Shazbot Pty Ltd v Warner Capital Pty Ltd

[2018] NSWSC 1645

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645

Hearing dates:

5, 6, 12, 13 and 14 February 2018

Date of orders:

31 October 2018

Decision date:

31 October 2018

Jurisdiction:

Equity

Before:

Parker J

Decision:

1. The second plaintiff, Steven Barry Kugel, is entitled to an order for an account of the assets and liabilities of the insolvency practice CRS Warner Kugel, which the second plaintiff conducted in partnership with the second defendant, Anthony John Warner, between 19 September 2007 and 22 September 2014.
2. The business of the partnership included acting as company administrator, company liquidator, trustee in bankruptcy and administrator of Bankruptcy Act 1966 (Cth), Part X arrangements, but did not include the remaining Bankruptcy Act 1966 (Cth), Part IX debt agreement business operated by Debtfree Pty Ltd.
3. The first plaintiff, Shazbot Pty Ltd, is entitled, at its election, to an account of profits or an award of equitable compensation arising from the transfer of its share in Debtfree Pty Ltd to the first defendant, Warner Capital Pty Ltd, on 22 September 2014.

Catchwords:

PARTNERSHIPS AND JOINT VENTURES – partnerships – legal characterisation – insolvency practice trading through a proprietary company acting as trustee of a unit trust – fees earned in personal capacity by parties to insolvency practice – where insolvency practice previously conducted business as a partnership – where parties to insolvency practice are directors of proprietary company – whether partnership exists – role of company in partnership – whether income belonged to unit trust – sham

 

PARTNERSHIPS AND JOINT VENTURES – partnerships – dissolution and winding up – accounts – agreement to distribute partnership assets – where agreement does not deal with all assets and liabilities of partnership – where agreement subject to further adjustments – whether agreement binding

 

PARTNERSHIPS AND JOINT VENTURES – partnerships – dissolution and winding up – accounts – calculation of work in progress component – calculation of goodwill component

  EQUITY – fiduciary duties – directors’ duties to shareholders – whether director owed fiduciary duty to shareholder in taking transfer of shares in company at nominal value upon dissolution of business relationship

Legislation Cited:

Bankruptcy Act 1966 (Cth), Part IX and Part X
Partnership Act 1892 (NSW), ss 1, 19, 29, 30, 39

Cases Cited:

ACN 079 638 501 Pty Ltd v Pattison [2012] VSC 445
Adams v Bank of New South Wales [1984] 1 NSWLR 285
Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622
Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199
Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36
Commissioner of Taxation (Cth) v Everett (1980) 143 CLR 440; [1980] HCA 6
Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317; [2003] HCA 51
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Friend v Booker (2009) 239 CLR 129; [2009] HCA 21
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64
In re Diplock [1948] Ch 465
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4
Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72
Morgan v 45 Flers Pty Ltd (1986) 10 ACLR 692
Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342
Palermo v Palermo [2015] WASCA 49
Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21
Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462

Category:

Principal judgment

Parties:

Shazbot Pty Ltd (First Plaintiff)
Steven Barry Kugel (Second Plaintiff)
Warner Capital Pty Ltd (First Defendant)
Anthony John Warner (Second Defendant)
Clarence Street Partners Pty Ltd (Third Defendant)

Representation:

Counsel:
P Afshar (First and Second Plaintiffs)
S Wells (First, Second and Third Defendants)

  Solicitors:
Blackman Legal (First and Second Plaintiffs)
SR Law (First, Second and Third Defendants)

File Number(s):

2015/119465

Publication restriction:

Nil

Judgment

1. Both the second defendant, Anthony John Warner, and the second plaintiff, Steven Barry Kugel, are accountants. From September 2007 until September 2014, Mr Warner and Mr Kugel conducted an insolvency practice together under the name “CRS Warner Kugel”, to which I will refer as “CWK”. These proceedings arise out of the termination of their professional relationship.

2. Both Mr Warner and Mr Kugel were qualified insolvency practitioners. Both practised in corporate insolvency and were registered company liquidators. In addition, Mr Warner practised in personal insolvency and was a registered trustee in bankruptcy.

3. The practice of CWK involved both personal and corporate insolvency. For personal insolvency, it consisted of acting as the trustee in bankruptcy of individuals’ estates pursuant to appointments under the Bankruptcy Act 1966 (Cth). All such appointments were made in favour of Mr Warner, as Mr Kugel was not a registered trustee in bankruptcy. On the corporate side, the work of the practice consisted both of official liquidations (pursuant to court order) and voluntary administrations. Most of the corporate appointments were made in favour of Mr Warner and Mr Kugel jointly, but there were a handful solely in Mr Warner’s name and a handful solely in Mr Kugel’s name. Mr Warner concerned himself mainly with the personal insolvency aspect of the practice and Mr Kugel concerned himself mainly with the corporate insolvency aspect. I will refer to each appointment, whether personal or corporate, as giving rise to an “administration”.

4. CWK’s practice was conducted from rented premises in the Central Business District of Sydney. Staff were employed to undertake both professional and administrative work under the direction of Mr Warner and Mr Kugel. The staff were employed by the third defendant, a company incorporated in September 2007 under the name CRS Warner Kugel Pty Ltd (“CWK Pty Ltd”). The premises were leased in the name of CWK Pty Ltd, and other liabilities and expenses undertaken in the practice were likewise undertaken in the name of the company.

5. The directors of CWK Pty Ltd were Mr Warner and Mr Kugel and the shares in the company were owned by the first defendant, Warner Capital Pty Ltd (“Warner Capital”) and the first plaintiff, Shazbot Pty Ltd (“Shazbot”). Warner Capital was a company controlled by Mr Warner and his wife; it acted as the trustee of a discretionary trust for the benefit of them and their family. Similarly, Shazbot was a company controlled by Mr Kugel and his wife and was the trustee of a discretionary trust for the benefit of them and their family.

6. Shortly after the incorporation of CWK Pty Ltd, it entered into a trust deed pursuant to which it was constituted as trustee of a unit trust known as the “CRS Warner Kugel Unit Trust” (“CWK Unit Trust”). The units in the trust were equally owned by Warner Capital and Shazbot.

7. As well as the CWK practice, there was a business of acting as administrator of personal insolvency agreements under Part IX and Part X of the Bankruptcy Act. This business was mainly the responsibility of Mr Warner. It operated under the names “Debt Free Direct” or “Debtfree”. The business was acquired in January 2008 and thereafter it was operated through a company called Debtfree Pty Limited (“DF”) alongside the CWK practice. The shares in DF were acquired in the name of CWK Pty Ltd but approximately seven months later, in October 2008, they were transferred to Warner Capital and Shazbot. From that point onwards, the profits from the Debtfree operations were distributed by way of dividend to Warner Capital and Shazbot.

8. In September 2014 Mr Warner told Mr Kugel that he (Mr Warner) wished to terminate the relationship, and Mr Kugel accepted that termination. Mr Kugel caused Shazbot to transfer its shareholding in DF and its unit holding in the CWK Unit Trust to Warner Capital for nominal consideration. The administrations continued under the direction of Mr Warner and the income of the practice continued to be channelled through CWK Pty Ltd (subsequently renamed Clarence Street Partners Pty Ltd), now under the sole control of Mr Warner.

9. Following the termination, calculations were done of the amount of cash held in the practice bank accounts as at 30 September 2014, and the amount of the practice’s liabilities as at that date. A half share of this, after taking into account some adjustments, was paid to Shazbot. A payment of $100,000 was made in October and a “final” payment of approximately $11,000 was made in November.

Issues for determination

10. As at 30 September 2014, monies had been recorded by way of work in progress in the records of the practice, representing fees which had been recorded as chargeable to the administrations then on foot but which had not then been paid. In some of the administrations, no funds were available. In others, money was held but the formal steps required for payment had not been taken. The parties referred to these fees as “WIP Assets”. No allowance was made in the payment to Shazbot for any share of the WIP Assets. Nor was any allowance made for any goodwill associated with the CWK practice or the Debtfree business, or for the value of the shares in DF. The defendants deny that they had any obligation to do so.

11. The first issue for determination is the legal nature of the relationship under which the CWK practice was conducted. The plaintiffs contend that, as a matter of proper legal analysis, there was a partnership between Mr Warner and Mr Kugel personally. Alternatively, they say there were personal relations of confidence between them giving rise to quasi-partnership fiduciary obligations. The defendants deny that any fiduciary obligations were owed by Mr Warner personally. The defendants’ case is that the CWK practice was conducted by CWK Pty Ltd as trustee of the CWK Unit Trust and there was, in law, no partnership relationship at all. A subsidiary question is whether, if there was a partnership, it included the Debtfree business.

12. The second issue is whether the plaintiffs have any further right to a share of the value of the WIP Assets or of the Debtfree business. The plaintiffs claim that upon dissolution of the partnership they are entitled to orders which would secure Mr Kugel a half interest in the WIP Assets (and a half interest in the value of the Debtfree business). Orders are sought for the quantification of those alleged entitlements pursuant to the Partnership Act 1892 (NSW), s 39. The defendants contend that any entitlement to a share in the WIP Assets or the Debtfree business (whether by way of partnership distribution or otherwise) was surrendered by agreement in September 2014. The defendants’ contention is that all of the obligations which they have, have been complied with.

13. The third issue is, should the plaintiffs have some entitlement to a share of the WIP Assets or the Debtfree business, how the value of that is to be determined. Initially, both parties presented expert evidence on valuation questions, but it was accepted in the course of the hearing that the Court would not itself go into the details of calculation and would refer the ascertainment of the quantum of any entitlement to a referee. The parties, however, disagree, as to how the accounting process ought to be undertaken.

Summary and analysis of evidence

14. Mr Kugel gave evidence in the plaintiffs’ case and Mr Warner gave evidence in the defendants’ case. Both were cross-examined at length. Much of their evidence appeared straightforward and credible. But there were difficulties with some aspects of each of their evidence and there were some areas where their evidence was in conflict. I approach the evidence of both of them on issues in dispute with some reservation.

15. Evidence was also given in the defendants’ case by Peter Malone and Jack Panaghis. Mr Malone was employed in the CWK practice as a member of the professional staff. He was a senior manager who reported to both Mr Warner and Mr Kugel. Mr Panaghis performed a similar role at Debtfree. Both witnesses were briefly cross-examined. Their credibility was not questioned and I accept their evidence so far as it goes.

16. Mr Warner and Mr Kugel first met when they were both working as members of the employed professional staff at an accountancy firm known as Thompson Douglas Butterell (now Grant Thornton). They both later worked in different insolvency practices but remained in touch with each other and from time to time they discussed working together.

17. Mr Warner and Mr Kugel had further discussions about working together in late October 2006 or thereabouts. At that time Mr Kugel was a member of the professional staff of an insolvency firm known as GHK Green Krejci. Mr Warner was conducting an insolvency practice under the name “CRS Warner Sanderson” (to which I will refer as “CWS”) with Clifford John Sanderson, another insolvency practitioner.

The CWS practice and the Debtfree business

18. The CWS practice had originally been established by Mr Warner (alone) under the name “CRS Partners” in May 2005. Mr Warner was joined by Mr Sanderson in August 2005. The practice operated from leased premises at 30 Clarence Street, Sydney. It used the internet domain names “crspartners.com.au” and “crswarnersanderson.com.au”.

