Wallace v Altan

[2018] NZHC 1337

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2701

[2018] NZHC 1337

BETWEEN

DEBORAH WALLACE

Appellant

AND

HAKAN ALTAN

Respondent

Hearing:	1 May 2018
Counsel:	IM Hutcheson for Appellant P J Wright for Respondent
Judgment:	12 June 2018

JUDGMENT OF WHATA J

This judgment was delivered by me on 12 June 2018 at 4.00 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date: ………………………….

Counsel/Solicitors:

Iain Hutcheson, Barrister, Auckland Ogles Podwin & Associates, Auckland

Peter Hilton Lowndes, Barrister, Auckland

WALLACE v ALTAN [2018] NZHC 1337 [12 June 2018]

[1]    Mr Altan and Ms Wallace were partners in a hair salon. In 2013, Ms Wallace gave notice of dissolution of partnership and issued a trespass notice to Mr Altan. With Mr Altan gone, she continued to operate the salon under a different name but out of the same premises with the same staff. Mr Altan and Ms Wallace were not able to agree the division of partnership property. The District Court made an order for

$39,233 in Mr Altan’s favour, together with interest from 25 January 2017.1 This included a sum for goodwill. However, no order was made in relation to any profits accrued through use of partnership assets after dissolution.

[2]    Ms Wallace now appeals on the basis that, in the absence of a restraint of trade, the goodwill value was nil, with the result that Mr Altan owed her $18,773. Mr Altan cross-appeals claiming the Judge erred in failing to make Ms Wallace account for use of partnership assets since dissolution.2

[3]The issues on appeal are therefore:

(a)whether, in the absence of a restraint of trade, the value of the goodwill in a hairdressing business was nil; and

(b)whether Ms Wallace must account for salon profits after the date of dissolution.

Background

[4]    The salient facts can be stated briefly. Ms Wallace and Mr Altan are hairdressers. In July 2007, they formed a partnership to operate Saints Hair Design, Ms Wallace’s then hair dressing salon at St Heliers. Mr Altan paid $35,000 for 50 per cent of the business. It was a term of the agreement that if either party wishes to sell their ownership share, the other partner must have the option to purchase at market value.

1      Altan v Wallace [2017] NZDC 18073 at [148].

2      Leave to appeal was necessary as the cross-appeal was filed late. There being no objection to this, leave is granted.

[5]    In October 2009, Mr Altan discovered that taxes had not been paid and so he began to take a closer interest in the management of the salon. He then discovered, in early 2011, that Ms Wallace had, between 2007 and 2009, taken in the order of

$210,000 in salon money for personal expenses. Attempts to resolve repayment of the sum taken proved difficult because, among other things, Ms Wallace’s husband was gravely ill at the time.

[6]    In September 2011, Mr Altan made an offer to Ms Wallace to purchase her share of the business and settle any debt she owed. This offer was rejected. However, in May 2012, Ms Wallace agreed to pay Mr Altan $70,000.

[7]    Discussions about the fate of the partnership continued and in March 2013, Mr Altan made another offer to buy Ms Wallace out of the partnership. The offer was for $45,000 for the goodwill, the benefit of the lease, the business bank account, plant and equipment, as well as fixtures, fittings and stock. The offer also anticipated that all liabilities and obligations (including outstanding income tax) would remain with the business. The offer included a restraint of trade and non-solicitation provision to the effect that whoever left would not work in the hairdressing business for 12 months within a 5 kilometre radius, or seek out partnership clients. Ms Wallace’s lawyers wrote back rejecting that offer,  and counter-offered on similar terms, except that   Mr Altan was to pay his own outstanding income tax. There was some discussion between the lawyers for Mr Altan and Ms Wallace about the exclusion of income tax (a liability of about $55,000) from the offer.  On 8 April 2013 Mr Altan rejected   Ms Wallace’s offer.

