Shazbot Pty Ltd v Warner Capital Pty Ltd

1. [1]

   Both the second defendant, Anthony John Warner, and the second plaintiff, Steven Barry Kugel, are accountants. From September 2007 until September 2014, Mr Warner and Mr Kugel conducted an insolvency practice together under the name “CRS Warner Kugel”, to which I will refer as “CWK”. These proceedings arise out of the termination of their professional relationship.

2. [2]

   Both Mr Warner and Mr Kugel were qualified insolvency practitioners. Both practised in corporate insolvency and were registered company liquidators. In addition, Mr Warner practised in personal insolvency and was a registered trustee in bankruptcy.

3. [3]

   The practice of CWK involved both personal and corporate insolvency. For personal insolvency, it consisted of acting as the trustee in bankruptcy of individuals’ estates pursuant to appointments under the Bankruptcy Act 1966 (Cth). All such appointments were made in favour of Mr Warner, as Mr Kugel was not a registered trustee in bankruptcy. On the corporate side, the work of the practice consisted both of official liquidations (pursuant to court order) and voluntary administrations. Most of the corporate appointments were made in favour of Mr Warner and Mr Kugel jointly, but there were a handful solely in Mr Warner’s name and a handful solely in Mr Kugel’s name. Mr Warner concerned himself mainly with the personal insolvency aspect of the practice and Mr Kugel concerned himself mainly with the corporate insolvency aspect. I will refer to each appointment, whether personal or corporate, as giving rise to an “administration”.

4. [4]

   CWK’s practice was conducted from rented premises in the Central Business District of Sydney. Staff were employed to undertake both professional and administrative work under the direction of Mr Warner and Mr Kugel. The staff were employed by the third defendant, a company incorporated in September 2007 under the name CRS Warner Kugel Pty Ltd (“CWK Pty Ltd”). The premises were leased in the name of CWK Pty Ltd, and other liabilities and expenses undertaken in the practice were likewise undertaken in the name of the company.

5. [5]

   The directors of CWK Pty Ltd were Mr Warner and Mr Kugel and the shares in the company were owned by the first defendant, Warner Capital Pty Ltd (“Warner Capital”) and the first plaintiff, Shazbot Pty Ltd (“Shazbot”). Warner Capital was a company controlled by Mr Warner and his wife; it acted as the trustee of a discretionary trust for the benefit of them and their family. Similarly, Shazbot was a company controlled by Mr Kugel and his wife and was the trustee of a discretionary trust for the benefit of them and their family.

6. [6]

   Shortly after the incorporation of CWK Pty Ltd, it entered into a trust deed pursuant to which it was constituted as trustee of a unit trust known as the “CRS Warner Kugel Unit Trust” (“CWK Unit Trust”). The units in the trust were equally owned by Warner Capital and Shazbot.

7. [7]

   As well as the CWK practice, there was a business of acting as administrator of personal insolvency agreements under Part IX and Part X of the Bankruptcy Act. This business was mainly the responsibility of Mr Warner. It operated under the names “Debt Free Direct” or “Debtfree”. The business was acquired in January 2008 and thereafter it was operated through a company called Debtfree Pty Limited (“DF”) alongside the CWK practice. The shares in DF were acquired in the name of CWK Pty Ltd but approximately seven months later, in October 2008, they were transferred to Warner Capital and Shazbot. From that point onwards, the profits from the Debtfree operations were distributed by way of dividend to Warner Capital and Shazbot.

8. [8]

   In September 2014 Mr Warner told Mr Kugel that he (Mr Warner) wished to terminate the relationship, and Mr Kugel accepted that termination. Mr Kugel caused Shazbot to transfer its shareholding in DF and its unit holding in the CWK Unit Trust to Warner Capital for nominal consideration. The administrations continued under the direction of Mr Warner and the income of the practice continued to be channelled through CWK Pty Ltd (subsequently renamed Clarence Street Partners Pty Ltd), now under the sole control of Mr Warner.

9. [9]

   Following the termination, calculations were done of the amount of cash held in the practice bank accounts as at 30 September 2014, and the amount of the practice’s liabilities as at that date. A half share of this, after taking into account some adjustments, was paid to Shazbot. A payment of $100,000 was made in October and a “final” payment of approximately $11,000 was made in November.

Issues for determination

1. [10]

   As at 30 September 2014, monies had been recorded by way of work in progress in the records of the practice, representing fees which had been recorded as chargeable to the administrations then on foot but which had not then been paid. In some of the administrations, no funds were available. In others, money was held but the formal steps required for payment had not been taken. The parties referred to these fees as “WIP Assets”. No allowance was made in the payment to Shazbot for any share of the WIP Assets. Nor was any allowance made for any goodwill associated with the CWK practice or the Debtfree business, or for the value of the shares in DF. The defendants deny that they had any obligation to do so.

2. [11]

   The first issue for determination is the legal nature of the relationship under which the CWK practice was conducted. The plaintiffs contend that, as a matter of proper legal analysis, there was a partnership between Mr Warner and Mr Kugel personally. Alternatively, they say there were personal relations of confidence between them giving rise to quasi-partnership fiduciary obligations. The defendants deny that any fiduciary obligations were owed by Mr Warner personally. The defendants’ case is that the CWK practice was conducted by CWK Pty Ltd as trustee of the CWK Unit Trust and there was, in law, no partnership relationship at all. A subsidiary question is whether, if there was a partnership, it included the Debtfree business.

3. [12]

   The second issue is whether the plaintiffs have any further right to a share of the value of the WIP Assets or of the Debtfree business. The plaintiffs claim that upon dissolution of the partnership they are entitled to orders which would secure Mr Kugel a half interest in the WIP Assets (and a half interest in the value of the Debtfree business). Orders are sought for the quantification of those alleged entitlements pursuant to the Partnership Act 1892 (NSW), s 39. The defendants contend that any entitlement to a share in the WIP Assets or the Debtfree business (whether by way of partnership distribution or otherwise) was surrendered by agreement in September 2014. The defendants’ contention is that all of the obligations which they have, have been complied with.

4. [13]

   The third issue is, should the plaintiffs have some entitlement to a share of the WIP Assets or the Debtfree business, how the value of that is to be determined. Initially, both parties presented expert evidence on valuation questions, but it was accepted in the course of the hearing that the Court would not itself go into the details of calculation and would refer the ascertainment of the quantum of any entitlement to a referee. The parties, however, disagree, as to how the accounting process ought to be undertaken.

Summary and analysis of evidence

1. [14]

   Mr Kugel gave evidence in the plaintiffs’ case and Mr Warner gave evidence in the defendants’ case. Both were cross-examined at length. Much of their evidence appeared straightforward and credible. But there were difficulties with some aspects of each of their evidence and there were some areas where their evidence was in conflict. I approach the evidence of both of them on issues in dispute with some reservation.

2. [15]

   Evidence was also given in the defendants’ case by Peter Malone and Jack Panaghis. Mr Malone was employed in the CWK practice as a member of the professional staff. He was a senior manager who reported to both Mr Warner and Mr Kugel. Mr Panaghis performed a similar role at Debtfree. Both witnesses were briefly cross-examined. Their credibility was not questioned and I accept their evidence so far as it goes.

3. [16]

   Mr Warner and Mr Kugel first met when they were both working as members of the employed professional staff at an accountancy firm known as Thompson Douglas Butterell (now Grant Thornton). They both later worked in different insolvency practices but remained in touch with each other and from time to time they discussed working together.

4. [17]

   Mr Warner and Mr Kugel had further discussions about working together in late October 2006 or thereabouts. At that time Mr Kugel was a member of the professional staff of an insolvency firm known as GHK Green Krejci. Mr Warner was conducting an insolvency practice under the name “CRS Warner Sanderson” (to which I will refer as “CWS”) with Clifford John Sanderson, another insolvency practitioner.

5. [18]

   The CWS practice had originally been established by Mr Warner (alone) under the name “CRS Partners” in May 2005. Mr Warner was joined by Mr Sanderson in August 2005. The practice operated from leased premises at 30 Clarence Street, Sydney. It used the internet domain names “crspartners.com.au” and “crswarnersanderson.com.au”.

6. [19]

   Mr Warner and Mr Sanderson were also involved in a business of direct marketing of debt agreements under Part IX of the Bankruptcy Act. The business operated under the name “Debt Free Direct” or “Debtfree”. Such agreements provide an alternative to formal bankruptcy, typically for consumer debtors with few assets or liabilities who are unable to meet their financial commitments. They operate under a system of registration with the Australian Financial Security Authority (“AFSA”). The agreements are administered by a registered debt agreement administrator, approved by AFSA.

7. [20]

   The direct marketing model was derived from an English group of companies, the holding company for which was Debt Free Direct Group PLC (“DFD Group”). There were two Australian companies involved. One was called Debt Free Direct Australia Pty Ltd (“DFDA”). DFDA was a subsidiary of DFD Group. The other company was called Debtfree Pty Ltd (“DF”). DF was owned by Mr Sanderson and Mr Warner.

8. [21]

   The Debtfree business was established in Australia pursuant to what was termed a “joint venture” agreement entered into in June 2006 between DFD Group and its subsidiaries on the one hand and Mr Warner, Mr Sanderson and DF on the other. The idea was that DFD Group would fund the establishment of the Australian business, which would be run on a day-to-day basis by Mr Warner and Mr Sanderson. It was hoped in due course to float the business, with Mr Warner and Mr Sanderson receiving a share.

9. [22]

   According to Mr Warner this “joint venture” agreement was later documented in two written contracts executed in August. The first contract was between DFDA and DF, Mr Warner and Mr Sanderson and was styled the “Services Agreement”. The second contract was between three DFD Group companies (including the parent), DFDA, DF, Mr Warner and Mr Sanderson, and was referred to in the evidence as the “Share Issue Agreement”.

10. [23]

    The copies of the contracts in question which were annexed to Mr Warner’s affidavit, although executed by Mr Warner, Mr Sanderson and DF, were not executed by DFD Group or DFDA. The body of each agreement contained provisions which appeared still to be in draft. Mr Warner’s evidence on this subject was not challenged and I proceed on the basis that Mr Warner’s evidence on the subject was accurate and the documents in evidence represented the substance of the agreements between both parties.

11. [24]

    Pursuant to these arrangements, the business was operated through DFDA. The board of DFDA consisted of DFD Group managers, Mr Warner and Mr Sanderson. Mr Sanderson was the chief executive officer. Under the Services Agreement, DF (which apparently held the registration as a debt agreement administrator with AFSA), provided the necessary administration services in return for a fee of $25,000 per month (to begin in November or December 2006). The Share Issue Agreement gave one of the DFD Group companies, Debt Free Direct (Australia) Ltd (not to be confused with the Australian company, DFDA, which was its subsidiary), the right to acquire the shares in DF. But it also provided, in the event of the business being floated, for Mr Sanderson and Mr Warner, between them, to receive twenty-five per cent of the issued share capital of that company or thirty per cent if the float was valued at $35 million or more.

12. [25]

    DFDA commenced operations in August 2006. It conducted its business from offices which were located on the other half of the floor occupied by the CWS practice at 30 Clarence Street. Following negotiations with the landlord, DFDA took a lease over the whole of the floor, with CWS contributing a half share of the rent.

13. [26]

    The catalyst for Mr Kugel joining Mr Warner and Mr Sanderson in practice was that Mr Kugel had connections with those who controlled the estate of the late Rene Rivkin, who had been a flamboyant and apparently very wealthy Sydney stockbroker. A large tax demand had been made on the estate and it appeared that it would need to go into bankruptcy. The understanding reached between Mr Warner and Mr Kugel was that Mr Kugel would join the CWS practice and persuade the executors of Mr Rivkin’s estate to appoint Mr Warner as the estate’s trustee (since Mr Kugel himself was not a registered trustee in bankruptcy).

14. [27]

    On 2 November, Mr Warner sent an email to Peter Harkin, a solicitor of the firm Colin Biggers & Paisley, setting out what he described as “some key terms for our intended partnership” with Mr Kugel. Mr Warner asked Mr Harkin to have them formalised into a partnership deed and noted that Mr Kugel had asked that he (Mr Warner) pass them on to Mr Harkin. The “key terms” were as follows:

15. [28]

    In his first affidavit, sworn in December 2015, Mr Warner said that following an initial meeting with Mr Kugel in which the issue had been raised, he discussed the question of Mr Kugel joining the firm and then had a further meeting with Mr Kugel in which they had a conversation to the following effect:

16. [29]

    Mr Kugel’s version of events, in his affidavit of March 2016, was as follows:

17. [30]

    There was no evidence from either Mr Kugel or Mr Warner concerning the heads of agreement sent by Mr Warner to Mr Harkin on 2 November.

