerry dated 5 March 2021 and 7 April 2021.
15. In my view, Mr Landers has adopted a spreadsheet prepared by the plaintiff on instructions and has not provided an independent opinion. Acting on the plaintiff’s instructions, Mr Landers relied on informally generated spreadsheets to determine the plaintiff’s alleged commission entitlement rather than relying on the raw data or formal financial records of the partnership. His evidence was that he verified a sample of between 6-12 properties on the spreadsheet provided to him by the plaintiff out of 98 transactions.
16. Further, acting on instructions, Mr Landers took into account revenue attributable to the Wyndham office and not the partnership office in Melton. His report also fails to take into account deductions for expenses and establishment costs of the partnership business.
17. As a result, the Landers reports overstate the plaintiff’s commission entitlement and the financial position of the partnership. In the circumstances, I give little weight to Mr Landers’ reports and prefer the evidence of Mr Aerry who referred to commission statements for each property listed and/or sold by the plaintiff and the partnership and records expenses for the partnership business.
Legal Framework
18. A partnership arises between persons carrying on a business in common with a view to profit. There are three elements that must be present to form a partnership: (1) carrying on a business; (2) the business is carried out for the mutual benefits of all persons involved; (3) a view to profit. In deciding whether a partnership exists, the courts look at what the parties do in the partnership, not what is said.
19.Under s 5(1) of the Partnership Act 1958 (Vic) (“the Act”) it says:
(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5 [of the Act].
20. The test for a partnership is whether there has been a sharing of expenses, profits and losses, and if each party involved has a form of authority within the group that forms the partnership. The Act sets out rules to answer whether there is a partnership under s 6.
21. The relevant provisions for partnership dissolution in Victoria are also provided for in the Act. The rights and duties of the persons involved in a partnership include, for example, sharing equally in profits and losses.
22. The Act sets out the rights each partner has in relation to the termination of the partnership and what process is used to equally distribute the partnership assets.
23. Section 13 of the Act says:
Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner, and after his death his estate is also severally liable in due course of administration for such debts and obligations so far as they remain unsatisfied but subject to prior payment of his separate debts.
24. Section 42 provides for the continuing authority of partners for purposes of winding up:
After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership...
25. Section 43 sets out the rights of partners as to application of partnership property:
On the dissolution of a partnership, every partner is entitled as against the other partners to have the partnership property applied in payment of the firm’s debts and liabilities and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm. For this purpose, any partner on termination of the partnership can apply to the court to wind up the business and affairs of the firm.
26. The process used to equally distribute the partnership assets is set out in s 48. The rule for distribution of assets on final settlement of accounts is as follows:
In settling accounts between the partners after dissolution of partnership, the following rules shall subject to any agreement be observed—
a)losses including losses and deficiencies of capital shall be paid first out of profits, next out of capital, and lastly if necessary by the partners individually in the proportion in which they were entitled to share profits;
b)the assets of the firm including the sums (if any) contributed by the partners to make up losses or deficiencies of capital shall be applied in the following manner and order—
i.in paying the debts and liabilities of the firm to persons who are not partners therein;
ii.in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital;
iii.in paying to each partner rateably what is due from the firm to him in respect to capital;
iv.the ultimate residue (if any) shall be divided among the partners in the proportion in which profits are divisible.
27. The Court applies the above principles in undertaking the present task.
Issue 1 whether there was an over or underpayment of commission
28. It was common ground between the parties that during the pre-partnership period of 6 February 2017 to 31 January 2018 (“pre-partnership period”), the plaintiff was engaged by the defendant as a sales agent at the Wyndham office. During this period, the plaintiff’s commission rate was 50%.
29. It was also agreed that during the partnership period between 1 February 2018 and 30 November 2019 (“partnership period”), the plaintiff was entitled as a partner to a commission rate of 60%.
30. Commission revenue for the agency is calculated according to the following formula:
(A – B) – C = AC
Where:
A = total commission paid by a vendor on the sale of a property
B = franchise fee payable by the agency to Biggin & Scott Corporate (8.8% of A)
C = marketing levy ($550.00)
AC = total agency commission revenue.
