Sobey v Sobey

60 VR 44

SOBEY v SOBEY and Others Supreme Court of VictoriaRandall AsJ 6 April 2018, 16 August 2019[2019] VSC 536Partnership and Partners — Dissolution of partnership — Taking of accounts — Where one partner continued operating partnership business and using its assets before finalisation of dissolution — Where plaintiff entitled to share of post-dissolution profits attributable to, or interest calculable by reference to, share of partnership assets — Where the plaintiff elected an award of interest — Where negative net assets at dissolution — Whether interest calculated against gross assets or net assets — Whether subsequent discharge of business’s liabilities relevant — Partnership Act 1958 (Vic), s 46.

The plaintiff had been a member of a partnership operating a family farming business (Partnership). In late 2010, the plaintiff left the business, which was then operated solely by his brother, the third defendant.

The Court had previously declared the Partnership dissolved as at 28 January 2011 and ordered a taking of accounts.

Pursuant to s 46 of the Partnership Act 1958 (Vic) (Partnership Act), the plaintiff was entitled to either a share of the profits since dissolution, or to interest from the date of dissolution, calculated upon his share of the Partnership’s assets. The taking of accounts proceeded on the basis that the plaintiff elected to claim interest.

At the date of dissolution, the Partnership’s assets were $971,268 and liabilities $1,468,642. That is, its gross asset position was positive but its net asset position was negative. Further, in January 2012 the plaintiff’s parents had discharged the borrowings that had been the liabilities of the Partnership business.

The plaintiff claimed interest upon the gross assets of the Partnership at the date of dissolution, and contended that the liabilities were irrelevant as they were subsequently discharged. He claimed alternately that if interest was to be calculated upon net assets, he was entitled to interest from January 2012 when the liabilities were discharged. He claimed as a further alternative that the Court should take a flexible approach to its calculation to account for the discharge of the liabilities.

The third defendant opposed these claims, asserting that the plaintiff was only entitled to interest upon the Partnership’s net assets at the time of dissolution, that such position had been negative and that the plaintiff was consequently not entitled to any interest.

Held:

The amount of interest payable to the plaintiff pursuant to s 46 of the Partnership Act was nil, as the Partnership’s net assets at the date of dissolution were negative. [69].

(a)
The proper approach to determining interest payable under s 46 was to consider the Partnership’s net assets at the date of calculation. [27], [36].
Oddy v Fry (Unreported, Supreme Court of Victoria, McDonald J, 22 May 1997); Fry v Oddy [1999] 1 VR 557 explained.Sandhu v Gill[2006] Ch 456; Walker v Melham[2007] NSWSC 264; Beale v Trinkler [2007] NSWSC 1058 considered.

doi: 10.25291/VR/60-VR-4460 VR 45

(b)
The date for the calculation of interest pursuant to s 46 was the date of the Partnership’s dissolution. [41].
Buttigieg v Buttigieg [2002] NSWSC 738 considered.
(c)
The discharge of liabilities after the dissolution of the Partnership was irrelevant to the taking of accounts. [42].

Consideration of whether the date from which interest runs was immutable. [43]–[68].

Barclays Bank Trust Co Ltd v Bluff[1982] Ch 172; Cameron v Murdoch(1986) 63 ALR 575; Popat v Shonchhatra [1995] 1 WLR 908; Popat v Shonchhatra [1997] 1 WLR 1367; Giumelli v Giumelli[2000] WASC 90; Yard v Yardoo[2006] VSC 109 considered.Chandroutie v Gajadhar[1987] 2 WLR 1 referred to.

Taking of accounts

This was a determination by the Court of a dispute arising in the course of the taking of accounts of a dissolved partnership. The facts are stated in the judgment.

P Anderson for the plaintiff. P H Caillard for the defendants. Reserved judgment.Table of ContentsIntroduction45Andrew's position48James' position49Section 46 of the Partnership Act 195850Interest50Am I bound to follow Fry v Oddy?57The effect of the discharge of liabilities as at January 201258Is the date from which interest runs immutable?60Conclusion70RANDALL AsJ

Introduction

1This is a taking of accounts pursuant to a judgment made by Almond J in a proceeding arising from a dispute concerning partnerships.12The Sobey family had conducted a family farming business in the Ballarat region of Victoria since 1969. The business was initially conducted by the first defendant Geoffrey Sobey and the second defendant Jennifer Sobey. In 1994, their eldest son, the plaintiff Andrew, became the third partner. In 1995, their second son, the third defendant James, became the fourth partner. The four-way partnership (the G J A & J Sobey partnership) continued 1

Sobey v Sobey [2014] VSC 373.

60 VR 46until 2008 when Geoffrey and Jennifer retired from the partnership. Andrew and James continued to run the farming business in partnership (the A & J Sobey partnership) until the latter part of 2010 when hostility and conflict within the family resulted in Andrew leaving the farm. Since then, James has continued to operate the farming business without Andrew.23On 21 August 2014, Almond J relevantly made the following orders:

3. In relation to the G J A & J Partnership:

(a)
the Court declares that the G J A & J Sobey Partnership was dissolved by agreement; and

...

5. The Court declares that:

(a)
a partnership known as the A & J Sobey Partnership existed between [Andrew] and [James] as from 1 July 2007;
(b)
[Andrew] and [James] were interested in the assets and the profits of the partnership and liable to the losses of the partnership in equal shares;
(c)
...
(d)
the partnership was dissolved on 28 January 2011.

6.
Order that the following accounts and necessary enquiries be taken and made by an Associate Judge:
- (a)
  there be a taking of accounts of the A & J Sobey Partnership including:
  - (i)
    an account of all partnership dealings and transactions between [Andrew] and [James];
  - (ii)
    an account of the credits, property and effects belonging to the partnership at 28 January 2011;
  - (iii)
    an account of the partnership debts and liabilities at 28 January 2011;

...

7.
Reserve to the Associate Judge taking the accounts the question whether, if there are assets or property of the A & J Sobey partnership that have not been disposed of, such assets and property be sold and, if so, the manner of such sale and the payment of proceeds of such sale.
8.
Direct that in taking the accounts directed by this order the books of account of the A & J Sobey Partnership signed by both partners shall be evidence of the matters contained in them with liberty to the parties interested to take objections thereto.

4In the reasons for judgment, Almond J made a number of findings to the effect that:

(a)
partnership financial statements were prepared to satisfy compliance requirements and did not necessarily accurately reflect receipts by individual partners;3

Ibid [1]–[2].

Ibid [77].

60 VR 47

(b)
Andrew and James would continue the farming together in the partnership after the dissolution of the four-way partnership, and there was seamless transition to the two-way partnership with the assumption of all the liabilities of the four-way partnership;4 and
(c)
there would not be any taking of accounts on the dissolution of the four-way partnership.5

5Almond J found that Andrew’s conduct in finally leaving the family farming business near the end of January 2011 constituted the giving of notice of an intention to dissolve the partnership. On that basis, Almond J set the date that constituted the giving of notice of Andrew’s intention to dissolve the partnership at 28 January 2011.66Almond J concluded that the date of dissolution of the A & J Sobey partnership was 28 January 2011 and that James has made use of the A & J Sobey partnership assets subsequent to its dissolution. Almond J held that such use would need to be brought to account (at Andrew’s option) either as a share of the profits made since the dissolution attributable to the use of Andrew’s share of the partnership assets or as interest on the amount of his share of the partnership assets pursuant to s 46 of the Partnership Act 1958 (Vic).7Almond J’s orders were not disturbed by the Court of Appeal.78On 8 August 2017, I answered questions for determination preliminary to the taking of accounts.89From the instigation of the steps for the taking of accounts, the defendants had submitted that it was an arid exercise as, at the date of dissolution (28 January 2011) the liabilities of the partnership outweighed the assets, and thus Andrew’s ‘share’ of the partnership assets as at the date of dissolution was in the negative. It followed that there could be, within the meaning of s 46, no ‘profits made since the dissolution as the Court may find to be attributable to the use of [Andrew’s] share of the partnership assets’.10Eventually Andrew conceded the point and a debate ensued about whether Andrew had irrevocably elected to proceed down that path. On 11 December 2017, I permitted Andrew to pursue interest at the rate of 7 % per annum on the amount of his share of partnership assets subject to liberty to apply in the event that James submitted that any prejudice might flow from the apparent resiling from the initial election. No application was made. It was on that basis, and on the basis of the facts set out in the following paragraph, that the taking of accounts proceeded. The parties are to be congratulated for reaching general agreement on the issues requiring determination.4

Ibid [138].