18. [31]

    The accounts of Mr Kugel and Mr Warner about the negotiations which took place prior to Mr Kugel joining the practice differed in some details. On Mr Kugel’s account, the words “partner” and “partnership” were expressly used to describe his status in the CWS practice. Mr Warner’s account did not include the word “partner” but I see no reason to doubt that it was used in the discussions. The heads of agreement sent to Mr Harkin specifically describe the relationship as a partnership and, as will be seen, the term was thereafter used by all the parties to describe the relationship between them. It is not necessary to seek to try to resolve the other discrepancies, such as who initiated the proposal.

19. [32]

    Mr Warner was appointed to the Rivkin estate bankruptcy, and Mr Kugel joined the CWS practice, on 7 November.

20. [33]

    In response to Mr Warner’s email of 2 November, at some point in the following few weeks Mr Harkin prepared a memorandum headed “Partnership Deeds”. The memorandum set out twenty-five numbered issues to be considered and left space for responses. On 7 December, Mr Sanderson circulated to Mr Kugel and Mr Warner his suggested responses. The questions posed by Mr Harkin and Mr Sanderson’s responses (shown in bold) included the following:

21. [34]

    Mr Sanderson’s covering email stated:

22. [35]

    The reference to “Rod” was to Rodney Grosvenor, a tax accountant who acted as an advisor to Mr Warner and Mr Sanderson. Mr Grosvenor’s firm acted as tax agent for the CWS practice entities.

23. [36]

    Shortly after circulating his responses to Mr Harkin’s questions Mr Sanderson circulated an email he had received from Mr Grosvenor on 28 November attaching a diagram which Mr Sanderson described as the “current legal structure”.

24. [37]

    The diagram showed three entities involved in the CWS practice. One was Corporate Restructuring Solutions Administration Pty Ltd (“CRS Administration”), referred to in the 2 November heads of agreement, which was shown as holding “assets/staff/leases”. The second was another company called Corporate Restructuring Solutions Pty Ltd, acting as trustee of a unit trust known as the “CRS Unit Trust”. The third entity was a partnership named “CRS Warner Sanderson”.

25. [38]

    The diagram showed an administration fee passing between the CRS Unit Trust and CRS Administration. Although the arrow depicted the fee going from CRS Administration to the unit trust, this cannot be correct and the flow of money must have been the other way; this is confirmed by other evidence. A ten per cent “commission” was shown as flowing from the CRS Unit Trust to the partnership.

26. [39]

    The diagram showed Mr Sanderson and Mr Warner as the partners in the “CRS Warner Sanderson” partnership and the owners of Corporate Restructuring Solutions Pty Ltd, the trustee company. The units in the unit trust were owned by Warner Capital and Sanderson Capital Pty Limited (“Sanderson Capital”) as trustees for Mr Warner’s and Mr Sanderson’s family trusts. The shares in CRS Administration were owned by Warner Capital and Sanderson Capital. DFDA was shown on the diagram but not as part of the structure. DF was not shown at all.

27. [40]

    Another entity shown on the diagram but not as part of the structure was a company called CRS Corporate Finance Pty Ltd. According to Mr Warner, this company was incorporated when he and Mr Sanderson established the CWS practice in August 2005. Although the company seems to have been regarded as part of the practice structure (see recital H to the Deed of Indemnity and Release executed following the dissolution of the CWS practice, quoted at [71] below) there was no evidence that it undertook any significant activity at the relevant time, or that Mr Kugel had anything to do with it.

28. [41]

    There is no evidence which casts any light on what happened at the meeting with Mr Grosvenor (if it occurred). Nor is there any evidence of any further involvement of Mr Harkin.

29. [42]

    Shazbot was incorporated in January 2007. In Mr Warner's affidavit, he said that this was done so that Shazbot could hold Mr Kugel’s interest in the CWS practice. This evidence was not objected to and Mr Kugel did not address the subject himself. In fact, however, it was not until the financial year ended 30 June 2008 that income from the practice was distributed to Shazbot: see [89] below.

30. [43]

    After he joined the practice in November 2006, Mr Kugel was allocated an email address under the “crspartners.com.au” domain name. The email footer used the name “CRS Warner Sanderson”, and contained no reference to any company name or ACN. Nor did it contain an ABN. The letterhead used on correspondence was in the same form. Emails and letters which went out under the name of Mr Kugel described him as “Partner”. Emails and letters from Mr Warner and Mr Sanderson also described each of them as a “Partner”.

31. [44]

    Soon after Mr Kugel joined the practice, Mr Warner contacted CWS’ insurance brokers, Willis Australia, to update the practice’s professional indemnity insurance. The confirmation issued by Willis, dated 12 December 2006, is in evidence. It shows the named insured as including CRS Administration, Mr Warner, Mr Sanderson, Mr Kugel and the “partnership of Anthony Warner, Clifford Sanderson and Steven Kugel t/as CRS Warner Sanderson”. The relevant business activities were described as “accountants and insolvency practitioners”.

32. [45]

    An account signatory form from Macquarie Bank from the same period is also in evidence. On the form, both Mr Warner and Mr Kugel were shown as “partner” and the company name was shown as “CRS Warner Sanderson”.

33. [46]

    In January 2007 Mr Warner sent to Mr Sanderson and Mr Kugel management accounts for the practice for the months of November and December 2006. These consisted of a profit and loss account for CRS Administration and a profit and loss account and balance sheet for the CRS Unit Trust. Mr Warner stated that CRS Administration’s figures for November had been “split between the new and old partnership”. He indicated that $90,000 would be distributed for the “new partnership”, one third to “each partner”.

34. [47]

    Insolvency practice required that any monies received in the course of an administration be held in a bank account under the name of the practitioner(s) holding the relevant appointment. The account could be drawn on to pay legal fees and other disbursement incurred in the administration. But fees could not be drawn without approval from the creditors, or, in some cases, from the court. The practice was to prepare a remuneration report which would then be submitted for approval. Thus there was a time lag between the work being undertaken and payment being received.

35. [48]

    Where possible, when CWS accepted instructions, contribution would be obtained in advance for costs and disbursements to be incurred in the administration. But this was not possible in every case, and even where a contribution was obtained, it might prove insufficient to cover the costs of the administration. In some administrations, there were insufficient funds to meet fees and disbursements, and recovery was dependent upon the success of recovery proceedings against third parties.

36. [49]

    The CWS practice maintained a system to keep track of fees incurred which had not yet been paid, which were referred to as “work in progress”. The system also appears to have included disbursements incurred by CWS where there were no funds in the administration, which were referred to as “outlays”. The system ran under a software package called “Viztopia”. It was separate from the bookkeeping system which did not record fees or recovery of disbursements until the amounts were actually received. Once fees were approved, a cheque would be drawn in favour of the relevant practitioner (who was legally the person entitled to receive the fees). The practice adopted within CWS was then for the practitioner(s) in question to endorse the cheque over to Corporate Restructuring Solutions Pty Ltd as trustee for the CRS Unit Trust. A tax invoice would be issued under the CRS Unit Trust’s ABN for GST purposes.

37. [50]

    Bookkeeping was done for the CWS practice by its staff, and management accounts were prepared. Every few months cash drawings would be made from the practice’s cash on hand. I have already referred to Mr Warner’s email to Mr Sanderson and Mr Kugel about the January 2007 distribution. Mr Warner was principally responsible for supervising the preparation of management accounts, and for proposing the amounts to be drawn, and the process continued thereafter under his direction.

38. [51]

    In March 2007 Mr Warner, Mr Sanderson and Mr Kugel agreed to undertake the direct marketing of company liquidations online, in a manner similar to the marketing of Part IX debt agreements in the Debtfree business. They agreed to register the business name “Company Liquidations Direct” for this purpose and established a website under the domain name www.liquidationsdirect.com.au. The registration of the business name was organised by Mr Warner. The proprietor of the name was recorded as Corporate Restructuring Solutions Pty Ltd.

39. [52]

    By July 2007 the relationship between Mr Sanderson on the one hand, and Mr Warner and Mr Kugel on the other hand, had become strained. Mr Kugel felt that Mr Sanderson was not making sufficient contribution to the CWS practice. Mr Warner agreed. A meeting took place on 4 July between the three men. A file note by Mr Kugel records:

40. [53]

    By August, Mr Sanderson had become frustrated in his dealings with DFD Group management. Mr Warner had arranged to visit the DFD Group management in England on 24 August. On 22 August, Mr Sanderson emailed Mr Warner. Mr Sanderson said that he could not operate as CEO and that he would welcome it if DFD Group were to remove him as CEO provided they did not interfere with his shareholding in DF. Mr Warner passed this on at the meeting with DFD Group management and agreed to take over as CEO of the Debtfree business in Australia. Mr Sanderson was eventually removed as a director of DFDA (and thus as CEO) on 27 October.

41. [54]

    Mr Kugel took the position, supported by Mr Warner, that Mr Sanderson's departure from the Debtfree business meant that he was no longer contributing anything to the partnership and should leave. Mr Sanderson had retained Colin Biggers & Paisley to advise on issues arising out of the termination of Mr Sanderson's involvement with Debtfree. Mr Kugel and Mr Warner told Mr Sanderson that the retainer of Colin Biggers & Paisley was a private matter of Mr Sanderson's which would not be paid for out of the CWS practice. They retained their own solicitor, Deborah Searle, to act for them in their dealings with Mr Sanderson.

42. [55]

    On the morning of 19 September, Colin Biggers & Paisley forwarded to Mr Kugel a proposed Deed of Indemnity and Release providing for Mr Sanderson to leave the partnership. Mr Kugel consulted Mr Warner and Ms Searle. At 5.34 pm Mr Warner sent an email to Mr Sanderson, copied to Mr Kugel, which relevantly stated:

43. [56]

    The email went on to provide figures for the CRS Unit Trust, CRS Administration and “CRS Warner Sanderson”. It appears that separate accounts were still being maintained for the former CRS Warner Sanderson practice up until Mr Kugel had joined the previous November, and this is what “CRS Warner Sanderson” referred to. The net assets of the CRS Unit Trust were to be divided equally between Mr Warner, Mr Sanderson and Mr Kugel. CRS Administration had only minimal funds. The net assets of “CRS Warner Sanderson” were to be divided equally between Mr Sanderson and Mr Warner.

44. [57]

    Mr Warner and Mr Kugel took immediate steps to secure the loyalty of the staff of the CWS practice. Letters were prepared to the staff members and delivered on 19 September. The letters were drafted by Mr Kugel and signed by Mr Warner. They stated:

45. [58]

    The following day, 20 September, CWK Pty Ltd was incorporated. This was organised by Mr Warner. The shareholders were Shazbot and Warner Capital. Mr Warner and Mr Kugel were the directors.

46. [59]

    The new CWK practice continued to use the “crspartners.com.au” domain name, and also established the domain name “www.crswarnerlegal.com.au”. The firm name shown on emails and letterheads was changed to “CRS Warner Kugel” but the form of the email footers and letterheads was otherwise unaltered. Mr Warner and Mr Kugel continued to be identified as “Partner”.

47. [60]

    In evidence is an email sent by Mr Warner to two clients on 21 September (and copied to Mr Kugel). The email stated:

48. [61]

    On 27 September Mr Warner wrote to Willis Australia on CWK letterhead as “partner”. The letter stated:

49. [62]

    The letter went on to ask that CWK Pty Ltd be noted as an additional insured entity on the policy.

50. [63]

    On 6 October (a Saturday) Mr Warner emailed Mr Kugel as follows:

51. [64]

    Mr Kugel organised the establishment of a unit trust in accordance with Mr Warner’s request. It appears to have been arranged through an accountancy firm called Watson Business Accountants. This was the firm of Maurice Watson, who was retained by Mr Warner and Mr Kugel as an accounting and tax advisor in place of Mr Grosvenor.

52. [65]

    The trust deed, backdated to 20 September 2007 in accordance with Mr Warner’s request, is in evidence. CWK Pty Ltd was the trustee. Warner Capital and Shazbot were the unit holders. The trust was called the CRS Warner Kugel Unit Trust. The deed was executed by Mr Kugel on behalf of CWK Pty Ltd, and by Mr Warner and Mr Kugel on behalf of Warner Capital and Shazbot.

53. [66]

    On 17 October Mr Warner arranged for the registration of “CRS Warner Kugel” as a business name. The registration was in the name of CWK Pty Ltd. By this stage the company had obtained an ABN in its corporate name and that ABN was recorded on the registration.

54. [67]

    Mr Kugel and Mr Warner had decided, seemingly so as to take advantage of advertising on Google, that the name of the direct marketing business for company liquidations should be “Liquidation Direct” rather than “Liquidations Direct”. On 19 October, they established a new domain name of “www.liquidationdirect.com.au”. The business name “Liquidation Direct” was registered on 30 October. Again the registered owner was CWK Pty Ltd under its corporate ABN.