[8]    On 12 April 2013, Ms Wallace then gave notice to Mr Altan of the dissolution of the partnership. She advised that the debts ($35,935) would be shared between the partners. Mr Altan’s lawyer replied that he did not consent to Ms Wallace taking over the salon, and that the partnership property would have to be divided. From there, matters deteriorated very quickly. On Tuesday 16 April, Mr Altan went to the salon to work, but Ms Wallace  called the Police to get him to leave.  Then, on Wednesday, 17 April, she handed Mr Altan a trespass notice and changed the locks at the salon. Subsequent correspondence between the parties’ lawyers came to nothing.

[9]    Mr Altan then rented a chair at another salon, Garden of Eve on Remuera Road. He contacted all his previous clients from Saints Hair Design (just over half of the Saints clients list). In total, about 10 per cent of the Saints Hair Design clients moved to Mr Altan at Garden of Eve. Mr Altan attributed this small number to the distance from St Heliers and parking problems. Meanwhile, Ms Wallace continued to operate out of the same premises with the same staff (minus Mr Altan), though she changed the name of the salon to Saints 55.   Sales revenue for the period 1 April 2013 to     31 March 2014 dropped from $269,161 to $207,513. Expenditure in the same period also dropped from $267,493 to $203,352. In the result, net profit increased by about

$2,500 in the year following dissolution.3

The evidence

[10]   The background facts recorded above are not disputed. It is unnecessary therefore to recount the evidence as to fact. It is, however, helpful to set out the expert valuation evidence, given its significance to the central issues on appeal. Mr Weber gave evidence for Mr Altan. Mr Livingstone gave evidence for Ms Wallace.

Anthony Eric Weber

[11]   Mr Weber has a Bachelor of Business Studies and a Master of Business Administration. He has undertaken more than 350 forensic investigations and reports as to business and relationship property valuations in both Australia and New Zealand. Mr Weber analysed the financial performance of the partnership. Net profit before tax is noted as follows:

2009	$140,000
2010	$116,000
2011	$135,000
2012	$145,000
2013	$1,000

[12]   The reported financial position of the partnership as at 31 March 2013 was as follows:

3      A point made by the Judge at [139] and not challenged on appeal.

(a)stock with a reported value of $5,250;

(b)current liabilities, including accounts payable of $12,936, a GST liability of $22,864 and a bank overdraft net of $19,378;

(c)goodwill is the assessed value of the business at commencement; and

(d)the fixed assets have a reported (depreciated) value of $1,436.

[13]   Mr Weber, like Mr Livingstone, valued the hair dressing business by applying a multiplier to a calculation of future maintainable earnings. He commenced by capitalising earnings, before proprietor’s income, interest, depreciation and tax (EBPIDT). His analysis indicated that the likely future maintainable EBPIDT for the business is $148,041 per annum. The 2013 result was ignored as anomalous.

[14]   Based on information sourced from Bizstats Limited, Mr Weber determined that the appropriate EBPIDT multiplier was 1.38. In the result, he arrives at an assessed enterprise value of $204,240. He then deducts reported enterprise value (based on the financial statements ended 31 March 2013) being $76,686. He concludes that his assessed enterprise value represents an increase of $127,554 over the reported enterprise value. He then assesses the value of tangible operating assets, including stock, plant, equipment and chattels. Inventories are valued at $5,250, while the assessed value of plant and equipment and chattels (being replacement value) is

$68,000. This is based on valuation provided by Tilling Valuations Limited. The total TOA (tangible operating assets) is approximately $73,750. Mr Weber then calculates the value of goodwill by deducting TOA from enterprise value. The assessed goodwill is therefore $130,750.

[15]   Mr Weber then assesses the value of the partners’ capital account. This, he says, is the sum of the balance per the financial statements and any increase in enterprise value. In Mr Altan’s case that is $82,913, comprising $19,136 per financial statements and $63,777 for increase in enterprise value. He says, on the face of it,  Ms Wallace owes Mr Altan the balance of his capital account of $82,913.