Ibid [147]–[150].

Ibid [162].

Sobey v Sobey [2016] VSCA 36.

Sobey v Sobey [2017] VSC 449.

60 VR 4811The findings or agreed facts upon which the taking of accounts is based are as follows:

(a)
Almond J found that the partnership between Andrew and James dissolved on 28 January 2011;
(b)
there was no realisation of the partnership assets, and James continued to farm alone;
(c)
as at 28 January 2011 the total assets were agreed at $971,268;
(d)
as at 28 January 2011 the partnership liabilities were agreed at $1,468,642;
(e)
approximately a year after the dissolution of the partnership, in January 2012, the parents of Andrew and James discharged all the borrowings that had been liabilities of the partnership between Andrew and James.

Andrew’s position

12The position put on behalf of Andrew is as follows:

(a)
Andrew’s share of the gross partnership assets is 50% of $971,268, namely $485,634;
(b)
the liabilities existing as at 28 January 2011 are irrelevant, the same being discharged in January 2012;
(c)
interest at the rate of 7% per annum ought to be calculated on the amount of Andrew’s share of the gross assets as at the date of dissolution;
(d)
alternatively, if interest ought to be calculated upon the ‘net’ assets as at the date of dissolution, interest is payable from January 2012 when the liabilities were extinguished;
(e)
alternatively, the Court ought to adopt a flexible approach to such calculation so as to ensure that the subsequent discharge of liabilities is taken into account and an equitable result is produced;
(f)
to ignore the discharge would produce a result that is ‘surprising and unfair’ as that expression was used in Sandhu v Gill9in that it:
- (i)
  bestows the entirety of the benefit of the discharge on [James] who will, as a result, not only receive 100 per cent of the partnership assets following dissolution, but will then be entitled to have had the use of these assets without any liability and without accounting for said use to [Andrew]; and

[2006] Ch 456, 466[35].

60 VR 49

- (ii)
  creates a situation where no remedy is available to [Andrew] for being denied the benefit of continued use of the partnership assets, which is the situation s 46 attempts to remedy,
(g)
the partnership share and the interest payable is a debt accruing to Andrew.10

James’ position

13On behalf of James it was put as follows:

(a)
pursuant to the order of Almond J, the date for the taking of the partnership accounts is 28 January 2011 and no other;
(b)
on 28 January 2011, there was a surfeit of liabilities over assets;
(c)
accordingly, Andrew’s interest in the assets as at that date was in the negative;
(d)
interest is payable on the net assets and if the liabilities exceed the assets, as was the case as at 28 January 2011, no interest is payable;
(e)
the liabilities existing as at 28 January 2011 were not subsequently discharged in January 2012 in any event. The parents of Andrew and James paid out the bank obligations to ameliorate their liability as guarantors.11 Accordingly, either at common law or pursuant to s 52 of the Supreme Court Act 1986 (Vic), the parents were entitled to be indemnified by Andrew and James. That indemnity subsisted irrespective of how the liability was treated in the books of James as the subsequent accounts were not ‘partnership’ accounts and, in any event, treatment in James’ books did not bind his parents in any way. If the debt became statute barred in January of 2018, it was still a debt but just not recoverable from that time; and
(f)
melding an order to allow Andrew credit for the discharge of the liabilities would effectively ‘penalise’ James for continuing the partnership.

14There are other adjustments that need to be made including on account of unauthorised withdrawals and account of benefits received by Andrew from the proceeds of the sale of Learmonth (Selwoods Road). However, there is no need for orders at this juncture and the parties will only come back to Court if an agreement cannot be reached.10

Section 47 of the Partnership Act provides: ‘Subject to any agreement between the partners the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner’s share is a debt accruing at the date of the dissolution or death’.

See Sobey v Sobey [2017] VSC 449.

60 VR 50

Section 46 of the Partnership Act 1958

15Section 46 provides as follows

Share of profits made after dissolution

Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate then in the absence of any agreement to the contrary the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the court may find to be attributable to the use of his share of the partnership assets or to interest at the rate of seven per centum per annum on the amount of his share of the partnership assets:

Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner and that option is duly exercised the estate of the deceased partner or the outgoing partner or his estate as the case may be is not entitled to any further or other share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof he is liable to account under the foregoing provisions of this section.

Interest

16The primary submission put on behalf of Andrew was that the Court ought to have calculated interest on the amount of Andrew’s share of the gross assets. The fall-back position was that interest ought to run on the amount of Andrew’s share of the partnership assets following the discharge of the bank liabilities in January 2012.17Andrew relied upon Fry v Oddy.12 Andrew submitted that the ‘calculation [of] profits pursuant to s 46 was undertaken with reference to the gross assets of the partnership’, and he noted that ‘[t]his was not challenged on appeal’.18In Oddy v Fry (Unreported, Supreme Court of Victoria, McDonald J, 22 May 1997),13 McDonald J had before him an amended originating motion in which the plaintiff sought a declaration that the partnership between himself and the defendants was dissolved upon his retirement. The plaintiff in that case sought orders for an account to be taken of all sums due to him from the defendants upon the dissolution of the partnership, an account of all sums due from the defendants to him pursuant to s 46 of the Partnership Act, and for payment from the defendants to him of all sums found to be due to him on the taking of such accounts.19A decision of McDonald J in the same proceeding considered whether to adopt a special referee’s report.14 The report dealt with various matters including the ‘net’ assets of the firm as at the date of retirement and the continuing partners’ use of the plaintiff’s share of the partnership assets 12

[1999] 1 VR 557.

Oddy v Fry (Unreported, Supreme Court of Victoria, McDonald J, 22 May 1997).

[1998] 1 VR 142.

60 VR 51post retirement. The defendants undertook to pay the plaintiff the sum representing a share of the net assetsof the firm as at the date of retirement. The question as to the entitlement post retirement was referred for determination at trial in the absence of agreement.20In the second Oddy hearing,15 McDonald J considered the plaintiff’s claim against the continuing partners for a share of profits pursuant to s 46 of the Partnership Act. A chartered accountant was called as a witness on behalf of the plaintiff. Hardy, the chartered accountant, expressed an opinion as to the gross assets of the firm as at the date of dissolution. McDonald J said:

In electing to use the gross assets of the firm in the exercise performed by him, Hardy said that he did so firstly because s 46 made no reference to net assets. Secondly, he said, that if the exercise undertaken by him was done taking into account the liabilities of the firm and commencing with the figure that the interest of the plaintiff in the firm valued on the basis of the net tangible assets, as done by the special referee, the end result would be that the amount to which the plaintiff was entitled pursuant to s 46 of the Act, on his calculations, would be greater than that if the exercise was done having regard to the gross assets of the firm. He adopted the more conservative approach. To these matters I shall return later.16

21McDonald J noted:

As I have previously referred to, if the exercise performed by Hardy was performed by reference to the net assets of the firm the figure representing the share of the profits as is attributable to the use of the plaintiff’s share of the partnership assets is somewhat larger in amount. I did not have the advantage of receiving submissions on whether in the circumstances of this case when considering the use made of the plaintiff’s share of the partnership assets, regard should bee [sic] had to the net assets as against the gross assets of the firm. In such circumstances I do not propose to finally determine that matter in this case as the plaintiff seeks to recover the lesser of the two sums. It may well be in the circumstances of this case to the extent that the assets were used to provide security to the continuing firm’s bank, reference should be had to gross assets whereas the use of such assets as ‘trade debtors’ and ‘work in progress’ by the conversion of the same into cash which was then used in the business and is casually connected with the profits earned, reference should be made to the net assets. In the circumstances of this case I am not called upon to determine this matter.17

22The Court of Appeal in Fry v Oddy18did not disturb the use of ‘gross’ assets for the s 46 calculation. However, Brooking JA raised his metaphoric eyebrows as follows:

As to [the determination of the plaintiff’s share of the partnership assets at the date of his retirement], for reasons which he gave, Hardy proceeded to determine the plaintiff’s share of gross, not net, assets. Since this has not been called in

Oddy v Fry (Unreported, Supreme Court of Victoria, McDonald J, 22 May 1997).