55. [68]

    Meanwhile, negotiations continued between Mr Warner and Mr Kugel on the one hand and Mr Sanderson on the other about the dissolution of the partnership. Mr Sanderson retained Phillip Stern, solicitor, of Addisons, in place of Colin Biggers & Paisley. His position was that, while the partnership had been terminated on 19 September, he did not accept that the figures provided on 19 September represented a full and final accounting from the partnership. Mr Kugel and Mr Warner caucused about this. On 24 September, Mr Kugel forwarded to Mr Warner the email from Mr Sanderson from the previous December attaching Mr Sanderson’s comments on the issues raised by Mr Harkin (see [33] above). Mr Warner wrote back to Mr Kugel:

56. [69]

    On 22 October Mr Sanderson emailed Mr Warner saying that he had lost Viztopia from his computer. He said he needed it to review the WIP and debtors of the practice. He asked Mr Warner to reload it and also to provide him with a WIP analysis which Mr Warner had mentioned having undertaken as at 19 September. Mr Warner and Mr Kugel ignored this request. On 30 October, Mr Stern, on behalf of Mr Sanderson, wrote to Ms Searle formally repeating the request. Mr Kugel and Mr Warner instructed Ms Searle to take the position that Mr Sanderson had received a full accounting of the assets of the partnership as at 19 September 2007 as shown in the accounts, including debtors. Strictly speaking, this may have been correct, but of course the point was that WIP was not included in the accounts until it was actually received.

57. [70]

    On 8 November the paperwork came in to approve fees in a longstanding administration, for the bankrupt estate of Edna Liddell. The administration dated back to before Mr Sanderson joined Mr Warner in August 2005. Mr Warner emailed Mr Kugel:

58. [71]

    The dispute between Mr Warner, Mr Sanderson and Mr Kugel was eventually settled in accordance with a Deed of Indemnity and Release executed in December. The parties to the Deed were Mr Warner, Mr Sanderson and Mr Kugel personally and their respective companies, Warner Capital, Sanderson Capital and Shazbot. Neither Corporate Structuring Solutions Pty Ltd nor CRS Administration was a party. Nor was CWK Pty Limited. The recitals to the Deed included the following:

59. [72]

    The Deed provided for Mr Warner and Mr Kugel to pay Mr Sanderson and Sanderson Capital the sum of $10,000 in “full and final satisfaction of all of [Mr Sanderson's] entitlement to the assets of the dissolved partnerships”. In return, Mr Sanderson and Sanderson Capital were to transfer all of their shares and units in Corporate Restructuring Solutions Pty Ltd, CRS Administration, CRS Corporate Finance Pty Ltd and the CRS Unit Trust. The $10,000 consideration was attributed to the units in the Unit Trust.

60. [73]

    The figure of $10,000 represented an additional amount above the net assets of the partnership in accordance with the account proffered in Mr Warner's letter of 19 September; it thus gave Mr Sanderson something on account of WIP, although, according to both Mr Kugel and Mr Warner, only part of the amount Mr Sanderson would have received on a full account.

61. [74]

    The position taken by Mr Kugel in these proceedings with respect to WIP, namely that it became an asset of the practice when it was incurred, is inconsistent with the position taken by Mr Kugel and Mr Warner in their dealings with Mr Sanderson. But the tone of their private communications, with its talk of “peddling” the view that Mr Sanderson was not entitled to share in the WIP, and the mock concern about Mr Sanderson missing out on WIP subsequently collected for the Liddell estate, shows that they had no genuine belief that it was proper or correct. Mr Warner and Mr Kugel were just being, as they thought, clever. Their tactics in dealing with Mr Sanderson reflect no credit on either of them but are otherwise irrelevant to the issues which I must determine.

62. [75]

    In the end, Mr Sanderson did receive a payment on account of the WIP although it did not represent the full amount due. Indeed the fact that Mr Warner made an allowance in his favour out of the Liddell estate fees for the period when he was a sole practitioner shows that as between themselves, Mr Warner and Mr Kugel adopted the approach that the WIP should be distributed according to the ownership of the practice at the time it was incurred, rather than the time it was received.

63. [76]

    The Deed of Indemnity and Release provided for the tax returns for the three CWS companies and the CRS Unit Trust for the financial years ended 30 June 2007 and 30 June 2008 to be prepared and lodged by Mr Grosvenor. The Deed did not refer to the preparation and lodgement of the CWS partnership tax return. Nonetheless this was done as well. In the CRS Unit Trust return the beneficiaries were shown as Warner Capital, Sanderson Capital and Mr Kugel personally in the 2007 return but Shazbot was shown as the third beneficiary in the 2008 return. Mr Sanderson, Mr Warner and Mr Kugel personally were shown as the partners for the CWS partnership tax returns for both years.

64. [77]

    As we have seen, the CWK practice was represented by Mr Warner to clients, employees and others as being a partnership between himself and Mr Kugel. Mr Warner also acquiesced in similar representations being made by Mr Kugel. This continued right up to the dissolution of the practice. Similar representations were made, and acquiesced in, by Mr Warner concerning the CWS practice when it was being conducted with Mr Sanderson.

65. [78]

    The Statement of Claim in the proceedings alleges that the relationship between Mr Warner and Mr Kugel from September 2007 onwards was one of partnership and that the prior relationship between Mr Warner, Mr Sanderson and Mr Kugel had also been one of partnership. The defence denies that Mr Kugel and Mr Warner were in partnership after September 2007. But it admits that the prior relationship with Mr Sanderson was a partnership. Initially this had been denied, but an amendment was made to the defence in November 2017 to make the admission. In his affidavit, Mr Warner said that he “now” realised that the relationship between himself and Mr Sanderson and Mr Kugel had been a partnership. He repeated this under cross-examination. I consider the effect of this “admission” in determining the legal relationship between the parties, below.

66. [79]

    By January 2008 DFD Group (now called Fairpoint) wanted to get out of the Debtfree business in Australia. Mr Warner entered into negotiations with the representatives of Fairpoint to take over the remainder of the business so it could be operated alongside the CWK practice.

67. [80]

    Mr Warner initially wanted to offer a percentage of DFDA’s book but eventually offered to purchase the business for $60,000 over three $20,000 instalments. Mr Kugel agreed to this on the proviso that no more should be offered. The offer was accepted. Debt Free Direct (Australia) Ltd exercised its rights under the Share Issue Agreement to acquire the shares in DF from Mr Warner and Mr Sanderson, with a view to transferring them to Mr Warner and Mr Kugel. Mr Sanderson resigned as a director of DF leaving Mr Warner as the sole director.

68. [81]

    On 22 January Mr Warner emailed Mr Kugel about a new administration coming in. Mr Kugel asked where from and Mr Warner replied teasing him about not being in the office. Mr Kugel’s response indicated he was somewhat offended by this and Mr Warner tried to smooth things over. He wrote:

69. [82]

    The purchase of the Debtfree business was formalised under a deed styled “Deed of Sale of Shares and Assets” dated 31 January. CWK Pty Ltd purchased from Debt Free Direct (Australia) Ltd the shares in DF. CWK Pty Ltd also purchased from DFDA various items of computer and office equipment. DFDA remained the owner of the domain name “www.debtfreedirect.com.au” and the trademark “Debtfree Direct”, but DF was licensed to use the Debtfree Direct website and trademark for a period of twelve months. It was also agreed that DF could use its newly registered domain name “www.getdebtfree.com.au” and the “Debtfree” business name which it had earlier registered but not used.

70. [83]

    The Debtfree business was conducted by DF alongside the CWK practice. DF employed its own staff. Most of its expenses (such as telephone expenses) were contracted, and paid for, in its own name. Some expenses (such as rent and electricity) were shared with CWK. Should one of DF’s customers find that he or she needed to go into a formal bankruptcy, the matter would be referred to CWK. Debtfree promoted itself as having access to insolvency practitioners for this purpose in its website.

71. [84]

    The staff of the CWK practice operated in two practice groups, one for corporate insolvency and one for personal insolvency. Generally, Mr Kugel managed the corporate insolvency work and Mr Warner managed the personal insolvency work. Mr Warner was largely responsible for managing the Debtfree business. But Mr Kugel occasionally assisted when required. In March 2008, Debtfree business cards were printed for Mr Kugel showing him under the title of “Director – Sales and Marketing”.

72. [85]

    The system of incurring WIP and later recovering fees after obtaining approval which I have described for the CWS practice continued for the CWK practice. The procedure adopted was to have regular “fee runs” where approval would be sought and monies paid out for all administrations where funds were available. Initially this happened every month or so, but later it occurred every quarter. Mr Warner also continued to supervise the practice bookkeeping and the distributions of income from the practice. Bookkeeping and distributions of dividends from DF were likewise looked after by Mr Warner.

73. [86]

    It appears that initially the income and expenses of the CWK practice were recorded under the corporate ABN for CWK Pty Ltd, but Mr Warner decided (presumably on Mr Watson’s advice: see [87] below) that this was a mistake and the income and expenses should have been recorded under an ABN for the Unit Trust. In July 2008 the corporate ABN for CWK Pty Ltd was cancelled. The record of the corporate ABN on the business names which had been registered the previous October was left unchanged.

74. [87]

    In October 2008 Mr Warner wrote to Mr Watson:

75. [88]

    There was no direct evidence from Mr Warner or Mr Kugel about this instruction to Mr Watson or the reasons for it. But in the absence of any challenge from Mr Kugel I infer that this instruction, and the reason given for it, were discussed beforehand, and agreed, between Mr Warner and Mr Kugel. The transfer proceeded, the transfer forms being backdated to 30 June.

76. [89]

    Watson Business Accountants undertook preparation of the accounts and tax returns for DF and for the CWK practice for the year ended 30 June 2008. The approach adopted for the CWK practice was simpler than that which had been adopted for the CWS practice. There was no allocation of a share of the income by way of “commission” to a separate partnership. Nor was there a separate administration company. All of the net income from the operation of the practice was returned as income of CWK Pty Ltd as trustee of the CWK Unit Trust. The net income of the unit trust was distributed to Warner Capital and Shazbot as beneficiaries.

77. [90]

    In July 2009 the preparation of the tax returns and accounts for the CWK practice and DF was transferred from Watson Business Accountants to the firm of Manser Tierney & Johnston. This was done to save money; Mr Watson appears to have continued to act as an advisor when required. Manser Tierney & Johnston prepared the tax returns and financial statements from the year ended 30 June 2009 onwards. They followed the same general approach as Watson Business Accountants, which remained unchanged thereafter.

78. [91]

    In September 2010 Mr Warner applied to have Mr Kugel admitted as an affiliate member of the Institute of Chartered Accountants in Australia (ICA). The application form showed the “company name” as “CRS Warner Kugel” and Mr Kugel’s position as “partner”. The practice entity offered a choice of sole practitioner, partnership, company, and trust. The “partnership” box was selected. The form was signed by Mr Warner on behalf of the “practice entity”. One of the sections required the identification of all practice entity participants, requiring a list of “all partners/directors/trustees”. Mr Warner and Mr Kugel were listed as having a fifty per cent holding each; no other entity was identified.

79. [92]

    After some point (not identified in the evidence), the Debtfree business began to offer personal insolvency agreements under Part X of the Bankruptcy Act alongside debt agreements under Part IX. Part X arrangements required a registered bankruptcy trustee to act as the trustee of the property the subject of the agreement. This was done by Mr Warner. The fees to which he was entitled were made over to DF and accounted for as part of its income. Records appear to have been kept of WIP incurred using the same system as was used for bankruptcies and corporate insolvencies.

80. [93]

    In March 2008 Mr Warner and Mr Kugel moved the CWK practice and the Debtfree business to leased premises at 36 Clarence Street. In February 2010 they took a five year lease at 56 Clarence Street and moved the CWK business there.

81. [94]

    Starting in 2010, Mr Warner and Mr Kugel began to undertake direct marketing of the CWK practice’s services on the internet under the additional name “The Insolvency Experts”. The name was registered as a business name on behalf of CWK Pty Ltd in March 2010.

82. [95]

    A domain name (www.insolvencyexperts.com.au) was acquired and internet advertising was undertaken. An associated 1300 telephone number was obtained. Mr Kugel was mainly responsible for this aspect of the practice. The Liquidation Direct website was eventually folded into the Insolvency Experts website with the separate Liquidation Direct website being shut down in May 2012.

83. [96]

    The Insolvency Experts website, which was published from 2013 onwards, stated:

84. [97]

    The website advertised that all calls on the 1300 number would be answered “by a Senior Partner”. The entity behind the website was shown as “CRS Warner Kugel trading as The Insolvency Experts”.

85. [98]

    In mid-2012 the statutory regime for directors penalty notices (“DPNs”) changed. Where a company has failed to comply with its tax withholding obligations, such a notice may be issued, imposing liability on the director to pay the relevant tax personally. Previously, a director could avoid personal liability if the company was put into liquidation or voluntary administration within fourteen days of receiving the DPN. This created an incentive for directors to place companies in voluntary administration or liquidation. The statutory changes reduced the incentive by limiting the circumstances in which this defence to a DPN was available.

