Warner Capital Pty Ltd v Shazbot Pty Ltd

1. [1]

   GLEESON JA: I agree with White JA.

2. [2]

   WHITE JA: This is an appeal from orders of the Equity Division made on 6 September 2023 on the taking of an account between the second appellant, Mr Warner, and the second respondent, Mr Kugel, and companies they control (Shazbot Pty Ltd v Warner Capital Pty Ltd (No 3) [2023] NSWSC 527 (J3) and Shazbot Pty Ltd v Warner Capital Pty Ltd (No 4) [2023] NSWSC 1001) (J4). Shazbot Pty Ltd is a company controlled by Mr Kugel. Warner Capital Pty Ltd, Clarence Street Partners Pty Ltd, and Debtfree Pty Ltd are companies controlled by Mr Warner. The roles of the companies are explained in earlier judgments of the primary judge and are not relevant to the disposition of the appeal.

3. [3]

   Mr Warner and Mr Kugel practised as insolvency practitioners. At an earlier stage of the proceedings, the primary judge (Parker J) held that they did so through a partnership known as CRS Warner Kugel from 19 September 2007 to 22 September 2014. His Honour found that this was so notwithstanding that the partnership was conducted through a unit trust (Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 (J1) at [208]).

4. [4]

   In that judgment, the primary judge reached the following conclusions (at [246]):

5. [5]

   There was a further hearing before the primary judge which led to orders for the taking of accounts (Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114 (J2)). Those orders were the subject of an appeal to this Court that was determined on 25 June 2020 (Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121) (CAJ)). The appeal was substantially unsuccessful but the orders made on 16 September 2019 were varied. After further variation of the orders pursuant to the slip rule (Shazbot Pty Ltd v Warner Capital Pty Ltd (No 4) [2023] NSWSC 1001) (J4), the orders for the taking of accounts were relevantly as follows:

6. [6]

   The effect of these orders was that the account was to be taken between the individuals being the second plaintiff, Mr Kugel, and the second defendant, Mr Warner. It is significant for some of the issues raised on this appeal that under Order 6(a) and 6(b) the second defendant, Mr Warner, and his companies were required to account for the “income collected” from 22 September 2014 which formed part of the partnership’s work in progress (WIP) as at 22 September 2014, and not the net income after expenses of collection and overheads.

7. [7]

   The partnership was brought to an end at the insistence of Mr Warner. As the primary judge found in J3 at [6]:

8. [8]

   At the date of dissolution of the partnership the firm had on foot 461 administrations consisting of corporate liquidations, personal bankruptcies, and personal Part X arrangements (J3 at [13]). Recorded WIP (which would reflect the number of hours worked by each practitioner or employee multiplied by his or her hourly rate of charge) was, in round terms, $4.2 million (J3 at [13]).

9. [9]

   The primary judge found that of that work in progress Mr Warner had collected $1.56 million, and also found that “Mr Warner has also accrued a further $5.8 million on the book for work done after September 2014, of which he has collected $3.4 million” (J3 at [13]).

10. [10]

    Mr Warner took over all but five of the administrations.

11. [11]

    Only Mr Warner was a registered trustee in bankruptcy. Following the dissolution of the partnership, Mr Warner continued the administrations in bankruptcy and Part X administrations. For most of the company liquidations, Mr Warner and Mr Kugel had been appointed as joint liquidators. Mr Kugel resigned from those appointments and they were taken over by Mr Warner. The liquidations Mr Kugel retained were the subject of Order 6(c) and are not in issue on this appeal.

12. [12]

    In the 2020 proceedings in this Court, the leading judgment was given by Gleeson JA, with whose reasons Macfarlan and Meagher JJA agreed. Gleeson JA recorded that the primary judge in his first judgment had identified two stages for the analysis of the value of WIP at the CWK practice. The first was to value WIP accrued as at 22 September 2014 and the second was to value what the primary judge described as “residual goodwill” (CAJ at [139]). It is useful to quote Gleeson JA’s summary of the reasons of the primary judge in his first and second judgments leading to the orders made:

13. [13]

    Gleeson JA held that the primary judge was correct to require an accounting for the actual collections attributable to the WIP as at 22 September 2014 (CAJ at [158]) and was also correct in declining to allow the Warner interests a general deduction for later business expenses incurred by Mr Warner (CAJ at [162]). There was a qualification to that in that expenses “specifically referable to the collection of particular fees” could be deducted (CAJ at [162]). This would relate to the disbursements incurred in the collection of recoveries but not general business expenses. As to the interpretation of the words in Order 7(c) “… capital value (if any) of the goodwill as at 22 September 2014 associated with the future conduct of the insolvency administrations being conducted by the partners as at that date (but excluding the collection of work in progress of the Partnership Firm as at 22 September 2014)” Gleeson JA observed:

14. [14]

    The taking of the accounts was remitted to the primary judge. After a further hearing over five days in February and March 2023 the primary judge delivered his third judgment (J3) and directed the parties to bring in short minutes of order to give effect to his reasons. His Honour dealt with two issues. The first, which is the subject of the present appeal, concerned the value of the administrations taken over by Mr Warner (Order 7(b) and 7(c)). After dealing with an application for the correction of the orders made on 16 September 2019 after variation of those orders by the Court of Appeal on 25 June 2020 (J4), a complex series of orders was made on 6 September 2023 in relation to the parties’ obligations to account to each other and for set-off. Two further judgments followed (Shazbot Pty Ltd v Warner Capital Pty Ltd (No 5) [2023] NSWSC 1322 (J5) and Shazbot Pty Ltd v Warner Capital Pty Ltd (No 6) [2024] NSWSC 81 (J6)). These judgments concerned the calculation of interest, questions of set-off, costs, and interest on costs.

15. [15]

    No issues arise directly in this appeal on those matters, although if the appeal were allowed there would be consequential effects on those matters.

16. [16]

    In J3, the primary judge noted (at [17]) that on the first and second days of the hearing a question was identified as to whether a purchaser could properly have paid a sum of money for the acquisition of the book or could properly have required payment to take over the book. The issue arises under s 595 of the Corporations Act 2001 (Cth) and from a standard published by the Accounting Professional and Ethical Standards Board (APES 330 Insolvency Services cll 3.20 and 3.21 (see below at [51]-[61])).

17. [17]

    The primary judge recorded (J3 at [18]):

18. [18]

    Without expressing a concluded view on the question (J3 at [38]) the primary judge expressed a prima facie view that cl 3.21 of the Standard would be contravened if a hypothetical purchaser of the book were to be paid money by the vendor of the book as an inducement to acquire the book (J3 at [34]-[37]).

19. [19]

    Mr Warner relied upon evidence of two chartered accountants and experienced insolvency practitioners, Mr Michael Hird and Ms Suelen McCallum. He also relied on evidence of another insolvency practitioner, Mr Nicholas Crouch, who gave evidence of an actual transaction in which he was asked to take over a book of personal bankruptcy administrations and the process that entailed.

20. [20]

    The primary judge did not find that a purchaser acquiring the book of administrations subject to the conditions in Orders 6 and 7 would require payment of money to take over the book. The primary judge found that Mr Hird’s calculations of premiums and discounts that a hypothetical purchaser would pay, or require to be paid to him or her, were not shown to be well based. His Honour found that Mr Hird’s reasons did not provide any “… real objective basis for, or disclose any chain of expert reasoning to justify, the selection of those percentages” (J3 at [92]). His Honour found that the similar comment was applicable to the evidence of Ms McCallum (J3 at [95]).

21. [21]

    Whilst the primary judge summarised the process of reasoning of Mr Hird (J3 at [39]-[58]) and Ms McCallum (J3 at [60]-[63]), his Honour did not descend into a detailed critique of their reasons. That was so for three principal reasons.

22. [22]

    First, the calculations of Mr Hird and Ms McCallum were not based on any evidence of any prior sales but were a theoretical analysis based on a perception of what a typical purchaser would require to take on the book. There was no evidence of actual market transactions in which a vendor would be prepared to pay moneys to the purchaser to acquire the book (J3 at [81]). The only evidence of an actual transaction was that of Mr Crouch. His acquisition of part of a book did not involve him requiring a payment as a condition of taking it on. Rather he “cherry-picked” a small proportion of administrations and negotiated a subordination of the outgoing practitioner’s WIP on those administrations (J3 at [83] and [93]).

