Wombats Downunder Pty Ltd v G & W a Dicenso Pty Ltd (No 2) - [2011] SASC 3

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
WOMBATS DOWNUNDER PTY LTD & ANOR v G & W A DICENSO PTY LTD & ANOR (No 2)
[2011] SASC 3
Reasons of Judge Lunn a Master of the Supreme Court
19 January 2011
PARTNERSHIP
Application by plaintiffs to have accounts and inquiries on dissolution of partnership taken before the trial of the action – 6R251 held sufficiently wide to empower the Court to order accounts and inquiries before trial – held no issues pleaded in the defence which made the taking of the accounts and inquiries dependant on findings to be made at the trial on the pleaded issues – order to be made before trial.

WOMBATS DOWNUNDER PTY LTD & ANOR v G & W A DICENSO PTY LTD & ANOR (No 2)
[2011] SASC 3
JUDGE LUNN:
Reasons on plaintiffs’ application for taking of accounts and inquiries before trial

Prior to 15 July 2009 the first plaintiff and the first defendant[1] had been in partnership in a paintball and skirmish business at Barrungule under the name of “Skirmish Down Under Mt Gambier”. The partnership was dissolved as from 15 July 2009. In this action the plaintiff seeks orders concerning its winding up and damages against the defendant.
[1] Each referred to respectively hereafter as the plaintiff and the defendant.
On 26 October 2010 the plaintiff filed its Second Statement of Claim (FDN34). By an application issued on 8 October 2010 (FDN31) they sought, inter alia, that various accounts and inquiries relating to the partnership be ordered to be taken before the trial of the action. This was opposed by the defendant. FDN31 was listed for argument for 18 November 2010. On that day the defendants applied for an adjournment so that they could make significant amendments to their defence which they said raised matters relevant to the determination of FDN31. I reluctantly granted the adjournment, albeit with costs against the defendants. The plaintiffs ultimately did not oppose the amended defence, although they reserved the right to argue that the matters pleaded in it did not amount to good grounds to defend the action.[2]
[2] FDN31 has been argued on the basis that the new defence which the defendant was given permission to file was to be its defence, but it has not yet been filed.
As the matter evolved during argument, there were two issues on FDN31 which need to be determined. These are:
·whether there should now be an order for the taking of accounts for the partnership for the period from its inception until 30 June 2008; and
·whether there should be an inquiry and account now ordered as to what has happened to the assets of the partnership after its dissolution and what benefit either party has received from them.
At the outset it is important to identify clearly what precisely is in issue between the parties as disclosed by the current pleadings. There is no counterclaim and so the issues all relate to the plaintiffs’ entitlement to any relief.
There is a dispute whether under the agreement setting up the partnership the defendant was to pay to the plaintiff $150,000, or only $120,000, for its 49 per cent interest in the partnership business and assets. This appears to be a liability arising before the commencement of the partnership and so would not affect the partnership accounts. It will be resolved by the trial Judge on the evidence about the agreement for the formation of the partnership.
There appears to be a dispute on the pleadings about what was agreed about the respective entitlements of the partners as to what they would be paid by the partnership for their respective services to it.[3] However, the pleaded versions of each party of these arrangements were that the plaintiffs collectively and the defendants collectively would each draw $40,000 per annum from the business. That would not seem to affect the final partnership accounts other than possibly in the description of the payments. I doubt that any determination of the issue is required by the Court, and, if it is, it is trivial.
[3] For this purpose it is probably necessary to differentiate between the first and second plaintiffs and the first and second defendants, but it is not material to what I have now to decide.
The plaintiff claimed an order for an account and inquiry of the partnership assets and business. It also claimed extensive other relief by way of declarations, damages and the like, but those claims are either in the alternative to what it would obtain if the accounts and inquiries which it seeks are ordered or are in addition to them. Insofar as it seeks declarations and damages in addition to the accounts and inquiries, that is a matter for the trial Judge. However, I find it difficult to see how any damages could be assessed until the taking of the final partnership accounts has been completed.
Other than determining any special defences raised by the latest defence, the pleadings do not require a determination of the plaintiffs’ entitlement to any other relief except damages. I now turn to the two grounds of defence principally relied upon by the defendants and raised by the latest amendments to their defence.