19. Mr Warner and Mr Sanderson were also involved in a business of direct marketing of debt agreements under Part IX of the Bankruptcy Act. The business operated under the name “Debt Free Direct” or “Debtfree”. Such agreements provide an alternative to formal bankruptcy, typically for consumer debtors with few assets or liabilities who are unable to meet their financial commitments. They operate under a system of registration with the Australian Financial Security Authority (“AFSA”). The agreements are administered by a registered debt agreement administrator, approved by AFSA.

20. The direct marketing model was derived from an English group of companies, the holding company for which was Debt Free Direct Group PLC (“DFD Group”). There were two Australian companies involved. One was called Debt Free Direct Australia Pty Ltd (“DFDA”). DFDA was a subsidiary of DFD Group. The other company was called Debtfree Pty Ltd (“DF”). DF was owned by Mr Sanderson and Mr Warner.

21. The Debtfree business was established in Australia pursuant to what was termed a “joint venture” agreement entered into in June 2006 between DFD Group and its subsidiaries on the one hand and Mr Warner, Mr Sanderson and DF on the other. The idea was that DFD Group would fund the establishment of the Australian business, which would be run on a day-to-day basis by Mr Warner and Mr Sanderson. It was hoped in due course to float the business, with Mr Warner and Mr Sanderson receiving a share.

22. According to Mr Warner this “joint venture” agreement was later documented in two written contracts executed in August. The first contract was between DFDA and DF, Mr Warner and Mr Sanderson and was styled the “Services Agreement”. The second contract was between three DFD Group companies (including the parent), DFDA, DF, Mr Warner and Mr Sanderson, and was referred to in the evidence as the “Share Issue Agreement”.

23. The copies of the contracts in question which were annexed to Mr Warner’s affidavit, although executed by Mr Warner, Mr Sanderson and DF, were not executed by DFD Group or DFDA. The body of each agreement contained provisions which appeared still to be in draft. Mr Warner’s evidence on this subject was not challenged and I proceed on the basis that Mr Warner’s evidence on the subject was accurate and the documents in evidence represented the substance of the agreements between both parties.

24. Pursuant to these arrangements, the business was operated through DFDA. The board of DFDA consisted of DFD Group managers, Mr Warner and Mr Sanderson. Mr Sanderson was the chief executive officer. Under the Services Agreement, DF (which apparently held the registration as a debt agreement administrator with AFSA), provided the necessary administration services in return for a fee of $25,000 per month (to begin in November or December 2006). The Share Issue Agreement gave one of the DFD Group companies, Debt Free Direct (Australia) Ltd (not to be confused with the Australian company, DFDA, which was its subsidiary), the right to acquire the shares in DF. But it also provided, in the event of the business being floated, for Mr Sanderson and Mr Warner, between them, to receive twenty-five per cent of the issued share capital of that company or thirty per cent if the float was valued at $35 million or more.

25. DFDA commenced operations in August 2006. It conducted its business from offices which were located on the other half of the floor occupied by the CWS practice at 30 Clarence Street. Following negotiations with the landlord, DFDA took a lease over the whole of the floor, with CWS contributing a half share of the rent.

Mr Kugel joins the CWS practice

26. The catalyst for Mr Kugel joining Mr Warner and Mr Sanderson in practice was that Mr Kugel had connections with those who controlled the estate of the late Rene Rivkin, who had been a flamboyant and apparently very wealthy Sydney stockbroker. A large tax demand had been made on the estate and it appeared that it would need to go into bankruptcy. The understanding reached between Mr Warner and Mr Kugel was that Mr Kugel would join the CWS practice and persuade the executors of Mr Rivkin’s estate to appoint Mr Warner as the estate’s trustee (since Mr Kugel himself was not a registered trustee in bankruptcy).

27. On 2 November, Mr Warner sent an email to Peter Harkin, a solicitor of the firm Colin Biggers & Paisley, setting out what he described as “some key terms for our intended partnership” with Mr Kugel. Mr Warner asked Mr Harkin to have them formalised into a partnership deed and noted that Mr Kugel had asked that he (Mr Warner) pass them on to Mr Harkin. The “key terms” were as follows:

Heads of Agreement

Warner, Sanderson and Kugel (the new partnership) have agreed to establish the new partnership and will be operated through a unit trust (to be created) which will trade as CRS Warner Sanderson.

Partnership earnings and profits

Each partner will receive one third of the new partnership profits. No salaries will be paid to the partners. Earnings of the new partnership will include the following:

1.   Professional fees generated in the provision of insolvency services and corporate finance services by any partner after the new partnership is established. No partner is to compete with the partnership (except for services provided to Debt Free Direct Australia by Warner and Sanderson).

2.   Warner and Sanderson agree to contribute the management fee only they receive from Debt Free Direct Australia commencing in the month of December 2006. The monthly management fee is $25,000 (exclusive of GST). Any capital gain or dividends received by Warner or Sanderson from Debt Free Direct is to be excluded from the new partnership.

3.   It is acknowledged that Warner is to provide ½ of his time to the new partnership and the remaining of his time to Debt Free Direct Australia.

4.   It is acknowledged that Sanderson will provide all of his time to Debt Free Direct Australia. Sanderson will however assist with establishing a national network for CRS and in marketing generally.

…

Partnership decisions

Any partnership decision can be carried with 2 of the 3 partners in agreement, providing all 3 partners have been informed of the issue (except partnership dissolution). Partnership dissolution is to be determined in accordance with the agreed dispute resolution terms.

Dispute Resolution

As recommend by Peter Harkin.

Working Capital

Warner and Sanderson will provide the necessary working capital to the new partnership as a loan to the new partnership and will be repaid by the profits of the new partnership but only when funds become available and when agreement is reached with all partners.

…

Partnership Accounts

Partnership accounts are to be prepared at least quarterly and are to be distributed to every partner 20 working days after each quarter.

Corporate Restructuring Solutions Administration Pty Limited (CRS Administration)

CRS Administration is the service company used by Warner and Sanderson and incurs the necessary expenses in operating the business known as CRS Warner Sanderson. CRS Administration has entered into several long term liabilities as detailed below:

…

These costs will continue to be paid by CRS Administration and will recover those costs from the new partnership from month to month, as well as other costs which it incurs such as salaries and wages and other miscellaneous expenses.

28. In his first affidavit, sworn in December 2015, Mr Warner said that following an initial meeting with Mr Kugel in which the issue had been raised, he discussed the question of Mr Kugel joining the firm and then had a further meeting with Mr Kugel in which they had a conversation to the following effect:

Warner:   I have spoken to Cliff [Mr Sanderson] and he is happy for you to join CRS [CRS Warner Sanderson] and we will share one third of the profits with you but you need to be happy with a few things. Cliff [Mr Sanderson] spends all of his time, and I spend half of my time, in Debt Free Direct Australia. The other half of my time is spent in CRS [CRS Warner Sanderson]. We will be getting a management fee of $25,000 per month from Debt Free Direct Australia starting next month. Cliff [Mr Sanderson] and I are happy to pay that into CRS [CRS Warner Sanderson] but the shares we own in Debt Free will be kept separate. Are you happy with that?

Kugel:   Sounds good to me. I am confident the Rivkin job will come in around 7 November.

Warner:   OK - great - are you confident the Rivkin family will appoint me?

Kugel:   Yes, the accountant has spoken to the Rivkin family and they are happy for it to go wherever I go.

29. Mr Kugel’s version of events, in his affidavit of March 2016, was as follows:

(c)   … Mr Warner said “I have spoken about you and the Rivkin opportunity with Cliff and if you can bring the Rivkin matter to me you can come on with us as a full and equal partner. You can take the lead in the investigations although because it's my ticket, I must also be heavily involved.

(d)   Mr Warner then explained to me his current partnership arrangements with Mr Sanderson saying to me "If you join us it will be a partnership of 3 equal shares in terms of profit and losses and that you'll be expected to be the main marketer of our firms' services.

(e)   Mr Warner and I also had the following conversation:

Mr Warner:   Cliff and I have also setup a business performing debt

agreements and it's funded by a listed company in the UK. It's called Debt Free Direct and I expect that the Australian business will be listed at some stage in the future and that it's going to be extremely lucrative for Cliff and me. Because we devote so much time and effort into this business, shares in this company are specifically not included and will not be issued to you. But the UK parent company pays Debt Free a management fee of $25,000 each month for our services and we will now pay that fee into the Insolvency partnership which we will then split. It will then compensate the firm for the services that Cliff and I provide as we work nearly 100% and 50% respectively in building that business. Of course I will also spend time in the firm on the financial management and the day to day administration of the firm and the office.

I said:   I'm happy with the offer of a partnership on this basis but I need to confirm that the Rivkin family will come with me.

30. There was no evidence from either Mr Kugel or Mr Warner concerning the heads of agreement sent by Mr Warner to Mr Harkin on 2 November.

31. The accounts of Mr Kugel and Mr Warner about the negotiations which took place prior to Mr Kugel joining the practice differed in some details. On Mr Kugel’s account, the words “partner” and “partnership” were expressly used to describe his status in the CWS practice. Mr Warner’s account did not include the word “partner” but I see no reason to doubt that it was used in the discussions. The heads of agreement sent to Mr Harkin specifically describe the relationship as a partnership and, as will be seen, the term was thereafter used by all the parties to describe the relationship between them. It is not necessary to seek to try to resolve the other discrepancies, such as who initiated the proposal.

32. Mr Warner was appointed to the Rivkin estate bankruptcy, and Mr Kugel joined the CWS practice, on 7 November.

33. In response to Mr Warner’s email of 2 November, at some point in the following few weeks Mr Harkin prepared a memorandum headed “Partnership Deeds”. The memorandum set out twenty-five numbered issues to be considered and left space for responses. On 7 December, Mr Sanderson circulated to Mr Kugel and Mr Warner his suggested responses. The questions posed by Mr Harkin and Mr Sanderson’s responses (shown in bold) included the following:

2.   Capital - Which of the parties are providing capital? Is the amount of capital being provided known? Is the capital of an equity nature or debt nature? If further capital is to be raised by debt are each of the partners to provide the capital equally. If partners do advance capital to the partnership, what percentage of interest is entitled to be charged? EQUAL - NEED TO FIGURE OUT HOW TO DEAL WITH CRS ADMIN P/L DEBT TO NAB OF $60,000.

3.   Partnership Interest - Are the partners to have an equal interest or are the interests of the partners varied. If the interests of the partners are to be varied what are their percentage interests in the partnership? 1/3rd. REVIEW IN 1 YEAR (JAN 2008?) TO SEE IF FAIR SPLIT GIVEN PARTNER ALLOCATION ROLES WITH DFD. IF CONSIDERED A CHANGE IS NEEDED, THEN PROBABLY FIX BY WAY OF ALLOCTION OF PARTNER SALARIES RATHER THAN BY CHANGE TO 1/3rd EQUITY SPLIT.

4.   Share of Profits and Losses - Irrespective of how the interest in the partnership is structured partners may have losses shared equally or in proportion to their equity interest in the partnership. How are losses to be shared? 1/3rd

…

7.   Duties of Partners – Will all of the partners be involved in the business or will only some of the partners have an active role while others have a managerial and financial role? Please advise of the division if any of the roles between the partners. CJS TO BE PREDOMINANTLY DFD BUT IN CHARGE OF CRS NATIONAL AND MANAGEMENT FEE (CURRENTLY $25000 PM) FROM DFD TO FLOW THROUGH TO CRS. AW 50/50 DFD/CRS.