86. [99]

    According to Mr Warner, Mr Kugel told him that this change would mean that the corporate insolvency aspect of the CWK practice would never be the same again. Mr Warner said that Mr Kugel also expressed the view more generally that the insolvency business was a “race to the bottom” because of the increasing level of regulation and that he (Mr Kugel) would rather operate as a “middle man with no regulation”.

87. [100]

    According to Mr Warner this resulted in a decrease in the number of corporate insolvencies coming in. In September 2014 Mr Kugel emailed Mr Malone:

88. [101]

    According to Mr Warner, Mr Kugel also displayed less commitment to the practice from this time onwards. Mr Warner said that Mr Kugel involved himself with the development of other websites which had nothing to do with CWK’s business, and on Wednesdays would spend the morning playing golf and then leave work early. Mr Warner said he was told by a mutual acquaintance, Matt Davis, in early 2014 that he (Mr Davis) had been told by Mr Kugel that he wanted to retire. But there was no evidence from Mr Davis and Mr Kugel was not cross-examined on the point.

89. [102]

    Mr Warner acknowledged that, despite these developments, the CWK practice and the Debtfree business continued to operate profitably. The net profit figures for the CWK practice (as recorded in financial statements of the CWK Unit Trust) for the years ended 30 June 2012, 2013 and 2014 were $1.12 million, $1.24 million and $1.44 million respectively.

90. [103]

    At some point in the first half of 2014, Mr Warner decided that he wanted to end his business relationship with Mr Kugel. His plan was to establish a separate practice and take the personal insolvency work (including the Debtfree business) to that new practice. To this end, in April 2014 he registered some domain names for his new business. Using monies from his superannuation fund, he also purchased new premises. This was done in July.

91. [104]

    Mr Warner also took steps to cease paying out monies from the personal insolvency side of the practice. A fee run had been done in February 2014 for both the corporate and personal insolvency administrations. Subsequent fee runs were done for the corporate insolvency administrations in June and in early September. But Mr Warner ensured that no fee run was done for the personal insolvency administrations. And when, on 19 May, in preparation for the June end of financial year, Mr Watson asked Mr Warner about whether DF would be paying a dividend, Mr Warner told Mr Watson that it would not.

92. [105]

    Mr Warner kept the arrangements he was making to establish his own business secret from Mr Kugel. Nor did he tell him about not paying a dividend from DF or about the fact that no fee run had been done for the personal insolvency administrations. Mr Warner’s plan was to take all the steps he needed to prepare himself to depart and take the personal insolvency business with him, and then to spring this on Mr Kugel so that Mr Kugel would have the minimum possible time to react to it. In his evidence, Mr Warner sought to justify these tactics by saying that he was worried that Mr Kugel might react irresponsibly, but I do not believe this for one moment. Mr Warner was simply seeking to serve his own interests.

93. [106]

    Mr Kugel is a classically trained singer who interrupted his insolvency career between 1993 and 1995 to sing professionally. After that, he retained an interest in singing and became friendly with the famous Welsh singer, Bryn (now Sir Bryn) Terfel. In September 2014 the 49th and 50th birthdays of Mr Kugel and Mr Terfel were approaching. Mr Kugel emailed Mr Terfel asking whether he was interested in meeting somewhere in the world for a few days of golf from October onwards. Mr Terfel responded positively. This was on 12 September.

94. [107]

    The conversations which led to Mr Kugel leaving the CWK practice took place on Friday 19 September and Monday 22 September. Mr Warner and Mr Kugel gave conflicting accounts of the conversations, which I discuss in more detail below. But it was common ground between them that there were three conversations. The first took place at lunchtime on Friday 19 September. The second took place over coffee at about 9:30 am on Monday 22 September. The third took place in Mr Warner's office about ninety minutes later at about 11.00 am. At the third meeting Mr Kugel signed some minutes prepared by Mr Warner. I refer to those minutes in more detail below.

95. [108]

    Neither Mr Warner nor Mr Kugel took notes of what was said during the three meetings. But there are some emails sent by Mr Kugel during the period which allow some inferences to be drawn. The first is an email sent at 3:03 pm on Friday afternoon (after the lunchtime meeting) to Myee Allison, the practice’s bookkeeper. Mr Kugel asked her to contact Toyota Finance and get a payout figure for his car which was leased through the practice.

96. [109]

    At 5:47 am on Monday 22 September Mr Kugel sent an email to the office staff asking him not to use his credit card for business expenses. Between 6.27 am and 6:30 am he sent three emails concerning potential liquidation jobs. Each of the emails advised that he was “taking indefinite leave immediately” and that he would be unable to assist with the matter, and directed any inquiries to Mr Warner. At 6:43 am he sent an email to the Australian Taxation Office stating that he was no longer accepting court-appointed liquidations and wished to be removed from the ATO's list of liquidators.

97. [110]

    At 6:09 am Mr Kugel sent an email to the corporate insolvency staff to find out what official liquidations were still open and current. One of the staff, Sam Thing, responded with a table of eleven official liquidations at 8:33 am. One of the columns showed the funds held. A total of approximately $85,000 was held. The largest amount, approximately $63,000, was held for a company called Globalone Pacific Pty Ltd (also called, and to which I refer, as “Global One”). Amounts of approximately $15,000, $7,000 and $700 were held for three other companies. Nothing was held for the other seven.

98. [111]

    The table showed two other columns, one headed “Fees Approved” and one headed “Fees”. Nothing was shown in the “Fees Approved” for any of the liquidations; $74,000 was shown in the “Fees” column. Given Mr Warner’s later estimate that there was WIP of approximately $30,000, it may be that this table did not show WIP and the figures for “Fees” were for fees already recovered. The issue was not explored further in the evidence.

99. [112]

    Before his meeting with Mr Warner, Mr Kugel also sent an email to Mr Terfel (then in the United Kingdom). The email was shown as being sent to Mr Terfel at 10:10 pm on Sunday 21 September, UK time. Assuming that the UK was then still on summer time, this would have been 7:10 am in Sydney.

100. [113]

     In the email, Mr Kugel told Mr Terfel that he and Mr Warner were breaking up and the proposed trip was off. Mr Terfel responded at 9.42 am Sydney time by asking why the break up had happened and whether it had been on the cards. Mr Kugel’s reply, which was sent at 10.40 am Sydney time, was as follows:

101. [114]

     The minutes prepared by Mr Warner and signed by Mr Kugel in Mr Warner’s office at 11 am described themselves as minutes of “General Meetings” of CWK Pty Ltd and DF. The CWK Pty Ltd minute showed Mr Warner and Mr Kugel as attending as directors, rather than as representatives of the shareholders, Shazbot and Warner Capital, as would have been appropriate for a general meeting. Similarly, the DF minute showed Mr Warner (the sole director) attending as a director and Mr Kugel in attendance. The CWK Pty Ltd minute recorded Mr Kugel’s resignation as a director and a resolution being passed to change the name to “CRS Partners”. The DF minute stated:

102. [115]

     A transfer form for Shazbot’s share in DF was also signed and dated on the same date. Mr Warner also signed notifications to the Australian Securities and Investment Commission of these changes.

103. [116]

     Neither the minute nor the ASIC notification for CWK Pty Ltd referred to the transfer of Shazbot’s share in that company. A search of the company, dated October 2015, shows Shazbot as still recorded as a shareholder. But it seems that Mr Kugel has had nothing to do with the company, and it has been under Mr Warner’s control, since 22 September 2014.

104. [117]

     Mr Kugel ceased worked in the CWK practice immediately after his conversation with Mr Warner at 11 am on 22 September. Mr Kugel took control of the Insolvency Experts business name and the domain name “insolvencyexperts.com.au”. He also took over the associated 1300 number. The domain name, the 1300 number and the business name were formally transferred to Shazbot over the following weeks.

105. [118]

     On 3 October, Mr Warner sent Mr Kugel a text message which stated:

106. [119]

     On 13 October Mr Warner emailed Mr Kugel as follows:

107. [120]

     On 13 October Mr Kugel completed a notice of change of details of a liquidator form for the Australian Securities and Investments Commission. The form recorded him ceasing to be a member of the firm CWK and as practising as a liquidator from his home address in Killara. The date given for the change was 26 September. On 14 October 2014 Mr Warner arranged for the form to be lodged with ASIC and notified Mr Kugel that he had done so. In response Mr Kugel emailed:

108. [121]

     Following his departure from the CWK practice, Mr Kugel, now trading as Insolvency Experts, referred a number of corporate insolvency matters to his old firm, and for this purpose remained in contact with Mr Malone. On 22 October Mr Malone forwarded to Mr Kugel a publication of the Australian Restructuring Insolvency & Turnaround Association (“ARITA”) concerning recent court judgments involving liquidator remuneration. Mr Kugel responded:

109. [122]

     On 7 November Mr Kugel emailed Mr Warner asking when “the final distribution” was happening. Mr Warner responded that “hopefully” it would take place the following week. Mr Kugel replied “OK”.

110. [123]

     On 17 November Dane Tierney of Manser Tierney & Johnston sent an email to Mr Warner and Mr Kugel setting out a “dissolution calculation” for the CWK Unit Trust. It calculated the “net assets remaining” at $230,787.52, allocated this figure fifty per cent each to Mr Warner and Mr Kugel and then made certain adjustments relating to employee entitlements and the pay out of Mr Kugel’s car finance. After subtracting the “interim distribution” of $100,000 the amount due to Mr Kugel was shown as $11,306.87. Mr Warner caused this amount to be transferred to Shazbot on the following day.

111. [124]

     There was no evidence as to who asked Mr Tierney to prepare this calculation, but I assume it was Mr Warner. At the end of the calculation the following appeared:

112. [125]

     On 18 November Mr Warner sent Mr Kugel an email under the heading “final payment to dissolve partnership”. The email stated:

113. [126]

     Mr Kugel replied:

114. [127]

     As foreshadowed in this email Mr Kugel appears to have been surprised that the figure was not higher. On the morning of 18 November he had written to Sarah Li, an accountant at the practice as follows:

115. [128]

     Mr Kugel quickly came to realise that the calculation did not include any figure for WIP. On Thursday 20 November he wrote to Mr Warner:

116. [129]

     That evening Mr Warner responded:

117. [130]

     The following day Mr Warner wrote again to Mr Kugel:

118. [131]

     The following year questions arose about finalising the five remaining liquidations where Mr Kugel had been the sole appointee. Mr Warner had continued to conduct the liquidations but the professional indemnity insurance was to expire on 3 June and it was clear that not all the administrations would be completed by that date. On 20 March Mr Warner wrote to Mr Kugel. He indicated that he would be renewing his professional indemnity insurance for his new firm but would not cover Mr Kugel. He offered Mr Kugel two choices. The first was for Mr Kugel to obtain his own professional indemnity cover from 3 June and remain as the liquidator but with Mr Warner to continue to undertake the administrations for him. The second was to resign and consent to the court appointing Mr Warner as liquidator. Mr Warner offered to pay the filing fee for the necessary interlocutory process. Mr Warner followed this up with a letter on 8 May. On 1 June Mr Kugel responded as follows:

119. [132]

     In the meantime, solicitors had become involved on both sides, and the present proceedings had been commenced in April. By early June there were three uncompleted liquidations left. Negotiations took place between the parties for Mr Warner to be appointed as liquidator but they did not succeed. Eventually another liquidator, Peter John Krejci, of BRI Ferrier, was appointed to each of the three companies on Mr Kugel’s application. In each of his supporting affidavits, Mr Kugel waived any entitlement to fees.

120. [133]

     In his affidavit of December 2015, Mr Kugel’s version of the conversation on Friday 19 September 2014 was as follows:

121. [134]

     Mr Kugel’s version of the conversation on the following Monday morning over coffee was as follows:

122. [135]

     Mr Kugel’s version of the conversation at 11 am after he told the staff that he was leaving was as follows:

123. [136]

     Mr Warner’s version of the conversation at lunch on Friday 19 September was as follows:

124. [137]

     Mr Warner’s version of the conversation over coffee on Monday was as follows:

125. [138]

     Mr Warner’s version of the conversation at around 11.00 am in his office was as follows:

126. [139]

     There are a number of features which are common to both accounts. The first step was that Mr Warner announced that he was leaving and would take the personal insolvency practice (including the Debtfree business) with him. At least by Monday, it was agreed that, rather than Mr Kugel retaining the liquidation practice, he would leave that to Mr Warner as well. Mr Warner would keep the CRS name and Mr Kugel would take the Insolvency Experts name.

127. [140]

     It was also agreed that Mr Warner would finish the official liquidations, where Mr Kugel was a court appointed liquidator, on Mr Kugel's behalf. On Mr Kugel’s account, it was specifically agreed that Mr Warner would bear any costs of completing the liquidations but would receive any remuneration which might ultimately be approved by the creditors of Global One. This is confirmed by Mr Kugel's letter of 1 June 2015.

