Houghton v Saha
[2015] NZCA 553
•18 November 2015 at 2.15 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA238/2015 [2015] NZCA 553 |
| BETWEEN | LUKE BRAMWELL HOUGHTON TIMOTHY GERARD ARBUCKLE |
| AND | GOVIND PRASAD SAHA TIMOTHY PETER REARDON NEIL ANTHONY LOWNE FROST JONATHAN ROBERT MACDONALD MYERS RICHARD HUGH MORISON MICHAEL ANTHONY PEAD VISWA PHANI KUMAR PADISETTI |
| Hearing: | 12 August 2015 |
Court: | Miller, Courtney and Clifford JJ |
Counsel: | S A Barker and P J Niven for Appellants |
Judgment: | 18 November 2015 at 2.15 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed in part.
BThe appellants’ summary judgment is granted on those aspects of their counterclaim detailed at [50].
CWe declare that cl 7.1 of the Deed empowers the first respondent to allocate losses as between the partners in his (guided) discretion on a performance basis, in the accounts for the stub period 31 October 2012, guided by the principles set out in sch 1 of the Deed.
____________________________________________________________________
REASONS OF THE COURT
(Given by Clifford J)
Table of Contents
Introduction [1]
Background [4]
The challenged High Court decision [30]
This appeal – as filed and as argued [33]
GAAP non-compliance [46]
The interpretation dispute [52]
Result [61]
Costs [63]
Introduction
This is an appeal by Luke Houghton and Timothy Arbuckle against parts of a decision of Collins J.[1] In that decision Collins J declined two applications by Messrs Houghton and Arbuckle in proceedings brought against them and the second to seventh respondents by the first respondent, Govind Saha, in relation to the affairs of the Saha International Partnership in liquidation (the Partnership). The first was an application for summary judgment made as counterclaim plaintiffs. The second was an application for strike-out made as defendants.
[1]Saha v Reardon [2015] NZHC 638.
Messrs Houghton and Arbuckle, Dr Saha and the second to seventh (other than the fourth) respondents are the current members of the Partnership. The fourth respondent is a former member.
The second to seventh respondents are abiding the decision of the Court.
Background
The Partnership was established in 2001. Dr Saha was its foundation partner. Messrs Houghton and Arbuckle became members of the Partnership on 1 April 2007 and 1 August 2002 respectively.
The Partnership carried on business providing management and financial consultancy services in New Zealand, Australia, Namibia and South Africa. From at least financial year (FY) 2009 onwards,[2] the Partnership’s financial performance deteriorated. That matter was discussed at a meeting of the Partnership’s advisory committee on 24 May 2010. At or following that meeting:
(a)interest on capital was suspended;
(b)partner drawings were suspended;
(c)an independent accountant was engaged to review the financial position of the Partnership; and
(d)the partners engaged in a process of exploring options to save the Partnership as a going concern.
[2]I.e., the financial year ending 31 March 2009.
That outcome was not achieved. Instead it was decided that the major assets of the Partnership were to be sold and the Partnership wound up. One of those assets comprised the Australia and New Zealand consulting business.
Messrs Arbuckle and Houghton worked in that business.
An agreement was reached for that business to be sold to the accounting firm Deloitte. During the negotiation of that transaction, disputes between the partners arose, including as to the treatment in the winding up of partners’ current account deficits.[3] Some explanation is required.
[3]There were also disputes about capital account balances. They need not be referred to in this judgment.
The affairs of the Partnership were governed by a formal deed of partnership entered into in August 2009 but agreed to be operative as from the establishment of the Partnership (the Deed). The Deed provided that:
(a)the Partnership’s annual accounts (profit and loss account balance sheet and cash flow statement) were to be prepared in accordance with the New Zealand Financial Reporting Act 1993, i.e. generally accepted accounting practice (GAAP);
(b)partner remuneration was to be based on partner performance over the medium term; and
(c)Dr Saha, as the foundation partner, was to have extensive powers, including the sole responsibility and discretion for determining the level of remuneration of partners.
Schedule 1 of the Deed set out guidelines for determining the partners’ performance-based remuneration, but essentially the decision was for Dr Saha to make. Any dispute about remuneration, and any other aspect of “the partners’ terms and conditions of service to the Partnership”, was to be referred not to an arbitrator but to a named expert, who would act as such and whose decision would be final and binding.
From FY2006 onwards a practice was adopted of determining income and allocating profits to partners for a given financial year not only on the basis of income and profits in that year, but also on the basis of income and profits anticipated to be derived in subsequent years. Anticipated income and profits were referred to in various internal working documents used for the purpose of calculating and communicating partnership remuneration as “accrued income” and “advances of profits”. At the same time, the partners’ current accounts as recorded in the accounts of the Partnership itself were prepared on a more orthodox basis, and did not reflect that allocation of anticipated income and profits to partners.