…

11.   If a partner wished to retire should there be a provision for retirement of a partner or would the partnership be at an end? RETIRING PARTNER GETS PAYOUT OF NET ASSETS. NO GOODWILL PAYOUT.

…

13.   What is to happen on the death of a partner? Is the partner's share to be bought out or is it to be transferred to the deceased partner's surviving relatives? AUTOMATIC PAYOUT OF NET ASSETS. I.E. SAME AS RETIREMENT.

…

20.   Are moneys received from lectures and talks to be paid into the business, or are they kept individually? If paid into the business, does this count towards hours of work? YES, IF INSOLVENCY RELATED.

…

25.   Please confirm that if one partner wishes to sell the share of the partnership, that it should first be offered to the other partner. CAN’T SELL - JUST RETIRE AND GET NET ASSETS

34. Mr Sanderson’s covering email stated:

We need to get together and discuss and also agree the legal structure proposed by Rod - I’ll explain at the meeting.

35. The reference to “Rod” was to Rodney Grosvenor, a tax accountant who acted as an advisor to Mr Warner and Mr Sanderson. Mr Grosvenor’s firm acted as tax agent for the CWS practice entities.

36. Shortly after circulating his responses to Mr Harkin’s questions Mr Sanderson circulated an email he had received from Mr Grosvenor on 28 November attaching a diagram which Mr Sanderson described as the “current legal structure”.

37. The diagram showed three entities involved in the CWS practice. One was Corporate Restructuring Solutions Administration Pty Ltd (“CRS Administration”), referred to in the 2 November heads of agreement, which was shown as holding “assets/staff/leases”. The second was another company called Corporate Restructuring Solutions Pty Ltd, acting as trustee of a unit trust known as the “CRS Unit Trust”. The third entity was a partnership named “CRS Warner Sanderson”.

38. The diagram showed an administration fee passing between the CRS Unit Trust and CRS Administration. Although the arrow depicted the fee going from CRS Administration to the unit trust, this cannot be correct and the flow of money must have been the other way; this is confirmed by other evidence. A ten per cent “commission” was shown as flowing from the CRS Unit Trust to the partnership.

39. The diagram showed Mr Sanderson and Mr Warner as the partners in the “CRS Warner Sanderson” partnership and the owners of Corporate Restructuring Solutions Pty Ltd, the trustee company. The units in the unit trust were owned by Warner Capital and Sanderson Capital Pty Limited (“Sanderson Capital”) as trustees for Mr Warner’s and Mr Sanderson’s family trusts. The shares in CRS Administration were owned by Warner Capital and Sanderson Capital. DFDA was shown on the diagram but not as part of the structure. DF was not shown at all.

40. Another entity shown on the diagram but not as part of the structure was a company called CRS Corporate Finance Pty Ltd. According to Mr Warner, this company was incorporated when he and Mr Sanderson established the CWS practice in August 2005. Although the company seems to have been regarded as part of the practice structure (see recital H to the Deed of Indemnity and Release executed following the dissolution of the CWS practice, quoted at [71] below) there was no evidence that it undertook any significant activity at the relevant time, or that Mr Kugel had anything to do with it.

41. There is no evidence which casts any light on what happened at the meeting with Mr Grosvenor (if it occurred). Nor is there any evidence of any further involvement of Mr Harkin.

42. Shazbot was incorporated in January 2007. In Mr Warner's affidavit, he said that this was done so that Shazbot could hold Mr Kugel’s interest in the CWS practice. This evidence was not objected to and Mr Kugel did not address the subject himself. In fact, however, it was not until the financial year ended 30 June 2008 that income from the practice was distributed to Shazbot: see [89] below.

Conduct of CWS practice

43. After he joined the practice in November 2006, Mr Kugel was allocated an email address under the “crspartners.com.au” domain name. The email footer used the name “CRS Warner Sanderson”, and contained no reference to any company name or ACN. Nor did it contain an ABN. The letterhead used on correspondence was in the same form. Emails and letters which went out under the name of Mr Kugel described him as “Partner”. Emails and letters from Mr Warner and Mr Sanderson also described each of them as a “Partner”.

44. Soon after Mr Kugel joined the practice, Mr Warner contacted CWS’ insurance brokers, Willis Australia, to update the practice’s professional indemnity insurance. The confirmation issued by Willis, dated 12 December 2006, is in evidence. It shows the named insured as including CRS Administration, Mr Warner, Mr Sanderson, Mr Kugel and the “partnership of Anthony Warner, Clifford Sanderson and Steven Kugel t/as CRS Warner Sanderson”. The relevant business activities were described as “accountants and insolvency practitioners”.

45. An account signatory form from Macquarie Bank from the same period is also in evidence. On the form, both Mr Warner and Mr Kugel were shown as “partner” and the company name was shown as “CRS Warner Sanderson”.

46. In January 2007 Mr Warner sent to Mr Sanderson and Mr Kugel management accounts for the practice for the months of November and December 2006. These consisted of a profit and loss account for CRS Administration and a profit and loss account and balance sheet for the CRS Unit Trust. Mr Warner stated that CRS Administration’s figures for November had been “split between the new and old partnership”. He indicated that $90,000 would be distributed for the “new partnership”, one third to “each partner”.

47. Insolvency practice required that any monies received in the course of an administration be held in a bank account under the name of the practitioner(s) holding the relevant appointment. The account could be drawn on to pay legal fees and other disbursement incurred in the administration. But fees could not be drawn without approval from the creditors, or, in some cases, from the court. The practice was to prepare a remuneration report which would then be submitted for approval. Thus there was a time lag between the work being undertaken and payment being received.

48. Where possible, when CWS accepted instructions, contribution would be obtained in advance for costs and disbursements to be incurred in the administration. But this was not possible in every case, and even where a contribution was obtained, it might prove insufficient to cover the costs of the administration. In some administrations, there were insufficient funds to meet fees and disbursements, and recovery was dependent upon the success of recovery proceedings against third parties.

49. The CWS practice maintained a system to keep track of fees incurred which had not yet been paid, which were referred to as “work in progress”. The system also appears to have included disbursements incurred by CWS where there were no funds in the administration, which were referred to as “outlays”. The system ran under a software package called “Viztopia”. It was separate from the bookkeeping system which did not record fees or recovery of disbursements until the amounts were actually received. Once fees were approved, a cheque would be drawn in favour of the relevant practitioner (who was legally the person entitled to receive the fees). The practice adopted within CWS was then for the practitioner(s) in question to endorse the cheque over to Corporate Restructuring Solutions Pty Ltd as trustee for the CRS Unit Trust. A tax invoice would be issued under the CRS Unit Trust’s ABN for GST purposes.

50. Bookkeeping was done for the CWS practice by its staff, and management accounts were prepared. Every few months cash drawings would be made from the practice’s cash on hand. I have already referred to Mr Warner’s email to Mr Sanderson and Mr Kugel about the January 2007 distribution. Mr Warner was principally responsible for supervising the preparation of management accounts, and for proposing the amounts to be drawn, and the process continued thereafter under his direction.

51. In March 2007 Mr Warner, Mr Sanderson and Mr Kugel agreed to undertake the direct marketing of company liquidations online, in a manner similar to the marketing of Part IX debt agreements in the Debtfree business. They agreed to register the business name “Company Liquidations Direct” for this purpose and established a website under the domain name The registration of the business name was organised by Mr Warner. The proprietor of the name was recorded as Corporate Restructuring Solutions Pty Ltd.

Mr Sanderson leaves

52. By July 2007 the relationship between Mr Sanderson on the one hand, and Mr Warner and Mr Kugel on the other hand, had become strained. Mr Kugel felt that Mr Sanderson was not making sufficient contribution to the CWS practice. Mr Warner agreed. A meeting took place on 4 July between the three men. A file note by Mr Kugel records:

The purpose of the meeting was to discuss Cliff’s role in the partnership following a number of other such meetings, generally over coffee, where my dissatisfaction with the performance of Cliff in the partnership was raised.

In this meeting, Cliff was again asked to undertake marketing for the firm and Anthony and I tried to get some undertakings as to seeing a certain number of accountants, lawyers per week.

This time Cliff had reached a point where he said that he doesn’t intend to do any marketing for CRS whatsoever as he just didn’t have any motivation for the firm.

On that basis, we then had an argument about whether he had any role in the partnership and he said that he believed Anthony and I should go on alone and put more effort into Liquidation Direct.

He said his only contribution to the firm was and would ever be $200,000 from DFD [Debt Free Direct management fee].

We argued about Cliff leaving the partnership and he said he wanted his share of cash at bank after expenses and that he wanted his National Bank loan paid out. He also wanted $200,000 from DFD which left CRS with only $100,000 for Anthony’s services to that company.

[Further discussion followed.]

Cliff again said he wanted no liabilities, wanted the debt paid by any means and whatever cash was available after expenses.

He then went on about how he intended to trick DFD into taking on the lease liability for our premises and he was also trying to get them to take on leasing of equipment and a rent reduction. On this basis he said going forward, CRS/Liquidation Direct could be a terrific business and one best run with Anthony and myself only.

I had heard enough by this time, having told him my immediate reaction to his offer was to keep him in the partnership for his $200k.

As I got up to leave, my parting comments were that I would consider his offer and get back to him. I then left Anthony & Cliff in the room together.

53. By August, Mr Sanderson had become frustrated in his dealings with DFD Group management. Mr Warner had arranged to visit the DFD Group management in England on 24 August. On 22 August, Mr Sanderson emailed Mr Warner. Mr Sanderson said that he could not operate as CEO and that he would welcome it if DFD Group were to remove him as CEO provided they did not interfere with his shareholding in DF. Mr Warner passed this on at the meeting with DFD Group management and agreed to take over as CEO of the Debtfree business in Australia. Mr Sanderson was eventually removed as a director of DFDA (and thus as CEO) on 27 October.

54. Mr Kugel took the position, supported by Mr Warner, that Mr Sanderson's departure from the Debtfree business meant that he was no longer contributing anything to the partnership and should leave. Mr Sanderson had retained Colin Biggers & Paisley to advise on issues arising out of the termination of Mr Sanderson's involvement with Debtfree. Mr Kugel and Mr Warner told Mr Sanderson that the retainer of Colin Biggers & Paisley was a private matter of Mr Sanderson's which would not be paid for out of the CWS practice. They retained their own solicitor, Deborah Searle, to act for them in their dealings with Mr Sanderson.

55. On the morning of 19 September, Colin Biggers & Paisley forwarded to Mr Kugel a proposed Deed of Indemnity and Release providing for Mr Sanderson to leave the partnership. Mr Kugel consulted Mr Warner and Ms Searle. At 5.34 pm Mr Warner sent an email to Mr Sanderson, copied to Mr Kugel, which relevantly stated:

As discussed, last night it is our intention (Steven Kugel and Anthony Warner) to accept your offer to withdraw from the CRS Partnership. You made the offer to us on the 4th of July 2007. Your offer to withdraw from the partnership was on the basis that the partnership would pay out the loan to the National Australia Bank (NAB), notwithstanding Steven Kugel has no obligation to pay out the NAB loan. The balance of the funds after the NAB loan was paid out was to be divided equally between the three of us. At the time, we said we wanted time to consider your offer and we said we would revisit it in a month or so. You agreed to leave your offer on the table. We now accept the offer, effective immediately and now provide you with an accounting as to the settlement of the partnership assets.