128. [141]

     A detail on which Mr Warner and Mr Kugel differ is that Mr Kugel said that Mr Warner gave a specific date for his departure, namely Wednesday 24 September, and Mr Warner said only that it would be some time soon. I think it is likely that the specific date of 24 September was mentioned. It was referred to by Mr Kugel in his email of 20 November and that was not disputed by Mr Warner.

129. [142]

     On both Mr Warner’s and Mr Kugel’s account, Mr Kugel’s initial reaction was that he would not want to take the liquidation side of the business. Clearly when he came to work in the early morning of Monday 22 September and sent out the emails to prospective clients, the ATO and Mr Terfel, Mr Kugel had made up his mind on this point, although even then none of the steps he took on Monday morning were irrevocable. I am inclined to think, therefore, that the final decision was not made until the weekend. If it had been made on Friday lunchtime the emails would have been sent on Friday afternoon.

130. [143]

     On both accounts, Mr Warner's departure, and the fact that he would take the personal insolvency business, was presented as a fait accompli. Clearly Mr Warner believed that because Mr Kugel did not hold personal insolvency qualifications, he (Mr Warner) was entitled to appropriate the personal insolvency part of the business to himself. Whether that was a correct view will be discussed below. But it does not appear to have occurred to Mr Kugel that he had any entitlement to protest about it.

131. [144]

     Mr Warner's account presented Mr Kugel as having accepted, and perhaps even been relieved by, the termination of the business relationship. I accept that Mr Kugel could have kept going with the corporate side of the insolvency practice, and chose not to. But the fact was that Mr Warner had been the person primarily responsible for the administration of the practice. Mr Kugel specifically mentioned this to Mr Terfel and I see no reason to doubt that he would have mentioned it to Mr Warner, as he claimed.

132. [145]

     It is true that Mr Kugel expressed some pessimism about the liquidation business to Mr Malone, both before and after the breakup with Mr Warner. He also mentioned it to Mr Terfel as a reason for not going on. But I do not think the significance of this should be overstated. When Mr Kugel wrote to Mr Terfel, he had been suddenly and humiliatingly rejected by Mr Warner, his long-standing business partner. He had been forced to face the fact that he did not feel able to carry on the corporate insolvency practice on his own. It would hardly be surprising if Mr Kugel, in explaining what had happened to Mr Terfel (and to himself) had emphasised problems with the business as a justification for his decision not to continue. It does not follow that Mr Kugel would necessarily have volunteered these problems to Mr Warner, as Mr Warner claimed.

133. [146]

     In cross-examination, it was suggested by counsel for Mr Kugel to Mr Warner that the references in his affidavit to Mr Kugel having "lost faith” and there being no future in the business because of the DPN changes was something Mr Warner had taken from the email to Mr Terfel when he obtained it on discovery before preparing his affidavit. Despite Mr Warner’s denial, I think that is a plausible suggestion. There appears to be no mention of these matters in Mr Warner's contemporaneous correspondence.

134. [147]

     It is common ground that the company minutes and the DF share transfer were prepared by Mr Warner. Mr Kugel said that he signed the documents without reading them. He was challenged on this but I accept his evidence. It is consistent with the attitude he displayed throughout of leaving administrative matters to Mr Warner.

135. [148]

     Another area of disagreement between Mr Warner and Mr Kugel is what was said about accounting for the assets and liabilities of the partnership. For his part, Mr Kugel said that Mr Warner expressly promised to account to him for all of the partnership assets. For his part, Mr Warner said that only cash was mentioned. He presented the parties as having agreed that he would keep the business and make only specific allowances in relation to cash.

136. [149]

     Mr Warner was obviously conscious of WIP as a potential issue, having adopted the approach of not drawing the personal insolvency WIP for previous months with a view to appropriating it to himself once the separation took place. Mr Kugel had no inkling that this had happened. In these circumstances, I doubt that Mr Warner expressly promised to account for all of the partnership assets. With the WIP situation in mind, the last thing that Mr Warner would have done would have been to make any promise concerning WIP. It is far more likely that Mr Warner would have only mentioned the cash, as he was intending at that point to limit any account in favour of Mr Warner to that amount. Again, whether he was correct in this view is a legal question which I will address below.

137. [150]

     The evidence shows that Mr Kugel obtained details of the financial position of the official liquidations prior to his discussion with Mr Warner on the Monday morning, and it is clear that those official liquidations were discussed. In his email of 20 November, Mr Warner said that Mr Kugel had asked him to finish the official liquidations and said that if he wanted the WIP he could have those liquidations back. Mr Kugel did not contest what Mr Warner said and did not take the liquidations back either. The following year, Mr Kugel in his letter of 1 June, Mr Kugel described the agreement with respect to the official liquidations that Mr Warner was to complete all liquidations and to receive in return for being entitled to what he could get from “Global Pacific” (I assume a reference to Global One). Although Mr Kugel’s letter referred only to Global One, I think I must proceed on the basis that the parties expressly agreed on 22 September that Mr Warner would complete all of the official liquidations and would be entitled to retain whatever came out of them. Implicitly, this included the benefit of any WIP.

138. [151]

     It is also clear that Mr Warner and Mr Kugel agreed that it would be Mr Warner who would prepare a distribution statement for the dissolution of the business. Mr Warner had up to that point been responsible for the supervision of the business’s books and the preparation of its accounts. On both accounts, Mr Kugel told Mr Warner that he trusted him to do the necessary calculations.

139. [152]

     But in my finding the discussion went no further than this. Neither Mr Warner nor Mr Kugel mentioned the possibility of other assets or liabilities having to be considered. It is common ground that WIP was not mentioned. At no stage did either Mr Warner or Mr Kugel speak in terms of releasing their mutual rights and obligations.

140. [153]

     On 7 November Mr Kugel was expecting the “final” distribution to happen soon. But Mr Kugel cannot have expected that work in progress as at 22 (or 30) September could all have been collected by November. There would have been administrations which were dependent upon funds coming in from recovery actions, where the monies might not be received for months or years afterwards. Counsel put this point to Mr Kugel in cross-examination. He responded that he was only expecting some sort of timetable for the final distribution.

141. [154]

     I do not find Mr Kugel’s explanation very convincing, but I do not think that this goes so far as to demonstrate that Mr Kugel thought that he had no entitlement to WIP as at 30 September. Mr Kugel would have expected that WIP to that date which could have been drawn would have been. It is true that that could not have been done with administrations which were dependent on funds coming in in the future. But Mr Kugel may have assumed that some estimated value would be attributed to such WIP, or the problem may simply have not occurred to him. I think that the latter is the most likely explanation. Whatever the explanation may be, it does not affect my finding that there was no express agreement between Mr Warner and Mr Kugel about the extent to which, if at all, WIP was to be included in the division of the practice’s assets.

Legal relationship between parties

1. [155]

   Counsel for Mr Kugel contended that the CWK practice was a partnership between Mr Kugel and Mr Warner. Alternatively, counsel contended that Mr Warner was estopped from denying that the practice was a partnership. Counsel further argued that if the relationship was not strictly speaking a partnership, it was a joint venture between Mr Kugel and Mr Warner in the nature of a partnership. Counsel contended that the partnership (or joint venture) business included not only the CWK practice but also the Debtfree business.

2. [156]

   Counsel for Mr Warner disputed this analysis. Counsel’s contention was that, in law, the business of the CWK practice was conducted by CWK Pty Ltd as trustee for the CWK Unit Trust, and the Debtfree business was conducted by DF. On this analysis, Mr Warner and Mr Kugel did not participate in the CWK practice or the Debtfree business in their personal capacities, but as directors and as agents for Shazbot and Warner Capital, the shareholders and unit holders.

3. [157]

   In response, counsel for Mr Kugel contended that the partnership included rights of ownership in, and control over, the corporate and trust structures adopted by the parties. Alternatively, counsel contended that to the extent inconsistent with partnership, those structures were a sham.

4. [158]

   The Partnership Act 1892 (NSW), s 1(1), defines “partnership” as:

5. [159]

   A partnership is not legally possible without a binding contract between the partners to conduct the relevant business together. Once this exists, further express specification of the parties’ rights and obligations is unnecessary. To the extent that these matters are agreed upon (which may happen implicitly as a result of the subsequent course of dealing: Partnership Act, s 19), the Court will give effect to the agreement; to the extent to which they are not agreed upon by the parties, the detail is supplied by the Partnership Act.

6. [160]

   Where a business is conducted through a closely held proprietary company, it is common for the participants to speak of each other as “partners”. Strictly speaking, this is incorrect. If the business is the business of the company, then the parties participate as officers or shareholders of the company. Their rights are as shareholders, albeit that those rights include the ability to secure the dissolution of the company on the “just and equitable” ground: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379.

7. [161]

   On the other hand, it is possible for partnership and corporate rights to co-exist. One such situation is where the partnership business includes or involves the holding of the shares in a company or units in a unit trust. A different type of co-existence was recognised by the Western Australian Court of Appeal in Palermo v Palermo [2015] WASCA 49. In that case, two brothers were involved in property development, share dealing, corporate consulting, farming and accounting over a period of 35 years through a complex and extensive network of companies and trusts. At trial, the case for the plaintiff (see at [159]) was that the parties:

8. [162]

   The trial judge rejected the plaintiff’s case, on the ground that an “overarching” partnership agreement was inconsistent with the fact that the business activity had been conducted through companies and trusts. This decision was overturned by the Court of Appeal which accepted that the plaintiff’s case was legitimate, and remitted the matter for rehearing so that the existence or otherwise of the alleged “overarching” partnership agreement could be determined on the facts.

9. [163]

   In determining whether a partnership existed in this case, the Court is deciding whether there was a binding contract between the parties involving the conduct of a business with the characteristics set out in the definition in the Partnership Act. The question is ultimately one of law, and the fact that the parties did or did not characterise their relationship as a partnership is not determinative.

10. [164]

    The plaintiffs’ Statement of Claim alleged that when Mr Kugel joined the CWS practice in November 2006 he “joined with [Mr Warner and Mr Sanderson] in partnership to conduct a business of providing corporate insolvency services and personal bankruptcy services”. As already noted, this was eventually admitted in the defendants’ defence. No equivalent admission was made concerning the establishment of the CWK practice in September 2007. But Mr Warner was party to holding Mr Kugel out as a “partner” in the practice’s correspondence. Mr Warner referred in his email communications to Mr Kugel to the dissolution of the practice as a dissolution of a partnership: see [125] above. The DF minute which Mr Warner drafted (see [114] above) expressly spoke of Mr Kugel “resigning from the partnership”. Does this conduct amount to some sort of admission that the relationship was one of partnership?

11. [165]

    In Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317; [2003] HCA 51 Dovuro distributed canola seed contained small amounts of seeds from three weed species. The WA Department of Agriculture declared the weeds to be prohibited species, resulting in financial loss to the farmers who had bought and planted the canola seed. Dovuro made apologies, both in a media release and a letter, for what had happened. In the media release Dovuro apologised to growers and said that the situation “should not have occurred”. The letter stated that Dovuro had “failed in its duty of care” to inform growers as to the presence of the weed seeds and had “got it wrong in this case”. Dovuro was sued in negligence. The question in the proceedings was whether Dovuro had breached its duty of care by failing to label the seed in a way which would have drawn the attention of farmers and the Department to the presence of the relevant weed species. One of the issues discussed in the High Court was the effect, if any, of Dovuro’s “admissions”.

12. [166]

    Gummow J acknowledged that an allegation involving a conclusion of law could be made in a pleading, and an allegation so made could therefore be admitted. But otherwise an admission could only be made as to a fact or conclusion of fact, not a conclusion of law or a conclusion of mixed fact and law. His Honour observed that an “admission” that the defendant “failed in its duty of care” involved a conclusion that on the facts the defendant had failed a standard fixed by law. The standard was to be determined by the Court and a witness’ view on the question was of no evidentiary value.

13. [167]

    McHugh J agreed with Gummow J. Hayne and Callinan JJ said that in some circumstances tendering an apology could constitute an admission of relevant facts, but the “admissions” in the case, which did not reveal anything about what the defendant ought reasonably to have done in the light of what it knew or ought to have known when it distributed the seeds, was not such an admission. Heydon J agreed with Gummow J and also with Hayne and Callinan JJ. In dissent, Gleeson CJ agreed with Gummow J that care needed to be taken in identifying the precise significance of “admissions”. On his Honour’s analysis, it was always a question of what was being admitted. His Honour agreed that the admission of breach of duty of care was of no value, but considered on the facts that the apologies conveyed an admission of fact, namely as to the concern which those in the industry would have had about the presence of the weed seeds.

14. [168]

    The defendants admitted that there had been a partnership between Mr Warner, Mr Sanderson and Mr Kugel, but not between Mr Warner and Mr Kugel. For reasons given below, the soundness of the distinction may be questionable. But, however inconsistent the defence may be on this point, the fact remains that it contains no admission that the legal relationship of partnership existed between Mr Warner and Mr Kugel. On the authority of Dovuro, the use of the term “partner” and “partnership” cannot of itself amount to an admission of the existence of the legal relationship. The question is whether it should be analysed as carrying with it an admission or admissions of fact which lead to the conclusion that a partnership existed.