31. AC is then divided between the Agency, the selling agent, and the listing agent:
a. Where the agent’s commission rate is 50%, the Agency retains 50% of AC. The remaining 50% of AC is divided on a 40:60 ratio between the selling agent and the listing agent.
b. Where the agent’s commission rate is 60%, the agency retains 40% of AC. The remaining 60% of AC is then divided on a 40:60 ratio between the selling agent and the listing agent.
c. Where a single agent acted as both the listing and the selling agent, that agent retains the full agent’s commission.
32. Mr Aerry, the defendant’s expert, prepared data commission sheets from February 2018 to November 2019 for each property with the original commission sheets taking into account the plaintiff’s role (with varied commission rates as an employee) and compared the invoices and the hard copy bank statements. He found that the plaintiff had been paid an amount of $369,228.73 (including payments before the start of the partnership) against his total commission entitlements of $346,899.56 (including commissions earned before the start of the partnership). In this case, the defendant claims that the plaintiff had been overpaid by $22,329.17.
33. Mr Landers, the plaintiff’s expert, opined in Finding 2 of his report that the total commission generated by the plaintiff from the commencement from the commencement of employment on 6 February 2017 to the completion of the partnership on 30 November 2019 amounted to $400,012.35 (incl GST). The plaintiff had been paid $351,753.60 (incl GST). In his view, the plaintiff had been underpaid an amount of $48,258.75 (incl GST).
34. Annexure 1 of Mr Aerry’s report provided calculations for unconditional and settled and unconditional and not settled properties in the period. 6 properties settled after 30 November 2019 but had sold prior to that date. 4 properties were Wyndham and not the Melton office. The wrong commission type was also provided in some entries, for example some were given 80% and 100% instead of 60%. Mr Aerry adjusted the commissions accordingly.
35. The difference between the two experts on this topic included:
a. Mr Landers relied on the contracts that were signed and agreed to in the Melton business and not the Wyndham business based on instructions given to him by the plaintiff and not based on the listings themselves. Mr Aerry went through each of the listings and verified the contracts from the source documents. Mr Aerry adjusted the 4 properties that were Wyndham and not the Melton office.
b. Mr Landers’ commission calculation included the pre-partnership period whereas Mr Aerry adjusted for that period in Annexure II of his report in the reconciliation in the amount of $92,886.45. The plaintiff was seeking commissions for 24 additional properties pre- partnership period which Mr Aerry did not value because there were no source documents evidencing these sales.
c. Mr Aerry excluded 6 properties settled after 30 November 2019 but had sold prior to that date.
d. Mr Aerry adjusted for the wrong commission type provided in some entries, for example some were given 80% and 100% instead of 60%.
e. The treatment of a debit of $20,000.00 in October 2019 by Mr Aerry which was shown to be during the conclave a deposit paid in a private sale transaction of the plaintiff’s property which was a personal transaction and not income from the Melton Office. Mr Aerry made the concession during the conclave that the amount of the $20,000.00 ought to be deducted from his Annexure II.
36. As set out above, the Court gives little weight to Mr Landers’ report as Schedule B is an informal spreadsheet prepared by the plaintiff and apart from a sample of 6-12 properties, appears to be the sole basis for the calculation of the alleged sum of $400,012.35 commissions entitlement claimed. During the course of cross examination, it was revealed that there were further deficiencies in Schedule B such as:
a. the first 24 properties listed in Schedule B relating to alleged additional pre-partnership commissions were not sufficiently identified. The property name columns do not contain full addresses and are in almost all cases identified by a single word, which variously appear to possibly be streets, suburbs, or other tag. Neither Mr Landers nor the plaintiff has produced any evidence to identify the relevant sale and they do not appear to relate to any of the commission statements in the court book. The Court is not put in a position where Schedule B and the resulting calculations may be assessed or considered against the raw data and calculations produced by the defendant. I find that no evidence has been offered to prove the existence or sale of these 24 properties, or to support the plaintiff’s claim to any entitlement to commission for these 24 properties.
