Chia & Ors v Ireland

No A13 of 2000

---

(Judgment by: Gaudron J, Kirby J)

Between: Peter Heng Lam Chia, Juliana Howard Nicholls and Geoffrey Fraser White
And: Deborah Laurie Ireland

Court:

Judges:
Gaudron J
Kirby J

Case References:
Chia & Others v Ireland - [2000] SASC 47

Judgment date: 9 August 2000

Adelaide

---

Judgment by:
Gaudron J
Kirby J

Application for special leave to appeal

TRANSCRIPT OF PROCEEDINGS

MR M.F. GRAY, QC: May it please the Court, I appear with my learned friend, MR P.A. HEYWOOD-SMITH, for the applicant. (instructed by Winters)

MR P.A. McNAMARA: May it please the Court, I appear for the respondent. (instructed by Kelly & Co)

GAUDRON J: Thank you.

MR GRAY: Your Honours, the underlying complaint in this matter is that both the judgments of the District Court judge and the Full Court do not bring to account the plaintiff's restricted share in the profits of the enterprise. This is brought about by neither judgment making findings in respect of matters in respect of which findings should have been made, and the method of reasoning that brings the court to that and, in the case of the District Court judge, treating goodwill as capital of the partnership owned by the four partners in equal shares, whereas it should have not been so treated.

GAUDRON J: Well, you say it should not have been so treated, but would that presumption not arise in the absence of some good reason for treating it otherwise?

MR GRAY: Goodwill we say, your Honour, is fairly clearly, by a decision of this Court and by a decision of the Court of Appeal in Ireland, been shown to be property of the partnership, assets of the partnership, but not capital of the partnership, and that there is a distinction in the Partnership Act by virtue of section 24 between profits and capital, which section 24 confines itself to - - -

GAUDRON J: All the partners are entitled to share equally in the capital and profits of the business.

MR GRAY: Yes, they are, your Honour. We say that that says nothing as to the partnership assets, which section 44 of the Partnership Act deals with in terms of what happens on dissolution to capital, and which then deals with - - -

GAUDRON J: What does it say about goodwill?

MR GRAY: Sorry, section 44 does not speak of goodwill, your Honour.

GAUDRON J: What does it say about the assets?

MR GRAY: It says that the assets of the firms - and this is section 44(b):

the assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, will be applied in the following manner and order.

GAUDRON J: Now, what was happening here, although it has by no means been made clear, and no analysis seems to have been made in those terms, but was it not the case that when the remaining partners agreed to rule off the books - which is what the agreement was at a certain date - that could only have meant, can it not, that they were forming a new partnership of the surviving partners who would buy the assets of the old?

MR GRAY: Who would be called to account with respect to the assets of the old. That is another distinction that I would want to make.

GAUDRON J: Well, of course, I know you want to make that distinction and it is fundamental to your case to make that distinction, is it not? But what else could have been happening? There was not a dissolution taking place in any real sense.

MR GRAY: There was a dissolution taking place, which is referred to as a technical dissolution - - -

GAUDRON J: Yes, but it was a dissolution which involved a new partnership coming into existence, did it not?

MR GRAY: Yes.

GAUDRON J: Which bought the property and the assets of the old.

MR GRAY: But which was treated by the trial judge in terms of, as regards any purchase, as a purchase of the capital of the company. He treated the concept of goodwill as it attached - - -

GAUDRON J: Yes, well having done that, there may be a real question whether, because of the way the case was run at first instance, this is an appropriate vehicle to determine any matter.

MR GRAY: I suppose we are saying it was the way that the trial judge approached the matter in the first place to treat goodwill as capital - - -

GAUDRON J: How did your side approach it, on the basis that there was never a partnership?

MR GRAY: That was part of the argument, that there was never a partnership, but there was also the additional argument that in so far as goodwill was concerned, it fell to be accounted for in terms of section 44 of the Partnership Act. Alternatively, and certainly - - -

GAUDRON J: But section 44 could have no application, could it, in the circumstances that were occurring in this case?

MR GRAY: With respect, your Honour, I say that it does.

GAUDRON J: On final settlement of accounts, after - - -

MR GRAY: Yes, and that, indeed, is the way the trial judge approached the matter. He approached it, and the order is in terms of section 44. If your Honour looks at the application book at page 34, your Honour will see that the order that was made:

The Court orders under Section 44 of the Partnership Act that there be a settling of accounts between the parties on following basis -

and then orders that:

the plaintiff is entitled to be paid the sum of $90,235.75 in respect of capital.

This is in terms of determining that the plaintiff is entitled to one-quarter share of the capital, which includes the goodwill, and the share of the business is valued in terms of the goodwill. If goodwill is not capital, that is where we say that the fact that she was not an equal partner should be reflected in terms of the value. It is either reflected in terms of the value at the start, or ultimately in terms of the accounting which takes place pursuant to section 44, which will bring to account - - -

GAUDRON J: So, ultimately the question in this case is whether goodwill is, for the purposes of the Partnership Act, capital or not.