15. [169]

    I do not think it should. The question for the Court is what agreement was made between the parties. That in itself is a question of law, being a matter of objective construction of the parties’ dealings with each other, to the extent revealed by the evidence. It is not, as in Dovuro, a factual question of breach. It may well be that Mr Warner believed at the time that he had entered into a partnership with Mr Kugel. But that subjective belief is of no assistance in deciding what in law happened. And the bare use of the terms “partner” and “partnership” does not itself establish the existence of any specific facts about the dealings between Mr Warner and Mr Kugel in September 2007 which lead to the necessary legal conclusion.

16. [170]

    There is no evidence of any express communication, oral or written, between Mr Warner and Mr Kugel at the time the CWK practice was established which formally defined the roles which would be played by Mr Warner, Mr Kugel and CWK Pty Ltd. Those obligations must be determined as a matter of construction from the actions taken by Mr Warner and Mr Kugel, and the communications between them, in the light of the surrounding circumstances, or “matrix of fact”.

17. [171]

    Part of the matrix of fact is the prior course of dealing between Mr Warner and Mr Kugel. I think it is clear from the actions of Mr Warner and Mr Kugel, and their communications with the staff and clients, in September 2007, that their intention was to establish a new two-person practice and associated company acting as trustee of a unit trust of the same type which had previously existed for the CWS practice. In effect, Mr Warner and Mr Kugel were to enjoy the same relationship with each other in the CWK practice as Mr Warner, Mr Sanderson and Mr Kugel had enjoyed in the former CWS practice. It is therefore relevant to ask what the nature of that earlier relationship was.

18. [172]

    The heads of agreement sent to Mr Harkin in November 2006 were not signed but the context makes it clear that they had been agreed as between each Mr Warner, Mr Sanderson and Mr Kugel. Although the heads of agreement were incomplete so far as such matters as dispute resolution were concerned (see [27] above), it was not essential for those matters to be specified in order to have a binding partnership agreement. Nor was the formality of signature required. In my view, the proper analysis is that the heads of agreement document itself represented a binding partnership agreement between the parties, albeit that they contemplated that the agreement would later be documented with further and, perhaps, different, terms: Masters v Cameron (1954) 91 CLR 353 at 360-362; Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628 (affirmed in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634-636)

19. [173]

    The context in which the CWK practice was established in September 2007 also included the way in which the CWS practice had previously been conducted, with each of Mr Sanderson, Mr Warner and Mr Kugel being held out as a “partner” as clients, to the practice’s insurer, and others. It also included the negotiations up to September 2007 with Mr Sanderson which proceeded on the basis that there was a personal relationship of partnership between himself, Mr Warner and Mr Kugel.

20. [174]

    If this was all which had to be taken into account, there would be no doubt that the CWK practice should be characterised as a partnership between Mr Warner and Mr Kugel personally. But it is necessary to consider the effect of the involvement of CWK Pty Ltd. The November 2006 heads of agreement for the partnership between Mr Warner, Mr Sanderson and Mr Kugel described the three of them as carrying on the CWS practice “through” a unit trust. It is clear that Mr Warner and Mr Kugel intended that the CWK practice would be conducted “through” a company acting as trustee of a unit trust in the same sort of way. What does this mean in legal terms?

21. [175]

    I think the starting point is that the income of the CWK practice consisted of fees earned from insolvency administrations conducted by Mr Warner and Mr Kugel. It was Mr Kugel and Mr Warner personally who held the appointments, and they personally were entitled to the fees. This was reflected in the fact that fees were paid by drawing cheques in the names of Mr Warner and Mr Kugel, such cheques then being endorsed over to CWK Pty Ltd. It is clear that Mr Warner and Mr Kugel intended from the outset that the practice’s income would derive from their personal fee-earning capacity.

22. [176]

    I think it is also clear that Mr Warner and Mr Kugel intended that they would practice in common. The income from their insolvency appointments would be shared and they would not be entitled to practice on their own individual accounts. This was specifically reflected in the heads of agreement for the CWS practice (see [27] above). This is an ordinary incident of partnership (see Partnership Act, ss 29 and 30) and I think it is clear that Mr Warner and Mr Kugel intended to carry it through to the CWK practice.

23. [177]

    These features of the relationship create difficulty for the defendants’ submissions. CWK Pty Ltd was not entitled to practise as a liquidator or trustee in bankruptcy. It had no entitlement to receive any fees out of the administrations. Although tax invoices were issued by it, that appears to have been incorrect: CWK Pty Ltd was not supplying the relevant services.

24. [178]

    In theory, CWK Pty Ltd might have operated as a “service company” by providing services to Mr Warner and Mr Kugel. But Mr Warner and Mr Kugel never purported to retain CWK Pty Ltd to provide services in that way. In any event, that would have been a different and more limited business.

25. [179]

    Alternatively, CWK Pty Ltd might have been made party to some sort of agreement between Mr Warner and Mr Kugel for the conduct of the practice. But it was not suggested that there was any such agreement. CWK Pty Ltd had no right to require Mr Warner or Mr Kugel to hand over the fees which they earned or to compel them to conduct their activities through the CWK practice.

26. [180]

    CWK Pty Ltd, like its predecessor companies in the CWS practice, was never treated as an independent vehicle with its own corporate rights and interests. It was simply used as a receptacle for assets of the practice and a channel for the income earned by Mr Warner and Mr Kugel.

27. [181]

    This is not just a case of parties adopting a legal structure and later not behaving consistently with it. In my finding, this is the way Mr Warner and Mr Kugel intended from the outset for the practice to operate. It reflected the way in which the former CWS practice has been conducted.

28. [182]

    Counsel for the defendants referred to the following observations by Young J (as his Honour then was) in Morgan v 45 Flers Pty Ltd (1986) 10 ACLR 692 at 694-5:

29. [183]

    Counsel also referred to authority which emphasises that where parties have made a deliberate commercial decision to adopt a corporate structure for their business activities, equity will not intervene. Reference was made in particular to the High Court’s observations in Friend v Booker (2009) 239 CLR 129; [2009] HCA 21 at [86] and by Barrett J (as his Honour then was) in Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 at [78].

30. [184]

    The answer to these submissions is that in this case the Court is not concerned with whether to respect a decision by the parties, established on the facts, to adopt a corporate structure. If such a decision were established, the Court would hold the parties to it. The issue in the present case is what construction is to be put on the parties’ agreement to associate with each other in the first place.

31. [185]

    Counsel for the defendants also relied on the decision of Ferguson J (as her Honour then was) in ACN 079 638 501 Pty Ltd v Pattison [2012] VSC 445. In that case, the defendant, Mr Pattison, was an insolvency practitioner. Mr Pattison incorporated a company, the plaintiff, of which he was the sole director and secretary. Mr Pattison’s billing arrangements were similar to those used by the CWS and CWK practices in this case. Fees for the work were paid by cheque to Mr Pattison which he would endorse over to the company. The company granted a charge over its property as security for advances from a financier. The company was placed in a members voluntary liquidation and a dispute later arose between the company (acting by its receivers on behalf of the financier) and Mr Pattison about ownership of WIP incurred, but not billed, before the liquidation. Mr Pattison argued that because the appointments were personal, any income he derived was personal and accordingly the benefit of WIP not billed must likewise belong to him and fall outside the scope of the charge.

32. [186]

    Ferguson J found in favour of the company. On analysing the evidence, she found that Mr Pattison was an employee of the company. That distinguishes the case from the present, where there was no such employment arrangement, on any view. Her Honour apparently considered an arrangement under which an insolvency practitioner is employed by a corporate entity, with the practitioner accounting for the income to the company as an employee, is valid and effective. I have some reservations about this. I am not sure that it deals fully with the problem that an employee usually acts as agent for the employer in the conduct of the employer’s business and in this instance the employer company could not itself provide the relevant services or derive the relevant income. But it is not necessary to consider the question further for present purposes.

33. [187]

    For these reasons, I reject the submission that the CWK practice was conducted by CWK Pty Ltd. So what role did the company play in the conduct of the practice by Mr Warner and Mr Kugel?

34. [188]

    In Gazzana v Santamaria [2015] NSWSC 916, the defendant, Mr Santamaria, was the sole director of the second defendant, Antonio Santamaria Excavation and Demolition Pty Ltd (“ASED”) which was a building contractor. The plaintiff, Mr Gazzana, operated his own business as a building contractor as a sole trader. Pursuant to an agreement between Mr Gazzana and Mr Santamaria the two businesses were merged and thereafter operated by Mr Gazzana and Mr Santamaria together. After the parties fell out, consent declarations were made by this Court that Mr Gazzana and Mr Santamaria (personally) had conducted a building contractor business together in partnership and that they had done so “through” ASED. A number of questions arose which were the subject of separate decision by Ball J.

35. [189]

    During the partnership, some further equipment had been purchased in the name of ASED. ASED had also incurred liabilities. The question was whether these assets and liabilities were assets and liabilities in the partnership to be taken into account on its winding up. Ball J said (at [32]):

36. [190]

    Certain equipment had been leased in the name of ASED from a financier. Mr Santamaria and his wife gave guarantees for ASED’s liabilities under the lease and ASED paid out the residual on the lease to acquire the equipment from which the partnership business had been conducted. Ball J concluded that the partnership had taken over the business formerly carried on by ASED and that ASED had no sources of income other than the income it earned in conducting the partnership business. He also inferred that during the term of the partnership the lease payments were met by ASED out of the income of the partnership. He said (at [37]):

37. [191]

    In my view, a similar analysis applies in the present case. Mr Warner and Mr Kugel were in partnership, with the partnership business being carried on “through” CWK Pty Ltd. On the facts of this case, however, I would not express the relationship between CWK Pty Ltd on the one hand, and Mr Warner and Mr Kugel on the other hand, as one of agent and principal. That is for two reasons.

38. [192]

    The first reason is that, unlike the company in Gazzana, CWK Pty Ltd could not itself conduct the partnership business. And if it could not do so itself, it could not do so as agent for the partners.

39. [193]

    Secondly, the interposition of the company meant that not all of the liabilities associated with the conduct of the practice were necessarily partnership liabilities. For instance, the liabilities incurred under the lease, and in employment of the staff of the practice, were liabilities of CWK Pty Ltd. CWK Pty Ltd undertook those legal liabilities on its own behalf, not as agent for Mr Warner and Mr Kugel. Mr Warner and Mr Kugel could not have been sued personally as principals for the rent, or by the employed staff, under the Partnership Act.

40. [194]

    Of course the protection was only partial: the interposition of CWK Pty Ltd could not affect liability incurred in the conduct of an administration for which Mr Warner or Mr Kugel might be sued personally by an administration creditor or some other aggrieved person. But it was clearly designed to have the effect of excluding “business” creditors. To treat the company as the partners’ agent would undermine that.

41. [195]

    At the same time, CWK was not engaged in its own independent business. The understanding between the parties, necessary implicit in the circumstances, was that the monies derived from the insolvency practice, once signed over to CWK Pty Ltd, would be used to discharge the practice’s expenses. In my view, the proper analysis is that CWK Pty Ltd received the income, and incurred the liabilities, as trustee for the partners in the partnership business. It follows that, subject to any contrary agreement between Mr Warner and Mr Kugel, assets acquired by CWK Pty Ltd with partnership income were likewise held on trust for the partners.

42. [196]

    There is no conceptual difficulty with such an analysis. As between partners, partnership property is subject to the obligations defined in s 20 of the Partnership Act. Those obligations have some parallels with the obligations imposed on a trustee under trust law. Strictly speaking, however, such property is not, merely because it is partnership property, subject to a trust. But where the legal title to partnership property is vested in one partner alone, then that partner is obliged to hold and apply the property for the account of the firm. The property is held by the partner on trust, in the true sense of the term, for the partnership: see Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462 at [126]. If one of the partners can be required to hold the property on trust for the partnership, there is no reason why the partners cannot, among themselves, agree that a third party is to hold the property for the partnership in the same way. In my view, subject to a matter to which I now turn, that would be the proper legal analysis of what Mr Kugel and Mr Warner agreed with respect to CWK Pty Ltd.

43. [197]

    It is not necessary to consider whether Mr Warner and Mr Kugel could effectively have assigned the fee income to which they were entitled for acting as liquidators to CWK Pty Ltd (cf Commissioner of Taxation (Cth) v Everett (1980) 143 CLR 440; [1980] HCA 6). There never was any purported assignment and no consideration was ever provided by CWK Pty Ltd to support any such purported assignment.

44. [198]

    Commercially, treating CWK Pty Ltd as trustee for Mr Warner and Mr Kugel deprives the unit trust of any substance. But not legally. Income which CWK Pty Ltd received between September 2007 and September 2014 which was not partnership income fell into the unit trust, and to the extent that such income was distributed to the unit holders, those distributions remain valid. Even if, as seems likely, all of the income was partnership income, the initial settlement sum remained an asset of the unit trust and the trust retained a legal existence. Thus the parties’ actual intention to create the trust is respected. It is just that Mr Warner and Mr Kugel failed to understand that the legal consequence of the structure they adopted was that the income that they earned as insolvency practitioners was not income of that unit trust.