56. The email went on to provide figures for the CRS Unit Trust, CRS Administration and “CRS Warner Sanderson”. It appears that separate accounts were still being maintained for the former CRS Warner Sanderson practice up until Mr Kugel had joined the previous November, and this is what “CRS Warner Sanderson” referred to. The net assets of the CRS Unit Trust were to be divided equally between Mr Warner, Mr Sanderson and Mr Kugel. CRS Administration had only minimal funds. The net assets of “CRS Warner Sanderson” were to be divided equally between Mr Sanderson and Mr Warner.

56. Mr Warner and Mr Kugel took immediate steps to secure the loyalty of the staff of the CWS practice. Letters were prepared to the staff members and delivered on 19 September. The letters were drafted by Mr Kugel and signed by Mr Warner. They stated:

As you may be aware, Cliff Sanderson has offered his resignation to the partners of CRS Warner Sanderson and this offer has been accepted by the remaining partners Steven Kugel and Anthony Warner.

As you know, you have been employed by CRS Administration Pty Ltd and, in accordance with partnership requirements, this Company will cease to operate.

Notwithstanding the foregoing, you will be offered continuing employment with the administration company of the new partnership and will enjoy precisely the same terms and conditions as you have up until now.

…

I look forward to a long and continuing relationship in the new partnership company and thank you for your support.

58. The following day, 20 September, CWK Pty Ltd was incorporated. This was organised by Mr Warner. The shareholders were Shazbot and Warner Capital. Mr Warner and Mr Kugel were the directors.

59. The new CWK practice continued to use the “crspartners.com.au” domain name, and also established the domain name “ The firm name shown on emails and letterheads was changed to “CRS Warner Kugel” but the form of the email footers and letterheads was otherwise unaltered. Mr Warner and Mr Kugel continued to be identified as “Partner”.

60. In evidence is an email sent by Mr Warner to two clients on 21 September (and copied to Mr Kugel). The email stated:

I thought I should inform you before the “insolvency grapevine” informed you. Cliff left our partnership this week, effective Wednesday 19 September.

Steven Kugel and I immediately formed a new partnership which will trade as CRS Warner Kugel.

The CRS web site has been updated to reflect the change.

61. On 27 September Mr Warner wrote to Willis Australia on CWK letterhead as “partner”. The letter stated:

The CRS Warner Sanderson partnership was dissolved on 19 September 2007.

A new partnership was formed which is now known as CRS Warner Kugel. The partners in CRS Warner Kugel are Anthony Warner and Steven Kugel. Both Anthony Warner and Steven Kugel were listed as partners in the professional indemnity insurance which was placed on 3 June 2007.

62. The letter went on to ask that CWK Pty Ltd be noted as an additional insured entity on the policy.

63. On 6 October (a Saturday) Mr Warner emailed Mr Kugel as follows:

I forgot to register a Unit Trust! Can you please do it on Monday as we banked money on Friday so we need it asap. If you can back date it to 20 September that would be great.

The trustee of the Unit Trust will be CRS Warner Kugel Pty Limited. Details of that company are attached.

The unit holders will be Shazbot Pty Limited and Warner Capital Pty Limited.

64. Mr Kugel organised the establishment of a unit trust in accordance with Mr Warner’s request. It appears to have been arranged through an accountancy firm called Watson Business Accountants. This was the firm of Maurice Watson, who was retained by Mr Warner and Mr Kugel as an accounting and tax advisor in place of Mr Grosvenor.

65. The trust deed, backdated to 20 September 2007 in accordance with Mr Warner’s request, is in evidence. CWK Pty Ltd was the trustee. Warner Capital and Shazbot were the unit holders. The trust was called the CRS Warner Kugel Unit Trust. The deed was executed by Mr Kugel on behalf of CWK Pty Ltd, and by Mr Warner and Mr Kugel on behalf of Warner Capital and Shazbot.

66. On 17 October Mr Warner arranged for the registration of “CRS Warner Kugel” as a business name. The registration was in the name of CWK Pty Ltd. By this stage the company had obtained an ABN in its corporate name and that ABN was recorded on the registration.

67. Mr Kugel and Mr Warner had decided, seemingly so as to take advantage of advertising on Google, that the name of the direct marketing business for company liquidations should be “Liquidation Direct” rather than “Liquidations Direct”. On 19 October, they established a new domain name of “ The business name “Liquidation Direct” was registered on 30 October. Again the registered owner was CWK Pty Ltd under its corporate ABN.

68. Meanwhile, negotiations continued between Mr Warner and Mr Kugel on the one hand and Mr Sanderson on the other about the dissolution of the partnership. Mr Sanderson retained Phillip Stern, solicitor, of Addisons, in place of Colin Biggers & Paisley. His position was that, while the partnership had been terminated on 19 September, he did not accept that the figures provided on 19 September represented a full and final accounting from the partnership. Mr Kugel and Mr Warner caucused about this. On 24 September, Mr Kugel forwarded to Mr Warner the email from Mr Sanderson from the previous December attaching Mr Sanderson’s comments on the issues raised by Mr Harkin (see [33] above). Mr Warner wrote back to Mr Kugel:

This is a handy document for us 1/3 of net assets, no mention of WIP anywhere (WIP was never brought in our accounts). That we must stand behind. It also said it was a non-goodwill partnership. We would go on to say that you must stay on board to enjoy WIP that matures, ie it only matures into an asset with further effort! - we can at least peddle this and see where it gets us.

69. On 22 October Mr Sanderson emailed Mr Warner saying that he had lost Viztopia from his computer. He said he needed it to review the WIP and debtors of the practice. He asked Mr Warner to reload it and also to provide him with a WIP analysis which Mr Warner had mentioned having undertaken as at 19 September. Mr Warner and Mr Kugel ignored this request. On 30 October, Mr Stern, on behalf of Mr Sanderson, wrote to Ms Searle formally repeating the request. Mr Kugel and Mr Warner instructed Ms Searle to take the position that Mr Sanderson had received a full accounting of the assets of the partnership as at 19 September 2007 as shown in the accounts, including debtors. Strictly speaking, this may have been correct, but of course the point was that WIP was not included in the accounts until it was actually received.

70. On 8 November the paperwork came in to approve fees in a longstanding administration, for the bankrupt estate of Edna Liddell. The administration dated back to before Mr Sanderson joined Mr Warner in August 2005. Mr Warner emailed Mr Kugel:

Good time keep on rolling. I will draw $7k personally as that WIP dates back to when I was a sole practitioner! I will gift the rest to us ($28,500)! A real pity that Cliff isn’t around to share in these golden oldies!

71. The dispute between Mr Warner, Mr Sanderson and Mr Kugel was eventually settled in accordance with a Deed of Indemnity and Release executed in December. The parties to the Deed were Mr Warner, Mr Sanderson and Mr Kugel personally and their respective companies, Warner Capital, Sanderson Capital and Shazbot. Neither Corporate Structuring Solutions Pty Ltd nor CRS Administration was a party. Nor was CWK Pty Limited. The recitals to the Deed included the following:

A   Warner and Sanderson commenced a partnership on or about 1 October 2005 ("the earlier partnership").

B   Warner and Sanderson later admitted Kugel as a partner on 7 November 2006 ("the later partnership").

C   Both the earlier partnership and the later partnership dissolved on 19 September. This deed is to refer to the earlier partnership and the later partnership as the (dissolved partnerships).

D   The dissolved partnerships traded as CRS Warner Sanderson.

E   Sanderson held his interests in the dissolved partnership through [Sanderson Capital] and in his personal capacity.

F   Warner held his interests in the dissolved partnership through [Warner Capital] and in his personal capacity.

G   Kugel held his interests in the dissolved partnership through [Shazbot] and in his personal capacity.

H   The dissolved partnerships comprised an insolvency practice which operated through the following entities;

●   Corporate Restructuring Solutions Pty Limited

●   Corporate Restructuring Solutions Administration Pty Limited

●   CRS Corporate Finance Pty Limited

●   CRS Unit Trust

…

J   The assets of the dissolved partnerships included:

●   The assets as recorded in the books and records for Corporate Restructuring Solutions Pty Limited (A.C.N. 115 874 630), Corporate Restructuring Solutions Administration Pty Limited (A.C.N. 115 919 769) and CRS Corporate Finance Pty Limited (A.C.N. 118 365 389);

●   Work in Progress for all insolvency administrations administered by either Warner, Sanderson or Kugel which had not yet been billed as at 19 September 2007;

●   Debtors for all insolvency administrations administered by either Warner, Sanderson or Kugel which had been billed but not paid as at 19 September 2007; and

●   All intellectual property of the dissolved partnership including the web sites for CRS Warner Sanderson ( - and Liquidations Direct start="72">

The Deed provided for Mr Warner and Mr Kugel to pay Mr Sanderson and Sanderson Capital the sum of $10,000 in “full and final satisfaction of all of [Mr Sanderson's] entitlement to the assets of the dissolved partnerships”. In return, Mr Sanderson and Sanderson Capital were to transfer all of their shares and units in Corporate Restructuring Solutions Pty Ltd, CRS Administration, CRS Corporate Finance Pty Ltd and the CRS Unit Trust. The $10,000 consideration was attributed to the units in the Unit Trust.

The figure of $10,000 represented an additional amount above the net assets of the partnership in accordance with the account proffered in Mr Warner's letter of 19 September; it thus gave Mr Sanderson something on account of WIP, although, according to both Mr Kugel and Mr Warner, only part of the amount Mr Sanderson would have received on a full account.

The position taken by Mr Kugel in these proceedings with respect to WIP, namely that it became an asset of the practice when it was incurred, is inconsistent with the position taken by Mr Kugel and Mr Warner in their dealings with Mr Sanderson. But the tone of their private communications, with its talk of “peddling” the view that Mr Sanderson was not entitled to share in the WIP, and the mock concern about Mr Sanderson missing out on WIP subsequently collected for the Liddell estate, shows that they had no genuine belief that it was proper or correct. Mr Warner and Mr Kugel were just being, as they thought, clever. Their tactics in dealing with Mr Sanderson reflect no credit on either of them but are otherwise irrelevant to the issues which I must determine.

In the end, Mr Sanderson did receive a payment on account of the WIP although it did not represent the full amount due. Indeed the fact that Mr Warner made an allowance in his favour out of the Liddell estate fees for the period when he was a sole practitioner shows that as between themselves, Mr Warner and Mr Kugel adopted the approach that the WIP should be distributed according to the ownership of the practice at the time it was incurred, rather than the time it was received.

The Deed of Indemnity and Release provided for the tax returns for the three CWS companies and the CRS Unit Trust for the financial years ended 30 June 2007 and 30 June 2008 to be prepared and lodged by Mr Grosvenor. The Deed did not refer to the preparation and lodgement of the CWS partnership tax return. Nonetheless this was done as well. In the CRS Unit Trust return the beneficiaries were shown as Warner Capital, Sanderson Capital and Mr Kugel personally in the 2007 return but Shazbot was shown as the third beneficiary in the 2008 return. Mr Sanderson, Mr Warner and Mr Kugel personally were shown as the partners for the CWS partnership tax returns for both years.