In brief, the defence pleads that the second defendant, as the manager of the partnership, employed on behalf of the partnership an accountant who prepared accounts for the partnership for each of the financial years ended 30 June 2006, 2007 and 2008. Taking the defendants’ case at its highest, these accounts were supplied to the plaintiffs, they did not dispute them and they apparently used them in what they submitted to the Commissioner of Taxation for their own tax returns.[4] However, no such tax returns were prepared for the balance of the duration of the partnership until 15 July 2009.[5] The defendants contend that because the plaintiffs did not dispute these accounts prepared by the tax accountant up until 30 June 2008, the Court should not now order any accounts of the partnership activities for that period. The defendants’ counsel conceded it was not a plea of a settled account, but submitted it went to the exercise of the Court’s discretion about whether any, and what, accounts should now be ordered.
[4] The plaintiff has not yet filed a reply to the amended defence. For the purposes of this application, I assume that the defendant can prove what it has pleaded on the relevant topics.
[5] There is evidence of a tax return and accounts for the financial year ended 30 June 2009, but I infer these were not supplied to the plaintiff. There is no evidence of any accounts or tax return prepared for the period from 1 July 2009 to the date of dissolution on 15 July 2009.
The defendants also pleaded that the plaintiffs were estopped by their acceptance of the tax accounts from now disputing them. I accept the submission of the plaintiffs’ counsel that insufficient facts amounting to reliance or detriment have been pleaded to constitute any valid estoppel.
The second topic pleaded in the new defence was a plea in paragraph 8 about the identity, the subsequent history and the defendants’ use of the plant and equipment of the partnership as at the date of dissolution. It pleaded that the items are of little value. It admits the defendants have made some use of some of the items since the dissolution of the partnership.
This plea in paragraph 8 is irrelevant to the issues to be determined on the Statement of Claim, and, if the plaintiffs had challenged the permission to amend, this amendment would have been disallowed. All the plaintiff seeks in the Statement of Claim is an inquiry about what were the assets of the partnership at the date of its dissolution and an account relating to any subsequent use of them by the defendants. That does not require that evidence be led at the trial about the identity of the assets or what use the defendants may have made of them. They are matters to be canvassed on the taking of the inquiry and account. As I stated in my reasons No 1, part of the purpose for the account and inquiry procedure is to avoid wasting the resources of the Court at formal trials in dealing with issues which are better left for the more informal and flexible procedures of accounts and inquiries. If the defendants’ plea that the assets are of little value is correct, this highlights that the valuable time of a trial Judge should not be occupied in hearing evidence on the topic.
The plaintiff brings FDN31 under 6R 251 which provides:
251-Orders for accounts or report
(1)The Court may, on is own initiative or on application by a party, order that accounts or a report relevant to a question in issue in an action be prepared and filed in the Court.
(2)The order may provide for preparation of the accounts or report by a party, an independent expert or other person.
(3)The Court may, in the same or a later order, give directions about the nature and extent of the inquiry to be carried out for the preparation of the account or report.
Example—
The Court might (for example) give directions about the extent to which the person preparing the accounts or report is required to inquire into the adequacy of existing accounts or records.
(4)The Court may order the examination of a party or other person on accounts or a report filed under this rule.
(5)The Court may order that, on the filing of accounts under this rule, a party is to pay to another an amount certified by the person preparing the accounts, to be owing from that party to another party.
Although it is not explicit on its face, 6R 251 is sufficiently wide to enable the Court to order accounts or inquiries before the trial of the other issues in the action. Order 15 Rule 1 of the 1947 Rules provided:
Where a writ of summons … involves taking an account, if the defendant … does not after appearance, by affidavit or otherwise, satisfy the Court … that there is some preliminary issue to be tried, an order for the proper accounts, with all necessary inquiries and direction … shall be forthwith made.
Order 57 of those Rules made separate provision for accounts and inquiries after the trial of an action. In the 1987 Rules, which replaced the 1949 Rules, the provisions of O15 and O58 were concertinaed into a single new rule which provided:
87R 71.03
The Court may at any stage of proceedings in a cause or matter, on application of a party or of its own motion, direct any necessary inquiries or accounts to be taken or made.
I consider 6R 251 to be the successor of 87R 71.03. Read in the light of its history, and of 6R 117(1), and bearing in mind the utility of being able to have some accounts and inquiries completed before the trial, I consider that 6R 251 empowers the Court to make such orders before trial. The authorities on the old O15 still apply that such an account and inquiry can be ordered before trial where it is clear the account would be ordered if the matter went to trial and it did not depend on the plaintiff establishing its case at trial.[6]
[6] Re Gyhon [1885] 29 Ch D 834; Re Bowen [1882] 20 Ch D 538.