45. [199]

    But where does this leave the parties’ wider intentions? Clearly Mr Warner and Mr Kugel did not just wish, in incorporating CWK Pty Ltd and establishing the CWK Unit Trust, to shield themselves from personal liability. They also wished to obtain the tax advantages associated with treating the net income of the CWK practice as income of a unit trust which could be distributed, through the unit holders, to beneficiaries of their family trusts.

46. [200]

    CWK Pty Ltd provided no consideration for the endorsement of Mr Warner’s and Mr Kugel’s fee cheques over to it. But it might be suggested that the intention of Mr Warner and Mr Kugel was to make a gift of that income to CWK Pty Ltd as trustee of CWK Unit Trust, and that this is inconsistent with the bare trust which I consider arose in favour of Mr Warner and Mr Kugel as partners.

47. [201]

    I think, however, that there are difficulties with such an analysis. Mr Warner and Mr Kugel did not contemplate that the whole of the income which they earned was to go to the trust. Rather, they intended for the income to be applied to meeting the expenses of the practice and acquiring any assets which were needed to conduct the practice. There is no reason to think these liabilities were limited to those which were incurred by CWK Pty Ltd, although in the ordinary course, most, if not all, of them would be. Had Mr Warner or Mr Kugel been sued by an administration creditor for some form of misfeasance, then any liability would have been a personal liability. But clearly Mr Warner and Mr Kugel would have intended that, to the extent not covered by insurance, such costs would be defrayed from the practice income before any distributions were made.

48. [202]

    In the hands of CWK Pty Ltd, as trustee of the unit trust, the income would not have been income from a business. CWK Pty Ltd could not conduct the business as trustee of the unit trust any more than it could conduct the business on its own account. It can only have received income from Mr Warner and Mr Kugel as a gift. This raises a question as to whether it would even be proper for CWK Pty Ltd to incur the practice expenses. If the income was received as a gift, rather than being earned by CWK Pty Ltd, then there was no connection between the receipt of the income and the incurring of the expenses which would entitle CWK Pty Ltd to be indemnified out of the assets of the unit trust against those expenses (or to claim a tax deduction for them).

49. [203]

    These points illustrate a wider inconsistency between the unit trust structure and the objective intentions of the parties. If the partnership income had been a gift in the hands of CWK Pty Ltd as trustee for the unit trust, CWK’s obligations would have been to deal with that income in accordance with the interests of the unit holders. Those interests were not necessarily the same as those of Mr Warner and Mr Kugel personally. In the event of conflict it would have been the duty of CWK Pty Ltd as trustee to prefer the unitholders’ interests. The potential for personal claims being made against Mr Warner and Mr Kugel, which were not liabilities of CWK Pty Ltd, illustrates the sort of conflict which could arise. But it cannot have been intended that CWK Pty Ltd could be guilty of breach of trust if it failed to have regard to the unit holders’ interest, as distinct from Mr Warner’s and Mr Kugel’s interests in the conduct of the practice.

50. [204]

    If it were otherwise, the fiscal objectives of Mr Warner and Mr Kugel would be defeated in a spectacular way. If the signing over of the cheques amounted to a gift of monies to the trust, that would not affect the fact that, for fiscal purposes, the income was derived by Mr Warner and Mr Kugel. They would be personally liable for the tax. But the expenses incurred by CWK Pty Ltd, if not incurred as trustee for them, could not be deducted against that income. It cannot have been intended that the unit holders would be entitled to receive the gross income, or even the net income, of the practice, leaving Mr Warner and Mr Kugel to be personally liable for all of the tax and lacking any of the income from which to discharge their tax obligations.

51. [205]

    There was no formality to the endorsement of the fee cheques. For the reasons I have given I think it is properly characterised as handing over the cheques to be held on trust for the partners who earned the fees. But if the endorsement of the fee cheques to CWK Pty Ltd were properly to be characterised as a gift to the CWK Unit Trust, then I think it should be ignored as a sham in the “less pejorative” sense of the term used by the High Court in Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21 (see [36] and ff). It would not have been open to CWK Pty Ltd to retain the whole of the income, in the interests of the unit holders, without allowing for payment of the expenses of the practice. The fiscal objective may have been to convert the net income into income of the unit trust; but this was not consistent with the financial intention which was to apply the gross income against the expenses of conducting the practice: Raftland at [58].

52. [206]

    The consequence is that CWK Pty Ltd was required to hold the assets of the practice and the net income of the practice for the benefit of Mr Warner and Mr Kugel individually, and to account to them individually. To the extent that instead CWK Pty Ltd paid the net income out to Shazbot and Warner Capital as unit holders under the unit trust, CWK Pty Ltd is required to account to Mr Warner and Mr Kugel for those monies. In turn, Shazbot and Warner Capital would appear to be liable to account to CWK Pty Ltd for income distributed to them: see In re Diplock [1948] Ch 465.

53. [207]

    This may not apply to all of the income earned by CWK Pty Ltd and distributed to Shazbot and Warner Capital. It may be that there is other income which was properly booked to the CWK Unit Trust. It is not necessary to pursue this further at this stage. If necessary it can be investigated as part of the taking of accounts.

54. [208]

    For these reasons, I conclude that the CWK practice was, in law, conducted by Mr Warner and Mr Kugel in partnership. Income of the practice paid over to CWK Pty Ltd, and property purchased by CWK Pty Ltd out of that income, was held by CWK Pty Ltd on trust for Mr Warner and Mr Kugel as partners. This conclusion makes it unnecessary to consider whether, had the partnership business been conducted by CWK Pty Ltd, there was some sort of “overarching” partnership relationship between Mr Warner and Mr Kugel (and possibly Warner Capital and Shazbot). It is also unnecessary to consider whether the conduct of Mr Warner and Mr Kugel after September 2007 estopped them from denying the existence of a partnership.

55. [209]

    The Debtfree business gives rise to different considerations. The income of the business came largely from fees derived from the administration of Part IX debt agreements. It was DF as a corporate entity which was the administrator, not Mr Warner personally. The obstacle to treating the business as being carried on by DF itself, rather Mr Warner and Mr Kugel personally, does not exist.

56. [210]

    It is clear from the correspondence between Mr Warner and Mr Kugel prior to the acquisition of DF from DFD Group that it was intended that the income flowing from the Debtfree business would be part of the partnership. This was reflected in the decision to acquire the shares in DF in the name of CWK Pty Ltd. Given my conclusion that CWK Pty Ltd was operating as trustee for the partners individually, the proper conclusion is that it acquired the shares in DF as trustee for the partnership. But these were the shares in DF, not the Debtfree business itself. The Debtfree business was operated by DF within a corporate structure and there is no reason to attribute to the parties an intention to cut across that.

57. [211]

    The effect of the subsequent transfer of the shares in DF from CWK Pty Ltd to Shazbot and Warner Capital must next be considered. I have already found that the transfer reflected an agreement between Mr Warner and Mr Kugel to transfer the shares for the reasons given in the email from Mr Warner to Mr Watson (see [87] above). The operative reason for the transfer, as given in the email, was to ensure that if another partner came into the CWK practice, that new partner would not share the benefit of the income stream represented by dividends from DF. The way of achieving this was to transfer the shares from CWK Pty Ltd, which was the receptacle for the partnership’s property, to Shazbot and Warner Capital. In my view, the proper construction of what happened is that Mr Warner and Mr Kugel agreed that thenceforth the shares in DF would not be partnership property and were instead to be enjoyed by Shazbot and Warner Capital in their own right.

58. [212]

    Counsel for Mr Kugel pointed out that no consideration was given by Warner Capital and Shazbot for the transfer. I do not think that matters; the cross-agreements between Mr Warner and Mr Kugel, who were the partners and therefore controlled the beneficial interest in the DF shares, provided sufficient consideration to make the transaction effective.

59. [213]

    It remains to consider the fees signed over by Mr Warner to DF for acting as administrator of Part X arrangements. Unlike the fees derived from debt agreements under Part IX, DF had no right itself to receive those fees. The appointment as Part X debt administrator was personal to Mr Warner. In my view, the fees for conducting those operations were partnership income, for essentially the same reasons that the income of the CWK practice was partnership income and not income of CWK Pty Ltd.

60. [214]

    I conclude that from 19 September 2007 until 22 September 2014, Mr Warner and Mr Kugel carried on business as partners, the partnership business being the conduct of insolvency administrations as liquidator, administrator, trustee in bankruptcy or administrator of Part X insolvency agreements. Between 31 January 2008 and 30 June 2008 the partnership business also included the holding of the shares in DF. The operation of the Debtfree business itself was not part of the partnership. There will need to be declarations accordingly.

61. [215]

    The fee income signed over to CWK Pty Ltd was received by CWK Pty Ltd as trustee for Mr Warner and Mr Kugel as partners, and the expenditure by that company was likewise undertaken as trustee for Mr Warner and Mr Kugel as partners. Assets and liabilities associated with the business were likewise held as trustee for Mr Warner and Mr Kugel. There may need to be an enquiry as to whether any of CWK Pty Ltd’s income or expenditure, or its assets and liabilities, fell outside the bare trust in favour of Mr Warner and Mr Kugel, and thus fell within the CWK Unit Trust.

Dissolution of business relationship

1. [216]

   The Partnership Act, s 39, provides:

2. [217]

   In Gazzana, another of the questions before Ball J concerned the parties’ entitlements on dissolution of the partnership. After Mr Gazzana and Mr Santamaria fell out, Mr Santamaria suggested that Mr Gazzana write down a list of everything that they had bought together and they would split it in half. Mr Gazzana agreed. The parties went through the list and indicated on it which of the items were to go to which party. Mr Gazzana agreed in cross-examination that he understood at the time that this division marked the end of the relationship between himself and Mr Santamaria. But on the conclusions reached by Ball J, the list did not include all of the partnership assets, nor did it include all of the liabilities of the partnership. It was argued for Mr Santamaria that the agreement had no effect at all: it was simply an unfinished negotiation. Ball J rejected this. His Honour concluded that the parties had agreed that the partnership should be dissolved and that the equipment on the list was to be distributed in accordance with the division on the list. But his Honour continued:

3. [218]

   Counsel for the defendants contended that in this case there had been an agreement which limited the obligation to account to cash and liabilities which existed as at 22 September 2014. I reject this submission. In my finding, no final agreement of this character was reached. I think the case is the same as Gazzana. The parties agreed to dissolve their business relationship (and thus the partnership, although they may not have been thinking in those terms). They also agreed Mr Kugel was to have the Insolvency Experts business name and associated assets, and Mr Warner was to carry on the corporate and personal insolvency administration. But they did not make any specific agreement as to all the assets and liabilities of the partnership (understandably, because Mr Warner was not thinking in partnership terms). In particular, they did not provide for the realisation of WIP.

4. [219]

   Furthermore, there was no finality to the parties’ agreement. The calculations undertaken by Mr Tierney were undertaken for Mr Warner on the express basis that they depended upon the instructions which had been given to him. In any event, the figure reached by Mr Tierney was not final but was subject to further adjustment. But more importantly, there was never any agreement by Mr Kugel to abide by the figure reached by Mr Tierney.

5. [220]

   Mr Warner and Mr Kugel also did not provide for the costs of the winding up process. Probably they did not think there would be any. But it is a consequence of my conclusions that the tax returns lodged for the partnership entities were incomplete and incorrect. The income of the partnership will have to be reallocated from the unit trust to the partners trading individually. This may result in penalties having to be paid. This process will need to be provided for as part of the winding up of the partnership.

6. [221]

   For these reasons, I think that there is no binding agreement which prevents Mr Kugel from having partnership accounts taken in accordance with his entitlement under s 39. But in case I am wrong in that view, I will consider whether any such agreement, if binding, would be enforceable against Mr Kugel.

7. [222]

   As I have found, Mr Warner appears to have approached the termination of the partnership on the footing that because he was the only one of the partners who was authorised to act as a trustee in bankruptcy, he was entitled on termination of the partnership to take all of the personal insolvency administrations with him. In taking this view, Mr Warner was wrong. For as long as the partnership agreement subsisted, he was required to apply his trade as a trustee in bankruptcy for the benefit of the partnership as a whole, and to share the benefit of that with Mr Kugel. On termination of the partnership, his fiduciary obligations did not cease. He had continuing obligations to realise the assets of the partnership for the best advantage of both parties, and he was not entitled to put his own personal interests ahead of that obligation: Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 at 197-199. He was therefore not entitled simply to appropriate the former partnership business to himself, at least without the fully informed consent of Mr Kugel.