[16]   Mr Weber then identifies the number of customers taken by Mr Altan. He assesses this at 60, or 10 per cent of the client base, based on Mr Altan’s evidence. This has a value, he says, of $13,075 (being 10 percent of $130,750). Mr Weber, therefore, assesses Mr Altan’s interest in the partnership at $69,888, being the adjusted capital account of $82,913 less the value of customers taken, $13,075.

[17]   The Judge questioned Mr Weber on the significance of a restraint of trade. He said goodwill is normally a substantial part of an enterprise value and normally a sale of business of this kind would be subject to a restraint of trade and he would advise a purchaser to insist on a restraint of trade. He also observed that his valuation assumes the full client base is retained.

Timothy Grant Livingstone

[18]   Mr Livingstone is a chartered accountant with 30 years’ experience. He was approached by Ms Wallace to provide a valuation of her hairdressing business. He produced a report based on  the  partnerships’  financial  statements  for  the  years 31 March 2013 and 2012. Using EBPIDT and Bizstat’s data, he has calculated the potential and tangible (goodwill) value of the business and possible total sales price by using the average of five sales transactions. He observes:

(a)Intangible asset value = 65.9 percent of EBPIDT; Altan and Wallace EBPIDT = $133,063. Goodwill ($133,063 at 65.9 percent) = $87,688.

(b)Total sales price = 1.28 x EBPIDT;

=         $133,063 x 1.28;

=         $170,320.

[19]   Based on raw Bizstat’s data, he calculates the partnership selling price would mostly likely be calculated as follows:

(a)	Goodwill	$87,688;
(b)	Stock (per financials)	$5,250;
(c)	Tangible    assets    (leasehold    improvement plant and equipment)	$77,382
(d)	Total sale price	$170,320

[20]His report also notes:

Where there is no restraint to service partnership clients on either partner there is legal precedent that supports not placing any value on goodwill. The relationship between client and stylist has been said to be a very personal one and clients usually follow the stylist with whom they have established a personal connection.

The absence of any ongoing lease … supports this approach (of not placing any value on goodwill).

[21]His report goes on to state that:

If a court were to consider a goodwill component I believe it should be calculated on Wallace’s sales revenue for the year ended 31 March 2014 of

$245,958 and comparing this to the last two years of the partnership revenue.

The partnership average sales for two years ended 31 March 2013 and 2012 was $328,970. Adopting this approach there is a theoretical argument that Wallace retained 74.77 percent of the client base.

Applying this percentage to goodwill calculated at 2.3(a) above:

Total goodwill	$87,688
Wallace goodwill (74.77 percent)	$65,564
Less 50 percent per partner	$43,844
Theoretical goodwill adjustment payable to Altan	$21,720.

[22]   Mr Livingstone also reduces value at tangible assets to book value. Accordingly, the report continues:

Amending the market value calculations based on BIZstats to the particular partnership situation the market value is as follows:

Assuming nil goodwill:
Goodwill	Nil
Tangible assets	$1,436
Stock	$5,250
Total:	$6,686
Assuming goodwill:
Goodwill	$87,688
Tangible assets	$1,436
Stock	$5,250
Total:	$94,347

[23]   Mr Livingstone disagrees with Mr Weber in terms of his value for the leasehold improvements ($68,000). In his view, this is inconsistent with evidence and unsustainable. He also notes that Mr Weber makes no adjustments for the overdraft ($55,191) and additional creditors ($5,820) or the assets of the partnership retained by Ms Wallace ($6,699). He also believes that Mr Weber’s adjustment for clients retained by the plaintiff is inadequate. He highlights the fact that Mr Weber has taken no account of the absence restraint of trade.