Ibid 7.

Ibid 43.

[1999] 1 VR 557.

60 VR 52

question by the defendants, I say no more about it.19

23Ormiston JA noted:

The argument on this appeal having taken a rather different course, queries were raised on this appeal as to a number of figures and calculations made, albeit with little or no evidence to support any specific alternative. In the result, even if this court were to think that the figures or calculations resulted in too high an award in favour of the respondent, there was in the end no ready substitute for any of those figures and it would be unfair to impose yet another inquiry upon the respondent unless no other course could be fairly adopted.20

24Further, Ormiston JA did not question the calculation by reference to ‘gross assets’ and seems to have accepted that in the circumstances it was equated to the net assets. Ormiston JA said:

The first factor is the only aspect of the case which, in the circumstances and having regard to the whole of the evidence, gave me concern. One of the key points of the appellant’s argument was that, although the expert witness and the trial judge had chosen a figure by way of ‘allowance’ of $130,000 for each of the continuing partners, that figure was treated only as the notional salary of each of those partners to be deducted from gross profits to produce the net profits for the present purpose, whereas the true exercise should have been to ascertain what part of the subsequently earned profits was attributable to the retiring partner’s share in the assets.21

25Callaway JA, apart from agreeing with the reasons of Brooking JA, did not address the issue.26In the third Oddy case,22 McDonald J made final orders including an order for interest. However, the interest referred to was pursuant to s 58(1) of the Supreme Court Act and not the alternative claim pursuant to s 46 of the Partnership Act.27Notwithstanding what is set out in the Oddy cases, I am satisfied that the proper approach is to consider the ‘net’ assets as at 28 January 2011. As mentioned above, the net assets in the partnership as at 28 January 2011 were negative in the amount of approximately $500,000.2328In Sandhu v Gill,24 the parties had been partners at will with a view to purchasing and converting a property to run as a business. The claimant subsequently commenced proceedings for the winding up of the partnership and sought an equal share of the post-dissolution profits. The English Court of Appeal held that the reference in s 42(1) of the Partnership Act 1890 (UK) to ‘the partnership assets was to the net partnership assets, namely the surplus or what remained out of the gross assets for distribution between 19

Ibid 563[18].

Ibid 571–2[48] (citation omitted).

Ibid 574[53].

Oddy v Fry (unreported, Supreme Court of Victoria, McDonald J, 16 June 1997).

See [9] above.

[2006] Ch 456.

60 VR 53the partners after all debts and liabilities of the partnership had been met’.2529Section 42(1) of the English Act provided:

Right of out-going partner in certain cases to share profits made after dissolution.

(1)
Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent per annum on the amount of his share of the partnership assets.26

30Neuberger LJ specifically analysed the concept of ‘a partner’s share of the partnership assets’ as that phrase is used in s 42(1) of the English Act. The analysis included the following:27

With that, I now turn to the meaning of section 42(1). The concept of “a partner’s share of the partnership assets”, at any time before the end of the winding up process in accordance with section 44, is conceptually somewhat opaque. In a case to which I will have to return, Popat v Shonchhatra[1997] 1 WLR 1367, in an uncontroversial passage Nourse LJ said, at p 1372:

Although it is both customary and convenient to speak of a partner’s “share” of the partnership assets, that is not a truly accurate description of his interest in them, at all events so long as the partnership is a going concern. While each partner has a proprietary interest in each and every asset, he has no entitlement to any specific asset and, in consequence, no right, without the consent of the other partners or partner, to require the whole or even a share of any particular asset to be vested in him. On dissolution the position is in substance not much different, the partnership property falling to be applied, subject to sections 40 to 43 (if and so far as applicable), in accordance with sections 39 and 44 ... As part of that process, each partner in a solvent partnership is presumptively entitled to payment of what is due from the firm to him in respect of capital before division of the ultimate residue in the shares in which profits are divisible: see section 44(b) 3 and 4. It is only at that stage that a partner can accurately be said to be entitled to a share of anything, which, in the absence of agreements to the contrary, will be a share of cash.

The meaning of section 42(1): the arguments for the defendant’s case

In the current edition of Lindley & Banks on Partnership, 18th ed (2002) the topic of “partnership shares” is dealt with in chapter 19. Lord Lindley’s “classic definition” is quoted in para 19–05. He said that:

the share of a partner is his proportion of the partnership assets after

Ibid.

As can be seen, the first para of s 46 of the Victorian Act reflects the English 1890 Act save that the interest rate is seven per centum in the Victorian Act.

Sandhu v Gill[2006] Ch 456, 462–4[18]–[25], 465–6[34]–[35].

60 VR 54

they have been all realised and converted into money, and all the debts and liabilities have been paid and discharged.

In the following paragraph the editors effectively endorse this definition, albeit stating that “it would be more accurate to speak of a partner’s entitlement to a proportion of the net proceeds of sale of the assets”. The editors go on to explore a little further the nature of a partner’s share in three circumstances, namely while the partnership is continuing, after “general dissolution” and after “death, retirement or expulsion of a partner”.

As to the position while the partnership is continuing, Lindley & Banks suggest in para 19–09 that:

“in the absence of any agreement to the contrary, the share of a partner will represent (and should always be stated in terms of) his proportionate share in the net proceeds of sale of the partnership assets, after all the firm’s debts and liabilities have been paid or provided for.”

The editors go on to suggest that this is supported "in substance" by the approach of the Court of Appeal in the passage I have quoted from Popat’s case [1997] 1 WLR 1367.

In para 19–10 the editors turn to the position on the general dissolution, and “submit” that “each partner’s share will have the same proprietary character as it had prior to the dissolution”. They immediately go on to state that “in terms of value, the share must still be expressed as a net entitlement since, in the absence of some specific agreement between the partner, it cannot properly be viewed in any other light”. That is also stated to be supported by the passage I have quoted from Popat’s case.

One can find support for this conclusion in at least some of the authorities referred to in the footnotes to the passages that I have cited in Lindley & Banks. Thus, in Re Ritson [1899] 1 Ch 128, 131 Chitty LJ said of a deceased partner that his "interest in the joint assets [of the partnership] was only his share of the surplus after payment of the joint debts", echoing a similar observation of Lindley MR himself, at pp 130–131. In Rodriguez v Speyer Bros[1919] AC 59, 68 Lord Finlay LC said:

When a debt due to the firm is got in no partner has any definite share or interest in that debt; his right is merely to have the money so received applied, together with the other assets, in discharging the liabilities of the firm, and to receive his share of any surplus there may be when the liquidation has been completed.

The concept of an interest in such a "surplus" is also to be found in a judgment of Buckley J, Burdett-Coutts v Inland Revenue Comrs[1960] 1 WLR 1027, 1035 where he said, when he observed that the analysis of Romer J in Manley v Sartori[1927] 1 Ch 157:

is authority for the view that, when a dissolved partnership is to be, or is in course of being, wound up, each partner or his estate retains an interest in every single asset of the former partnership which remains unrealised or unappropriated, and that that interest is proportionate to his share in the totality of the surplus assets of the partnership.

So far I have referred to authorities after the 1890 Act, but it is worth observing that it seems to have been the same before that Act came into force. Thus in Ashworth v Munn(1880) 15 Ch D 363, 369–370 James LJ said:

60 VR 55

their [the partners’] interest is exactly in proportion to what the ultimate amount coming due to them upon the final taking and adjustment of the accounts may be ... the share of each of the other partners no doubt is not a share in any specific asset or any specific part of the assets real or personal, but is his share of what will ultimately come to him when the accounts are ascertained, and when the partners who are to contribute have contributed, and when the assets are got in, the debts paid, and the amounts realised.

Although this observation was, as mentioned, made before the 1890 Act came into force, it should be noted that, as stated in Lindley & Banks, para 1–06, the 1890 Act "introduced no great change in the law".

...