I accept the defendants’ submission that the granting of the plaintiffs’ application here requires the exercise of two separate discretions. The first is whether the Court would necessarily grant an order for the accounts and inquiries at the trial of the action. The second is whether the Court should exercise its discretion under 6R 251 to order those accounts and inquiries on an interlocutory basis before trial. I do not accept the defendants’ submission that on what has been pleaded in this action the exercise of the discretion on whether accounts and inquiries should be ordered should be left to the trial Judge at the conclusion of the trial. The defendant relied on a number of authorities that whether an order for an account and inquiry was made or not was in the discretion of the Court.[7] The cases he referred to were not partnership cases. It was stated in Mulherin’s case at [20] that every partner has a right to have a proper account of the partnership affairs. Other than on a plea of a settled account, I am not aware that this Court has ever refused an order for the taking of proper accounts and inquiries to give effect to the dissolution of a partnership. If there is a basis to refuse such an order, it is only in exceptional circumstances which are far beyond the circumstances of this case. There is nothing in what the defendant has pleaded or put forward by affidavit evidence to make me believe it is not inevitable that after a trial of this action a trial Judge would, if such accounts had not already been taken, order accounts and inquiries to be taken by the Court for the period of the partnership affairs up to 30 June 2008 and of the partnership assets at the date of dissolution and of what use the defendant has subsequently made of them.
[7] Rapid Metal Developments Australia Pty Ltd v Rosato [1971] Qd R 82; Mulherin v Quinn Villages Pty Ltd, Muir J, 31 August 2007.
In relation to the tax accounts up to 30 June 2008, there are several reasons why they should not stand as the final accounting between the partners for that period. They are accounts prepared for income tax purposes, and therefore include items such as depreciation which are not relevant on an account on what is due between the partners. The accounts do not show what amount is either due to, or owing by, the partners respectively at the date of dissolution, which is the primary function of an account ordered by the courts. While as a matter of accounting convenience the accounts are prepared for financial years, the account which the Court would order is for the whole of the period of the partnership. There is no utility in dividing it into periods before and after 30 June 2008. The accounts as prepared up to 30 June 2008 are unaudited and contain major reservations about the uses which can be made of them and the accounting standards on which they are based.
As far as I am aware, there is no reason why any accountant appointed by the Court to take the proper accounts for this partnership should not have regard to the tax accounts. Insofar as they properly record the affairs of the partnership, they can be adopted by the accountant appointed by the Court, if he or she sees fit, as part of the final account. Insofar as there may be any issues between the parties on the final accounts, my ruling does not preclude the parties from using the tax accounts as evidence in resolving those disputes.
I reject the defendants’ submission that the plaintiffs’ claim for accounts is limited by its pleading to one under s 42 of the Partnership Act 1891. That section provides:
42—Right of outgoing 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 the partner’s estate, then, in the absence of any agreement to the contrary, the outgoing partner or the partner’s estate is entitled, at the option of the partner or the partner’s representatives, to such share of the profits made since the dissolution as the Court may find to be attributable to the use of the partner’s share of the partnership assets, or to interest at the rate of seven per cent per annum on the amount of the partner’s share of the partnership assets.
Section 42 is limited to allowing a partner to elect whether to seek an account of the use made by the other partner of partnership assets after the dissolution or to claim 7 per cent per annum on the value of the share of the assets. The plaintiffs’ right to the accounts at large are a matter of general law and do not require the pleading of any statute.
There are good reasons why the Court should exercise its discretion under 6R 251 to order the accounts and inquiries sought at this stage of the action. Whether the trial Judge will order any further relief to the plaintiff over and above its entitlements on a proper accounting can only be assessed in the light of the final accounts. Thus the taking of the accounts at this stage will probably avoid a substantial adjournment of the trial. The issue of whether the defendant agreed to pay $150,000, or $120,000, for his interest in the partnership assets is probably outside of the partnership accounts, but, even if it is part of the accounts, the alternatives can be easily factored in and the finalisation of the accounts can then be left until after the relevant findings are made at the trial. If either party seeks to falsify or surcharge the accounts and reports which are to be prepared, the Master taking the accounts and inquiries has the option of referring the issues thereby raised to be dealt with at the trial of the action rather than having to hold a separate contested hearing on them after the trial is completed.
Accordingly, I am prepared to now make orders for accounts and inquiries to be taken on the disputed topics. I invite the plaintiff to bring in minutes of order to give effect to these reasons and to deal with how the accounts and inquiries are to be taken.