b. Schedule B does not correctly calculate the commission entitlements of the plaintiff. The errors made by the plaintiff are highlighted in full in the defendant’s report, and include:
i. calculating the marketing fee in the total commission payable by the vendor to the agency (where sales agents have no entitlement to a share in the marketing fee payable by the vendor);
ii. calculating a total commission where the relevant commission statement clearly shows the calculation is wrong;
iii. failing to deduct the marketing levy before calculating the agency commission; and
iv. calculating both the sales agent and listing agent commission, where the plaintiff was only entitled to either the listing or the selling agent commission.
c. Schedule B does not refer to or appear to correlate consistently with the primary evidence. For example, Mr Landers was taken to the entry for 28 Somerset Road in which Schedule B records a commission with marketing levy in the sum of $11,560.00. However, the commission statement relating to that property indicated that the withdrawal of commission was $10,000.00.[1] Similarly, for 41 Enterprise Cct, Schedule B records $13,640.00 for commission with marketing levy. The commission statement stated that the withdrawal of commission for that property was $12,400.00.[2] Finally, entry for 14 Inverness Place, Thornhill Park, the sale price is recorded as $436,000.00, however, the invoice statement states that the sale price is $463,000.00.[3]
[1] Exhibit D1
[2] Exhibit D2
[3] CB 665
37. The plaintiff claims full commissions on properties which settled after he exited the business. The defendant contends that the plaintiff is not entitled to such commissions and sought to factually distinguish my decision in MW Corp Pty Ltd v Sabata Lalita Nominees Pty Ltd (“MW Corp”).[4] The defendant submits that:
[4] [2017] VCC 832
a. The partnership agreement in the present case does not provide for any entitlement of the plaintiff to commission following his exit.
b. Commission does not become due and payable to a sales agent until a property settles (as settlement remains uncertain until it occurs). The entitlement does not arise until settlement. In the absence of an agreement to the contrary, a sales agent’s entitlement to commission ends once the sales agent exits the business.
c. The plaintiff’s entitlement in this regard is distinct from his entitlement to profit share as a partner. The plaintiff’s commission entitlement under the Partnership Agreement is in the capacity as a sales agent, and is not related to the assets or profits generated by the partnership business. The defendant submits that MW Corp therefore does not apply to the plaintiff’s commission entitlement.
38. In my view, Mr Aerry’s calculations must be corrected for an adjustment for the October-19 payment of $20,000.00 in commissions. On a balance of probabilities, the contract of sale of land dated 4 October 2019,[5] and the land title search for 1 Elder Lane Aintree, supports the plaintiff’s contention that the $20,000.00 amount was the deposit paid for the plaintiff’s private sale which was a personal transaction and not income from the Melton Office. I accept Mr Aerry’s concession that the amount of the $20,000.00 ought to be deducted from his Annexure II. This results in an overpayment in commissions on Mr Aerry’s Annexure II in the sum of $2,329.17 to the plaintiff.
[5] Exhibit P1
39. In addition, the plaintiff is entitled to his commission of the 4 out of 16 properties post dissolution which the defendant concedes he was involved in as one of the listing agents. Mr Aerry identifies the 4 properties settled after dissolution which were conditional before 30 November 2019 in Annexure III (B) of his report. These commissions on the 4 conditional contracts were settled post dissolution and have been earnt by the plaintiff. The remaining properties were procured, maintained and turned into revenue by reason of the exercise of skill and diligence of the defendant and no allowance for commissions on conditional sales contracts and signed exclusive sales authorities is made.[6]
[6]MW Corp [2017] VCC 832 at [12]
40. Applying the formula to calculate commission as a partner in relation to the 4 properties with conditional contracts signed before 30 November 2019 as set out above, the plaintiff is owed $11,072.17.
41. The net underpayment of commissions is $8,743.00.
Issue 2 Profits
42. The partnership agreement stipulated that the plaintiff was entitled to 20% of the profits of the partnership, payable at the end of each financial year.
43. This issue related to three periods of time: February 2018 to June 2018; July 2018 to June 2019 and July 2019 to November 2019. Mr Aerry found a loss in the first two periods and a small profit in the final period.[7] The defendant submits that during the loss-making periods, the defendant provided funding to the partnership to prevent it from trading while insolvent. The losses were funded capital injections made by the defendant. It was contested between the parties as to whether such capital injections were made with the knowledge and consent of the plaintiff, on the understanding that any losses would be shared pro rata.