As we have seen, the CWK practice was represented by Mr Warner to clients, employees and others as being a partnership between himself and Mr Kugel. Mr Warner also acquiesced in similar representations being made by Mr Kugel. This continued right up to the dissolution of the practice. Similar representations were made, and acquiesced in, by Mr Warner concerning the CWS practice when it was being conducted with Mr Sanderson.

The Statement of Claim in the proceedings alleges that the relationship between Mr Warner and Mr Kugel from September 2007 onwards was one of partnership and that the prior relationship between Mr Warner, Mr Sanderson and Mr Kugel had also been one of partnership. The defence denies that Mr Kugel and Mr Warner were in partnership after September 2007. But it admits that the prior relationship with Mr Sanderson was a partnership. Initially this had been denied, but an amendment was made to the defence in November 2017 to make the admission. In his affidavit, Mr Warner said that he “now” realised that the relationship between himself and Mr Sanderson and Mr Kugel had been a partnership. He repeated this under cross-examination. I consider the effect of this “admission” in determining the legal relationship between the parties, below.

Acquisition of Debtfree business

79. By January 2008 DFD Group (now called Fairpoint) wanted to get out of the Debtfree business in Australia. Mr Warner entered into negotiations with the representatives of Fairpoint to take over the remainder of the business so it could be operated alongside the CWK practice.

80. Mr Warner initially wanted to offer a percentage of DFDA’s book but eventually offered to purchase the business for $60,000 over three $20,000 instalments. Mr Kugel agreed to this on the proviso that no more should be offered. The offer was accepted. Debt Free Direct (Australia) Ltd exercised its rights under the Share Issue Agreement to acquire the shares in DF from Mr Warner and Mr Sanderson, with a view to transferring them to Mr Warner and Mr Kugel. Mr Sanderson resigned as a director of DF leaving Mr Warner as the sole director.

81. On 22 January Mr Warner emailed Mr Kugel about a new administration coming in. Mr Kugel asked where from and Mr Warner replied teasing him about not being in the office. Mr Kugel’s response indicated he was somewhat offended by this and Mr Warner tried to smooth things over. He wrote:

… at the present you are the finder and I am the minder/grinder and that is what makes our partnership a success! …

Anyway, I really was joking, but I guess it hit a nerve, but don’t worry if I didn’t value/appreciate your contribution you would hear about it and I wouldn’t want to bring the DFD business formally into CRS. I know that you have brought in the bulk of the work and that is why I want to bring in the DFD business into CRS because that is the right thing to do.

82. The purchase of the Debtfree business was formalised under a deed styled “Deed of Sale of Shares and Assets” dated 31 January. CWK Pty Ltd purchased from Debt Free Direct (Australia) Ltd the shares in DF. CWK Pty Ltd also purchased from DFDA various items of computer and office equipment. DFDA remained the owner of the domain name “ and the trademark “Debtfree Direct”, but DF was licensed to use the Debtfree Direct website and trademark for a period of twelve months. It was also agreed that DF could use its newly registered domain name “ and the “Debtfree” business name which it had earlier registered but not used.

83. The Debtfree business was conducted by DF alongside the CWK practice. DF employed its own staff. Most of its expenses (such as telephone expenses) were contracted, and paid for, in its own name. Some expenses (such as rent and electricity) were shared with CWK. Should one of DF’s customers find that he or she needed to go into a formal bankruptcy, the matter would be referred to CWK. Debtfree promoted itself as having access to insolvency practitioners for this purpose in its website.

Conduct of CWK practice and Debtfree business

84. The staff of the CWK practice operated in two practice groups, one for corporate insolvency and one for personal insolvency. Generally, Mr Kugel managed the corporate insolvency work and Mr Warner managed the personal insolvency work. Mr Warner was largely responsible for managing the Debtfree business. But Mr Kugel occasionally assisted when required. In March 2008, Debtfree business cards were printed for Mr Kugel showing him under the title of “Director – Sales and Marketing”.

85. The system of incurring WIP and later recovering fees after obtaining approval which I have described for the CWS practice continued for the CWK practice. The procedure adopted was to have regular “fee runs” where approval would be sought and monies paid out for all administrations where funds were available. Initially this happened every month or so, but later it occurred every quarter. Mr Warner also continued to supervise the practice bookkeeping and the distributions of income from the practice. Bookkeeping and distributions of dividends from DF were likewise looked after by Mr Warner.

86. It appears that initially the income and expenses of the CWK practice were recorded under the corporate ABN for CWK Pty Ltd, but Mr Warner decided (presumably on Mr Watson’s advice: see [87] below) that this was a mistake and the income and expenses should have been recorded under an ABN for the Unit Trust. In July 2008 the corporate ABN for CWK Pty Ltd was cancelled. The record of the corporate ABN on the business names which had been registered the previous October was left unchanged.

87. In October 2008 Mr Warner wrote to Mr Watson:

As you know we bought Debt Free in February 2008 for $40,000. The shares were originally purchased and registered in the name of CRS Warner Kugel Pty Ltd. Given the confusion surrounding CRS Warner Kugel Pty Ltd/CRS Warner Kugel Unit Trust we now want to transfer the shares into the names of our Family Trusts (directly).

The reason is if we ever bring in another partner into CRS they don’t get an immediate right to the shareholding in Debt Free.

88. There was no direct evidence from Mr Warner or Mr Kugel about this instruction to Mr Watson or the reasons for it. But in the absence of any challenge from Mr Kugel I infer that this instruction, and the reason given for it, were discussed beforehand, and agreed, between Mr Warner and Mr Kugel. The transfer proceeded, the transfer forms being backdated to 30 June.

89. Watson Business Accountants undertook preparation of the accounts and tax returns for DF and for the CWK practice for the year ended 30 June 2008. The approach adopted for the CWK practice was simpler than that which had been adopted for the CWS practice. There was no allocation of a share of the income by way of “commission” to a separate partnership. Nor was there a separate administration company. All of the net income from the operation of the practice was returned as income of CWK Pty Ltd as trustee of the CWK Unit Trust. The net income of the unit trust was distributed to Warner Capital and Shazbot as beneficiaries.

90. In July 2009 the preparation of the tax returns and accounts for the CWK practice and DF was transferred from Watson Business Accountants to the firm of Manser Tierney & Johnston. This was done to save money; Mr Watson appears to have continued to act as an advisor when required. Manser Tierney & Johnston prepared the tax returns and financial statements from the year ended 30 June 2009 onwards. They followed the same general approach as Watson Business Accountants, which remained unchanged thereafter.

91. In September 2010 Mr Warner applied to have Mr Kugel admitted as an affiliate member of the Institute of Chartered Accountants in Australia (ICA). The application form showed the “company name” as “CRS Warner Kugel” and Mr Kugel’s position as “partner”. The practice entity offered a choice of sole practitioner, partnership, company, and trust. The “partnership” box was selected. The form was signed by Mr Warner on behalf of the “practice entity”. One of the sections required the identification of all practice entity participants, requiring a list of “all partners/directors/trustees”. Mr Warner and Mr Kugel were listed as having a fifty per cent holding each; no other entity was identified.

Developments in CWK practice and Debtfree business

92. After some point (not identified in the evidence), the Debtfree business began to offer personal insolvency agreements under Part X of the Bankruptcy Act alongside debt agreements under Part IX. Part X arrangements required a registered bankruptcy trustee to act as the trustee of the property the subject of the agreement. This was done by Mr Warner. The fees to which he was entitled were made over to DF and accounted for as part of its income. Records appear to have been kept of WIP incurred using the same system as was used for bankruptcies and corporate insolvencies.

93. In March 2008 Mr Warner and Mr Kugel moved the CWK practice and the Debtfree business to leased premises at 36 Clarence Street. In February 2010 they took a five year lease at 56 Clarence Street and moved the CWK business there.

94. Starting in 2010, Mr Warner and Mr Kugel began to undertake direct marketing of the CWK practice’s services on the internet under the additional name “The Insolvency Experts”. The name was registered as a business name on behalf of CWK Pty Ltd in March 2010.

95. A domain name ( was acquired and internet advertising was undertaken. An associated 1300 telephone number was obtained. Mr Kugel was mainly responsible for this aspect of the practice. The Liquidation Direct website was eventually folded into the Insolvency Experts website with the separate Liquidation Direct website being shut down in May 2012.

96. The Insolvency Experts website, which was published from 2013 onwards, stated:

We are qualified Insolvency Practitioners, Chartered Accountants and are Registered with the Australian Securities & Investments Commission.

97. The website advertised that all calls on the 1300 number would be answered “by a Senior Partner”. The entity behind the website was shown as “CRS Warner Kugel trading as The Insolvency Experts”.

98. In mid-2012 the statutory regime for directors penalty notices (“DPNs”) changed. Where a company has failed to comply with its tax withholding obligations, such a notice may be issued, imposing liability on the director to pay the relevant tax personally. Previously, a director could avoid personal liability if the company was put into liquidation or voluntary administration within fourteen days of receiving the DPN. This created an incentive for directors to place companies in voluntary administration or liquidation. The statutory changes reduced the incentive by limiting the circumstances in which this defence to a DPN was available.

99. According to Mr Warner, Mr Kugel told him that this change would mean that the corporate insolvency aspect of the CWK practice would never be the same again. Mr Warner said that Mr Kugel also expressed the view more generally that the insolvency business was a “race to the bottom” because of the increasing level of regulation and that he (Mr Kugel) would rather operate as a “middle man with no regulation”.

100. According to Mr Warner this resulted in a decrease in the number of corporate insolvencies coming in. In September 2014 Mr Kugel emailed Mr Malone:

Just spoke to an accountant and we discussed the DPN. He hit the nail on the head when he said that it would have dramatically changed the business of liquidators.

I agreed. What is the incentive for placing a company into liquidation.

So since July 2012 we have seen a decrease in the number of liquidations.

101. According to Mr Warner, Mr Kugel also displayed less commitment to the practice from this time onwards. Mr Warner said that Mr Kugel involved himself with the development of other websites which had nothing to do with CWK’s business, and on Wednesdays would spend the morning playing golf and then leave work early. Mr Warner said he was told by a mutual acquaintance, Matt Davis, in early 2014 that he (Mr Davis) had been told by Mr Kugel that he wanted to retire. But there was no evidence from Mr Davis and Mr Kugel was not cross-examined on the point.

102. Mr Warner acknowledged that, despite these developments, the CWK practice and the Debtfree business continued to operate profitably. The net profit figures for the CWK practice (as recorded in financial statements of the CWK Unit Trust) for the years ended 30 June 2012, 2013 and 2014 were $1.12 million, $1.24 million and $1.44 million respectively.

End of the relationship between Mr Warner and Mr Kugel

103. At some point in the first half of 2014, Mr Warner decided that he wanted to end his business relationship with Mr Kugel. His plan was to establish a separate practice and take the personal insolvency work (including the Debtfree business) to that new practice. To this end, in April 2014 he registered some domain names for his new business. Using monies from his superannuation fund, he also purchased new premises. This was done in July.