As matters transpired, the income and profits recognised in advance in FY2007 to FY2010 did not materialise. It was the significance of that outcome, both in terms of the real results for FYs 2007 to 2010, and the actual position of the Partnership at the start of FY2011, that was discussed at the meeting on 25 May 2010 and that led to the decisions made there.
It is now agreed, including (as we understand) by Dr Saha, that the practice of anticipating income and profits was not in accord with GAAP.[4] But at the time partners — including Messrs Houghton and Arbuckle — made drawings from their current accounts on what was later seen to be overstated income and hence nonexistent partnership profits.[5] If matters were correctly stated on dissolution Messrs Houghton and Arbuckle’s current accounts would be in deficit requiring them to repay the relevant monies to the Partnership. That outcome was resisted by Messrs Houghton and Arbuckle as the deal with Deloitte came to be finalised.
[4]That practice involved the recognition of work in progress (WIP), accrued on projects being undertaken on a contingency basis before the relevant contingency was satisfied, as an asset and related fee revenue as accrued.
[5]There is a dispute as to the extent to which Messrs Houghton and Arbuckle, and other partners, were aware of these matters when drawing down the apparent positive balances in their current accounts. That dispute is not relevant for our purposes.
Disputes relating to the winding up of the Partnership, including the current account dispute, were mediated on 21 and 22 November 2010 by the appellants, Dr Saha, and all of the other respondents save the fourth. Those disputes were settled. That settlement was recorded in writing in a series of 14 settlement principles that the parties to the mediation agreed to implement (the Settlement Principles). As so recorded and relevant, the Settlement Principles provide:
1.Subject to point 5 Accounts 31/3/2010
Accounts wind-up)
After write-off of net balances as per 5 below remaining profit/loss to be divided equally amongst partners.
…
4.Loss – profit allocation as at winding up will be allocated as per Partnership Deed with the appeal right as per clause 8 of the Deed.
5.The net balance of Messrs Tim Arbuckle, Luke Houghton, Kumar Padisetti and Neil Frost shall be deemed zero (regardless of being positive or negative) as at 31 March 2010 and they shall not have a right to appeal to Robert Cross on their current accounts issues up to 31 March 2010.
It was also agreed that Dr Saha would manage the winding up of the Partnership.
Notwithstanding the Settlement Principles the partners were unable to agree on the finalisation of the winding up accounts. By some time in 2014 the accounts of the Partnership as relevant for the preparation of the winding up accounts as at
1 December 2010 comprised:(a)the accounts for the FYs 2007 and 2008, which had been settled and accepted by the Partnership before the Partnership’s financial difficulties and ultimate failure were known;
(b)the accounts for FYs 2009 and 2010, which had been prepared by or at the direction Dr Saha as manager of the winding up; and
(c)what were described as consolidated accounts for the Partnership for FYs ending 31 March 2011, 2012 and 2013, notwithstanding the fact that the Partnership had ceased to trade on 1 December 2010.
All of those accounts were disputed in some way: some for alleged failures to comply with GAAP, and some for alleged failures to properly reflect the Settlement Principles including the direction in Settlement Principle 1 (SP1) that “[a]fter write-off of net balances as per 5 below remaining profit/loss to be divided equally amongst partners”. In light of those disputes, in June 2014 Dr Saha commenced proceedings against Messrs Houghton and Arbuckle and the second to seventh respondents for, amongst other things:
(a)declarations that the accounts prepared and issued by the Partnership for all periods up to and including FY2009 were settled, and final and binding, and that the accounts that had been prepared during the winding up process for FY2010 were likewise final and binding;
(b)directions as to how accounts for any years subsequent to the period ending 31 March 2010 were to be finalised; and
(c)orders requiring the defendants to pay negative balances in their current accounts, as shown in the winding up accounts, and interest thereon to the Partnership.
Messrs Houghton and Arbuckle’s response to that application, a statement of defence and counterclaim filed on 24 August 2014, was vigorous.
They pleaded three affirmative defences. These were:
(a)that the Partnership’s accounts had not been prepared in accordance with the Deed, including GAAP, and that Dr Saha had not conducted the winding up in accordance with the requirements of the Deed and the Settlement Principles;
(b)that Dr Saha was personally liable to pay the defendants equitable compensation of NZ$4,441,316.53; and
(c)that the defendants were not liable to pay the Partnership any portion of any net deficit in their current and capital accounts (presumably as recorded in the winding up accounts) until Dr Saha had met the Partnership’s obligation to third party creditors up to an amount of NZ$700,000.
They counterclaimed against Dr Saha personally and in his capacity as a member of the Partnership and against each of the other members of the Partnership in their capacity as such.
Two causes of action are pleaded against the members of the Partnership in their capacity as such:
(a)in the first, Messrs Houghton and Arbuckle ask for orders that the accounts for the years FY2007 to 2010 be restated (FY2007 to FY2009), or for the accounts for FY2010 to be taken consistently with GAAP and so as to investigate “concerns the partners have with those accounts”; and
(b)in the second, they ask for declarations relating to the application of the Deed to all those accounts and of the Settlement Principles to the accounts for FY2010 and the winding up accounts.
Seven causes of action are pleaded against Dr Saha personally, based on overlapping aspects of the pleaded facts as to the way in which Dr Saha had managed and personally dealt with the Partnership. These are for:
(i)negligence, generally;
(ii)breach of fiduciary duty of good faith, generally;
(iii)breach of fiduciary duty of honesty, generally;
(iv)breach of fiduciary duty of disclosure, generally;
(v)negligence, breach of contract and breach of fiduciary duty, specifically — in respect of the retirement of a former partner;
(vi)breach of contract, specifically — in respect of Dr Saha’s allocation of income to himself for FYs 2008 and 2009; and
(vii)breach of contract and duty of good faith, specifically — in respect of Dr Saha’s obligation under the Settlement Principles to pay third party creditors of the Partnership.
The counterclaim is extensive, running (excluding the affirmative defences) to some 145 pages comprising 291 clauses, and then to a further 16 pages of particulars, comprising eight schedules.
Messrs Houghton and Arbuckle filed summary judgment and strike-out applications at the same time as their statement of defence and counterclaim.
They sought summary judgment on:
(a)the first and parts of the second[6] of their causes of action against the members of the Partnership in their capacity as such; and
(b)their sixth and seventh cause of action against Dr Saha personally, as to liability only; and
(c)their ninth cause of action against Dr Saha personally.
[6]Including:
(a)that under the Deed, and cl 4.4 in particular, Partnership losses were in the ordinary course to be allocated on the basis of the partners’ ratios recorded in sch 9 of the Deed, which reflected shareholdings in the Partnership, in distinction to the performance‑based allocation of Partnership profits as assessed by Dr Saha;
(b)that in terms of SP1 any profits or losses remaining for FY2010, after the “zeroing” of Messrs Arbuckle, Houghton and Frosts’ current (and capital) accounts, were to be shared equally (i.e. not as apportioned by Dr Saha and not (in the case of losses) pro rata partners’ ratios); and
(c)that any profits or losses on the winding-up were to be distributed as expressly provided by cl 20.1 of the Deed, in proportion to partners’ shareholdings (as opposed to being allocated by Dr Saha as he had purported to do in the accounts he had prepared for the “FYs” 2011, 2012 and 2013).
They sought strike-out of that part of Dr Saha’s claim that required interest to be paid to the Partnership with respect to overdrawn current/capital accounts as at 31 March 2012.
Various affidavits were filed in support of those applications. Relevantly for our purposes, these included an affidavit from a Steven Shirtliff, a Deloitte partner from Sydney. Mr Shirtliff attested to a variety of ways in which the accounts in respect of which the Partnership and Dr Saha sought declarations did not comply with GAAP. Mr Shirtliff summarised the main areas of GAAP compliance he had been instructed to analyse as follows:
(a)Revenue and asset recognition of various items in [the Partnership]’s accounts, principally related to unbilled Work in Progress (“WIP”);
(b)Consolidation of controlled entities;
(c)Disclosure of changes in accounting policies, changes in accounting estimates and errors;
(d)The application of the overall requirements for financial statements including the accrual basis of accounting, income/expense cutoff and other overriding requirements for financial statements; and
(e)Recognition of expenses and liabilities for employee benefits.
Mr Shirtliff prepared spreadsheets describing and demonstrating the adjustments required to bring those accounts into compliance with GAAP.
Justice Collins heard Messrs Houghton and Arbuckle’s applications on 4 and 5 March and gave his decision on 1 April 2015.
The challenged High Court decision
Justice Collins’ decision can be summarised succinctly.
The Judge first summarised the well-established principles relating to summary judgment and strike-out. He then carefully analysed Messrs Houghton and Arbuckle’s pleadings and the affidavit evidence. On the basis of that analysis, the Judge identified a range of factual disputes between Messrs Houghton and Arbuckle, and Dr Saha and the other respondents. He concluded that the existence of those disputes meant that he could not be satisfied that:
(a)as regards the summary judgment applications and the relevant legal principles, there was no defence to the relevant claims; and
(b)as regards the strike-out application and the relevant legal principles, the relevant claim was clearly untenable.
The Judge concluded that, on the basis of the materials before him, all claims involved factual disputes that could only be resolved at trial. He declined strike-out and summary judgment accordingly.
This appeal — as filed and as argued
In their notice of appeal against that decision, Messrs Houghton and Arbuckle considerably narrowed their sights. They only challenged the Judge’s decision to the extent that, as regards the claims against Dr Saha and the other respondents in their capacity as members of the Partnership, he failed to order that the accounts for the FYs 2007–2010 be reopened and/or taken to bring them into compliance with GAAP (and to investigate the areas of dispute the partners had) and to make some,[7] but not all, of the declarations sought as to the way in which the winding up should be conducted and the winding up accounts prepared.
[7]That is those recorded above at n 6.
Messrs Houghton and Arbuckle did not appeal either of the Judge’s decisions not to enter summary judgment on the sixth, seventh and ninth causes of action against Dr Saha personally and not to strike out the claim for interest on capital.
Matters were further refined in argument before us. It became apparent that the real dispute between the parties was not as to whether the relevant accounts had in fact been prepared in accordance with GAAP, though it had been expressed that way. Dr Saha appeared to accept at least to some extent they had not been. Rather the dispute was as to the relevance, in the context of the winding up, of the variations from GAAP to the winding up. And more generally as to whether Dr Saha had complied with the Settlement Principles, especially SP1, in preparing the disputed accounts. Messrs Houghton and Arbuckle are of the view that Settlement Principle 5 (SP5) (current account zeroing as at 31 March 2010) means that the negative current account balances that would result from such a restatement are not relevant on winding up as between the partners.
Dr Saha is (we think) now of the view that the FY2010 accounts are to be prepared on the basis of that zeroing. But, as we understand it, he maintains there is to be an adjustment to the winding up accounts to take account as between the partners of those adjustments. That is: notwithstanding the agreement to “zero” current accounts as at the end of FY2010, the accounts for the Partnership on winding up are to be prepared on the basis of the now realised actual results, and not the erroneous anticipated results. It would appear that Dr Saha therefore contends that the winding up accounts should be prepared on the basis of opening entries that reflect correctly stated current and capital account balances, notwithstanding the zeroing of accounts as at 31 March 2010. The parties agreed before us that that was the central issue in the substantive dispute between them.
But that dispute, if we have understood it correctly, was not the subject of the summary judgment application. On that basis, it was accepted by counsel that declarations relating to the reopening, restatement and/or statement of the accounts for FY2007–FY2010 might not, after all, be required. They might not be required to the extent that Dr Saha accepted the adjustments that Mr Shirtliff has identified reflect GAAP non-compliance. At the end of the hearing counsel were left to determine the extent of any such agreement and to file a memorandum with the Court advising the outcome of that process.
Before us Mr Harley, counsel for Dr Saha, also confirmed that his client agreed that the provisions in the Deed that gave him the discretionary power to determine profit allocations did not apply as regards the preparation of the accounts for FY2010. Rather, and in terms of the Settlement Principles, after zeroing, losses for that year would be shared equally.
The only issue that was definitively left for us at the close of the hearing was one that related to the accounts for the “stub” period, 1 April 2010 – 31 November 2010, that were recognised in the course of the hearing as needing to be prepared to reflect the trading of the Partnership during that final period. That issue was whether Dr Saha, pursuant to his power to allocate profits, also had an equivalent power under cl 7.1 of the Deed to allocate losses as between the partners in his (guided) discretion. Mr Barker and Mr Harley agreed that it would be of assistance to the parties if we were to determine that point of interpretation. Mr Harley took that position responsibly and notwithstanding the fact that he otherwise supported the conclusions that Collins J had reached.
The parties also acknowledged that, if we find Dr Saha does have that power, it will be a matter for the substantive hearing of the counterclaim to determine how Dr Saha was to exercise it and whether he did so properly when he prepared the stub period accounts. It was accepted that he, as manager of the wind up, was to prepare those accounts.
As matters transpired full agreement was unfortunately not reached on the extent of GAAP variations and the adjustments to disputed accounts required to bring them into line with GAAP. Rather, a memorandum of 14 September advised that, with reference to Annexure B to the appellant’s written submissions (which recorded some ten instances of non-compliance with GAAP) that agreement had been reached on three of those, namely Nos 2, 3 and 6, being:
(a)the failure to include as an expense on the income statement for FY2007 the directors’ bonuses for Messrs Myers and Houghton (No 2); and
(b)the failure to account for accumulative leave liability in FY2007 and FY2008 (Nos 3 and 6).[8]
[8]In Annexure B each instance of alleged non-compliance is titled “Ser 1” (etc.). We are not familiar with the term “Ser”. We use “No” instead.
As regards those errors, that memorandum recorded:
5. The parties to this memorandum record that:
(a)they agree that the errors recorded below in paragraph 6 (Errors) are errors in the partnership accounts;
(b)the partnership accounts need to be corrected in respect of the Errors;
(c)such correction should be effected in accordance with generally accepted accounting principles as required under the partnership deed; and
(d)each Error is to be corrected such that the consequences of the Error are shared by partners:
(i)who were partners in the financial year in which the Error occurred;
(ii)in the proportions required by the partnership Deed.
The memorandum went on to state:
All other matters before the Court remain at issue and the parties to this memorandum respectfully request that the Court issue judgment in respect of those matters at issue.
On that basis, we understand we are being asked to rule on the appellants’ appeal against the decision of Collins J declining to enter summary judgment as regards:
(a)the instances of GAAP non-compliance recorded in categories 1, 4, 5 and 7–10 of Annexure B; and
(b)the question of whether Dr Saha had the power, under cl 7.1 of the Deed, to allocate losses for the stub period 1 April 2010–31 November 2010.
It is to those issues that we now turn. We reserve leave to apply if the understanding we record at (a) is not correct. Having regard in particular to what we say at [63] below, counsel should not take this as any kind of encouragement.
GAAP non-compliance
The appellants seek summary judgment as regards the fact of these instances of GAAP non-compliance mainly on the basis that Dr Saha admitted the various non‑compliances in his statement of defence to their counterclaim.
Annexure B of the appellants’ written submissions identified ten categories of alleged GAAP non-compliance. It set out each allegation from the counterclaim alongside what it said were Dr Saha’s relevant admissions. We have carried out the same exercise ourselves and include it in the appendix. The appellants’ analysis was generally correct, save as regards Nos 7 and 9.
As to Nos 7 and 9, Dr Saha’s denial in respect of variations precludes the entry of summary judgment on the terms sought by the appellants.
Dr Saha’s denial in respect of paragraphs 66 and 67 is of a different nature. At paragraph 63 the counterclaim pleads various variations from GAAP in the accounts for the years FY2007–FY2010 including recognition of WIP as revenue. The terms of paragraphs 66 and 67 of the counterclaim are that Dr Saha was personally responsible for that variation. As the appellants submit, the denial pleaded to paragraphs 66 and 67 reflects Dr Saha’s more general assertion that he did not prepare relevant disputed accounts.
We therefore enter summary judgment to the effect that the disputed accounts (referred to at [16] above) were, to the extent recorded in Nos 1, 4, 5, 8 and 10 in the appendix to this judgment, not prepared in accordance with GAAP. We express no view on the question whether Dr Saha personally prepared (or knowingly caused others to prepare) the non-compliant accounts. That remains for resolution, to the extent it is relevant, at the substantive hearing.
We hesitate to go further. It may be that, on the basis of that order, the parties do agree with respect to those errors in the same terms that they recorded at [5] of their joint memorandum of 14 September 2015. This matter is, however, sufficiently complicated for us not to be sure of that point.
The interpretation dispute
As relevant, the Deed provides:
…
4.4Liability of Partners: In the event of any liabilities arising from the Business of the Partnership, the liability will be shared between the Partners in the ratios specified in Schedule 9 at the time the circumstances occur that give rise to the liability (such calculation giving a figure referred to in this clause as a Partners “Initial Liability”) PROVIDED THAT:
(a)For a Partner who has been a Partner for less than five years but more than three years, their liability will be calculated by multiplying their Initial Liability by their number of years as a Partner and dividing such figure by five;
(b)For a Partner who has been a Partner for less than three years, their liability will be decided by the Foundation Partner taking into account the length of time spent as a Partner provided that the total liability of such Partner will not be greater than the amount representing their Initial Liability;
(c)Where there is excess liability to be met by the Partnership following deductions pursuant to (a) and (b) above, this excess liability will be payable by the Partners who have been Partners for more than five years (in addition to their Initial Liability) with such excess liability divided amongst those Partners to the applicable ratios specified in Schedule 9 (excluding those Partners who have been Partners for less than five years).
…
7REMUNERATION OF PARTNERS
7.1Performance based: It is agreed that the remuneration of Partners will be determined on a performance basis, although each Partner will have a pre-agreed base remuneration PROVIDED THAT such base remuneration is not guaranteed and is dependent on the financial performance of the Business. Such remuneration shall be determined in accordance with the guidelines described in Schedule 1.
7.2Determining Remuneration: The foundation Partner will have the sole responsibility and discretion for determining the level of remuneration of the Partners in accordance with the guidelines described in Schedule 1.
7.3Confidentiality: Each Partner’s level of remuneration will remain confidential between the Partner concerned and the Foundation Partner. Each Partner, except the Foundation Partner, acknowledges and accepts that other Partner’s levels of remuneration will not be disclosed to them.
…
20WINDING UP
20.1The Partners may by Special Resolution resolve to wind up the Partnership. The process for such winding up shall be:
(a)The liquidation of any assets of the Partnership;
(b)Satisfaction of any debts of the Partnership;
(c)The distribution of the net assets or net liabilities (as the case may be) to or from the Partners in proportion to each Partners respective shareholding in the Company.
…
The interpretation argued for by Messrs Houghton and Arbuckle is that the foundation partner’s discretion to determine remuneration and hence allocate profits does not extend to the allocation of losses in a year in which the Partnership does not make a profit at all. The argument was that cl 4.4 (“Liability of Partners”) governed any allocation of losses in that circumstance.
For Dr Saha, the argument was that implicit within his power to determine remuneration, and hence allocate profits, on a performance basis was a power to do likewise where the overall result of the Partnership in any given financial year was a loss. The liabilities referred to in cl 4.4 were external liabilities of the Partnership to creditors, not the “losses” in any one year that arose from the application of GAAP.
In our view a correlative of the foundation partner’s discretionary power to allocate profits as between partners to recognise performance would be a power to allocate losses on a similar basis. We reach that view by reference to the context of the Deed as a whole and, in particular, the agreement that partner remuneration was to reward medium-term performance. The point can be expressed simply. Take a year in which the part of the Partnership in which Partner A works has performed well, exceeded budget and, on a stand-alone basis, traded at a profit. In that same year the part of the Partnership in which Partner B works has performed badly, not met budget and traded at a loss. For such a year performance-based allocation of losses (that is more to Partner B than, if any, to Partner A), is a logical application of the “remuneration based on performance” principle. The effect would be that Partner B would have to perform over the medium-term to earn profits to restore his current account to a positive balance before he would be entitled (all other things being equal) to draw profits from the Partnership.
Interpreting the Deed on that basis would accord with general principles of partnership law. Lindley & Banks on Partnership put the position as follows:[9]
Sharing of losses: the general presumption
It is self evident from the terms of section 24(1) that, in the absence of any agreement to the contrary, each partner is entitled to an equal share of the firm’s profits and must bear an equal share of the firm’s losses. However, where profits are divisible in some other proportions, the normal inference is that losses are to be divided in those proportions, unless there is some express or implied agreement which requires them to be divided in some other way. Accordingly, where one partner is compelled to pay more than his share of a partnership debt or incurs a personal liability in the course of carrying on the firm’s business, he will in general be entitled to a contribution from his co‑partners to the extent necessary to reflect those express or implied loss‑sharing ratios.
(footnotes omitted)
[9]Roderick Banks Lindley and Banks on Partnership (19th ed, Sweet and Maxwell, London, 2010) at [20-5]. Section 24(1) as referred to is the equivalent of s 27(1) of the Partnership Act 1908, which provides:
27 Rules as to interests and duties of partners subject to special agreement
The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement (express or implied) between the partners, by the following rules:
(a)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:
…
Whilst accepting that general principle, Messrs Houghton and Arbuckle argue that cl 4.4 of the Deed is an express agreement to the contrary. Their argument was that, in effect, cl 4.4 explicitly required losses to be shared equally, and not in the same proportion as profits. Their argument went along the following lines:
(a)Whilst partners were jointly and severally liable with their other partners for the debts and obligations of the Partnership incurred while he or she was a partner, as between themselves they could agree the basis upon which debts or obligations and losses could be shared. Thus partners might decide that a particular liability was not to be met with Partnership funds. In that case partners would be liable to contribute to meet that liability in the proportions agreed. There were, they argued, any number of reasons why partners might decide that particular liabilities were to be met directly by partners rather than by the application of Partnership funds.
(b)It was important for a Partnership agreement to address specifically the basis upon which each partner would share in the liabilities and losses of the Partnership. They pointed to an observation in Lindley & Banks that a Court may have no alternative but to hold partners liable in equal shares in a situation where agreement is recorded for profits to be shared on an unequal basis if the Court was not prepared to infer that losses should be borne in the same way as profits.[10]
(c)Messrs Houghton and Arbuckle then interpreted cl 4.4 as determining that partners were to share equally in losses of the Partnership.
[10]Banks, above n 9, at [10-85].
As Mr Ahern for the Partnership and Dr Saha argued, that is a strained interpretation to give to cl 4.4. Losses are not the same thing as liabilities. In any trading period, losses are determined once liabilities have been accounted for. Losses may be met by capital, retained earnings or borrowings. In our view, the argument advanced for Messrs Houghton and Arbuckle confused the two concepts. In particular, whether a loss requires contribution of funds to the Partnership and in what proportions will depend on the Partnership’s financial structure and the agreements between the partners.
We conclude that, in the accounts for the stub period 31 November 2010, Dr Saha may allocate Partnership losses on a performance basis, guided by the principles set out in sch 1 of the Deed.
In doing so, we note that we express no view on the question of how any such allocation might properly be made by the foundation partner.
Result
The appeal is allowed in part.
We grant the appellants’ summary judgment on those aspects of their counterclaim detailed at [50]. We conclude that Dr Saha may allocate partnership losses on a performance basis, in the accounts for the stub period 31 November 2010, guided by the principles set out in sch 1 of the Deed.
Costs
Ultimately, we have been asked to enter summary judgment on matters which, on the pleadings before us, Dr Saha has admitted to be technical errors. But Dr Saha continues to dispute the significance of those technical errors for the winding up of the Partnership. So it is not clear to us what the appellants have gained from this summary judgment. We would have thought it may have been sufficient for the appellants simply to record, as between the parties, the admitted errors so that at trial those matters would be regarded as accepted. The issue would then be the significance of the variations for the Partnership winding up as to be effected in terms of the Settlement Principles. We also have resolved a question of interpretation by consent. In these circumstances, our view is that costs should lie where they fall.
Solicitors:
Buddle Findlay, Wellington for Appellants
Morrison Kent, Auckland for Respondents
APPENDIX
| Pleading | Admission |
| No 1: FY2007 — Non-consolidation of South African loss in breach of GAAP (NZ IAS 27) | |
| Statement of Counterclaim (SoCC) at [33] (CoA1 47) “33. SIP had effective control of SIL, SA Pty Ltd, SISAP, and SIIP and the financial accounts of SIL, SA Pty Ltd, SISAP, and SIIP were required under GAAP (New Zealand International Accounting Standard (“NZ IAS”) 27) to be consolidated with the SIP Accounts.” | Statement of Defence (SoD) at [12] (CoA1 166) “12. He admits paragraph 33.” |
| SoCC at [59]–[60](b) (CoA1 56) “59. The plaintiffs repeat paragraph 34(h) and say that this required the SIP Accounts, amongst other things, to be prepared in accordance with GAAP in New Zealand. 60. GAAP required, amongst other things: | SoD at [29] (CoA1 171–172) “He admits generally paragraph 59, 60 …and says further: …” He goes on to raise affirmative defences.[11] |
| SoCC at [61] (CoA1 57) “61. The following were controlled entities of SIP for the purposes of NZIAS 18: (a) the Australian and Namibian branches of SIP; (b) SA Pty Ltd; (c) SISAP; and (d) SIL, such that the SIP accounts had to consolidate the accounts for all of these entities in order to comply with GAAP and the Deed.” | SoD at [29] (CoA1 171–172) “He admits generally paragraph … 61 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [63](c) (CoA1 57) “63. The SIP Accounts for FY2007–FY2010 have not been prepared in accordance with GAAP because, inter alia: | SoD at [29] (CoA1 171–172) “29. He admits … paragraph 63”. |
| Schedule 1 to the SoCC at [2] (CoA1 137). | |
| No 4: FY2008 — Recognition of WIP (HRL and ERM) as revenue in breach of GAAP (NZ IAS 18) | |
| SoCC at [59]–[60](c) (CoA1 56) “59. The plaintiffs repeat paragraph 34(h) and say that this required the SIP Accounts, amongst other things, to be prepared in accordance with GAAP in New Zealand. 60. GAAP required, amongst other things: | SoD at [29] (CoA1 171–172) “He admits generally paragraph 59, 60 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [63](a) (CoA1 57) “63. The SIP Accounts for FY2007–FY2010 have not been prepared in accordance with GAAP because, inter alia: | SoD at [29]–[30] (CoA1 171–172) “He … admits paragraph 63”. “He denies paragraphs 66 and 67.”[12] |
| Schedule 1 to the SoCC at [7] (CoA1 137). | |
| No 5: FY2008 — Non-consolidation of South African loss in breach of GAAP (NZ IAS 27) | |
| SoCC at [33] (CoA1 47) “33. SIP had effective control of SIL, SA Pty Ltd, SISAP, and SIIP and the financial accounts of SIL, SA Pty Ltd, SISAP, and SIIP were required under GAAP (New Zealand International Accounting Standard (“NZ IAS”) 27) to be consolidated with the SIP Accounts.” | SoD at [12] (CoA1 166) “12. He admits paragraph 33.” |
| SoCC at [59]–[60](b) (CoA1 56) “59. The plaintiffs repeat paragraph 34(h) and say that this required the SIP Accounts, amongst other things, to be prepared in accordance with GAAP in New Zealand. 60. GAAP required, amongst other things: | SoD at [29] (CoA1 171–172) “He admits generally paragraph 59, 60 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [61] (CoA1 57) “61. The following were controlled entities of SIP for the purposes of NZIAS 18: (a) the Australian and Namibian branches of SIP; (b) SA Pty Ltd; (c) SISAP; and (d) SIL, such that the SIP accounts had to consolidate the accounts for all of these entities in order to comply with GAAP and the Deed.” | SoD at [29] (CoA1 171–172) “He admits generally paragraph … 61 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [63](c) (CoA1 57) “63. The SIP Accounts for FY2007–FY2010 have not been prepared in accordance with GAAP because, inter alia: | SoD at [29] (CoA1 171–172) “29. He admits … paragraph 63”. |
| Schedule 1 to the SoCC at [6] (CoA1 137). | |
| No 7: FY2008 — Failure to recognise all of the expenses falling within the reporting period (expenses shifted into FY2009) in breach of GAAP (NZ IAS 1) | |
| SoCC at [234](d) (CoA1 108) “234. In addition to the matters pleaded in 229–232, the integrity of the SIP Accounts is in question, because: | Denied in SoD at [138] (CoA1 186) “He denies paragraphs 230 – 234 inclusive.” |
| Schedule 1 to the SoCC at [5] (CoA1 137). | |
| No 8: FY2009 — Recognition of WIP (Bass Link) as revenue in breach of GAAP (NZ IAS 18) | |
| SoCC at [59]–[60](c) (CoA1 56) “59. The plaintiffs repeat paragraph 34(h) and say that this required the SIP Accounts, amongst other things, to be prepared in accordance with GAAP in New Zealand. 60. GAAP required, amongst other things: | SoD at [29] (CoA1 171–172) “He admits generally paragraph 59, 60 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [63](a) (CoA1 57) “63. The SIP Accounts for FY2007–FY2010 have not been prepared in accordance with GAAP because, inter alia: | SoD at [29]–[30] (CoA1 171–172) “He … admits paragraph 63”. “He denies paragraphs 66 and 67.”[13] |
| Schedule 1 to the SoCC at [7] (CoA1 137). | |
| No 9: FY2009 — Failure to recognise all of the expenses falling within the reporting period (expenses shifted from FY2009) in breach of GAAP (NZ IAS 1) | |
| SoCC at [234](d) (CoA1 108) “234. In addition to the matters pleaded in 229–232, the integrity of the SIP Accounts is in question, because: | Denied in SoD at [138] (CoA1 186) “He denies paragraphs 230 – 234 inclusive.” |
| No 10: FY2010 — Recognition of amounts (Bass Link, Blue Energy and Kudu) as revenue in breach of GAAP (NZ IAS 18). | |
| SoCC at [59]–[60](c) (CoA1 56) “59. The plaintiffs repeat paragraph 34(h) and say that this required the SIP Accounts, amongst other things, to be prepared in accordance with GAAP in New Zealand. 60. GAAP required, amongst other things: | SoD at [29] (CoA1 171–172) “He admits generally paragraph 59, 60 … and says further: …” He goes on to raise affirmative defences. |
| SoCC at [63](a) (CoA1 57) “63. The SIP Accounts for FY2007–FY2010 have not been prepared in accordance with GAAP because, inter alia: | SoD at [29]–[30] (CoA1 171–172) “He … admits paragraph 63”. “He denies paragraphs 66 and 67.”[14] |
[11]Here, and elsewhere where noted in this table, those affirmative defences reflect broader aspects of the dispute between the appellants, Dr Saha and the second to seventh respondents, which may be summarised by the proposition that although there may have been variations from GAAP in the disputed accounts, those variations are ― for a variety of reasons ― not relevant to the resolution of the substantive dispute between them.
[12]See explanation above at [49].
[13]See explanation above at [49].
[14]See explanation above at [49].