[7] (a) In the First Period – a loss of $91,991.00 (b) In the Second Period – a loss of $65,002.00 (c) In the Third Period – a profit of $33,886.00.
44. Mr Landers found that the partnerships’ profit for the 3 periods was a total of $476,890.23 (excl GST)[8] and said that the partnership had never required the plaintiff to contribute to the losses of the partnership or its expenses prior to these proceedings and it was not contained in any of the terms of the partnership agreement.
[8] (a) In the First Period – a profit of $9,363.66. (b) In the Second Period – a profit of $201,111.46. (c) In the Third Period – a profit of $266,142.11.
45. The partnership’s external accountant also had a different result.
46. The differences are on the basis of the following matters:
a. an inconsistent approach in revenue recognition from the invoices. Mr Aerry used one methodology for the three periods. Mr Landers said that if he had the source documents available to him then he would use the source documents but he was not provided with them and he produced his report under extreme time pressures.
b. Mr Landers used whatever was set out in the trust account and used those transactions for recognising revenue.
c. The plaintiff recognised revenue for 9 properties that were conditional as of 30 November 2019 and the income was generated at the time the contract was signed. Mr Landers says that the revenue was generated at that point in time. There is a slight difference between conditional and unconditional contracts between the experts. Mr Aerry did not take into account conditional contracts in recognising revenue.
d. Mr Aerry says that the set-up costs were paid by the defendant. Mr Aerry states that partners share in the losses and the profits. Mr Aerry says that the plaintiff must pay 20% of the set-up costs or losses. Mr Landers contends that it depends on what the partnership agreement says.
e. Mr Aerry states that the plaintiff recognised $70,450.27 as income on account reimbursements for cancelled sale contracts and transfers into transaction accounts, without any source document(s) about their exact nature and without ascertaining whether these transactions belong to Melton or Wyndham office. The defendant confirmed that $22,272.21 belongs to Melton office and rest belongs to Wyndham office. Mr Landers was unable to do the same verification and relied upon instructions from the plaintiff. An amount of $22,272.21 has been recognised as income for the partnership.
f. There was a dispute in relation to the administration or management fee. Mr Landers said that it was peculiar to charge your own business an administration fee. Mr Aerry said that in the real estate industry, in which he had experience valuing, it was not unusual and such expenses included the external accountants and management fees payable to the defendant’s directors. Mr Landers conceded that he was not experienced in valuing real estate agencies.
47. Mr Aerry was provided with access to the source documents from the defendant such as the MYOB, bank statements and receipts. Mr Landers was not provided with all of the documents at the time of making his reports. As set out above, if he had been given the source documents, he would have referred to them.
48. Mr Aerry provided different simulations in relation to accrual revenue and conditional contracts.[9]
[9][CB 1345]
49. Both exerts agreed that the partnership agreement did not state how the marketing levy ought to be treated. There was a difference in methodology between the two accountants as to whether the marketing levy ought to be deducted from the commissions or not. Mr Aerry did not include the marketing levy as income as there must be an expense for the marketing. Mr Landers said that the marketing levy should not be deducted from the commissions.
50. The defendant submits that despite the plaintiff being a 20% partner in the partnership, at the time of dissolution of the partnership, the plaintiff had not contributed proportionately (or at all) to the losses of the partnership. To date, the losses of the partnership are still borne completely by the defendant.
51. In my view, Mr Arrey’s report ought to be preferred and adopted in relation to the revenue position of the partnership during the relevant period. He properly takes into account revenue attributed to Melton and not the Wyndham office, takes into account expenses of the partnership and the establishment costs of the partnership and accounts for the full depreciation expenses, which is recognised for taxation purposes and is not cash in the business. Therefore, there was no double counting for depreciation by the defendant as asserted by the plaintiff.