104. Mr Warner also took steps to cease paying out monies from the personal insolvency side of the practice. A fee run had been done in February 2014 for both the corporate and personal insolvency administrations. Subsequent fee runs were done for the corporate insolvency administrations in June and in early September. But Mr Warner ensured that no fee run was done for the personal insolvency administrations. And when, on 19 May, in preparation for the June end of financial year, Mr Watson asked Mr Warner about whether DF would be paying a dividend, Mr Warner told Mr Watson that it would not.

105. Mr Warner kept the arrangements he was making to establish his own business secret from Mr Kugel. Nor did he tell him about not paying a dividend from DF or about the fact that no fee run had been done for the personal insolvency administrations. Mr Warner’s plan was to take all the steps he needed to prepare himself to depart and take the personal insolvency business with him, and then to spring this on Mr Kugel so that Mr Kugel would have the minimum possible time to react to it. In his evidence, Mr Warner sought to justify these tactics by saying that he was worried that Mr Kugel might react irresponsibly, but I do not believe this for one moment. Mr Warner was simply seeking to serve his own interests.

106. Mr Kugel is a classically trained singer who interrupted his insolvency career between 1993 and 1995 to sing professionally. After that, he retained an interest in singing and became friendly with the famous Welsh singer, Bryn (now Sir Bryn) Terfel. In September 2014 the 49th and 50th birthdays of Mr Kugel and Mr Terfel were approaching. Mr Kugel emailed Mr Terfel asking whether he was interested in meeting somewhere in the world for a few days of golf from October onwards. Mr Terfel responded positively. This was on 12 September.

107. The conversations which led to Mr Kugel leaving the CWK practice took place on Friday 19 September and Monday 22 September. Mr Warner and Mr Kugel gave conflicting accounts of the conversations, which I discuss in more detail below. But it was common ground between them that there were three conversations. The first took place at lunchtime on Friday 19 September. The second took place over coffee at about 9:30 am on Monday 22 September. The third took place in Mr Warner's office about ninety minutes later at about 11.00 am. At the third meeting Mr Kugel signed some minutes prepared by Mr Warner. I refer to those minutes in more detail below.

108. Neither Mr Warner nor Mr Kugel took notes of what was said during the three meetings. But there are some emails sent by Mr Kugel during the period which allow some inferences to be drawn. The first is an email sent at 3:03 pm on Friday afternoon (after the lunchtime meeting) to Myee Allison, the practice’s bookkeeper. Mr Kugel asked her to contact Toyota Finance and get a payout figure for his car which was leased through the practice.

109. At 5:47 am on Monday 22 September Mr Kugel sent an email to the office staff asking him not to use his credit card for business expenses. Between 6.27 am and 6:30 am he sent three emails concerning potential liquidation jobs. Each of the emails advised that he was “taking indefinite leave immediately” and that he would be unable to assist with the matter, and directed any inquiries to Mr Warner. At 6:43 am he sent an email to the Australian Taxation Office stating that he was no longer accepting court-appointed liquidations and wished to be removed from the ATO's list of liquidators.

110. At 6:09 am Mr Kugel sent an email to the corporate insolvency staff to find out what official liquidations were still open and current. One of the staff, Sam Thing, responded with a table of eleven official liquidations at 8:33 am. One of the columns showed the funds held. A total of approximately $85,000 was held. The largest amount, approximately $63,000, was held for a company called Globalone Pacific Pty Ltd (also called, and to which I refer, as “Global One”). Amounts of approximately $15,000, $7,000 and $700 were held for three other companies. Nothing was held for the other seven.

111. The table showed two other columns, one headed “Fees Approved” and one headed “Fees”. Nothing was shown in the “Fees Approved” for any of the liquidations; $74,000 was shown in the “Fees” column. Given Mr Warner’s later estimate that there was WIP of approximately $30,000, it may be that this table did not show WIP and the figures for “Fees” were for fees already recovered. The issue was not explored further in the evidence.

112. Before his meeting with Mr Warner, Mr Kugel also sent an email to Mr Terfel (then in the United Kingdom). The email was shown as being sent to Mr Terfel at 10:10 pm on Sunday 21 September, UK time. Assuming that the UK was then still on summer time, this would have been 7:10 am in Sydney.

113. In the email, Mr Kugel told Mr Terfel that he and Mr Warner were breaking up and the proposed trip was off. Mr Terfel responded at 9.42 am Sydney time by asking why the break up had happened and whether it had been on the cards. Mr Kugel’s reply, which was sent at 10.40 am Sydney time, was as follows:

No. It was a total and absolute surprise.

There are a number of reasons but largely it was due to a change of legislation that causes us to get less work, increased competition and downward pressure on prices and huge increases in compliance. What that all means is that the business really cannot sustain the both of us in its current form so Anthony came to me on Friday and said he was leaving by Wednesday of this week and that he was taking a part of the business.

The fact is that Anthony runs the administration of the business. I on the other hand are the face of the business so I really am not capable of doing the administration and I do not believe I have the time to be able to learn it and turn the business around. Also, because of the changes noted above, I cannot see the business working in the future. I have lost faith.

So I decided I would go and that Anthony can have the entire business.

And now I’m scared because I have no idea of what I will do. Anyway, I know that people face far bigger challenges than that so I mustn’t complain and must trust it will all work out for the best.

Anyway, now that I have to watch the pennies, there will be no birthday trip L

114. The minutes prepared by Mr Warner and signed by Mr Kugel in Mr Warner’s office at 11 am described themselves as minutes of “General Meetings” of CWK Pty Ltd and DF. The CWK Pty Ltd minute showed Mr Warner and Mr Kugel as attending as directors, rather than as representatives of the shareholders, Shazbot and Warner Capital, as would have been appropriate for a general meeting. Similarly, the DF minute showed Mr Warner (the sole director) attending as a director and Mr Kugel in attendance. The CWK Pty Ltd minute recorded Mr Kugel’s resignation as a director and a resolution being passed to change the name to “CRS Partners”. The DF minute stated:

1.   The financial statements for the company as at 30 June 2014 were tabled.

2.   In light of Steven resigning from the partnership it was resolved that Shazbot would sell his share in Debt Free Pty Ltd (A.C.N. 117 961 841) to Warner Capital for $1.

115. A transfer form for Shazbot’s share in DF was also signed and dated on the same date. Mr Warner also signed notifications to the Australian Securities and Investment Commission of these changes.

116. Neither the minute nor the ASIC notification for CWK Pty Ltd referred to the transfer of Shazbot’s share in that company. A search of the company, dated October 2015, shows Shazbot as still recorded as a shareholder. But it seems that Mr Kugel has had nothing to do with the company, and it has been under Mr Warner’s control, since 22 September 2014.

117. Mr Kugel ceased worked in the CWK practice immediately after his conversation with Mr Warner at 11 am on 22 September. Mr Kugel took control of the Insolvency Experts business name and the domain name “insolvencyexperts.com.au”. He also took over the associated 1300 number. The domain name, the 1300 number and the business name were formally transferred to Shazbot over the following weeks.

118. On 3 October, Mr Warner sent Mr Kugel a text message which stated:

We have decided to dissolve CRS as at 30 September. It’s going to be cleaner that way. We will therefore have cut off as at 30 September. We will hopefully get some figures & money to both of us next week. I will provide full details once Myee [the firm’s bookkeeper] & accountant have prepared all figures.

119. On 13 October Mr Warner emailed Mr Kugel as follows:

I have transferred 100k each as an interim distribution today. We are working hard to finalise but the accounts aren’t finished yet. As soon as the figures are completed I will send them through to you.

120. On 13 October Mr Kugel completed a notice of change of details of a liquidator form for the Australian Securities and Investments Commission. The form recorded him ceasing to be a member of the firm CWK and as practising as a liquidator from his home address in Killara. The date given for the change was 26 September. On 14 October 2014 Mr Warner arranged for the form to be lodged with ASIC and notified Mr Kugel that he had done so. In response Mr Kugel emailed:

Can you please ask the kids to kill all the off liqs urgently except that global whatever. I just don’t want a problem with asic. I would rather resign if they raise an issue. – but better to kill them off asap.

121. Following his departure from the CWK practice, Mr Kugel, now trading as Insolvency Experts, referred a number of corporate insolvency matters to his old firm, and for this purpose remained in contact with Mr Malone. On 22 October Mr Malone forwarded to Mr Kugel a publication of the Australian Restructuring Insolvency & Turnaround Association (“ARITA”) concerning recent court judgments involving liquidator remuneration. Mr Kugel responded:

Hardly worth doing it anymore.

Anyway, should have another three jobs coming your way this week.

122. On 7 November Mr Kugel emailed Mr Warner asking when “the final distribution” was happening. Mr Warner responded that “hopefully” it would take place the following week. Mr Kugel replied “OK”.

123. On 17 November Dane Tierney of Manser Tierney & Johnston sent an email to Mr Warner and Mr Kugel setting out a “dissolution calculation” for the CWK Unit Trust. It calculated the “net assets remaining” at $230,787.52, allocated this figure fifty per cent each to Mr Warner and Mr Kugel and then made certain adjustments relating to employee entitlements and the pay out of Mr Kugel’s car finance. After subtracting the “interim distribution” of $100,000 the amount due to Mr Kugel was shown as $11,306.87. Mr Warner caused this amount to be transferred to Shazbot on the following day.

124. There was no evidence as to who asked Mr Tierney to prepare this calculation, but I assume it was Mr Warner. At the end of the calculation the following appeared:

Our responsibility

This reconciliation has been prepared on the basis of information provided to us. Our procedures do not include verification or validation procedures. No audit or review has been performed and accordingly no assurance is expressed.

The reconciliation has been compiled exclusively for the benefit of the addressees. We do not accept responsibility to any other person for the contents of the reconciliation.

125. On 18 November Mr Warner sent Mr Kugel an email under the heading “final payment to dissolve partnership”. The email stated:

As discussed the final figures were calculated and we both received a report from the accountant. I have now paid out the final figures as per his letter.

I have also paid $74,378.50 into a joint bank account for creditors which haven’t been paid, ie rent, sensis and Bank of Queensland (for photocopier)…etc etc…see attached for detail. Furthermore we are expecting some insurance refunds and these refunds will be paid into this joint account. We can deal with these funds as each matter unfolds.

Please also remember that since July 2014 we have both had capital distributions totalling $300,000 and monthly drawings of $90,000. Therefore since July 2014 you have received $390,000 + what you received today by way of a final distribution of $11,306.87 = total of $401,307.

Of course I am happy to go through any aspect with you.

126. Mr Kugel replied:

I’ll get back to you on the figures as soon as I have a chance to think about it. Probably before the end of the week but I am very surprised by the final numbers. I might have Maurice go through it with you so he can explain it to me.

127. As foreshadowed in this email Mr Kugel appears to have been surprised that the figure was not higher. On the morning of 18 November he had written to Sarah Li, an accountant at the practice as follows:

Can you please do me a favour quietly.

Do you still have on your system the WIP sheets that you were given to prepare the last fee run? Not just for the fees drawn – but before that – the one that showed all the positions of WIP on all the jobs.

128. Mr Kugel quickly came to realise that the calculation did not include any figure for WIP. On Thursday 20 November he wrote to Mr Warner:

As noted, I am not satisfied with, and am rather confused by your statement that a final payment has been made in relation to the partnership businesses.

