Small v Harrison

[2004] NSWSC 612

CITATION:	Small v Harrison [2004] NSWSC 612
HEARING DATE(S):	7 July 2004
JUDGMENT DATE:	7 July 2004
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Declarations made
CATCHWORDS:	PARTNERSHIP - rights and duties of partners inter se - one partner uses partnership money without consent of the other to partly finance purchase of property - right of non-consenting partner concerning that property - PARTNERSHIP - dissolution and winding up - one partner has used partnership assets to partly finance purchase of real estate held in his own name, without consent of his partner - rights of non-consenting partner to that property in the winding up
LEGISLATION CITED:	Partnership Act 1892
CASES CITED:	Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321
PARTIES :	Christopher Gerard Small - Plaintiff Noel Elliott Harrison - Defendant
FILE NUMBER(S):	SC 5445/03
COUNSEL:	A D Justice - Plaintiff No appearance - Defendant
SOLICITORS:	McNamara & James - Plaintiff No appearance - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

WEDNESDAY 7 JULY 2004

5445/03 CHRISTOPHER GERARD SMALL v NOEL ELLIOTT HARRISON

JUDGMENT – Ex Tempore

1 HIS HONOUR: This is a hearing of a separate question which arises in a partnership dispute between the plaintiff and the defendant. It has proceeded on a basis where the defendant has not attended today, after having appeared in the proceedings and after having been notified that the matter would be set down for hearing in his absence, if he did not attend court on the date when the matter was in fact set down for hearing. The defendant has been called outside the Court and has not appeared today.

2 The evidence establishes that a partnership was entered in August 2000, between the plaintiff and the defendant, concerning the supply and installation of air-conditioning and refrigeration equipment. Their business was located in Grafton, and went by the name of Clarence Air-conditioning & Refrigeration. The plaintiff did work involving installation of the equipment while the defendant attended to the business side of things.

3 On 7 July 2003 the plaintiff served a notice of dissolution of the partnership. That notice of dissolution had the effect of dissolving the partnership immediately.

4 At the time of dissolution it appears that the plaintiff took with him various items belonging to the partnership, including certain records. Amongst those records he found several pages from a contract for sale of land, undated, but containing a cooling-off certificate bearing the date 12 July 2002, whereby the defendant purchased land located at 207 Prince Street, Grafton, for a sum of $162,000. The agent named in that contract is Bailey & Gough Real Estate. 207 Prince Street Grafton is the place where, from September 2002, the partnership business had been carried on. It was also the place where the defendant lived.

5 Also amongst the papers, which the plaintiff took with him, was a three page document dated 12 July 2002, headed "Authority and Direction." It was an authority given by the defendant, to his solicitor, concerning the purchase of the property at 207 Prince Street, Grafton. Each page of it was signed by the defendant. It said that the defendant confirmed his instructions for the solicitor to act on his behalf in connection with his purchase of the property on the following basis:

“1. I have agreed for the Purchase price to be increased from $158,000.00 now to $162,000.00;
2. I confirm my advice to you that I have obtained verbal approval for finance of $126,000.00 from Bananacoast Community Credit Union Limited (“BCCU”), however, such approval is subject to satisfactory valuation being received by the Credit Union.
I further confirm my advice to you that I was previously made bankrupt in 1995 and that I have only just been released on 4 July 2002 from the full effects of such bankruptcy and that I have fully disclosed such facts of bankruptcy to Mr Terry Marsh at BCCU and notwithstanding such facts, the Credit Union has verbally approved my application for finance. Apart from the above loan amount of $126,000.00, I have sufficient funds to complete my purchase (subject to your advice as contained in point 3 below);
3. I confirm that I have already paid the agent a “holding deposit” of $2,000.00 from the partnership account that I conduct with Mr Chris Small, my business partner. I further confirm that I will be drawing a cheque for $14,200.00 (representing the balance 10% deposit payable) from such business account, and that I shall be delivering this to the agent (Bailey & Gough First National).
I further confirm your advice to me that in view of the fact that I am purchasing the property in my own name and for my personal residential use, that I am intermingling my partner’s money with my money and that if my partner has not consented to such intermingling, that I will face legal action for the recovery of same, including potential criminal proceedings.
4. I intend instructing the agent to exchange Contracts for the purchase of the subject property without any conditions, notwithstanding your advice to me that I should be attempting to negotiate that the Contract for Sale be subject to and conditional upon at least some or all of the following conditions:-

There then followed a listing of six types of conditions which the solicitor recommended the contract for purchase should be subject to, with, in relation to each condition, an acknowledgment by the defendant concerning the type of risk he was running in not having a condition to that effect included in the contract. The document continued:

“5. I confirm the reason why I wish to dispense with the above precautions is due to the fact that there is apparently a competing purchaser who is prepared to exchange Contracts with the Vendors for a slightly lesser purchase price on Monday next, 15 July 2002. This alternate purchaser, I understand, is a cash purchaser and does not require finance, unlike my case.
6. I confirm my advice that I intend to use at least part of the property as my permanent residence and accordingly that as I have never owned any real estate in Australia, that I would be eligible for the First Home Owner Grant of $7,000.00 (as well as a stamp duty exemption on the Contract, Transfer and Mortgage under the Office of State Revenue First Home Plus Scheme).
7. I further confirm my instructions that you are authorized to waive my right to a cooling off period under the contract by giving a s 66W certificate.”