52. In my view, the partnership agreement in referring to the division of “profits” and s 5(1) of the Act by definition contemplate that there must a sharing of expenses, profits and losses. Further, in winding up the partnership, the Court must take an account of all outgoings and expenses and debts and liabilities which have been paid and by whom during the partnership to equally distribute the partnership assets.[10] It is not open to the plaintiff to argue that he is not obliged to contribute to the debts or unpaid reimbursement of set-up costs on the final settlement of accounts upon dissolution of the partnership.
[10] ss 43 and 48 of the Act
53. The Court is satisfied that:
a. the loss position for the partnership for the period is $123,107.00 of which the plaintiff as a partner is liable to contribute 20% to the losses in the amount of $24,621.40; and
b. the plaintiff as a 20% partner is liable to contribute 20% to start-up costs of the partnership in the amount of $9,271.20.
54. The plaintiff claims an entitlement to profits generated from properties that were the subject to conditional sales contracts or sales authorities as at the date of dissolution. The Court in MW Corp found that the outgoing partners in a real estate partnership were entitled to profit with an appropriate apportionment.
55. The defendant says that it would be unjust for the plaintiff to be awarded an amount for these properties in circumstances where he made no contribution to the realisation of these properties. It was a disputed fact as to whether the plaintiff breached the partnership agreement in only providing 1-month notice prior to exiting when the partnership agreement stipulated a 6-month period.
56. The defendant notes that the plaintiff was involved in 4 of the 16 post dissolution properties as one of the listing agents. These properties were assets of the partnership. In my view, the plaintiff made a contribution to at least 4 of the properties as a listing agent and in the circumstances is entitled to a share in the profits realised from the conditional properties and the sales authorities with an appropriate reduction applied to his share.
57. The Court takes into account the following factors in determining the appropriate reduction to apply to the post dissolution sales:
a. the risk taken on by the defendant that the Sales Authorities and Conditional Properties would fail to convert to revenue;
b. the degree of skill and exertion input by the defendant in realising the Sales Authorities and Conditional Properties;
c. the expenses associated with the partnership business between dissolution and the Sales Authorities and Conditional Properties being realised, including salary, superannuation, and operating costs; and
d. the plaintiff’s notice period of 1 month as opposed to 6 months as provided under the partnership agreement.
58. The Court finds that Sales Authorities should be reduced by 95% and the Conditional Properties by 70% to determine the profit to which the plaintiff is entitled to a 20% share.
59. Applying the formula for revenue realised from the Sales Authorities and Conditional Properties as follows:
(A – B) – C – D = R
Where:
A = total commission payable by a vendor
B = franchise fee payable by the agency to Biggin & Scott Corporate
C = marketing levy
D = the contracting sales agents’ commission of between 50% and 60%
R = total revenue realised by the business
the plaintiff is entitled to the sum of $1,506.28 in profit arising from the post dissolution properties as set out in the calculations contained in Annexure A.
60. The plaintiff was overpaid the sum of $31,147.00 in profits when the partnership was making a loss. The net position in relation to profits is an overpayment made to the plaintiff in the sum of $29,641.32.
61. Accordingly, the plaintiff is liable to pay the defendant:
a. $24,621.40 as his 20% share of the losses of the partnership;
b. $29,641.32 on account of an overpayment of profit share; and
c. $9,271.20 on account of the plaintiff’s 20% of the establishment costs of the partnership.
Topic 3: share of the assets including Goodwill
62. Mr Aerry says that there is no goodwill in the partnership as there was no profit. Goodwill is linked to profit. If there is a loss there can be no goodwill. Even if there was some profit, the name branding was not available as an asset in the franchise under the franchise agreement. Mr Landers did not have access to the franchise agreement in the preparation of his reports.
63. The external accountant did not include goodwill in its financial documentation. Mr Landers said that he would not expect an entry for goodwill to form part of the internal accounting documentation.
64. Mr Landers made a finding that the goodwill component of the business was calculated as $1,004,537.00 of which the plaintiff is entitled to a 20% share in the amount of $200,907.40. This amount was generated by a Business Value Assessment Audit Report. This document uses comparable businesses, here, 10, in a category of industry and provides an assessment based on answers provided by the plaintiff.