MR GRAY: Yes, your Honour.

GAUDRON J: Where was that raised in the Full Court, in the Court of Appeal, as a stark issue?

MR GRAY: I cannot say that it was raised as a stark issue, but it underlay the submissions that were put in the Court.

GAUDRON J: Where was it raised as an issue before the trial judge?

MR GRAY: It was raised as an issue in the presentation of the case as a whole. As I said, arguments were put - and there are references to the arguments that were put in terms of section 44 of the Partnership Act. Pitch it back into terms of section 44: there was much argument, as I understand it, made in relation to the application of section 44 and the application, in particular, as to whether under section 44(b)(iv) was there to catch the ultimate residue, being the goodwill. In other words, if capital does not - - -

GAUDRON J: Yes, but it must be that there was presented for decision an issue whether goodwill was capital or not. One could only reach that point if that issue was presented for decision.

MR GRAY: And it was in this way: there was also an issue as to the parties owning their own separate goodwill, which is an issue which touches upon whether it is capital or not.

GAUDRON J: Very, very tangentially.

MR GRAY: In relation to that, there is the specific finding that the goodwill formed part of the capital of the partnership and was owned by the partners in equal shares. It was clearly an issue before the trial judge. That is in the application book at page 21.

GAUDRON J: When you say it was clearly an issue, it does not look to me as though it was presented as the stark issue that you now say it is.

MR GRAY: I cannot say that it is stark in the sense of a specific pleaded issue in those terms. As your Honour said, the original case was that there was not a partnership, but the fall back position was if there was a partnership, then the terms of the partnership were that there was no goodwill payable on retirement. The fall back position from that was that if a share in respect of goodwill was payable, it was to be paid in terms of section 44(b)(iv) as part of the ultimate residue, not as part of capital. Because the issue that was raised with respect to section 24, and the findings were all that the parties did not share equally in the profits, but shared equally in the capital - - -

GAUDRON J: Yes. One can well understand what you say if one really had not had, for practical purposes, a sale of the goodwill to the new partnership of the surviving partners.

MR GRAY: But there was not an actual sale.

GAUDRON J: Well, ruling off the books must have meant that, must it not?

MR GRAY: With respect, your Honour, no. The ruling off of the books meant that a court, in resolving this matter, could either have a proposal put for the purchase of the outgoing partner's share, or could order an account in terms of section 44. It was always the case that an account should be ordered in terms of the rules under section 44. Once that comes about, then it is not a question of sale, it is a question of how you account for the goodwill.

KIRBY J: Assume that section 44 of the Partnership Act was not attracted, what was your solution to the - leave aside the exit rules, leave aside the contention that there was no partnership, how do you say the goodwill would have been valued?

MR GRAY: I say it would have been valued in terms of a final accounting.

KIRBY J: But according to what principle? Is your justice point that Dr Ireland was only bringing in 8 per cent of the combined income of the partnership, and that therefore to give her 25 per cent of the goodwill was an unjust disposition of the goodwill? Is that the essence of it?

MR GRAY: Yes, that is the essence of it, your Honour. There might be a number of ways of actually resolving that, some of which, of course, were not argued, related to the actual nature of goodwill and a partner sharing in the goodwill.

KIRBY J: But if I can say so, Mr Gray, it is not tendered in a very neat case. Your basic argument was no partnership. If you lost that, your secondary argument was if a partnership, it was to be dissolved according to the exit rules. You lost that. Then you are driven back either to the Partnership Act or to some other general principle of equity. But it is a very messy factual case to be tendering an issue of general principle. Otherwise, it is just a dispute between partners and it really does not tender an issue of general importance for the law of partnership.

MR GRAY: But it is a very important issue of principle as to how you resolve this issue if you get to the third of the defences of the - - -

GAUDRON J: But so important that it does not appear to have been specified in your notice of appeal to the Full Court.

MR GRAY: I cannot say anything about that, your Honour. But I do say there is also - and under this umbrella - the point that the Full Court accepted the proposition that the Court had a power to order an outgoing partner to sell and that that sale could be superimposed upon the settlement of the accounts between the partners. What I say with respect to that is that the Court did not have that power and that on the authorities that were referred to, that is Syers v Syers and Sobell, the two English cases, that on those authorities, the proper approach and the only approach was to call to account the share as at the date of dissolution. In calling to account that share, one would use the rules in section 44.

That the Court adopted that approach, which I say is a wrong approach, appears from the application book, in particular at page 47.

KIRBY J: Yes, whereabouts?