23. [23]

    Secondly, the primary judge considered that it was “… inherently unlikely that an incoming practitioner would require a substantial discount payment for the privilege of taking on more work of a similar character. For an incoming practitioner with spare capacity, expanding the size of the practitioner’s book would almost always be likely to create economies of scale. A practitioner who did not have spare capacity would presumably not be interested at all” (J3 at [86]).

24. [24]

    Thirdly, the primary judge was unable to accept that an outgoing practitioner who was selling the book of administrations would pay $1.94 million (the figure Mr Hird reached) to a purchaser to take over the book (J3 at [58], [99]). This was because rather than pay such a sum, the outgoing practitioner could resign from those administrations which constituted a liability for that practitioner or for a purchaser who acquired part of the book (J3 at [100]-[103]).

25. [25]

    This last matter was not something which had been considered by any of the “experts”. In relation to this matter the primary judge said (J3 at [104]):

26. [26]

    The appellants challenged these conclusions. They identified five interrelated issues arising on the appeal.

27. [27]

    The first issue was whether the “discount” payment which they contended a hypothetical purchaser would require be paid in order to take over the book would have been permissible. The primary judge did not decide that question but expressed a prima facie view that it would not have been permissible. The appellants contended that the payment would have been permissible. This is the subject of Ground 1 of the Further Amended Notice of Appeal.

28. [28]

    Secondly, the appellants challenge the primary judge’s reliance on there being no evidence of actual market transactions in which a purchaser has insisted on payment by the outgoing practitioner to acquire the book. The appellants submit that Orders 6(a), 6(b), 7(b) and 7(c), as varied by this Court and corrected under the slip rule, created a peculiar hypothetical framework for consideration of the issue of “value”. This was because of the priority afforded to the vendor’s WIP, the inability of the prospective purchaser to select which administrations within the book it might take on, and the legal and ethical prohibition on the purchaser paying any money to the vendor to acquire the book. These factors meant that there would have been no market in which the hypothetical purchase could have been made. This did not relieve the court from the task of assessing whether a hypothetical purchaser would require to be paid to take on the book, and if so, what payment would be made (Spencer v The Commonwealth of Australia (1907) 5 CLR 418 at 432; [1907] HCA 82). The question, so the appellants submitted, was not whether there was any purchaser in prospect who might have acquired the book on the terms stipulated by the orders of 16 September 2019, but what a hypothetical purchaser desirous to acquire the book would have required to be paid by the hypothetical vendor desirous to transfer the book on the stipulated terms. From the purchaser’s perspective those terms were onerous.

29. [29]

    This was the subject of Ground 2 of the Further Amended Notice of Appeal.

30. [30]

    The third issue identified by the appellants concerned the primary judge’s assessment of the evidence of Mr Hird and Ms McCallum. This is the subject of Ground 3 of the Further Amended Notice of Appeal. That ground contends that the judge erred in concluding that, in the case of a discount payable by a hypothetical vendor to a hypothetical purchaser within the framework of Orders 6 and 7, “the appellants failed to establish that the whole book of administrations had an overall negative value such that a discount was not payable by the prospective [vendor] to the prospective [purchaser]”.

31. [31]

    This ground did not identify with particularity why the judge erred in not accepting the evidence of the appellants’ expert witnesses.

32. [32]

    The fourth issue concerns the challenge to the primary judge’s conclusion that the power of the court to appoint a replacement liquidator meant that a discount would never be payable. This was the subject of Ground 3A.

33. [33]

    The appellants submitted that the primary judge only addressed the issue of the replacement by insolvency courts of liquidators and did not address the position of the replacement of trustees in bankruptcy in personal administrations.

34. [34]

    The judge’s general remarks were addressed to the replacement of “insolvency office holders”. His Honour said (J3 at [100]):

35. [35]

    That having been said, the primary judge’s more specific remarks related only to the replacement of liquidators.