65. Mr Landers conceded that it was not a full valuation report and used the BSTAR product as a tool to assist the Court in its assessment. Some of the 80 questions could not be answered as it depended on the outcome of these proceedings. He said that usually both parties would be involved in answering the questions, for example, in family law disputes. He conceded that there were some answers that were either equivocal or should have been answered differently, eg, years trading profitably, the net worth position of the business, whether litigation was on foot, the management accounting systems were not in place, whether the business could operate without the owners.
66. Mr Aerry had significant concerns in relation to the accuracy of the answers provided by the plaintiff in the BSTAR. Mr Landers said that the valuation is not overly optimistic or pessimistic, it rated in the middle. The benchmark is 6% and the ranking was 4.88%. Mr Aerry and Mr Landers said that the answers would have a material impact in relation to the profits, which was a matter for the Court to determine. The Court does not place any weight on the BSTAR valuation as it is not based on sufficient and accurate information.
67. The main difference between the parties was whether the partnership was profit or loss making.
68. The defendant submits that there can be no goodwill in the partnership business in circumstances where:
a. the business was at all material times making a loss;
b. there was no rent roll associated with the business (and thus no ongoing revenue stream);
c. the name and branding of “Biggin & Scott” was not owned by the partnership and the franchise agreement relating to the use of the name expressly provided that all goodwill relating to the name remain to be the exclusive benefit of Biggin & Scott itself; and
d. if there was any goodwill (which was denied by the defendant), it was destroyed at the dissolution of the partnership).
69. Further, the defendant relies on Halsbury’s[11] which provides:
[11]Winding Up of the Partnership at [305-630] Valuation of goodwill
Goodwill is only required to be valued on the dissolution of a partnership if there is to be a sale of the whole or part of the partnership business or if one or more of the continuing partners are entitled to purchase the departing partners’ shares.
70. Neither limbs are applicable in the present case.
71. The Court accepts that there is no goodwill in the partnership at the date of dissolution as the partnership was predominantly a loss making entity, the name Biggin & Scott Melton does not vest in the partners pursuant to the franchise agreement and there can be no goodwill in a partnership upon its dissolution. Therefore, there is no allowance for an amount for goodwill in the partnership.
Conclusion
72. The statement of claim initially pleaded causes of action arising from the Fair Work Act2009 (Cth) (“Fair Work Act”). Whilst the Fair Work Act has a number of provisions that provides power to the County Court to make decisions, it nevertheless restricts the courts, including the County Court, in their ability to make orders as to costs.[12] Section 570 states that “if a party to proceedings (including an appeal) in a court in relation to a matter arising under [the] Act, may be ordered by the court to pay costs incurred by another party to the proceedings”,[13] only if:
[12]Melbourne Stadiums Ltd v Sautner (2015) 229 FCR 221 at [157].
[13]Fair Work Act 2009 (Cth) s 570(1).
a. the court is satisfied that the party instituted the proceedings vexatiously or without reasonable cause; or
b. the court is satisfied that the party’s unreasonable act or omission caused the other party to incur the costs; or
c. the court is satisfied of both of the following:
i. the party unreasonably refused to participate in a matter before the FWC;
ii. the matter arose from the same facts as the proceedings.[14]
[14]Fair Work Act 2009 (Cth) s 570(2).
73. The plaintiff abandoned the claims made under the Fair Work Act and the Real Estate Industry Award (2010) on 19 March 2021 as noted in other matters in Judicial Registrar Muller’s orders. In my view, this has costs consequences in the proceeding as set out in my findings above.
74. Accordingly, for the purposes of this proceeding, it follows that I am satisfied that there be a declaration that there is no goodwill attributable to the partnership and that the defendant pay the plaintiff an underpayment of commission totalling $8,743.00 and the plaintiff repay the defendant an overpayment of partnership distributions totalling $63,533.59 with a net recoverable amount owing to the defendant of $54,790.59.
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Certificate
I certify that these 19 pages are a true copy of the judgment of Judicial Registrar Burchell delivered on 25 April 2021.
Dated: 27 April 2021
Julia Despard
Associate to Judicial Registrar Burchell
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