MR GRAY: Page 47, paragraph 35, where the Court observes:

However, in the course of a winding up, the court has power to make a Syers v Syers order requiring an outgoing partner to sell his or her share to his or her co-partners.

Then, at page 50, line 38, the last sentence of paragraph 44:

Upon settlement of accounts a payment to Dr Ireland for her share must be superimposed upon whatever else may be found to be her entitlement under sections 43 and 44.

This was after an earlier observation that the trial judge had conducted the exercise under section 44, and - - -

KIRBY J: Where is that in the order of the primary judge, in the reasons of the primary judge?

MR GRAY: I refer to page 34 as the order that was made under section 44 - - -

KIRBY J: Yes, I have those, but you mentioned earlier in answer to Justice Gaudron that the primary judge's order was made pursuant to the Partnership Act.

MR GRAY: Yes, that appears from the terms of the order that is set out in the application book at page 34. You see "under Section 44". So his Honour Justice Williams in the Full Court considers that that payment needs to be superimposed upon that order. It is our submission that that is wrong, and that submission is that there are really two aspects to it: Syers v Syers is not authority for the proposition that his Honour puts forward; and, secondly, that both Syers v Syers and the case of Sobell v Boston would appear to require an account. The actual passage from Sobell v Boston that I take your Honours to is conveniently set out in the application book at page 49 where, in quoting Justice Goff in that case, in the middle of the page just after line 26, his Honour said:

In my judgment, what he is entitled to is the value of his share at the date of his retirement, including, of course, the then goodwill, the ascertainment of which must at all events normally be a matter of inquiry, accounting and valuation, not sale.

Now, it is true that the "not sale" there referred to is talking about it in terms of the sale on dissolution. But neither that case, nor Syers v Syers is authority for the proposition that the court can order a sale in relation to this, and it is authority for the proposition - because that was the order that was made in Syers v Syers - for an accounting to be made in relation to the partner's share.

KIRBY J: That is the order you say ought to have been made?

MR GRAY: Yes. I also say that if that accounting had been made, then the goodwill would have had to have been taken into account in terms of the ultimate residue, not as part of the capital of the partnership.

KIRBY J: Well, it would have been a better case if that had been the way you run it at trial, and if that had been the point you raised on appeal to the Full Court, and that had been neatly presented to the Court. But instead it comes through a filter of three preliminary arguments, all of which were knocked on the head. However, I think your time is up.

GAUDRON J: Thank you, Mr Gray.

MR McNAMARA: Thank you, your Honours. May it please the Court, in - - -

KIRBY J: It is an odd result, given that the contribution to the income is 8 per cent.

MR McNAMARA: That 8 per cent, of course, reflects only the last two or three years of the life of the partnership. The respondent had been in the partnership for about 13 years. Initially she worked full-time, but then as children came along her work commitment changed to what was described as a six-tenths share, or a seven-tenths share of an ordinary practice. But the fact remains that she bought an equal one-fifth share, and as the courts below have found, the books and records have consistently treated her as a one-quarter, or on-fifth partner, depending on the number of partners concerned, from the outset. The result follows that if, as the Full Court and the trial judge found, goodwill is part of the assets of the partnership, then her one-quarter share attaches to that asset.

The respondent's submission is that the points that the applicants seek to agitate on appeal are, in truth, raised for the first time in this Court. The case was conducted, at first instance, as appears from the judgments below, on the basis that each side saw fit to value the practice as a whole. As far as concerns the present application, the issue between the parties was whether the respondent had a fixed one-quarter share in the business as a whole - and so it was held below - or whether, as the applicants were contending, her share could fluctuate from time to time. On that question of fact, the applicants have failed and clearly, in that respect, both the trial judge and the Full Court were right.

The applicants begin their attack in this Court on the judgments below by a submission that neither judgment, neither court, has made findings in respect of the application of section 44(b)(iv) to the goodwill. If that be the position, then the applicants fail because the respondent, in relation to the question of her share in the goodwill, and indeed assets as a whole, is assisted by the statutory presumption in section 24 of equality. That attaches not only to capital in the strict sense of the money entered in the books, but it also attaches to the assets of the partnership. Separately, there may or may not be room for a presumption that profits are to be shared equally.

In the Full Court, paragraph 27, page 46 of the application book, in the judgment of his Honour Justice Williams - might I take your Honours quickly to that - the court summarises the financial aspects of the partnership. Your Honours see:

(a)

that there is a pooling of all receipts from the professional endeavours.....

(b)

that the receipts generated by -

two components of the practice -

are incorporated into the pool and divided.....equally.

And (c), one set of accounts; (d) certain expenses. This is perhaps the most important finding for present purposes:

that the profits (except as mentioned in (b)) are divided between the four principals in proportion to their periodic contribution to the gross receipts. Accordingly in terms of relativity between the parties there is a periodic fluctuation in their respective profit entitlements.