In my judgment, that view is reinforced if one examines the effect of the closing words of section 42(1). Confining oneself to a case of only two partners, the section applies in a case where, after dissolution has occurred but before the winding up has been concluded, one of the partners carries on the partnership business, to the exclusion of the other. In such a case the excluded partner can elect between receiving a proportion of the profits or receiving interest at 5% per annum. The proportion of the profits is assessed by reference to "the use of his share of the partnership assets" and the interest is assessed on "the amount of his share of the partnership assets". It is very difficult to avoid the conclusion that the expression I have emphasised in those two quotations has the same meaning in each case. In the present instance Mr Sandhu appears to have elected for the first alternative, but I am currently concentrating on the second alternative.

In that connection, in agreement with Mr Blackett-Ord, it would seem to me quite remarkable if the partner who carries on the business could be obliged to pay the excluded partner interest based on a sum equal to the value of the latter’s interest in the gross assets of the partnership, ie his interest in the assets of the partnership, without taking into account the liabilities of the partnership. Yet that is what Mr Walker accepted his submission, and therefore the judge’s conclusion, mean. Consider a case, which would be common, and indeed the present is an example, where the main asset of the partnership consists of real property. Very often that asset will be charged to the bank, possibly for a sum which is equal to or conceivably even more than its value. If the judge’s conclusion in the present case is right, it would mean that the excluded partner would be entitled to interest based on the unencumbered value of the property, which would seem surprising and unfair.

31In Sandhu v Gill, Black J said:

I have reached the conclusion that the correct interpretation of section 42(1) is that which reflects the reality of the outgoing partner’s position vis-à-vis the partnership and not the interpretation adopted in the courts below. I am quite satisfied that the phrase “share of the partnership assets” has the same meaning on both occasions when it is used in the section. In my judgment, the section contemplates that a figure will be ascertained, as at the date of dissolution, for the assets after payment of third party liabilities in accordance with section 44(b)(1) and thereafter a calculation carried out as to what is due to the outgoing partner

60 VR 56

by way of advances, capital and share in any surplus. For the 5% interest option in section 42, no further calculation is necessary (except possibly in relation to a management allowance); the outgoing partner can claim 5% per annum on the figure calculated to be due to him. For the profit option, it will be necessary to work out the proportion that that figure bears to the total of the assets after discharge of third party liabilities; subject to arguments as to other factors that have contributed to the making of profit, the outgoing partner can claim the proportion of profit that his figure bears to the total assets. I have referred in this judgment to the accounting exercise as set out in section 44. As that section makes clear, however, contrary agreement will displace its provisions.28

32In Walker v Melham,29White J was required to consider what was included in the partnership assets. White J set out:

The relevance of this is that if the land were a partnership asset bought with partnership funds, then given that the parties’ contributions were equal as at May 1994, Mr Walker’s net share of the partnership assets to which he would be entitled on a notional winding-up at that time ... would include his share of the value of the land. Subject to the defences of abandonment and laches, Mr Walker would then be entitled, pursuant to s 42(1) of the Partnership Act, either to interest on that value or to an account for profits derived from the use of his share in the land up to November 2004.30

33In considering the orders to be made, White J said:

There should be a declaration as to the date of dissolution of the partnership. A specific date must be selected as accounts have to be taken at such a date. The choice of the date is arbitrary. It can be chosen at a convenient time (Lukin v Lovrinov (BC9801124, 22-23)). I will declare the partnership to be dissolved as at 31 May 1994.

Mr Walker is entitled to an account of the assets and liabilities of the firm at that date. There will be a declaration that the firm’s assets do not include the land and buildings. Its assets will include the goodwill of the partnership as at 31 May 1994.

The proceedings will be referred to an Associate Judge to inquire into, and certify the assets and liabilities of the partnership as at that date, and the value of each asset and liability. The Associate Judge will also inquire into and certify what are the respective interests of the partners in the net assets of the partnership as so determined. The parties acknowledge that they contributed equally to the partnership to that point. If there were equal drawings to that point, Mr Walker will be entitled to fifty percent of the net assets as so determined.

Mr Walker is entitled to simple interest at six per cent per annum in accordance with s 42(1) of the Partnership Act on the account of his share of the partnership assets as so determined.31

34In Beale v Trinkler,32 Brereton J embarked upon a similar analysis. His Honour said:28

Ibid 484[99].

[2007] NSWSC 264.

Ibid [37].

Ibid [67]–[70]

[2007] NSWSC 1058.

60 VR 57

For present purposes, the nature of a partner’s interest in partnership property may be taken to have been adequately and sufficiently summarised in Lindley & Banks on Partnership, 18th ed (in particular at [19-03], [19-09] and [19-10]). The authors refer at (at [19-03]) to Gray v Inland Revenue Commissioners [1994] STC 360, 377, in which Hoffmann LJ said:

As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share.

As the authors point out (at [19-09]), the precise nature of each partner’s beneficial interest depends on the terms of the partnership agreement, but commonly, if not invariably, has two characteristics: first, that it is in the nature of an interest taking effect in possession on and not before the determination of the partnership; and secondly, that on determination of the partnership, when the beneficial interest falls into possession, it takes effect subject to the right of the other partners to have the assets applied towards the payment of the firm’s debts and liabilities and any surplus divided between the partners in the manner prescribed by the Partnership Act. This normally involves a sale of the partnership property, except where the partners otherwise agree. In the absence of agreement to the contrary, the share of a partner represents a proportionate share in the net proceeds of the partnership assets after all the firm’s debts and liabilities have been discharged. The authors of Lindley point out that this analysis has apparently been accepted by the Privy Council in Hadlee v Commissioner of Inland Revenue (NZ) [1933] AC 524, 532G, and by the Court of Appeal in Popat v Shonchhatra[1997] 1 WLR 1367, 1372C-E.33

Am I bound to follow Fry v Oddy?

35According to rules of precedent, ‘[c]ourts are bound to apply principles laid out by courts higher in the appellant hierarchy’.34 I am bound by the decisions of the Court of Appeal and the High Court. However, I do not consider that the Court of Appeal in Fry v Oddy determined the issue of whether it was appropriate to use ‘gross’ or ‘net’ profits for the s 46 calculations. Clearly the lack of reference to the English authorities demonstrates that the Court of Appeal was not invited to consider the issue or to disturb the trial judge’s determination. At its highest, the calculation was not ‘called in question’ and, for reasons set out by Ormiston JA, it was not appropriate to embark upon an enquiry into the methodology and substitution for the figures already being considered by the trial judge.33

Ibid [5]–[6].

See Westlaw AU, The Laws of Australia (online at 15 April 2013) 25 Interpretation and Use of Legal Root Sources, ‘25.4 Judicial Statements’ [25.4.150], quoting Trident v McNiece(1988) 165 CLR 107, 129.

60 VR 5836In my opinion, it is appropriate to use the ‘net’ assets for the s 46 calculation of interest. It is well established that a partner’s interest in partnership property includes a right to a proportion of the surplus after dissolution and the realisation of the assets and payment of the debts and liabilities of the partnership.35 To calculate interest on the amount of an outgoing partner’s share of the gross assets of the partnership would be to ignore the debts and liabilities that exist at the time of dissolution. Neither precedent nor principle compels this result.

The effect of the discharge of liabilities as at January 2012

37Although it took place after the dissolution of the partnership, in light of Andrew’s submissions it is nevertheless convenient to consider the effect of the discharge of the partnership liabilities in January 2012. A good starting point is to consider the judgment of Master McLaughlin in Buttigieg v Buttigieg.36On the nature of the remedy under s 42(1) (the equivalent provision in the New South Wales Act), Master McLaughlin said:

[I]t should be recognised at the outset that the entitlement to interest under s 42(1) is not a discretionary remedy. Once the factual preconditions contemplated by the subsection have been established, a former partner in the situation of Frank has a right, at his option and in the alternative, either to a share of profits or to interest at the statutory rate.

The practical difficulties which have been recognised as confronting any attempt to take an account of profits of the nature described in the first alternative presented in s 42(1) appear to explain the reason why the statute presents the second alternative of interest at a specified rate. See Lindley & Banks on Partnership (17th ed, 1995) para 25-para 23 – para 25-para 26. Lord Lindley himself stated (in a passage written before the enactment of the 1890 statute):

owing to the extreme difficulty of taking an account of subsequent profits, so far as they are attributable only to one particular source, the tendency of the courts ... appears to be rather in favour of not exercising than of exercising the power alluded to, except in cases of gross fraud or breach of trust.