It is uncontroversial that our partnership is entitled to be paid for work in progress on all jobs that were current as at 22 September 2014. On that day you decided to tell me you had purchased a property in your superfund. Before that, on 19 September, you told me you were ending and leaving our partnership on 24 September 2014 to establish your new business.

The partnership has not dissolved as yet. It is in the process of being wound up. That process contemplates the collection of all its assets and the payment of its liabilities. Until that occurs the partnership has not been dissolved but continues for the purpose of winding up its affairs.

The work in progress existing as at 22 September is of course an asset of the partnership. While the right to remuneration is personal to the appointee in an insolvency appointment of course our practise for 9 years was that all such remuneration when paid was accounted for to the partnership. And there can be no doubt of course that the work in progress is therefore an asset of the partnership notwithstanding the personal right of the appointee to the paid remuneration.

Of course the right to payment of remuneration is contingent upon the approval of creditors or the Court, as the case maybe. It simply cannot be the case that all work in progress in insolvency appointments as at 22 September has been approved by creditors. Equally of course it is the case that payment for the work in progress, when it is approved, is often contingent upon recoveries being made in the relevant appointment to enable the remuneration to be paid. I am aware of a number of appointments where remuneration will not be paid until, for instance, recovery of preference payments.

Against this background then it is wholly impossible that all work in progress as at 22 September has been approved and paid.

191. The Debtfree business gives rise to different considerations. The income of the business came largely from fees derived from the administration of Part IX debt agreements. It was DF as a corporate entity which was the administrator, not Mr Warner personally. The obstacle to treating the business as being carried on by DF itself, rather Mr Warner and Mr Kugel personally, does not exist.

192. It is clear from the correspondence between Mr Warner and Mr Kugel prior to the acquisition of DF from DFD Group that it was intended that the income flowing from the Debtfree business would be part of the partnership. This was reflected in the decision to acquire the shares in DF in the name of CWK Pty Ltd. Given my conclusion that CWK Pty Ltd was operating as trustee for the partners individually, the proper conclusion is that it acquired the shares in DF as trustee for the partnership. But these were the shares in DF, not the Debtfree business itself. The Debtfree business was operated by DF within a corporate structure and there is no reason to attribute to the parties an intention to cut across that.

193. The effect of the subsequent transfer of the shares in DF from CWK Pty Ltd to Shazbot and Warner Capital must next be considered. I have already found that the transfer reflected an agreement between Mr Warner and Mr Kugel to transfer the shares for the reasons given in the email from Mr Warner to Mr Watson (see [87] above). The operative reason for the transfer, as given in the email, was to ensure that if another partner came into the CWK practice, that new partner would not share the benefit of the income stream represented by dividends from DF. The way of achieving this was to transfer the shares from CWK Pty Ltd, which was the receptacle for the partnership’s property, to Shazbot and Warner Capital. In my view, the proper construction of what happened is that Mr Warner and Mr Kugel agreed that thenceforth the shares in DF would not be partnership property and were instead to be enjoyed by Shazbot and Warner Capital in their own right.

194. Counsel for Mr Kugel pointed out that no consideration was given by Warner Capital and Shazbot for the transfer. I do not think that matters; the cross-agreements between Mr Warner and Mr Kugel, who were the partners and therefore controlled the beneficial interest in the DF shares, provided sufficient consideration to make the transaction effective.

195. It remains to consider the fees signed over by Mr Warner to DF for acting as administrator of Part X arrangements. Unlike the fees derived from debt agreements under Part IX, DF had no right itself to receive those fees. The appointment as Part X debt administrator was personal to Mr Warner. In my view, the fees for conducting those operations were partnership income, for essentially the same reasons that the income of the CWK practice was partnership income and not income of CWK Pty Ltd.

196. I conclude that from 19 September 2007 until 22 September 2014, Mr Warner and Mr Kugel carried on business as partners, the partnership business being the conduct of insolvency administrations as liquidator, administrator, trustee in bankruptcy or administrator of Part X insolvency agreements. Between 31 January 2008 and 30 June 2008 the partnership business also included the holding of the shares in DF. The operation of the Debtfree business itself was not part of the partnership. There will need to be declarations accordingly.

197. The fee income signed over to CWK Pty Ltd was received by CWK Pty Ltd as trustee for Mr Warner and Mr Kugel as partners, and the expenditure by that company was likewise undertaken as trustee for Mr Warner and Mr Kugel as partners. Assets and liabilities associated with the business were likewise held as trustee for Mr Warner and Mr Kugel. There may need to be an enquiry as to whether any of CWK Pty Ltd’s income or expenditure, or its assets and liabilities, fell outside the bare trust in favour of Mr Warner and Mr Kugel, and thus fell within the CWK Unit Trust.

Dissolution of business relationship

216. The Partnership Act, s 39, provides:

On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, 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; and for that purpose any partner or the partner's representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm.

217. In Gazzana, another of the questions before Ball J concerned the parties’ entitlements on dissolution of the partnership. After Mr Gazzana and Mr Santamaria fell out, Mr Santamaria suggested that Mr Gazzana write down a list of everything that they had bought together and they would split it in half. Mr Gazzana agreed. The parties went through the list and indicated on it which of the items were to go to which party. Mr Gazzana agreed in cross-examination that he understood at the time that this division marked the end of the relationship between himself and Mr Santamaria. But on the conclusions reached by Ball J, the list did not include all of the partnership assets, nor did it include all of the liabilities of the partnership. It was argued for Mr Santamaria that the agreement had no effect at all: it was simply an unfinished negotiation. Ball J rejected this. His Honour concluded that the parties had agreed that the partnership should be dissolved and that the equipment on the list was to be distributed in accordance with the division on the list. But his Honour continued:

55.   On the other hand, I do not accept that the agreement that was reached was intended to be a final division of the assets of the partnership that was intended to resolve once and for all the parties' respective rights and liabilities in relation to partnership property. The parties did not deal with all partnership property. Nor did they deal with any liabilities... No doubt the parties chose to divide the equipment on the list in a way that was roughly equal. But I do not think that by dividing the equipment in that way they were intending to resolve all the rights and liabilities of the parties in relation to partnership property. That could only have occurred if they identified all the partnership property and liabilities and agreed on who was entitled to that property and bear those liabilities, which plainly they did not do.

56.    To put the point another way, on 14 December 2014, the parties agreed on the division of certain assets. However, that agreement could not be interpreted as an agreement on the taking of accounts between them because the agreement did not deal with all of the assets let alone the liabilities in respect of which an account had to be taken. Consequently, in the taking of any accounts of the partnership they must bring to account the value of the assets they obtained as a consequence of the agreement they did reach.

218. Counsel for the defendants contended that in this case there had been an agreement which limited the obligation to account to cash and liabilities which existed as at 22 September 2014. I reject this submission. In my finding, no final agreement of this character was reached. I think the case is the same as Gazzana. The parties agreed to dissolve their business relationship (and thus the partnership, although they may not have been thinking in those terms). They also agreed Mr Kugel was to have the Insolvency Experts business name and associated assets, and Mr Warner was to carry on the corporate and personal insolvency administration. But they did not make any specific agreement as to all the assets and liabilities of the partnership (understandably, because Mr Warner was not thinking in partnership terms). In particular, they did not provide for the realisation of WIP.

219. Furthermore, there was no finality to the parties’ agreement. The calculations undertaken by Mr Tierney were undertaken for Mr Warner on the express basis that they depended upon the instructions which had been given to him. In any event, the figure reached by Mr Tierney was not final but was subject to further adjustment. But more importantly, there was never any agreement by Mr Kugel to abide by the figure reached by Mr Tierney.

220. Mr Warner and Mr Kugel also did not provide for the costs of the winding up process. Probably they did not think there would be any. But it is a consequence of my conclusions that the tax returns lodged for the partnership entities were incomplete and incorrect. The income of the partnership will have to be reallocated from the unit trust to the partners trading individually. This may result in penalties having to be paid. This process will need to be provided for as part of the winding up of the partnership.

221. For these reasons, I think that there is no binding agreement which prevents Mr Kugel from having partnership accounts taken in accordance with his entitlement under s 39. But in case I am wrong in that view, I will consider whether any such agreement, if binding, would be enforceable against Mr Kugel.

222. As I have found, Mr Warner appears to have approached the termination of the partnership on the footing that because he was the only one of the partners who was authorised to act as a trustee in bankruptcy, he was entitled on termination of the partnership to take all of the personal insolvency administrations with him. In taking this view, Mr Warner was wrong. For as long as the partnership agreement subsisted, he was required to apply his trade as a trustee in bankruptcy for the benefit of the partnership as a whole, and to share the benefit of that with Mr Kugel. On termination of the partnership, his fiduciary obligations did not cease. He had continuing obligations to realise the assets of the partnership for the best advantage of both parties, and he was not entitled to put his own personal interests ahead of that obligation: Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 at 197-199. He was therefore not entitled simply to appropriate the former partnership business to himself, at least without the fully informed consent of Mr Kugel.

223. It follows that in presenting Mr Kugel with an ultimatum to the effect that he was leaving, taking the personal insolvency part of the partnership business with him and setting up a new practice the following Wednesday, Mr Warner was threatening to do something which he had no right to do. In previously failing to conduct fee runs, Mr Warner was also in breach of his obligations. Mr Warner was required to manage the activities of the personal insolvency work group in the interests of both Mr Kugel and himself. He was not entitled to use his management powers to manipulate the practice’s procedures to suit his own interests.

224. In my view, by failing to pay out the profits from the personal insolvency business in the usual course, and by ambushing Mr Kugel with his proposal to terminate the partnership, Mr Warner was breaching his fiduciary obligations as partner. The law does not permit him to set up an agreement for release procured as a result of his own wrongdoing. Even if enforceable at law, it would not be enforceable in equity, resulting as it does from breaches by Mr Warner of his fiduciary obligations.

225. In final submissions, the primary position of Mr Kugel was that there had been an express agreement by Mr Warner to account to him for the WIP and for the value of the DF business. Orders in the nature of specific performance were sought to determine the amount due. Counsel eschewed any general account of the partnership assets and liabilities; according to counsel, agreement had been reached on the division of the other assets of the partnership and there was no occasion for any wider investigation.

226. I do not accept this approach. On my findings, there was never any express agreement concerning the value of the WIP (and still less the value of DF). I have concluded that there was a relationship of partnership (although not including the Debtfree business itself) and Mr Kugel is entitled to have an account taken of partnership assets and liabilities. But it is a basic principle that an account cannot be taken in part: Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 296. Unless Mr Warner and Mr Kugel agree to the contrary, the account must include all partnership assets and liabilities, not merely some of them.

227. The remaining question concerns the value of the Debtfree business. On the conclusions which I have reached, the Debtfree business itself was never part of the partnership business between Mr Warner and Mr Kugel. The benefit of the business was thus represented by shares in DF. On my conclusions, the ownership of those shares was for a time part of the partnership business but was not so after 1 July 2008.

228. When Mr Kugel transferred the shares in DF to Mr Warner on 22 September 2014 for nominal consideration, this would have represented a very substantial undervalue. Unknown to Mr Kugel, the company had not declared a dividend and had therefore retained the profits made in the year ended 30 June 2014. There would have been further profits attributable to the period up to 22 September.