KIRBY J: If one were going to a valuation of the goodwill, would not, at least to some extent, the proportion of their periodic contribution to the gross receipts be a relevant factor in valuing the goodwill?

MR McNAMARA: On the evidence of the experts, your Honour, it was not. Each of the experts sought to derive - and indeed on this topic they agreed - the future maintainable earnings of the practice and the service trust. Having derived that figure, it was a matter, as his Honour Justice Williams in the Full Court said, of striking a capitalisation rate. The rate selected was .55 per cent. From that, one reaches the value of the respondent's share. After that, it is a matter of working out what adjustments might be required by section 44.

This Court said in Rowella, which is mentioned in the application book, the Court said this at page 311 of 168 CLR, that where there is no express agreement or identifiable agreement - I will wait for your Honour Justice Gaudron to pick that up. Rowella Pty Ltd v ABFAM Nominees -

KIRBY J: What is the page in the Commonwealth Law Reports?

MR McNAMARA: It is at page 311, in volume 168, in the joint judgment.

KIRBY J: Yes, it is page 33 of the supplementary material.

MR McNAMARA: Thank you, your Honour, I am obliged to your Honour. Do your Honours see a paragraph "As the deed contains", halfway down the page?

GAUDRON J: Yes.

MR McNAMARA: Thank you.

As the deed contains no provision which governs the distribution of the "ultimate residue", section 47(2)(d) -

and that is equivalent to South Australia's section 44(2)(b):

requires the proportion in which "profits are divisible" to be ascertained. Where the partnership agreement provides for the proportions in which profits are divisible, the agreement furnishes the formula governing distribution under paragraph (d); otherwise one must look to section 27 -

and that is our section 24 -

which prescribes equality of division.

With respect, your Honours, that passage applies precisely to this case, that the applicants not having conducted their case in a way which sought to disentangle the goodwill - - -

KIRBY J: And not having, before the case ever came to the court, conducted their books in a way - - -

MR McNAMARA: Precisely, your Honour.

KIRBY J: To disentangle.

MR McNAMARA: Precisely. With respect, the exercise, in any event, is simply impossible, given the finding that there was but one goodwill, given the finding that there were not four or five goodwills, it would be an impossible exercise to apply section 44(b)(iv) in the circumstances. That then comes back, if I might, to paragraph 27(e) - - -

GAUDRON J: Well, Mr McNamara, we think we do not need to hear you further, thank you. Mr Gray.

MR GRAY: Your Honour, just one point from the application book, page 23 to show that this issue of goodwill as capital and goodwill as partnership assets was an issue. It is demonstrated by the dealing with Mr Holmes, the financial expert. Page 23, line 15, the trial judge said:

For example, he -

Mr Holmes -

justified his acceptance of the plaintiff having an 8% share in the partnership by reference to clause 36 of the 1985 draft partnership agreement. I have already found that this document did not comprise an agreement between the parties. He conceded that if goodwill was accepted as a capital asset of the partnership (which I have found it to be) this hypothesis would be untenable.

His evidence at the trial was in terms of goodwill not being a capital asset of the partnership.

KIRBY J: I have a feeling that lurking down here in the detail of this case is a point, but I have a very strong feeling that having regard to the way in which the matter was run at trial and in the Full Court, that it is not tendered to this Court in a way that would be appropriate to present a matter of general importance.

MR GRAY: Your Honour, I was very - - -

KIRBY J: I suppose it is fair to say that in many partnership disputes, the books are different from the assertions, and the thing is messy and it is a matter that courts have to try to sort out, but this is not a neat point that was presented. That is indicated, as Justice Gaudron has pointed out, because it was not really raised in the notice of appeal to the Full Court.

MR GRAY: Yes, your Honour, I accept that. What I do say with respect to that is - - -

KIRBY J: Why should we send a retrospective light to shine upon the detail of the case to try and sort it out at this level of the Australian hierarchy?

MR GRAY: But there is a very clear issue related to the question of whether goodwill is part of the capital of the partnership, because - - -

KIRBY J: I do not think there is, and I do not think that is the issue. I think the issue is whether, in the way in which the valuation was proceeded with, the proper approach to valuation was taken. This was a case in which there were so many different issues, all of which you lost that were presented, that it really does not come up to us in a suitable format, I think. Anyway, I am sorry, but - - -

MR GRAY: I can only put forward that page in the application book as showing how the issue is crystallised in terms of the expert relied upon by the applicants.

GAUDRON J: Yes, thank you, Mr Gray.

This case turns very much upon its own facts. Given that, and given also that the issue which the applicants now wish to agitate was not raised in the Full Court, this is not a case which might appropriately attract the grant of special leave. Special leave is refused and the matter having been the subject of written submissions, it is refused with costs.