8. [223]

   It follows that in presenting Mr Kugel with an ultimatum to the effect that he was leaving, taking the personal insolvency part of the partnership business with him and setting up a new practice the following Wednesday, Mr Warner was threatening to do something which he had no right to do. In previously failing to conduct fee runs, Mr Warner was also in breach of his obligations. Mr Warner was required to manage the activities of the personal insolvency work group in the interests of both Mr Kugel and himself. He was not entitled to use his management powers to manipulate the practice’s procedures to suit his own interests.

9. [224]

   In my view, by failing to pay out the profits from the personal insolvency business in the usual course, and by ambushing Mr Kugel with his proposal to terminate the partnership, Mr Warner was breaching his fiduciary obligations as partner. The law does not permit him to set up an agreement for release procured as a result of his own wrongdoing. Even if enforceable at law, it would not be enforceable in equity, resulting as it does from breaches by Mr Warner of his fiduciary obligations.

10. [225]

    In final submissions, the primary position of Mr Kugel was that there had been an express agreement by Mr Warner to account to him for the WIP and for the value of the DF business. Orders in the nature of specific performance were sought to determine the amount due. Counsel eschewed any general account of the partnership assets and liabilities; according to counsel, agreement had been reached on the division of the other assets of the partnership and there was no occasion for any wider investigation.

11. [226]

    I do not accept this approach. On my findings, there was never any express agreement concerning the value of the WIP (and still less the value of DF). I have concluded that there was a relationship of partnership (although not including the Debtfree business itself) and Mr Kugel is entitled to have an account taken of partnership assets and liabilities. But it is a basic principle that an account cannot be taken in part: Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 296. Unless Mr Warner and Mr Kugel agree to the contrary, the account must include all partnership assets and liabilities, not merely some of them.

12. [227]

    The remaining question concerns the value of the Debtfree business. On the conclusions which I have reached, the Debtfree business itself was never part of the partnership business between Mr Warner and Mr Kugel. The benefit of the business was thus represented by shares in DF. On my conclusions, the ownership of those shares was for a time part of the partnership business but was not so after 1 July 2008.

13. [228]

    When Mr Kugel transferred the shares in DF to Mr Warner on 22 September 2014 for nominal consideration, this would have represented a very substantial undervalue. Unknown to Mr Kugel, the company had not declared a dividend and had therefore retained the profits made in the year ended 30 June 2014. There would have been further profits attributable to the period up to 22 September.

14. [229]

    It will be recalled that Mr Kugel gave evidence that he signed the DF minute and share transfer prepared by Mr Warner on 22 September without reading them. Counsel for Mr Warner submitted that this did not matter and Mr Kugel (strictly, Shazbot, which owned the DF shares) was bound by his agreement to transfer them and subsequent execution of the transfer form. In my view, this is correct, at least so far as enforceability at law is concerned. I am not satisfied that Mr Kugel did not understand that he was transferring the shares for one dollar, but even if that was his understanding, it cannot be the basis for avoiding the transaction. The transaction was effective at law.

15. [230]

    But this is not the end of the analysis. In Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 the defendant, Mr Brunninghausen, and the plaintiff, Mr Glavanics, were brothers-in-law (their wives were sisters). Mr Brunninghausen formed a proprietary company which carried on the business of importing ski equipment. Mr Glavanics assisted in the formation of the company and was issued one-sixth of the shares. Mr Brunninghausen held the other five-sixths. Relations between Mr Glavanics and Mr Brunninghausen became strained and then broke down but there was pressure from their mother-in-law for them to resolve their differences. Mr Glavanics suggested that he could sell his shares so long as he could get a fair price. Before the discussion went any further, Mr Brunninghausen, who was the sole director of the company, received an approach from third parties to purchase the company’s business. Mr Brunninghausen did not disclose this to Mr Glavanics and negotiated the purchase of his shares. He then completed the negotiations with the third party purchasers, which resulted in their purchase of all of the shares in the company (including those purchased by Mr Brunninghausen from Mr Glavanics) at a much higher price per share than Mr Bruninghausen had paid for Mr Glavanics’ shares. Bryson J (as his Honour then was) held that in the particular circumstances of the case, Mr Brunninghausen owed fiduciary obligations to disclose the offers and awarded equitable compensation to Mr Glavanics based on the sale price obtained by Mr Brunninghausen.

16. [231]

    This conclusion was upheld by the Court of Appeal. Handley JA, who gave the leading judgment, reviewed the authorities and concluded that the purchase by a director of a proprietary company of the shares of one of the shareholders may, in appropriate circumstances, give rise to fiduciary obligations. Applying the decision of the High Court in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64, his Honour said at [99]:

17. [232]

    In my opinion, the facts of this case so far as they concern DF closely parallel those in Brunninghausen v Glavanics. Mr Warner was the sole director of DF. He therefore had exclusive control over the payment of dividends. He was responsible for managing the accounts of DF along with the other aspects of the practice. He arranged for DF not to pay a dividend in the hope that Mr Kugel would not notice, and he did not. Mr Kugel trusted Mr Warner on this subject. When Mr Warner put forward the resolution and the transfer at a figure of one dollar he must have known that this was much less than the value of the share at the time. He did not draw it to Mr Kugel's attention and Mr Kugel did not focus on it. Mr Kugel was no doubt distracted by the undertaking to pay out the assets and liabilities of the practice. In my opinion, equity would not permit Mr Warner to take advantage of the sale at this price. Mr Kugel was in a vulnerable position, and had been put in the vulnerable position by Mr Warner.

18. [233]

    In pleading and arguing the case for Mr Kugel and Shazbot, counsel did not expressly make the case that the transfer of the shares in DF was procured by breach of fiduciary duty of the type in Brunninghausen v Glavanics. But the case as pleaded did include the allegation that the business of DF was subject to fiduciary obligations, either of a partnership or of a joint venture nature. The conduct of Mr Warner which I think amounts to a breach of duty was squarely raised and complained of in the plaintiffs’ case. In my view, a Brunninghausen v Glavanics case is fairly within the plaintiffs’ pleadings and is open on the case as run, although the relevant line authority was not referred to.

19. [234]

    The plaintiffs’ case was put on the basis of equitable compensation. At no point have the plaintiffs sought to set aside any of the transfers of the shares. In principle, if the transaction stands then Shazbot is entitled either to an account of the profits derived by Warner Capital from the transfer, or to equitable compensation. The amount of equitable compensation recoverable would appear to be the value of a half share as at 22 September 2014 (subject, of course, to the Part X fee income, for which DF would be required to account to the partnership). It will be a matter for Shazbot to elect between the two remedies.

Valuation of WIP and other accounting issues

1. [235]

   Having concluded that an account should be taken between Mr Kugel and Mr Warner as partners concerning the assets and income of the insolvency practice, it will be necessary to formulate directions specifying the scope of the account. It may also be necessary to make subsidiary provisions for accounting by CWK Pty Ltd or DF, and for this purpose to join DF to the proceedings. In these circumstances, it is not necessary to make any final decision on how the WIP component of the accounting should be valued, as this can be dealt with among all of the other directions. I will, however, set out my preliminary views on the directions which might be made, for consideration by the parties.

2. [236]

   As has been seen, the accounting process was carried out so far as the cash assets of the partnership business at 22 September 2014 and the liabilities as at that date were concerned. But the calculation of liabilities included provisions and it was contemplated that there might be further adjustments necessary. There was no evidence before me as to whether this had happened. Should either party require it, those matters will need to be included in the account.

3. [237]

   As I have pointed out at [220] above, the tax returns for the entities associated with the partnership business will need to be amended. In particular, returns will need to be lodged for the partnership which I have found to have existed between Mr Warner and Mr Kugel. Those returns will include all of the partnership income, treating Mr Warner and Mr Kugel personally as recipients of it rather than Shazbot and Warner Capital. Any additional tax will fall upon Mr Warner and Mr Kugel personally, but returns will still need to be lodged for the partnership and it may be that penalties could be imposed on the partnership. The directions will need to provide for this to be done and for any costs and penalties to be imposed on the partnership to be taken into account. As I have mentioned, it will be necessary to consider whether an account should be taken of the amounts due from CWK Pty Ltd to the partners and from DF to the partners.

4. [238]

   So far as the WIP of the practice as at 22 September is concerned, it was submitted for Mr Warner that it would be necessary to engage in an extensive factual analysis of what amounts were in fact recovered, and that allowance should be made (a generous allowance) for the costs of recovery. It was emphasised that some of the administrations had little money in them and some had more.

5. [239]

   I think there are two stages to the analysis. The first stage is to value the WIP accrued as at 22 September 2014. If, as at 22 September, monies were held in the relevant administration which could have been drawn upon (either immediately or upon the making of an application for remuneration), then the value of the WIP, it seems to me, is simply its book value. Where insufficient monies were held, then the value of the WIP would have to be discounted for the delay in recovery, or possible non-recovery. It would be possible to do this as at 22 September 2014 without any regard to what in fact happened. But it may be appropriate to look at actual recoveries instead: see Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 at 293-295.

6. [240]

   Counsel for the defendants argued “just allowances” would need to be made in Mr Warner's favour. Limiting for the moment consideration of the partnership asset to the WIP, the only task to be done was to collect it. The cost of collection is part of the ordinary overhead for doing business to the extent that monies were held as at 22 September then it should already have been done in the ordinary course of business. To the extent that monies were not available at that point and waited until later, then they were presumably recovered alongside further fees which were charged by Mr Warner trading on his own. Any identifiable cost to Mr Warner would be the same whether he had recovered his own fees and the partnership fees. My preliminary view is that no allowance would be appropriate in this regard.

7. [241]

   This leaves a residual category of “goodwill”. Mr Warner did not simply receive the benefit of WIP accrued up to 22 September which had not been collected. In taking over the matters he gained the opportunity to earn further fees in future. At the same time, he shouldered the burden of completing the administrations which had insufficient assets to meet the administration costs. Of course, this must be considered as a single “book”.

8. [242]

   Had Mr Warner and Mr Kugel simultaneously become unable to practise and the partnership had been terminated on that account, it would have been necessary to dispose of the partnership business to a third party. Ignoring WIP accrued before the date of termination, some of the administrations might have represented liabilities, in that the completion of the administration would be likely to yield less than the cost of completing it. Other administrations might have been seen as likely to yield more, and might therefore have a “goodwill” value to an incoming practitioner. The question is what such an incoming practitioner would pay, or require to be paid, in those circumstances, for the whole “book” of uncompleted administrations, after allowing for WIP. This could be an asset or a liability depending on the overall value of the “book”. Such an enquiry may not be worthwhile, but if either party requires it, I think it needs to be undertaken as part of the overall assessment.

9. [243]

   Mr Warner was clearly content to allow Mr Kugel to take the benefit of the Insolvency Experts name and associated telephone number and domain names, in return for taking over the liquidations and insolvency matters. But if Mr Kugel seeks an allowance of the insolvency files, then Mr Warner is entitled to have the value of the Insolvency Experts intellectual property taken into account.

10. [244]

    It will be recalled that the parties also agreed that Mr Warner would complete the official liquidations, on the basis that he would pay the necessary costs but would receive the benefit of anything obtained from Global One. Mr Kugel's conduct in having Mr Krejci appointed as liquidator and in waiving any entitlement to fees has deprived Mr Warner of the opportunity to receive funds from Global One. It seems to me that there will have to be an assessment of the amount which was recoverable for WIP on that administration up to 22 September 2014, and Mr Kugel will have to make an allowance in favour of Mr Warner for this.

11. [245]

    I have referred above to the partnership account being taken as at 22 September 2014, rather than as at 30 September which was the date used in the calculations undertaken at Mr Warner’s direction. That is because I think that, strictly speaking, 22 September was the agreed date of dissolution of the business relationship. That was the day on which Mr Kugel agreed to leave, and left. The 30 September date was only put forward by Mr Warner at a later point (in his email of October 2008: see [87] above). Although Mr Kugel did not dispute it, that date did not form part of the dissolution agreement between Mr Warner and Mr Kugel. However, if the parties wish for convenience to use 30 September as the relevant date for the account, that can be reflected in the Court’s orders.

Conclusions and orders

1. [246]

   I have concluded that:

   1. (1)

      Mr Warner and Mr Kugel conducted the insolvency practice of CRS Warner Kugel as partners between 19 September 2007 and 22 September 2014;

   2. (2)

      the business of the partnership included acting as company administrator, company liquidator, trustee in bankruptcy and administrator of Part X arrangements, but did not include the remaining Part IX debt agreement business operated by Debtfree Pty Ltd;

   3. (3)

      Mr Kugel is entitled to an order for an account accordingly;

   4. (4)

      Shazbot is entitled, at its election, to an account of profits or an award of equitable compensation arising from the transfer of its share in Debtfree Pty Ltd to Warner Capital on 22 September 2014.

2. [247]

   I will hear from the parties, to the extent necessary, on the form of the orders required to give effect to this judgement; the form of further directions to be made for the accounts to which Mr Kugel and Shazbot are entitled; and costs.

3. [248]

   The orders of the Court are: