Moses v Stark

[2023] NZHC 1955

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2022-419-353

[2023] NZHC 1955

UNDER

section 73 of the Partnership Law Act 2019

IN THE MATTER

of the GJ & EM Stark Partnership

BETWEEN

JULIET ANNA MOSES

Plaintiff

AND

EILEEN MARY STARK

First Defendant

AND

KEITH RICHARD STARK

Second Defendant

Hearing:	24 July 2023 (via AVL)
Counsel:	J W A Johnson and S T Dymond for Plaintiff No appearance for the Defendants
Judgment:	25 July 2023
Reissued:	31 July 2023

JUDGMENT OF ISAC J

[Dissolution of partnership]

Introduction and the issues

[1]                 In 1965, George and Eileen Stark established the GJ & EM Stark Partnership as a vehicle for operating a farm business on their property at Ohinewai. George passed away in 2020, and Eileen is sadly no longer capable of managing her own affairs. Their interests in the partnership are now represented respectively by Juliet Moses, the executor and trustee of George’s estate, and Keith Stark, who acts pursuant to a power

MOSES v STARK [2023] NZHC 1955 [25 July 2023]

of attorney in relation to his mother Eileen’s property. Keith has also taken over the management of the partnership farm.1

[2]                 The relationship between the partnership’s representatives is dysfunctional, resulting in a state of deadlock and impeding the smooth running of partnership affairs. The partnership has accrued significant outstanding liabilities, and the farm has fallen into disrepair, requiring maintenance. In addition, the deadlock has left George’s estate unable to realise and administer its share of the partnership assets.

[3]                 Concerns about Keith’s management of the partnership’s assets and finances, and further delay in the administration of George’s estate, led Ms Moses to apply successfully  for  the  appointment  of   interim  receivers   to   the   partnership   in 20 April 2023.2

[4]                 In this proceeding Ms Moses seeks a declaration that the partnership is dissolved, and orders appointing permanent receivers over the partnership’s assets to implement and give effect to the dissolution.

[5]The key issues for determination are:

(a)whether the partnership has been dissolved; and

(b)whether the Court should appoint permanent receivers to the partnership.

[6]                 The defendants have taken no material steps to defend the proceeding.3 Accordingly, the hearing was conducted by way of formal proof.

1      For ease of reference, in this judgment I will refer to members of the Stark family by their first names. I mean no disrespect in doing so.

2      Moses v Stark [2023] NZHC 844.

3      While Keith attended a teleconference with Associate Judge Brittain on 17 March 2023, he failed to comply with the Court’s subsequent direction to file and serve a statement of defence. Keith also did not file any opposition to the plaintiff’s application for the appointment for interim receivers, and did not attend the hearing of that application.

Background

The partnership

[7]                 George and Eileen formed the partnership by an agreement of 12 April 1965. They farmed their property at Tahuna Road, Ohinewai, as a dairy farm at first before converting to a grazing operation in later years.

[8]The partnership’s principal asset is its farm on Tahuna Road. It also owns:

(a)a homestead on Rutherford Road, Ohinewai (although that may be subject to a claim by Eileen that this is her separate property);

(b)significant loans to several related parties, including Keith, Keith’s former wife Linda Stark, and the farming entity that they jointly own, Keilin Farms Ltd (Keilin) (although these debts are apparently disputed by Keith);

(c)43.74 per cent of the shares in Waitotara Farms Ltd (Waitotara). The balance of the shares in Waitotara are held by Keilin and Keith and Linda Stark personally;

(d)Fonterra shares; and

(e)funds in a bank account of approximately $500,000.

[9]                 Following George’s death, Keilin has managed the partnership farm, together with an adjacent farm owned by Waitotara. Ms Moses understands that Keilin is supposedly leasing the Waitotara farm, but is not aware of any current lease agreement.

George’s estate

[10]              George passed away on 13 July 2020. Probate was granted on 13 October 2020 to the executors named in George’s will; his wife, Eileen, and three of their children, Keith, Steven and Rosanne. However, the executors were unable to act unanimously and, by a deed of 2 June 2021, appointed Ms Moses as independent executor.

[11]In summary, George’s will:

(a)made certain conditional bequests;

(b)provided Eileen with a life interest in the estate’s assets;

(c)divided the residue of the estate on Eileen’s death between their five children; and

(d)gave a direction to the executors and trustees to retain the farm property owned by George and the shares in Waitotara for five years after his death, to enable Keith to continue utilising the land to fulfil the terms of a share milking contract.4

Eileen’s incapacity

[12]              On 28 November 2021, Dr Mary Gillooly assessed Eileen as lacking competence to manage her own affairs in relation to property and personal care and welfare. This had the effect of triggering a power of attorney Eileen had granted Keith in relation to her property affairs. Keith has represented his mother’s interests, including her interests in the partnership, since then.

Deadlock in the partnership and the appointment of interim receivers

[13]              Ms Moses has provided the Court with affidavits of 15 November 2022 and 20 July 2023. Her evidence is that the partnership is in a state of deadlock. She says Keith has generally been uncooperative, noncommunicative and obstructive towards the estate, which has made it virtually impossible to progress the administration of the estate.5

[14]              In addition, Ms Moses has identified a range of concerns relating to Keith’s management of partnership property, including:

4      However, as Mr Johnson for the plaintiff submitted, the farm was converted from a dairy operation to beef and, accordingly, there is no longer a sharemilking arrangement as contemplated by this provision of George’s will.

5      For instance, Keith refused to allow Ms Moses access to the partnership bank accounts. This was only remedied following the appointment of interim receivers.

(a)significant outstanding debts apparently owed to the partnership by Keith, Linda and Keilin;

(b)Keith’s management of the partnership farm and finances. A farm management consultant’s report of June 2022 described the farming operation as “poorly maintained and neglected” such that significant time and money would be required to bring it to an acceptable standard;

(c)potential intermingling of the financial affairs of the partnership, Keith and Waitotara; and

(d)significant outstanding liabilities owed by the partnership, such as income tax and GST returns. The partnership has not filed GST returns since October 2021. The interim receivers have been unable to make any real progress in settling the partnership’s tax affairs since their appointment largely because their ability to do so depends on Keith providing details of partnership expenses he has apparently met from Eileen’s personal funds, which he has not done.

[15]              In November 2022, after attempts to resolve the impasse proved fruitless,   Ms Moses filed these proceedings seeking the dissolution of the partnership and the appointment of receivers.

[16]              Separately, the estate has also brought parallel proceedings in the Family Court seeking the revocation of Keith’s power of attorney over his mother’s property affairs, and his replacement with an independent property manager. That application is scheduled to be heard on 7 August 2023.

[17]              In a decision of 7 March 2023, Associate Judge Sussock declined to appoint interim receivers to the partnership at that stage.6 Her Honour’s reasons included that if Keith is replaced as Eileen’s attorney in the Family Court proceedings then “many of the difficulties may be able to be resolved without the appointment of an interim

6      Moses v Stark [2023] NZHC 427.

receiver and the inevitable costs associated with that”.7 The Judge also observed that there did not appear to be any imminent threat to the partnership’s assets.8

[18]              Shortly thereafter, Ms Moses made a renewed application for the appointment of interim receivers. In a judgment of 20 April 2023, Associate Judge Brittain found:9

There is presently a deadlock in the management of the partnership. It is inappropriate for Keith Stark to continue to  manage  the  partnership  on Mrs Stark’s behalf, in a situation where he has a conflict between the mutual interests of his mother and the partnership, and his own personal interests and the interests of Waitotara Farms Ltd.

[19]              The Judge granted the application, and appointed interim receivers to manage the partnership’s ongoing business and recover loans owed to it by third parties, but not sell any real or tangible assets (except in the ordinary course of business).10    His Honour was satisfied that the appointment was necessary due to:11

(a)the length of the likely delay before the Family Court resolves who will manage Mrs Stark’s affairs;

(b)the farm management consultant’s view that the partnership’s farm is poorly maintained and neglected, requiring a significant investment of time and money to bring it up to an acceptable standard;

(c)the current potential for the intermingling of the financial affairs of the partnership, Keith Stark and Waitotara Farms Limited, which may prove difficult to unravel;

(d)the risk that Keith Stark is operating the partnership or utilising the partnership’s assets for his own benefit; and

(e)to ensure that partnership income is being used to serve the needs of Mrs Stark.

The present state of affairs

[20]              Ms Moses’s evidence is that there has been no material change in the situation since the interim receivers’ appointment. While the receivers now have oversight of Keith’s management of the farm and the partnership’s operations, and access to the

7      At [44(a)].

8      At [44(c) and (h)].

9      Moses v Stark, above n 2, at [32].

10     At [35]–[36].

11 At [34].

partnership’s bank account, Keith remains uncooperative with the receivers and the estate.

[21]              Ms Moses says that dissolution of the partnership and appointment of permanent receivers is necessary to:

(a)call in the significant debts owed to the partnership by related parties;

(b)carry out overdue maintenance and remedial work on the farm;

(c)assess and pay the partnership’s significant outstanding liabilities; and

(d)finally gather in and administer George’s estate.

The application

[22]              Mr Johnson for Ms Moses advances three grounds for dissolution of the partnership:

(a)First, the partnership was formally dissolved upon George’s death by operation of s 69 of the Partnership Law Act 2019. While the partnership technically subsists for the purpose of undertaking the winding-up process,12 the applicant submits that it is exceptionally unlikely that the parties will be able to undertake the wind-up process themselves given the state of affairs between Keith and the estate. Accordingly, judicial intervention is required.

(b)Second, dissolution of the partnership is warranted under s 72(a) of the Partnership Law Act on the basis that Eileen is mentally impaired and wholly lacks the competence to manage her own affairs.

(c)Third, the partnership is in a state of deadlock, and an independent receiver is necessary to facilitate the winding-up process.

12     Webb Laws of New Zealand: Partnership and Joint Ventures (online ed) at [187]; and s 75 of the Partnership Law Act 2019.

Legal principles for formal proof

[23]              The procedure for a formal proof hearing is governed by r 15.9 of the High Court Rules 2016. The rule requires the plaintiff to file affidavit evidence establishing each cause of action to the Judge’s satisfaction.13 The level at which the Judge is required to satisfy themselves regarding the plaintiff’s evidence is “much the same as it would be if the proceeding had gone to trial”.14

Consideration

Dissolution of the partnership

[24]Section 69(1) of the Partnership Law Act 2019 provides:

A partnership is dissolved with respect to all the partners by the death or bankruptcy of any partner.

[25]              Therefore, as Associate Judge Brittain correctly observed, “the partnership dissolved by operation of law on the death of George Stark on 13 July 2020”.15

[26]              So, where does that leave the parties? As Mr Johnson pointed out, dissolution is not quite the end of the story.

[27]              Section 75 of the Partnership Law Act provides that, notwithstanding dissolution, the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue to the extent that is necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. The partners cannot, therefore, embark on any new business.

[28]              The learned authors of The Laws of New Zealand summarise the position in this way:16

13     High Court Rules 2016, r 15.9(4).

14     Ferreira v Stockinger [2015] NZHC 2916 at [35].

15     Moses v Stark, above n 2, at [30].

16     Webb, above n 12, at [187].

… after dissolution, the partnership subsists merely for the purpose of completing pending transactions, winding up the business, and adjusting the rights of the partners.

[29]              In Bignell v Hayes, a partnership had been dissolved by notice. Woolford J observed that the partners have limited rights after dissolution, and “can only carry on business for the purpose of winding-up the affairs of the partnership”.17

[30]              It follows that Keith and Ms Moses, as the legal representatives of the partners, only retain the limited authority, rights and obligations of the partners so far as that is necessary to wind-up the affairs of partnership. But as the evidence reveals, they are incapable of exercising those powers due to the dysfunction that exists. Given that, and to ensure the status of the partnership and the authority of the partners to conduct its business is beyond doubt, I am satisfied it is appropriate to make a declaration that the partnership was dissolved upon George’s death on 13 July 2020, in keeping with s 69(1) of the Act.

[31]              It is accordingly strictly unnecessary to consider the second ground for dissolution based on Eileen’s incapacity. However, I note that I would have found this ground was made out. Given Dr Gilhooly’s assessment of Eileen’s capacity, that Eileen is wholly lacking the competence to manage her own affairs in terms of s 72(a), an order for dissolution on this basis would be warranted. That is because a partnership is an inherently personal business relationship between two or more people. Mental incapacity rendering one partner incapable of continuing the joint enterprise is accordingly a quintessential reason for dissolution.

[32]              The real question, to which I now turn, is whether it is appropriate to grant the application for the appointment of permanent receivers.

Should the interim receivership be made permanent?

[33]              The power to appoint receivers arises from the High Court’s inherent equitable jurisdiction.18 As Associate Judge Brittain noted in the present case, a distinction has

17     Bignell v Hayes HC Rotorua CIV-2010-463-838 at [24].

18     Rea v Omana Ranch Ltd [2012] NZHC 2639, [2013] 1 NZLR 587 at [7]–[11]; Vuletic v Vuletic

HC Auckland CP1328/88, 28 July 1988; Receiverships Act 1993, s 2(1) definition of “receiver”;

been drawn between the appointment of a receiver or manager in situations where the partnership continues, and appointment in situations where the partnership has been, or is about to be, dissolved.19 In the latter situation, appointment of a receiver is prima facie a matter of course.20 In the former, a more stringent approach to the exercise of the Court’s discretion is warranted, appointment being an order of last resort.21

[34]              The present case is very firmly in the latter category, where prima facie the appointment should follow as a matter of course. While the Associate Judge was satisfied it was appropriate to appoint interim receivers, it seems at that interlocutory stage the primary concern was to preserve the partnership property pending trial of the substantive application. I have now heard that application as a matter of formal proof.

[35]              Overall, having considered the appellant’s evidence, I am satisfied by a clear margin that it is appropriate to appoint permanent receivers to the partnership. I have reached that view for the following reasons.

[36]              First, the management of the partnership is in a state of deadlock and I am satisfied the parties are incapable of winding-up the affairs of the partnership themselves. The evidence indicates that Keith is unlikely to cooperate with the estate to do what is necessary to bring the partnership’s business to an end. The partnership was dissolved upon George’s death, over three years ago. Since then, the evidence indicates that Keith has excluded Ms Moses from the management of the partnership affairs, obstructed access to the partnership accounts, refused to provide information about partnership assets (such as stock levels), and withheld information relating to partnership finances, including invoices and farm management fees tendered by interests associated with Keith. Given this, it will not be possible to complete winding up the partnership without the appointment of independent receivers.

[37]              Second, as Associate Judge Brittain observed,22 Keith’s conflicted position makes it necessary to place management of the partnership’s affairs in independent

and Webb, above n 12, at [152]. Section 42 of the Partnership Law Act confers a limited jurisdiction on the Court to appoint receivers which does not apply in these circumstances.

19     Moses v Stark, above n 2, at [19]–[20].

20     At [21], citing Webb, above n 12, at [153].

21     At [20]–[29].

22 See above at [18].

hands. The interests of Eileen and the partnership on one hand, and Keith and Waitotara on the other, are distinctly at odds. As the applicant points out, Keith cannot be expected to take action to recover debts due to the partnership that are said to be owed by him or interests associated with him.

[38]              Third, the evidence indicates that the farm has been poorly maintained and requires remedial work. In addition, there is now evidence suggesting there may be emerging animal welfare issues on the farm that need to be addressed urgently.

[39]              Fourth, the partnership has failed to attend to its tax affairs for years, which are an essential element in its winding-up. The receivers’ report indicates that financial reports have not been  filed with Inland Revenue since  the financial year  ending    31 May 2020, and an email from the partnership’s accountant suggests the last GST return was filed in October 2021. The interim receivers have been unable to advance these matters because they rely on Keith’s cooperation, which has not been forthcoming.

[40]              Fifth, George’s estate needs to be administered, and this cannot happen until the partnership is wound-up. The evidence indicates that the current state of affairs is likely to risk the value of the partnership’s assets, and therefore the interests of the beneficiaries of George’s estate.

[41]              Sixth, even if Keith were to be removed as Eileen’s attorney in the Family Court proceedings, I accept the applicant’s submission that this may only be a temporary solution. For one, delay in those proceedings would seem likely.23 The evidence also indicates that Eileen, who is 89 years old, is very unwell. Her death before the partnership is wound-up is a distinct possibility. Given that it appears Eileen’s will appoints her children as executors of her estate, it is likely that the same issues which arose in relation to George’s estate could arise again.

23   Moses v Stark, above n 2, at [33]. Associate Judge Brittain noted that a delay in the resolution of the Family Court proceedings seems likely given Keith is self-represented and has a history of failing to comply with procedural directions.

Conclusion and result

[42]              I make a declaration that the GJ & EM Stark Partnership was dissolved on  13 July 2020, being the date of Mr George Stark’s death, pursuant to s 69(1) of the Partnership Law Act.

[43]              I appoint Steven Khov and Kieran Jones jointly and severally as receivers and managers of the partnership on the following terms:

(a)The receivers are to take such steps as they see fit in order to wind up the partnership business, including the sale of its assets.

(b)The receivers may take steps as they see fit to recover any loans or debts owed to the partnership.

(c)Leave is reserved to the receivers to apply for further directions.

[44]              The reasonable remuneration of the receivers shall be met from the assets of the partnership, subject to approval of that remuneration at the conclusion of the receivership.

[45]              Finally, the estate seeks its costs in the proceeding on a 2B basis of $23,048. It asks that Keith personally meets this sum, or at least a greater share of it, given that his “intransigent approach” necessitated and delayed the proceeding.

[46]              Given the evidence available to me, it would seem inappropriate for the costs of these proceedings to be borne by the partnership or, ultimately, the beneficiaries of George’s estate. I am satisfied that Keith’s conduct necessitated proceedings and exacerbated the level of costs the plaintiff has incurred. I therefore make an order for costs against the second defendant in the sum of $23,048.

Isac J

Solicitors:

North End Law, Hamilton for Plaintiff