His Lordship then observed in a footnote:

Judgment for an account of profits after dissolution are fearfully oppressive; and the writer is not aware of any instance in which such a judgment has been worked out and has resulted beneficially to the person in whose favour it was made.

It was these practical difficulties which prompted Lord Lindley, in his Supplement on the Partnership Act 1890, to express regret that the Court was not empowered to award interest of a rate greater than 5 per cent. It will be observed that in New South Wales the interest is now at a rate of 6 per cent.37

38Master McLaughlin was of the view that the use of some of the partnership assets was sufficient for the purposes of s 42(1), stating:35

Commissioner of State Revenue v Danvest Pty Ltd(2017) 55 VR 190, 216 (Santamaria JA, with whom Tate and McLeish JJA agreed).

[2002] NSWSC 738.

Ibid [35]–[36].

60 VR 59

The various matters relied upon by [the applicant] which occurred at the time of and after [the respondent’s] departure from the property can have no bearing upon [the respondent’s] entitlement to his statutory claim for interest, once the factual preconditions contemplated by the subsection, in respect to the use by [the applicant] of assets of the partnership, have been fulfilled. Further, in respect to the submission of [the applicant] that only some of the assets of the equipment were used by him after the termination of the partnership, in my conclusion it is not essential, in order to attract the provisions of the subsection, that the entirety of the partnership assets should be used by the former partner. In any event, it will be appreciated that the most significant of those assets, being the land itself, was used by [the applicant].38

39Master McLaughlin awarded interest, and said:

I am satisfied that after the dissolution of the partnership on 1 August 1998 [the applicant] continued to carry on the business of that partnership, using the assets of the partnership, until 30 June 2000. In consequence, therefore, [the respondent] is entitled to interest at the statutory rate of 6 per cent upon his share of the partnership assets from 1 August 1998 to 30 June 2000. It was not disputed that [the respondent’s] share of the partnership assets was one half of the amount of $386,000 – that is, an amount of $193,000. Upon my calculation, 6 per cent of the amount of $193,000 for the foregoing period of 1 year and 11 months comes to $22,195. That is the amount to which [the applicant] is entitled upon his claim grounded upon s 42(1) of the Partnership Act. If there is any error in the foregoing arithmetical calculation, such error may be corrected within seven days of the date hereof.39

40On what must be established to attract the statutory interest, Master McLaughlin said:

In order to attract the foregoing statutory entitlement to interest, it is necessary that the Court be satisfied that [the continuing partner] carried on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and [the outgoing partner].40

41It is common ground that James has continued to conduct the partnership using the partnership assets. It is also common ground that there has not been a final settlement of accounts until today. Accordingly, Andrew has of right the ability to claim interest upon the amount of his share of the partnership assets from 28 January 2011 at the rate of 7% per annum. However, as explained above,41 Andrew had ‘negative’ share of the partnership assets on that date. As such, Andrew is not entitled to any interest.42The upshot is that the discharge of the partnership liabilities in January 2012, approximately one year after dissolution and the date set for the taking of accounts, is irrelevant to the taking of accounts. It may be the case, as Andrew pointed out in his submissions, that James will get the whole benefit of the discharge in that he will receive 100% of the partnership assets 38

Ibid [37].

Ibid [43].

Ibid [29].

See [9] and [27] above.

60 VR 60following dissolution and he will have had the use of these assets without accounting to Andrew for their use. However, the fact remains that Andrew left the partnership when its account was in deficit, and Almond J fixed the taking of accounts at that time. Andrew’s entitlements fall to be determined on that basis. Unfortunate as it may be for Andrew, for the purposes of this exercise, the discharge of the partnership liabilities one year after the date set for the taking of accounts has no bearing on the outcome.

Is the date from which interest runs immutable?

43Without exception, the cases that I considered in compiling these reasons directed that interest be paid from the date of dissolution up until the final settlement of accounts. Each case made the calculation premised on there being ‘a positive’ interest in the partnership assets as at the date of dissolution.42 Some guidance is also found in various texts. With respect to the situation where the share of the partnership assets is nil, the author of Lindley & Banks on Partnership states:

In Sandhu v Gill, the Court of Appeal held that a partner cannot maintain a claim for a share of profits (or, for that matter, interest) under section 42(1) if his share in the partnership assets would, based on an account taken at the date of dissolution, be nil. Although Neuberger LJ was troubled by the apparent need to carry out a notional valuation exercise as at the date of dissolution, whenever the subsection is sought be to invoked, the current editor submits that this is to ignore the fact that, in most cases, such a claim will be actively pursued, in terms of quantum, only when finalising the dissolution accounts. At that stage the net financial position of each former partner should be fairly clear. A fortiori in the case of a claim for interest. Reference should also be made in this context to the decision in Hopton v Miller.43

44On the election to take interest in lieu of profits, Banks states:

If a claim to a share of profits is not sustainable or the outgoing partner or his estate so elects, simple interest will be payable at the rate of 5 per cent, a rate which has remained unchanged over the years.

An election for the payment of interest will not, of itself, deprive the outgoing partner or his estate of his rightful share of any increase in the value of the partnership assets (save, perhaps, for stock in trade) between the date of dissolution and the date of sale. This was clearly established in Barclays Bank Trust Co Ltd v Bluff.44

45On the application of s 42 of the UK Act to capital profits, Morse states:

It has been held many times that s 42 has no application to post-dissolution capital profits as defined by the Court of Appeal in Popat v Schonchhatra, ie to increases in the value of the partnership assets, as opposed to the original capital invested

See Walker v Melham[2007] NSWSC 264; Yard v Yardoo Pty Ltd[2006] VSC 109; Ryder v Frohlich (No 2)[2006] NSWSC 1325; Giumelli v Giumelli [2000] WASC 90; Popat v Shonchhatra [1995] 1 WLR 908;Cameron v Murdoch(1986) 63 ALR 575; Cameron v Murdoch [1983] WAR 321.

Roderick I’Anson Banks, Lindley & Banks on Partnership (Thomson Reuters, 20th ed, 2017) 961 [25–31].

Ibid [25–36] (citation omitted).

60 VR 61

by each partner. This had previously been decided in both Barclays Bank Trust Co Ltd v Bluff and Chandroutie v Gajadhar, in the context of an outgoing partner taking the interest option under s 42.45

46Confirming that the appropriate share of the assets is net, rather than gross, Morse states:

As we have seen, s 42 requires the calculation of the share of post-dissolution income profits to be by reference to the use of the outgoing partner’s share of the assets and not to any previous profit-sharing agreement, express or implied. The main question is whether the former is to be calculated in terms of his or her share of the total value of the assets of the business or his or her share of those assets after deducting any liabilities. In other words, is it by reference to his or her gross share or his or her net share of the assets? In Taylor v Grier (No 3), the judge held that it was clear that Parliament had intended only the net share to be used and since Mr Grier owed money to the partnership at the date of dissolution, his net share of the post-dissolution assets was nil. In Sandhu v Gill, the Court of Appeal came to the same conclusion, overruling Lightman J who had held that it was the full proprietary interest of the outgoing partner in the partnership assets.

The Court of Appeal came to this conclusion for a number of reasons. First, if the concept of the gross share was applied to the interest option under the section, it would produce the absurd result that the continuing partner would have to pay the outgoing partner interest on money owed by him to the firm. The creditor would be paying interest on a debt to the debtor. Given that, it was unlikely that the section would use the phrase ‘share of the assets’ to mean different things for the two options it provided. Second, the net profits interpretation accorded with the pre-Act cases; and third, it was also the position with regard to the equivalent section in New Zealand.46

47On interpretation of s 46 and its equivalent sections, Fletcher states that:

This section must be construed strictly within its statutory context. Its purpose is to provide a retiring partner, or the estate of a deceased partner, with a statutory claim to either an account of profits or interest at a stipulated rate where the business is continued after dissolution, other than in the proper course of winding up, using assets of the retired or deceased partner.47

48On the election of a share of the profits or interest at the stipulated rate (mutually exclusive options), Fletcher states that:

To assess which alternative is more advantageous, it is important to establish the base from which calculations will be made. In both situations, the courts have recognised that the relevant share should be the amount, recognised in the following section, due from the remaining partners to the outgoing partner or the representatives of a deceased partner. The term, “the partner’s share of the partnership assets” should be given the same meaning at the two places where it occurs in the section.

That amount consists of the partner’s share of the net assets of the partnership — the

Geoffrey Morse, Partnership and LLP Law (Oxford University Press, 8th ed, 2015) 269 [7.50] (citations omitted).

Ibid 271 [7.52] (citations omitted, emphasis added).

Keith L Fletcher, The Law of Partnership in Australia (Lawbook Co, 9th ed, 2007) 269 [7.160] (citation omitted).

60 VR 62

amount remaining after all outside creditors have been paid and any advances made by partners to the partnership have been repaid. It will be based on the amount of the partner’s capital remaining in the firm at dissolution plus the partner’s entitlement to a share of the ultimate residue.48

49On the calculation of these options, Fletcher states that:

If the claimant seeks interest, that interest will be calculated on the assessed value of the share at the date of death. However, if a share of profits is sought, profits are allowed as a proportion of total profits, based on the same ratio as the partner’s interest bore to the total assets at dissolution, after due allowance has been made for the personal contributions of the continuing partners.49 Profits are those recognised as accruing in the ordinary course of business. The term does not include unrealised gains in the value of assets.50

50Fletcher refers to s 47 and its equivalents, and states that:

This section indicates that, in spite of the fiduciary relationship between partners, any amount found to be owing to the deceased or retired partner is to be treated as a simple contract debt so that the normal periods of limitation apply and not the periods, if any, which apply to claims arising out of the administration of trusts or the estates of deceased persons.

...

Upon a strict construction of the section, the share, which is a debt accruing at the date of dissolution or death, should also be quantified at that date.51

51In an article, Nichol and Bromby review the implications of the decision in Oddy v Fry (Unreported, Supreme Court of Victoria, McDonald J, 22 May 1997).52 The authors described the pre-Oddy situation as follows:

Before Oddy, no Australian court had made a judgment on the entitlement of an outgoing partner to partnership profits under s 46. Retiring partners in this state have in the past, in circumstances where their share of assets is not promptly repaid to them, preferred to seek a payment of interest calculated on their capital, either under s 46 or under the Supreme Court Act 1986 (Vic).

Following this decision, the election offered under s46 is seen to have significant financial impact. If the plaintiff in this case had elected to take interest under s 46, he would have been entitled to approximately $43,000. In electing to seek a share of profits, he obtained a payment almost ten times that amount.53

52In Yard v Yardoo Pty Ltd,54 Cummins J had before him the following facts:

[Two] proceedings are interrelated and were tried together. Essentially both

Ibid 271 [7.165] (citations omitted, emphasis added). In Sandhu v Gill [2006] Ch 456both Neuberger LJ and Black J accepted as correct the analysis of the position contained in the 8th edition of this work and restated with minor changes in this paragraph.

Meagher v Meagher [1961] IR 96; Barclays Bank v Bluff [1982] Ch 172; Cameron v Murdoch (No 2) [1984] WAR 278; cf H Stevenson & Sons Ltd v Aktiengesellschaft fur Cartonnagen-Industrie [1917] 1 KB 842 at 849; Sandhu v Gill [2006] 2 WLR 8.

Fletcher, n 47, 271 [7.165] (citations omitted, emphasis added).

Ibid 278–9 [7.175].

[1998] 1 VR 142; Carey Nichol and Michael Bromby, ‘Partnership Profits at Risk’ [1999] Law Institute Journal 44.

Ibid (emphasis added).

[2006] VSC 109.

60 VR 63

proceedings arise from the separation of husband and wife and the consequences of that separation upon farming and other property. Trevor and Lorraine Yard were married in October 1969 and they lived together at Murrayville, north-west Victoria, in the Mallee country. Two children were born of the marriage. Trevor and Lorraine Yard separated in December 1997 and later divorced. Lorraine Yard commenced proceedings in July 1999 in the Family Court of Australia at Adelaide against Trevor Yard for property settlement and for maintenance. In October 2000 she commenced proceedings in the Supreme Court of South Australia, initially to prevent Trevor Yard and his parents from dealing with the assets of a family partnership and a family company Yardoo Pty Ltd and thereafter seeking the winding up of Yardoo Pty Ltd and a division of its assets and the dissolution of the family partnership and an accounting of its assets. Trevor Yard’s father, Alfred Yard, took proceedings in this Court in February 2001 seeking declarations as to the true ownership of the property the subject in part of Lorraine Yard’s South Australian Supreme Court proceedings. Her claim was transferred from the Supreme Court of South Australia to this Court in March 2001, pursuant to the provisions of the Jurisdiction of Courts (Cross-Vesting) Act 1989 and became proceeding no 5151 of 2001. Thus both proceedings were heard in this Court.55

53Cummins J describes how electing to pursue the interest option would operate in the case before him, stating:

Section 46 provides an alternative remedy to an account of profits by allowing interest on Lorraine’s portion of capital at 7%. In the current circumstances that would be an inequitable remedy in that Lorraine would be placed in a preferred position in that it does not take into account the ongoing finance costs paid by the continuing partners to maintain assets claimed to be Yard partnership assets; low profits and losses by the continuing partnership; reductions of capital; the absence of personal exertion by Lorraine; an allowance for Alfred; an allowance for Trevor as manager; and an allowance for Margaret Sims as full time worker. On Lorraine’s best case the gross assets of the Yard partnership available for distribution are: Paladin; Brian’s Block; and Plant, Equipment and Livestock according to the depreciation schedule.56

54It follows that, Cummins J did not consider it appropriate or possible to factor into the equation for the calculation of interest, the post-dissolution decreases in the partnership assets or the costs in maintaining the partnership assets.55Andrew relies primarily on Barclays Bank Trust Co Ltd v Bluff.57 From the headnote of the reported version, the facts were as follows:

A father and the defendant son were in partnership as farmers, sharing profits equally. The partnership was dissolved by the death of the father on May 13, 1972. By his will, the father gave his half share of the farming business to another son. Freehold property was valued at the date of death at £30,000 and eight separate agricultural tenancies were valued at £784. The aggregate value of the other partnership assets was about £11,430. The defendant carried on the farming business but there was delay in winding up the partnership affairs, due in part

Ibid [1].

Ibid [386] (emphasis added).

[1982] Ch 172 (H E Francis QC sitting as a Deputy High Court Judge) (Barclays Bank).

60 VR 64

to a hope that planning permission would be given for residential development of some of the land so increasing its value. Nothing materialised and in April 1974 solicitors for the plaintiff, the father’s executor, pressed for interest on the father’s share of the partnership assets which were still being used in the business, and for a sight of the farming accounts. Negotiations followed during 1974, 1975 and 1976 but without agreement on ways of discharging the defendant’s responsibility for his father’s share of the partnership assets or for payment of interest on assets used since the date of death or alternatively for payment of a share of the profits. In the meantime, the market value of the freehold property had increased considerably. The plaintiff applied for the winding up of the former partnership under the terms of the Partnership Act 1890.

On the plaintiff’s summons, inter alia, for declarations, the questions arose whether under section 42 of the Act of 1890 the plaintiff had elected to take 5 per cent. per annum on the father’s share of the partnership assets for the period up to the final settlement of accounts; and whether, if the plaintiff had so elected, the plaintiff would be deprived of the right on a sale of the farm property to share in the proceeds attributable to the property’s increased value at the time of the sale.