[24]   Mr Livingstone was challenged in cross-examination on his conclusion that a restraint of trade negated goodwill. He did not include goodwill because without a restraint of trade, a partner could set up a competing business. He was pressed on the fact that Mr Altan was forced out of the partnership but he maintained that Mr Altan could have, but chose not to, set up in competition to the salon.

[25]   Relevantly, both Mr Weber and Mr Livingstone were challenged during cross- examination on how much of  the  goodwill  value  was  attributable  to  location.  Mr Weber accepted that the closer Mr Altan had set up a competing salon, the more goodwill he could have retained.

[26]   Mr Weber also discusses the significance of location when asked by the Court what his opinion was on a name change once the partnership ended, from “Saints Hair Design” to “Saints 55”.

I would have thought that very few of the clients coming into that business would actually care about what it was called frankly and I don’t think it’s  unusual to change a name anyway. However, it is normal in a sale and purchase agreement for the vendor to give up the name so that the purchaser can use it. That happens quite frequently. But it does imply Ma’am that quite a lot of this goodwill did attach to the premises – to the location as well.

[27]   Mr Livingstone, too, in questions from the Court was challenged on the value that Ms Wallace received by simply carrying on the business and the significance of location. He accepted that a business that is set up already has a higher value. He also said:

A.Mmm, there is certainly I think – and I think that I wouldn’t disagree with Mr Weber that there is a component of loyalty to a location, just because it’s convenient, car knows how to get there and you know the people, that sort of thing. So, you know, it’s warm and it’s comfortable type of thing, so I can see that as an argument for saying “Hey, this is an ongoing business and there is an advantage there for – ”

[28]   Mr Livingstone was not able to precisely quantify the value of location, but intuitively put it at between $10,000 and $20,000. The Judge then asked Mr Livingstone if the location of the salon in St Heliers means it attracts wealthier people who have lived there for some time and are likely to keep going to the same salon out of habit. He responds that “that would be something that you would need to talk to Wallace and Altan on the sort of demographics of the client base”, noting that that demographic might not be accurate, and that it also depends on which demographic the salon markets to.

Legislative frame

[29]   The dissolution of a partnership on notice of one of the partners is provided for in s 35 of the Partnership Act 1908:

35       Dissolution by expiration or notice

(1)Subject to any agreement between the partners, a partnership is dissolved,—

(a)if entered into for a fixed term, by the expiration of that term:

(b)if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking:

(c)if entered into for an undefined time, by any partner giving notice to the other or others of his or her intention to dissolve the partnership.

(2)In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.

[30]   The distribution of assets after dissolution of a partnership is governed by    ss 45, 46 and 47 of the Partnership Act 1908:

45Right of outgoing partner in certain cases to share profits made after dissolution

(1)Where any member of a firm dies or otherwise ceases 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 or her estate, then, in the absence of any agreement to the contrary, the outgoing partner or his or her estate is entitled, at the option of himself or herself or his or her representative, to such share of the profits made since the dissolution as the court may find to be attributable to the use of his or her share of the partnership assets, or to interest at the rate of 5% per annum on the amount of his or her share of the partnership assets.

[…]

46Retiring or deceased partner’s share to be a debt

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.

47Rule for distribution of assets on final settlement of accounts

In settling accounts between the partners after a dissolution of partnership the following rules shall, subject to any agreement, be observed:

(a)losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:

(b)the assets of the firm, including the sums (if any) contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

(i)in paying the debts and liabilities of the firm to persons who are not partners therein:

(ii)in paying to each partner rateably what is due from the firm to him or her for advances as distinguished from capital:

(ii)in paying to each partner rateably what is due from the firm to him or her in respect of capital:

(iii)the ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

[31]   It is tolerably clear that the scheme of the Act as it relates to dissolution seeks to secure division of profits and assets to each partner rateably what is due to him or her, based on his or her share of those assets, after debts of the partnership and any advances made by him or her, have been accounted for.