229. It will be recalled that Mr Kugel gave evidence that he signed the DF minute and share transfer prepared by Mr Warner on 22 September without reading them. Counsel for Mr Warner submitted that this did not matter and Mr Kugel (strictly, Shazbot, which owned the DF shares) was bound by his agreement to transfer them and subsequent execution of the transfer form. In my view, this is correct, at least so far as enforceability at law is concerned. I am not satisfied that Mr Kugel did not understand that he was transferring the shares for one dollar, but even if that was his understanding, it cannot be the basis for avoiding the transaction. The transaction was effective at law.

230. But this is not the end of the analysis. In Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 the defendant, Mr Brunninghausen, and the plaintiff, Mr Glavanics, were brothers-in-law (their wives were sisters). Mr Brunninghausen formed a proprietary company which carried on the business of importing ski equipment. Mr Glavanics assisted in the formation of the company and was issued one-sixth of the shares. Mr Brunninghausen held the other five-sixths. Relations between Mr Glavanics and Mr Brunninghausen became strained and then broke down but there was pressure from their mother-in-law for them to resolve their differences. Mr Glavanics suggested that he could sell his shares so long as he could get a fair price. Before the discussion went any further, Mr Brunninghausen, who was the sole director of the company, received an approach from third parties to purchase the company’s business. Mr Brunninghausen did not disclose this to Mr Glavanics and negotiated the purchase of his shares. He then completed the negotiations with the third party purchasers, which resulted in their purchase of all of the shares in the company (including those purchased by Mr Brunninghausen from Mr Glavanics) at a much higher price per share than Mr Bruninghausen had paid for Mr Glavanics’ shares. Bryson J (as his Honour then was) held that in the particular circumstances of the case, Mr Brunninghausen owed fiduciary obligations to disclose the offers and awarded equitable compensation to Mr Glavanics based on the sale price obtained by Mr Brunninghausen.

231. This conclusion was upheld by the Court of Appeal. Handley JA, who gave the leading judgment, reviewed the authorities and concluded that the purchase by a director of a proprietary company of the shares of one of the shareholders may, in appropriate circumstances, give rise to fiduciary obligations. Applying the decision of the High Court in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64, his Honour said at [99]:

The defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so. This gave him the capacity to affect the interests of the plaintiff in a practical sense, and in the context of the negotiations with him “a special opportunity” to exercise that capacity to the detriment of the plaintiff who was “at the mercy” of the defendant and “vulnerable to abuse” by the defendant “of his position”: Hospital Products.

232. In my opinion, the facts of this case so far as they concern DF closely parallel those in Brunninghausen v Glavanics. Mr Warner was the sole director of DF. He therefore had exclusive control over the payment of dividends. He was responsible for managing the accounts of DF along with the other aspects of the practice. He arranged for DF not to pay a dividend in the hope that Mr Kugel would not notice, and he did not. Mr Kugel trusted Mr Warner on this subject. When Mr Warner put forward the resolution and the transfer at a figure of one dollar he must have known that this was much less than the value of the share at the time. He did not draw it to Mr Kugel's attention and Mr Kugel did not focus on it. Mr Kugel was no doubt distracted by the undertaking to pay out the assets and liabilities of the practice. In my opinion, equity would not permit Mr Warner to take advantage of the sale at this price. Mr Kugel was in a vulnerable position, and had been put in the vulnerable position by Mr Warner.

233. In pleading and arguing the case for Mr Kugel and Shazbot, counsel did not expressly make the case that the transfer of the shares in DF was procured by breach of fiduciary duty of the type in Brunninghausen v Glavanics. But the case as pleaded did include the allegation that the business of DF was subject to fiduciary obligations, either of a partnership or of a joint venture nature. The conduct of Mr Warner which I think amounts to a breach of duty was squarely raised and complained of in the plaintiffs’ case. In my view, a Brunninghausen v Glavanics case is fairly within the plaintiffs’ pleadings and is open on the case as run, although the relevant line authority was not referred to.

234. The plaintiffs’ case was put on the basis of equitable compensation. At no point have the plaintiffs sought to set aside any of the transfers of the shares. In principle, if the transaction stands then Shazbot is entitled either to an account of the profits derived by Warner Capital from the transfer, or to equitable compensation. The amount of equitable compensation recoverable would appear to be the value of a half share as at 22 September 2014 (subject, of course, to the Part X fee income, for which DF would be required to account to the partnership). It will be a matter for Shazbot to elect between the two remedies.

Valuation of WIP and other accounting issues

235. Having concluded that an account should be taken between Mr Kugel and Mr Warner as partners concerning the assets and income of the insolvency practice, it will be necessary to formulate directions specifying the scope of the account. It may also be necessary to make subsidiary provisions for accounting by CWK Pty Ltd or DF, and for this purpose to join DF to the proceedings. In these circumstances, it is not necessary to make any final decision on how the WIP component of the accounting should be valued, as this can be dealt with among all of the other directions. I will, however, set out my preliminary views on the directions which might be made, for consideration by the parties.

236. As has been seen, the accounting process was carried out so far as the cash assets of the partnership business at 22 September 2014 and the liabilities as at that date were concerned. But the calculation of liabilities included provisions and it was contemplated that there might be further adjustments necessary. There was no evidence before me as to whether this had happened. Should either party require it, those matters will need to be included in the account.

235. As I have pointed out at [220] above, the tax returns for the entities associated with the partnership business will need to be amended. In particular, returns will need to be lodged for the partnership which I have found to have existed between Mr Warner and Mr Kugel. Those returns will include all of the partnership income, treating Mr Warner and Mr Kugel personally as recipients of it rather than Shazbot and Warner Capital. Any additional tax will fall upon Mr Warner and Mr Kugel personally, but returns will still need to be lodged for the partnership and it may be that penalties could be imposed on the partnership. The directions will need to provide for this to be done and for any costs and penalties to be imposed on the partnership to be taken into account. As I have mentioned, it will be necessary to consider whether an account should be taken of the amounts due from CWK Pty Ltd to the partners and from DF to the partners.

236. So far as the WIP of the practice as at 22 September is concerned, it was submitted for Mr Warner that it would be necessary to engage in an extensive factual analysis of what amounts were in fact recovered, and that allowance should be made (a generous allowance) for the costs of recovery. It was emphasised that some of the administrations had little money in them and some had more.

237. I think there are two stages to the analysis. The first stage is to value the WIP accrued as at 22 September 2014. If, as at 22 September, monies were held in the relevant administration which could have been drawn upon (either immediately or upon the making of an application for remuneration), then the value of the WIP, it seems to me, is simply its book value. Where insufficient monies were held, then the value of the WIP would have to be discounted for the delay in recovery, or possible non-recovery. It would be possible to do this as at 22 September 2014 without any regard to what in fact happened. But it may be appropriate to look at actual recoveries instead: see Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 at 293-295.

238. Counsel for the defendants argued “just allowances” would need to be made in Mr Warner's favour. Limiting for the moment consideration of the partnership asset to the WIP, the only task to be done was to collect it. The cost of collection is part of the ordinary overhead for doing business to the extent that monies were held as at 22 September then it should already have been done in the ordinary course of business. To the extent that monies were not available at that point and waited until later, then they were presumably recovered alongside further fees which were charged by Mr Warner trading on his own. Any identifiable cost to Mr Warner would be the same whether he had recovered his own fees and the partnership fees. My preliminary view is that no allowance would be appropriate in this regard.

239. This leaves a residual category of “goodwill”. Mr Warner did not simply receive the benefit of WIP accrued up to 22 September which had not been collected. In taking over the matters he gained the opportunity to earn further fees in future. At the same time, he shouldered the burden of completing the administrations which had insufficient assets to meet the administration costs. Of course, this must be considered as a single “book”.

240. Had Mr Warner and Mr Kugel simultaneously become unable to practise and the partnership had been terminated on that account, it would have been necessary to dispose of the partnership business to a third party. Ignoring WIP accrued before the date of termination, some of the administrations might have represented liabilities, in that the completion of the administration would be likely to yield less than the cost of completing it. Other administrations might have been seen as likely to yield more, and might therefore have a “goodwill” value to an incoming practitioner. The question is what such an incoming practitioner would pay, or require to be paid, in those circumstances, for the whole “book” of uncompleted administrations, after allowing for WIP. This could be an asset or a liability depending on the overall value of the “book”. Such an enquiry may not be worthwhile, but if either party requires it, I think it needs to be undertaken as part of the overall assessment.

241. Mr Warner was clearly content to allow Mr Kugel to take the benefit of the Insolvency Experts name and associated telephone number and domain names, in return for taking over the liquidations and insolvency matters. But if Mr Kugel seeks an allowance of the insolvency files, then Mr Warner is entitled to have the value of the Insolvency Experts intellectual property taken into account.

242. It will be recalled that the parties also agreed that Mr Warner would complete the official liquidations, on the basis that he would pay the necessary costs but would receive the benefit of anything obtained from Global One. Mr Kugel's conduct in having Mr Krejci appointed as liquidator and in waiving any entitlement to fees has deprived Mr Warner of the opportunity to receive funds from Global One. It seems to me that there will have to be an assessment of the amount which was recoverable for WIP on that administration up to 22 September 2014, and Mr Kugel will have to make an allowance in favour of Mr Warner for this.

243. I have referred above to the partnership account being taken as at 22 September 2014, rather than as at 30 September which was the date used in the calculations undertaken at Mr Warner’s direction. That is because I think that, strictly speaking, 22 September was the agreed date of dissolution of the business relationship. That was the day on which Mr Kugel agreed to leave, and left. The 30 September date was only put forward by Mr Warner at a later point (in his email of October 2008: see [87] above). Although Mr Kugel did not dispute it, that date did not form part of the dissolution agreement between Mr Warner and Mr Kugel. However, if the parties wish for convenience to use 30 September as the relevant date for the account, that can be reflected in the Court’s orders.

Conclusions and orders

246. I have concluded that:

1. Mr Warner and Mr Kugel conducted the insolvency practice of CRS Warner Kugel as partners between 19 September 2007 and 22 September 2014;

2. the business of the partnership included acting as company administrator, company liquidator, trustee in bankruptcy and administrator of Part X arrangements, but did not include the remaining Part IX debt agreement business operated by Debtfree Pty Ltd;

3. Mr Kugel is entitled to an order for an account accordingly;

4. Shazbot is entitled, at its election, to an account of profits or an award of equitable compensation arising from the transfer of its share in Debtfree Pty Ltd to Warner Capital on 22 September 2014.

247. I will hear from the parties, to the extent necessary, on the form of the orders required to give effect to this judgement; the form of further directions to be made for the accounts to which Mr Kugel and Shazbot are entitled; and costs.

248. The orders of the Court are:

1.   Direct that within 21 days the plaintiffs bring in short minutes of order giving effect to this judgment, setting out further directions for the conduct of the accounts provided for by the judgment, and dealing with costs; if agreement cannot be reached there is to be a further hearing on matters which are not agreed, on a date and in accordance with a timetable, to be fixed by arrangement with my Associate.

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Amendments

06 November 2018 - Corrected formatting issues.

06 November 2018 - Amended typographical error in catchwords.

12 November 2018 - Para [105] - Amended the sentence with the words "...that Mr Warner might react irresponsibly..." so as to read "...that Mr Kugel might react irresponsibly..."

Decision last updated: 12 November 2018