56H E Francis QC was required to determine whether the plaintiff had elected to take interest rather than a share of profits. H E Francis QC held that the evidence did not disclose if the plaintiff had so elected and ‘it was open to the plaintiff to elect either for a share of the profits since the father’s death or for interest at 5 % on the father’s share of the partnership assets’.5857H E Francis QC also held:

That ‘profits’ in section 42(1) of the Act referred to profits accruing in the ordinary course of carrying on the partnership business pending realisation, which in the present case arose from use of the farm land and buildings; that those profits did not include, on a realisation of the farm property, the proceeds attributable to a fortuitous rise in prices of property since the date of death; and that, therefore, the plaintiff would not deprive itself of any right to share in such proceeds if it chose to take interest under section 42 of the Act on the father’s share of the partnership assets ...59

58As to interest, H E Francis QC said:

However, it was held that if the personal representative of a deceased partner chose under section 42 of the Act of 1890 to accept interest at the rate of 5 per cent. per annum on the deceased partner’s share from the date of death to the date of dissolution in lieu of a share of profits for the same period, such share must in the circumstances be calculated as at the death of the deceased. The court in that case60 made an order for the sale of the partnership property including the goodwill. Kingsmill Moore J said, at p 112:

If, however, the plaintiff elects to take 5 per cent per annum on the deceased’s share from dissolution there must be an inquiry as to the value of his share on dissolution. In the conduct of this inquiry, regard must be had to the

Ibid 173.

Ibid.

Meagher v Meagher [1961] IR 96.

60 VR 65

prices fetched on sale, but those must be reduced by ... such amount as is attributable to the enhancement of value due to the retention of the assets unsold from the date of dissolution to the date of sale of the relevant assets.

It would follow, therefore, that if the plaintiff in that case elected to take 5 per cent. interest she would not be entitled to any part of the proceeds of sale of the partnership property so far as such proceeds were attributable to the enhancement in value of the partnership assets between the date of dissolution and the date of sale. With the greatest respect to the Irish Supreme Court, I am quite unable to take the view that section 42(1) of the Partnership Act 1890 has the effect of producing such an inequitable result. The main business there consisted of acquiring premises, increasing their value by suitable repairs, alterations and improvements and then renting them to business or other tenants or reselling them at a profit. It is plain that while the partnership business was a going concern, profits arising from the sale of improved premises were profits within section 42, but on the sale of the entire partnership business, lock, stock and barrel as a going concern it does not seem to me that any part of the proceeds of sale can properly be regarded as profits within the meaning of section 42.61

59It is clear that H E Francis QC confined his decision to a determination of whether there had been an election, and any election would not deprive the plaintiff from seeking recompense for an increase in the value of the partnership assets. However, s 46 (the Australian version) was not the appropriate vehicle.60Barclays Bank was followed in Cameron v Murdoch which is a Privy Council appeal from a decision of the Western Australian Supreme Court and in Giumelli v Giumelli.62 In England, it was followed in Chandroutie v Gajadhar.6361In Cameron v Murdoch, the headnote set out the following:

James Cameron and his two sons, Jack and Dougald, farmed lands in Western Australia in partnership until his death in 1940. The business then continued as a partnership between Jack and Dougald until Jack’s death in 1974 and thereafter was continued by Dougald until his death in 1980, using the original partnership property and without steps being taken to administer James’ estate. Further land was acquired, improvements were made, and another son, Alex, built a home on and farmed parts of the property called ‘the Miling lands’. In these proceedings commenced in 1980, the Supreme Court of Western Australia made orders as to the assets of James’ estate, for the winding up of the partnership and in relation to other incidental matters. The judgment was challenged on six aspects by appeal and cross-appeal to the Judicial Committee of the Privy Council.64

62Lord Brandon of Oakbrook said:

Counsel for the appellants contended that the rights of the estate of a deceased former partner, in relation to such part of the profits made by the carrying on of the partnership business by the surviving partners as was attributable to the

Barclays Bank[1982] Ch 172, 182–3 (emphasis added).

[2000] WASC 90 (Giumelli).

[1987] 2 WLR 1.

Cameron v Murdoch(1986) 63 ALR 575, 575.

60 VR 66

use by them of the share of the deceased partner in the partnership assets, were not limited to the alternative remedies expressly conferred by s 55 of the Act of 1895, but extended in appropriate cases, of which the present case was one, to additional relief by virtue of s 6.65 As appears from the terms of that section, which has been set out earlier, it preserves existing rules of equity and common law applicable to partnership, except so far as they are inconsistent with the express provisions of the Act. In their Lordships’ opinion, there never has been a rule of equity under which surviving partners, who carry on the business of a partnership after its dissolution by reason of the death of a former partner, become trustees for the estate of that former partner of such part of the profits of the business thereby made as is attributable to the use of the latter’s share of the original partnership’s assets. The absence of any such rule gains strong confirmation from the inability of counsel for the appellants to cite a single decision, either in England or in Australia, in which such a rule has been recognized and applied.66 Their Lordships would, however, go further and hold that this suggested rule,67 even if it existed, would be inconsistent with the express provisions of s 55 of the Act of 1895. Under that section, as appears from its terms set out earlier, where surviving partners carry on the business of a partnership after it has been dissolved by the death of a deceased former partner, the representatives of the latter’s estate are entitled, at their option, to one or other of two remedies. These remedies are either an account of so much of the profits made by the carrying on of the business as are attributable to the use of the deceased former partner’s share of the capital assets of the original partnership, or interest at 6 per cent on the value of that share. To hold that, where surviving partners use profits made by the carrying on of the business of the original partnership for the acquisition of new capital assets, the representatives of the estate of the deceased former partner are entitled, not to an appropriate share of such profits themselves, but to a like share in the new capital assets into which they have been converted, would not be consistent with the express provisions of s 55. Further, s 56 makes it clear that the obligation to pay any sum due from surviving or continuing partners to an outgoing partner or a deceased partner’s estate is an obligation which sounds in debt and not in trust.68

63In Giumelli, the issue did not really arise. Master Bredmeyer set out:

The substance of the application is that the plaintiff wants the court to recognise that he has now elected to take interest on his share of the partnership assets at 6 per cent from 14 May 1986, which is the date of dissolution, until the date of the court order. ...

...

By way of background the plaintiff was a partner with family members in an orchard business. The plaintiff had a one-quarter share in that partnership. He was, in effect, expelled from that partnership. In 1990, Pidgeon J determined, as a preliminary matter, that the partnership had been dissolved on 14 May 1986,

Section 4 of the Partnership Act 1958 (Vic) (same content as s 6 of the WA Act): ‘Saving of rules of equity and common law: The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act’.

Cameron v Murdoch(1986) 63 ALR 575, 587–8 (emphasis added).

Ibid . The rule refers to the argument made by counsel regarding the surviving partners being trustees (for the estate) of the deceased partner's portion of the profits: at 587–8.

Ibid 588 (emphasis added).

60 VR 67

which was the date of service of the writ. In 1991 the plaintiff got a summary judgment against the other partners from me in the sum of $55,106, together with interest, from 14 May 1986 until judgment in part satisfaction of his interest in the partnership. That money was for undistributed profits.

...

The other option of interest at 6 per cent per annum on the retiring partner’s share of the partnership assets, is, in effect, a deemed share of profits. This is a simplified way of calculating the deemed benefit which the continuing partners got from the retention of the retiring partner’s capital in the partnership. Test it this way. If the continuing partners had paid the plaintiff his net share of the partnership assets on dissolution in 1986, and if the partnership did not have the share capital necessary to pay him out, they would have had to borrow it. Interest rates were much higher than 6 per cent in the late 1980s and early 1990s. This interest rate in s55(1) has remained at 6 per cent since 1895.69

64In Popat v Shonchhatra,70David Neuberger QC had before him the following facts:

The plaintiff and defendant entered into a partnership agreement to carry on a newsagency business and acquired leasehold premises, the goodwill of the existing business and certain fixtures and fittings. The partnership assets were assigned to them in joint names and paid for out of a partnership bank account which was in joint names. The plaintiff contributed £4,564, of which £2,700 had been lent to him for the purpose by the defendant. The defendant contributed £23,064, the balance being provided by business development loans from the bank. Since the defendant had provided most of the capital it was agreed that the plaintiff would provide most of the labour. After three and a half months the plaintiff voluntarily left and the partnership, which was determinable at will, came to an end. Thereafter the defendant carried on the business on his own. He also managed to acquire the freehold of the premises, which was conveyed into his sole name, from the freeholder for £80,000. Two and a half years after the termination of the partnership the defendant sold the premises and the other partnership assets at a profit.