District Court decision

[32]   Judge P Cunningham rejected the argument that a restraint of trade was necessary for goodwill to be a component of the business valuation. Her key findings are helpfully succinct. She concluded:

[137]     Ms Wallace was a hairdresser in business in that location prior to Mr Altan joining her as an employee in 2004 and become a partner in 2007. While she changed the name of the business post dissolution, she remained in the same location, the only thing she changed was the name of the salon from “Saints Hair Salon” to “Saints 55”. It was therefore business as usual. While it is the case that Mr Altan was free to set up business in the St Heliers Bay area if he wanted to, the fact is he did not. He worked in Remuera from the end of April – October 2013 and then at a salon in Kohimaramara.

[138]     In my view the approach adopted by Mr Weber as to the allocation of goodwill is more valid, meaning Mr Altan received 10% of the goodwill. Although Mr Altan actively canvassed just over 50% of the client list, only 10% of the clients actually became clients of his at Garden of Eve. This evidence was not challenged. In my view the likely reason for this is that most of the clients remained at the same salon, in the same place, with the same staff (minus Mr Altan).

[139]     The sales revenue for “Saints 55” dropped in the 1 April 2013- 31 March 2014 from $269,161.00 to $207,513.00. But the expenses in each year dropped proportionately, $267,493.00 for the 2013 year and $203,352.00 for the 2014 year. The net surplus before depreciation in the 2013 year was

$1,668.00 and in the 2014 year it was $4,161.00.

[140]In those circumstances, which included:

(a)Mr Altan took 10% of the goodwill;

(b)The salon retained by Ms Wallace had the advantage of the remainder of the goodwill, location and continuity;

(c)The net surplus of the business increased slightly,

It is entirely possible the business was still an attractive proposition on the open market. This is in direct contrast to the Short decision where because one of the former partners was present in the same location under another name, no third party would have paid for goodwill had Short & Co tried to sell goodwill. There was nothing to sell. I therefore come to the conclusion that Ms Wallace should compensate Mr Altan for the goodwill which she retained over and above her entitlement.

[33]   The Judge  then  quantified  the  value  of  the  partnership.  She  preferred  Mr Weber’s evaluation for the following reasons. She rejected Mr Livingstone’s 2015 sales figure as too far removed from dissolution. She adopted Mr Weber’s EBPIDT multiplier, given a concession by Mr Livingstone that this did not matter. The Judge was not concerned about Mr Weber’s use of the Tilling valuation report for tangible assets even though it was not admitted into evidence. She did not think it mattered. The Judge also agreed with Mr Weber that the financial performance of the salon in 2013 was not reliable, given the ructions that year.

[34]    The Judge therefore adopted Mr Weber’s capital account estimate of $82,913. She deducts 50 per cent of the outstanding partnership debt from this figure to arrive at $55,191. The Judge then makes a deduction to account for the clients retained by Mr Altan (being 10 per cent of Mr Weber’s assessed goodwill figure  - $13,075 or  10 per cent of $130,7500). This sums to $42,243. A further deduction for ACC and accountant fees of $2,910 (being half of $5,820) is then made, leading to a judgment sum of $39,233.

Issues

[35]As noted at [3], the key issues raised on appeal are:

(a)whether, in the absence of a restraint of trade, the value of the goodwill in a hairdressing business was nil; and

(b)whether Ms Wallace must account for salon profits after the date of dissolution.

[36]I now turn to address them.

Whether, in the absence of a restraint of trade, the value of the goodwill in a hairdressing business was nil

[37]Mr Hutcheson submits;

(a)Contrary to leading authority, Mr Weber’s valuation had no relation to the marketplace.4

(b)The Judge, by adopting Mr Weber’s valuation, thereby erred in fact and law because, without the restraint of trade, the value of the goodwill was minimal.

[38]   There is longstanding authority for the proposition that the absence of a restraint of trade may bear on the value of goodwill on the dissolution of a partnership. In Owen v Rayner Edwards J said, in 1905, in respect of a dissolving partnership of dentists:5

Apart from a special contract, the effect of the sale of the goodwill of a business, in respect of which there is in contemplation of law a saleable goodwill, does not carry with it the right to restrain the vendor from carrying on a similar business, even next door, nor does it carry with it the right to prevent the vendor from dealing with the customers of the old business.

[39]And further:6

If a goodwill is sold to one of the partners at a valuation it must be valued on the same footing as if it were sold to a stranger, - namely upon the footing that the purchasing partner, if he did not purchase the goodwill, would still be at liberty to set up the same business in the same locality and also upon the footing that the other partner or partners may do likewise. . .…

Even if there is a saleable goodwill attached to a dentist’s business, it is plain therefore …. that goodwill is of merely nominal value.

[40]   The Court of Appeal in Davison v Wayman more recently stated that the goodwill value “must aim to represent the price obtainable on the open market, the

4      Citing in particular Short v Gray HC Auckland CIV-2008-404-2232, 9 June 2010.

5      Owen v Rayner (1905) 25 NZLR 168 at 171.

6      At 172 - 173.

potential purchasers in which will include the other partners”.7 That case involved the dissolution of an accountants’ partnership by the withdrawal of one of the partners just eight weeks after its inception. The arbitrator’s award was set aside for valuing the goodwill component based on the book value of the goodwill at the time of the partnership merger rather than market value. In reaching this conclusion, Somers J noted:8

It is obviously material in assessing the existence and value of goodwill Mr Wayman was under no contractual obligation to refrain from setting up on his own account, although having agreed to sell his share of the goodwill he could not use the partnership name and might not canvas or solicit customers of the former firm.

[41]   Similarly, Asher J in Short v Gray emphasised the requirement to identify the market value of the partnership assets. He said: 9

…there must be clients who are ready to follow the place or the name, who present an available body of business, for it to follow that a purchaser will pay for that place or name. Those clients may stay available after dissolution because of the nature of the business, or because of a restraint of trade on those who might take the business. But an essential element is that non-transportable return business that constitutes market value.

[42]   The facts in Short are illustrative of one application of the principle just stated. That case involved dissolution of a legal partnership. The issue was whether the outgoing partner, Mr Gray, should pay goodwill to the continuing partners. The partnership paid just $1 for Mr Gray’s goodwill at inception. Asher J then had little difficulty finding on the facts of that case that without a restraint of trade, no third party would have paid goodwill for his practice, because it was very personal to him.10

[43]   Given this authority, Mr Weber was wrong to ignore the absence of a restraint of trade. But, like all precedent, the application and effect of the observations made in Owen, Davison and Short are fact dependent.11 There is no rule of law that market valuation for goodwill will depend on the existence of a restraint of trade.12   Indeed,

7      Davidson v Wayman [1984] 2 NZLR 115 at 118.

8      At 123

9      Short v Gray, above n 4, at [44].

10     At [47]-[48].

11     Fang v Ministry of Business Innovation and Employment [2017] NZCA 190, [2017] 3 NZLR 316 at [35].

12     Briggs v Briggs (1996) 14 FRNZ 404 at 411. Thorp J holds that the effect of a restraint of trade will depend on the nature of the goodwill.

the passage in Short just cited links goodwill to “the nature of the business or because of a restraint of trade on those who might take the business.” Notably also, each of these authorities dealt with professionals where it might be expected that the clients are highly transportable – i.e. will travel with the professional adviser. In this regard, it is apt to refer a further passage from Owen that exemplifies the significance of this factor. Edward J cited the following passage from Allan on Goodwill:13

There is a clear distinction between the goodwill of a trade and the goodwill of a profession, or, as it is sometimes called a practice, which depends entirely on the personal qualities as well as on the personal exertions of the practitioner. The distinction is thorough and radical, and has already been recognised …. “when the profits of the business result almost entirely from confidence placed in the personal skill of the party employed, as is the case of surgeons or attorneys, the goodwill is too insignificant to be “taken notice of”.

[44]   This point is further illustrated in Helsby v Oliver.14 That case concerned a restraint of trade issue where, after the sale of a hairdressing business in Takapuna, many clients followed the vendor to new premises in Ponsonby. The key issue in that case concerned the effect of a restraint of trade, and the extent to which it excluded solicitation by the vendor. The District Court found that judicial notice could be taken of a hairstylist’s ability to attract clients to a new venue.15 The High Court firmly rejected this proposition, noting that the issue was one of fact to be determined on the evidence.

[45]   Mr Livingstone was therefore wrong to assume that, at law, the absence of the restraint of trade signified a nil value for the goodwill. Rather, the value of the partnership goodwill is the price obtainable on the open market, assuming a willing buyer and a willing seller. This, as Asher J put it, will largely depend on the level of non-transportable return business.

[46]   Regrettably, the experts did not directly address this issue, other than in a cursory way. Nevertheless, it was available to the Judge to conclude that the salon enjoyed a substantial amount of non-transportable return business. Post-dissolution, the salon continued to perform as it had done previously (achieving comparable

13     Owen v Rayner, above n 5, at 179

14     Helsby v Oliver [1999] 1 NZLR 77 (HC).

15     At 84.

revenue and net profit without Mr Altan). Conversely, Mr Altan was only able to attract 10 per cent of his clients to a different location. Like the judge I prefer his evidence on this to the vague account given by Ms Wallace of client movements.16 Furthermore, Mr Livingstone made two important concessions: the location of the salon was valuable per se, and analysis of the demographics of the client base would be needed to precisely determine the division of personal goodwill and the non-transportable goodwill attached to the salon. Significantly, there was only very sparse evidence that Ms Wallace enjoyed substantial personal goodwill17 or that either Ms Wallace or Mr Altan could viably set up sufficiently close to the salon to represent a serious competitive threat.18 In this regard, the evidence was that the salon had several hairdressers, some of whom left from time to time, one of whom set up close by. The financial records show that such movements did not appear to have any marked long- term impact on revenue generation or profit.19 It is also tolerably clear the partners viewed the goodwill as a major asset of the salon. Both experts accepted this to be the case and that Mr Altan, in effect, purchased the goodwill in 2007.

[47]   Finally, as Glazebrook J said in Scott v Williams, valuation methodologies must always be assessed with an eye to the reality of the situation, and the result reached must be fair and just.20 While her observations were made in a relationship property case where there is a statutory requirement for just division of relationship property, as noted at [31], the Act envisages settlement based on what each partner is rateably due. The requirement for justness can be assumed.

16  Ms Wallace was given the opportunity to comment on Mr Altan’s book of work post dissolution  but failed to do so. She simply asserted that there had been a significant loss of clients to him.

17 This can be contrasted to Briggs v Briggs, above n 12, where 7 witnesses were produced specifically on the issue of personal goodwill.

18 Ms Wallace simply refers to remarks made by Mr Altan that he could set up on an existing salon, “Elaine’s Beauty Therapy”, across the road. Mr Altan relocated to within 500m-1km of the salon approximately six months after dissolution, but this had little appreciable effect. As noted I prefer Mr Altan’s evidence about this.

19 The records from 2009-2012 show a reasonably consistent performance over time, with the 2013 year producing an anomalous result.

20 Scott v Williams [2017] NZSC 185 at [108], [138]. Glazebrook J also, when discussing various valuation tests, notes at [100] that “in any valuation exercise the retaining partner in the business is treated as a potential purchaser. Indeed, both partners in the relationship can be treated as potential purchasers. In order to ensure equivalence between a potential third-party purchaser and the partner retaining the business, it would also be assumed that, if it were purchased by a third party, a restraint of trade would be given.” The majority in that case found goodwill was tied to the business because any new firm would have difficulty competing against a well-established firm in a relatively saturated market.

[48]   Most relevantly, this is not a case of a willing buyer/willing seller transaction. Mr Altan was forced from the partnership. Therefore, the absence of a restraint of trade in this case is not, per se, a reflection of a willing buyer/willing vendor transaction on the open market. Plainly, neither Mr Altan nor Ms Wallace would have willingly sold their interest in the partnership without full provision for goodwill (albeit they would have required a restraint of trade). Both Mr Weber and Mr Livingstone accepted that a purchaser would expect to pay for goodwill. As Mr Livingstone aptly put it under questioning:21

I mean that’s reality.

[49]   The absurdity of the prospect of sale, without accounting for goodwill, is best revealed by the outcome on the appellant’s case. Mr Altan would still be liable for a half share of the partnership debt with no offset for the goodwill, in fact, retained by the salon. By contrast, given the available evidence of return business (and the absence of cogent evidence supporting a finding of personal goodwill), an outcome based on a 50 per cent share accords with the scheme of the Act which contemplates division of profits and assets to each partner rateably what is due to him or her.

[50]   Finally, I also agree with the  Judge,  for  the  reasons  stated  by  her,  that  Mr Weber’s market valuation is more robust than Mr Livingstone’s approach. I have described their respective approaches above at [11]-[17] and [18]-[28]. The first major difference between them is their respective EBPIDT calculations. Mr Livingstone’s analysis is unduly favourable to Ms Wallace by incorporating the financial performance of the salon in 2013 (when the partnership was irrevocably breaking down). Secondly, his multiplier of 1.28 was too conservative, premised it seems, on the absence of a long-term lease. But Ms Wallace had no trouble whatsoever securing the tenancy, reflecting the lengthy association of the salon to the site. He also conceded under cross examination that he “would not sweat over the difference”.

[51]The appeal is therefore dismissed.

21     Similarly, Mr Weber stated that a purchaser “just wouldn’t buy it” without securing goodwill.

Residual issues

[52]For completeness, I turn to Mr Hutcheson’s residual contentions, the Judge:

(a)Erred by ignoring the fact that the Tilling valuation used by Mr Weber was inadmissible; and

(b)Failed to consider the debt paid by Ms Wallace.

[53]Like the Judge, I see nothing in either point:

(a)The Tilling valuation provides an indicative gross reinstatement value for the salon fit out. All relevant assumptions are displayed. The cogency of the use of, and conclusions drawn from, the Tilling valuation report could be, and were, tested by the experts and counsel.

(b)The Judge expressly considered the debt paid in reaching her final calculation.

[54]I therefore dismiss the appeal.

The cross-appeal

[55]   As to the cross-appeal, Mr Wright did not seek to pursue this if the appeal was not successful. It was not argued with any venom. I therefore do not entertain it further to a conclusion. For completeness, however, s 45 serves a different purpose to s 47. It protects the outgoing partner’s share of the profits pending final settlement of accounts on the assumption that the continuing partners carry on the business. In the present case, Ms Wallace effectively carried on the business without Mr Altan. My preliminary view therefore is that Mr Altan’s share of the salon’s profits pending final settlement should be accounted for. There are complications here, however, not addressed either by the judge or by counsel before me. To illustrate, a significant amount of time has elapsed since notice of dissolution, and Ms Wallace had made, I understand, improvements to the salon in that time. The extent to which the subsequent

profits of the salon are then attributable to the use partnership assets is not capable of resolution without further argument. The cross-appeal is therefore dismissed.

Costs

[56]   Mr Altan succeeded on the primary issue on appeal. He must have his costs on a scale 2B basis, together with disbursements (to be agreed or fixed by the registrar) unless good reason otherwise can be shown. Submissions no longer than two pages on costs may be filed, if necessary, within five working days from the date of this judgment.