6 The plaintiff has been able to, from the records of the business which he took with him, have an accountant reconstruct the accounts of the partnership to a certain extent. Those reconstructed accounts satisfy me, by a narration against the entries, as well as by the timing and nature of the expenditure, that partnership money was used to pay the following expenses:

19 July 2002	Bailey and Gough	$14,200.00
9 August 2002	Westpac Bank	$12,320.65
9 August 2002	Foott Law & Co	$ 785.84
9 August 2002	Commodore Conveyancing	$ 1,632.20
TOTAL	$28,938.69

7 Each of these amounts is a contribution to the purchase price of 207 Prince Street of a kind which can rise to a resulting trust. Another basis on which these contributions give rise to an entitlement to have the 207 Prince Street property treated as, at least in part, a partnership asset, is pursuant to Section 21 of the Partnership Act which provides that unless the contrary appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. The present state of the analysis of the accounts is such that it is not possible to be confident that these were the only applications of partnership money towards the purchase price.

8 A search of the title to 207 Prince Street shows that it was, on 20 October 2003, subject to a mortgage to the Bananacoast Community Credit Union Ltd. The analysis of the accounts does not make clear whether there have been any contributions towards repayments of that mortgage from the partnership’s funds or not, of a kind which could give rise to a constructive trust.

9 A statement of the defendant's account with the credit union has been tendered. It shows that there have been repeated defaults, attracting a special rate of interest, and what is referred to as an "Arrears Letter Fine.”

10 The plaintiff has given evidence that the defendant did not obtain or have his consent to the expenditure of money from the partnership business for the purchase of the property at 207 Prince Street, nor did the defendant inform him of the transactions, nor did he consent to those transactions taking place.

11 The High Court, in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327, said that:

“… The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realisation of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a "beneficial interest", notwithstanding its peculiar character.”

12 The evidence which I have outlined so far is sufficient to establish that $28,938.69, at the least, of partnership money has found its way into the property at 207 Prince Street. There is a clear case, on the evidence, that the partnership property has been so applied in breach of the fiduciary duty of the defendant. In those circumstances, where property which is obliged to be administered in accordance with fiduciary obligations has become mixed with property of the defendant, the winding-up of the partnership would involve tracing of the partnership’s property into the 207 Prince Street property. The fact that such tracing can occur means that, now, the defendant holds his interest in the property subject to that right to trace.

13 Given the way that a partner has, in relation to partnership assets, no title to specific property, it would be too simple to say that the plaintiff has, at present, any particular proportionate interest in the 207 Prince Street property. However, even though its quantum cannot be ascertained at present with certainty, he has a beneficial interest in that property. He also has a right to have the property properly applied in the winding-up of the partnership.

14 I have given consideration to whether there would be utility in making a declaration of such right, as the plaintiff can assert concerning the property, in the partial and incomplete way that is now possible. The right of a partner on dissolution is stated by s 39 of the Partnership Act1892 to include a right to have the property of the partnership applied in payment of the debts and liabilities of the firm, and that, for that purpose, any partner may, on termination of the partnership, apply to the court to wind-up the business and affairs of the firm.

15 In these circumstances, there would, it seems to me, be utility in making a declaration as to the rights in the 207 Prince Street property, to the extent to which they can now be established. That declaration is one which would lay a foundation for such application, as the plaintiff might later be advised to make, for an order for the sale or other realization of the partnership asset consisting of its interest in the 207 Prince Street property, or any other order, such as for appointment of a receiver of the partnership's interest in the real asset with power to sell it, which the plaintiff might be advised to make.

16 In these circumstances:

1. I declare that the sum of not less than $28,938.69 of money which was an asset of the partnership between the plaintiff and the defendant known as Clarence Air-conditioning & Refrigeration, has been applied by the defendant without the consent of the plaintiff towards the purchase price of the land in lot 2, deposited plan 37919 known as 207 Prince Street, Grafton.

2: I declare that the defendant holds his interest in the said land (subject to the mortgage to Bananacoast Community Credit Union Ltd) subject to an equitable obligation to treat a proportionate interest not less than the ratio which $28,938.69 bears to the total purchase price of the land as an asset of the partnership between the plaintiff and the defendant known as Clarence Air-conditioning & Refrigeration.

17 These declarations are made without prejudice to the right of the plaintiff to later establish that a larger proportionate interest in the property should be treated as an asset of the partnership.

18 These orders may be entered forthwith.

19 I stand the matter over to Friday 6 August 2004 before the expedition judge.

20 I grant leave for any further notice of motion, which the plaintiff might be minded to take out, to be made returnable before the expedition judge on Friday 6 August 2004.

21 I reserve the costs of today's application.

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Last Modified: 07/12/2004