65The plaintiff in that case claimed that he was entitled to 50 per cent of the capital profits on the sale of the partnership business. The report summarises David Neuberger QC’s holding as follows:

Held, that, in the light of the partners’ unequal financial contributions to the acquisition of the partnership assets, the fact that the partnership was terminated voluntarily by the plaintiff and the fact that the increase in the value of the premises was due not to external forces or to the plaintiff but to the efforts and expenditure of the defendant, the post-determination capital profits were not to be shared equally but apportioned in accordance with the partners’ capital contributions to the partnership assets after making an allowance in favour of the defendant because of his efforts in carrying on the business after the determination of the partnership; that the defendant held the proceeds of sale of the freehold on trust for himself and the plaintiff in the same proportions as the partnership assets generally; and that, in assessing the value of the plaintiff’s

Giumelli [2000] WASC 90[2]–[3], [12] (emphasis added).

[1995] 1 WLR 908 (David Neuberger QC sitting as a Deputy High Court Judge).

60 VR 68

interests in the proceeds of sale, account was to be taken of the defendant’s contribution of £80,000 to purchase the freehold.

66On the proper approach to be taken with s 42(1), David Neuberger QC stated:

The proper approach, therefore, is to assess the respective proportionate shares of the plaintiff and the defendant in the business as at 10 January 1990, and then to divide the post-determination profits between the parties pro rata to their proportionate shares, subject to first allowing to the defendant what Romer J called ‘a proper allowance ... for [his] trouble in ... carrying on the business’: see Manley v. Sartori, at p. 162.

It may help if I give a purely hypothetical example, which proceeds on the assumption that the partnership made a loss between September 1989 and January 1990, as the accounts put forward by the accountants appointed by the defendant suggest. (However, I must emphasise that, as already mentioned, those accounts will be considered by the master on any inquiry, and he may conclude, after hearing expert and factual evidence, that the partnership in fact made a profit.) Assume that, up to 10 January 1990, the partnership had lost £7,139.45 by way of income and capital loss. It is common ground that the profits and losses of the partnership would be shared equally between the plaintiff and the defendant: this seems to me to be plainly right in view of the absence of any other agreement between them, in the light of the provisions of section 24(1) of the Act of 1890. Accordingly, that loss would have to be apportioned equally between the parties, and would serve to reduce each party’s share of the capital. The defendant’s share of the capital would be reduced to £19,500, and the plaintiff’s share to £1,000. In those circumstances, the inquiry would involve looking at the profit made by the business between 10 January 1990 and 10 July 1992, and, after making the appropriate deduction in favour of the defendant, bearing in mind his efforts in carrying on the business, any balance would be divided between the parties in the proportion 19.5:1 in favour of the defendant. In principle, the plaintiff could, in the alternative to sharing the profits in this way, have elected to a payment of 5 per cent per annum on the amount of his share of the partnership assets measured as at 10 January 1990 (ie on the figure of £1,000 in the example I have given): see section 42(2) of the Act of 1890.71

67David Neuberger QC further said:

Ignoring for the moment the defendant’s purchase of the freehold interest in the premises, I have to consider next the contention of the plaintiff that he is entitled to recover half of the capital profit made on the sale of the premises, the goodwill and the fixtures and fittings, in July 1992. As matter of ordinary language, and in the light of the decision in Barclays Bank Trust Co. Ltd. v. Bluff[1982] Ch. 172, it seems clear that the provisions of section 42(1) of the Act of 1890 do not apply to such a capital profit. Mr. Sen, on behalf of the plaintiff, contends that the plaintiff is entitled to half the capital profit made on the sale of the business by virtue of the provisions of section 24(1) of the Act of 1890, which provides that, in the absence of "any agreement express or implied between the partners":

All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.

He further points to the decision itself in Bluff’s case, where it was held that,

Ibid 913–4 (emphasis added).

60 VR 69

where a surviving partner, following the dissolution of the partnership by the death of the other partner, carried on the business, and eventually sold the same as a going concern, he was not entitled to keep the whole of the capital profit resulting from the sale for himself: he was obliged to account to the executors of the deceased partner for their 50 per cent. of the capital profit. That decision was expressly approved by the Privy Council in Chandroutie v. Gajadhar[1987] AC 147, where effectively the same result obtained in what was described as an a fortiori case, of a partner being "wrongly ousted from the partnership by his co-partner, who continues to carry on the business": see p. 154.

I must confess to finding this a difficult point. In my judgment, section 24(1) of the Act of 1890 does not apply, because it appears to me to be dealing with the position as between partners during the period of 915 the partnership up to the date of the dissolution of the partnership. That is supported by the fact that, in relation to the income enjoyed after dissolution, section 24(1) cannot have been intended to apply, in view of the provisions of section 42(1). If section 24(1) only applies to the distribution of the revenue profit and loss up to dissolution, and not beyond dissolution, it would be inconsistent if it applied to the distribution of capital profit made after dissolution. This view appears to be consistent with the observations of Goff J. in Sobell v Boston[1975] 1 W.L.R. 1587, 1591C–F.

Further, as to the plaintiff relying on Bluff’s case [1982] Ch 172, and Chandrouti’s case [1987] AC 147, I observe that Lindley & Banks on Partnership, 16th ed (1990), seems to suggest that a different approach is appropriate in relation to capital profits made on the sale of the business assets by the partner who continues the business, where the partnership ends on retirement or lawful expulsion (as in Sobell) compared with where the partnership ends due to the death or wrongful exclusion of a partner (as in Bluff and Chandroutie respectively): see pp 207–208, para 10–163 and p 635, para 25–25, and the footnotes thereto. In any event, I am unconvinced that the decisions in Bluff and Chandroutie in fact support the plaintiff’s argument in this case that the capital profits made between January 1990 and July 1992 should be shared equally between the parties, because in those two cases it would appear that the partners not only shared profits and losses equally, but that they also had equal shares in the total assets of the partnership. In these circumstances, I have come to the conclusion, with some hesitation, that the appropriate way in which to apportion any capital profit as a result of the sale of the premises and the business in July 1992, on the facts of this case, is in the same proportion as the profits (after making an appropriate allowance for the efforts of the defendant) are to be shared. In other words, on the example I have given, the capital gain made between January 1900 and July 1992 would prima facie fall to be apportioned 19.5:1 in favour of the defendant as against the plaintiff.72

68Popat was appealed.73 The Court of Appeal allowed the appeal. The report summarises the Court’s holding as follows:

Held, allowing the appeal, that a distinction was to be made between the capital of a partnership and its assets; that, on acquisition, the leasehold premises, fixtures and fittings and the goodwill of the business became partnership property and, at least so long as the partnership was a going concern, neither partner had any right,

Ibid 914–5.

Popat v Shonchhatra [1997] 1 WLR 1367.

60 VR 70

without the consent of the other, to have the whole or a share of any particular asset vested in him; that, subject to any agreement between the partners, they were on dissolution of the partnership entitled to share in its capital in proportions corresponding to their respective contributions to the cost of acquiring the leasehold premises, fixtures and fittings and the goodwill, but they were entitled to share equally in the assets of the partnership; and that, accordingly, the judge should have directed an equal division of any post-dissolution revenue profits of the partnership and, pursuant to section 24(1) of the Partnership Act 1890, of the post-dissolution capital profits including the profits held by the defendant on the sale of the property, subject to a discretion to make an allowance in respect of the defendant’s work in carrying on the partnership business in the post-dissolution period; and that the freehold property was held in trust for the partners in equal shares.74

Conclusion

69I have taken from the cases the proposition that interest is payable to the plaintiff on his share of the partnership assets calculated as at the date of dissolution. As I have explained above,75 events which occur after that date are irrelevant. Accordingly, I determine that given that Andrew’s interest in the partnership as at the date of dissolution was in the negative, no interest is payable.70Given the terms of the orders made in [6](a) and [7] of Almond J’s order made on 21 August 2014 and the way that Andrew has put his submissions, in effect that is the end of the matter.71In the event that the parties cannot resolve the remaining matters, there is liberty to apply.Orders accordingly. Solicitors for the plaintiff: Harwood Andrews. Solicitors for the defendant: Nevett Ford. T B D GORTONBARRISTER-AT-LAW 74

Ibid 1367.

See [42] above.

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