36. [36]

    The fifth issue was the subject of Ground 4 of the Further Amended Notice of Appeal. The appellants submitted that the primary judge erred by not considering the detailed evidence available as to the stage and status of the individual administrations making up the book. They contended that if this were done it would have enabled an assessment and quantification of the extent to which individual administrations constituted liabilities, the monetary value of such liabilities and their overall effect on the value of the whole book, and hence the overall value of any discount payable to a theoretical purchaser.

37. [37]

    By Notice of Contention the respondents say in relation to the first issue that the primary judge should have held, for the purposes of the hypothetical transaction involving the sale of the book, that a payment by the vendor to the purchaser to acquire the book would have breached cl 3.21 of APES 330 Insolvency Services and would not fall under cll 8.17-8.23 of the same. Alternatively, the respondents contend that the primary judge should have held that it would have been uncertain to a hypothetical purchaser and vendor of the book whether such arrangements would, if carried out, have breached cl 3.21 of the Standard or fallen within cll 8.17 and 8.23 (the “Cost Funding Provision”).

38. [38]

    The respondents also contended:

Amendment of 2018 orders

1. [39]

   The appellants submit that the outcome of the taking of accounts is unfair. Pursuant to Order 6(a) and 6(b) the first, second, and fourth appellants have been required to account for the income collected by them from 22 September 2014 onwards in respect of the partnership’s WIP as at 22 September 2014, without having to account for the costs incurred in that collection.

2. [40]

   At J2 [42] the primary judge said:

3. [41]

   As noted above, in calculating the “collections”, a deduction in relation to expenses “specifically referable to the collection of particular fees” was allowed (CAJ at [162]; J2 at [42]).

4. [42]

   The issue of what were direct and indirect costs of collecting the partnership’s WIP as at 14 September 2014 was determined by this Court’s orders of 25 June 2020.

5. [43]

   Belatedly, in the appellants’ submissions in reply, senior counsel for the appellants invited the Court to treat the orders as interlocutory and to reconsider the orders.

6. [44]

   Without deciding whether the orders were interlocutory or final, that invitation should be rejected. The case has been fought on the basis of the orders that were made. Additional evidence would be required if Orders 6(a) and 6(b) were to be set aside and there would yet be another hearing. That course cannot be contemplated.

7. [45]

   In any event, given the way the dissolution of the partnership was effected, with Mr Warner presenting it as a fait accompli and taking over the premises and staff to pursue the business as his own, the complaint of unfairness rings hollow.

Background facts

1. [46]

   Insolvency practitioners are accountants but the features of their practice are very different from accounting practices generally. As Ms McCallum said:

2. [47]

   Ms McCallum also opined that:

3. [48]

   I will return to this matter below.

4. [49]

   The partnership practice was profitable. In the three years from 30 June 2012 to 30 June 2014 the net profits of the practice exceeded $1.8 million per annum before distribution of salaries for the partners. In the financial year ended 30 June 2014, the revenue from bankruptcies, liquidations, and Part X arrangements totalled $2,991,886 and the costs incurred in deriving that revenue totalled $1,802,821. Ms McCallum calculated that the profit component over the 2011 to 2014 financial years (being the fees earned less the expenses incurred in earning those fees), reflecting all costs assumed to be covered by an hourly charge rate, was 24.58%.

5. [50]

   Having regard to the historical profitability of the practice, it is counterintuitive that a hypothetical purchaser of the book as at 14 September 2022, which would include both profitable and unprofitable administrations, would require payment of a “discount” to take on the book, or that the vendor would be willing to pay such a “discount”, even though the purchaser would have to account to the vendor for the value of the WIP at the date of acquisition that was later collected.

The first issue

1. [51]

   There were two versions of APES 330 Insolvency Services, one issued in November 2011 and the second being a revised version issued in September 2014. The second would be the relevant version for a purchaser considering acquisition of the book after 22 September 2014. It relevantly included the following:

2. [52]

   Section 595 of the Corporations Act at all relevant times has relevantly provided:

3. [53]

   Both sub-s 595(1) and cl 3.20 of the Standard have the effect that an insolvency practitioner who was a hypothetical purchaser of the book could not pay a premium to the firm as vendor of the book to obtain the right to be nominated as liquidator in the corporate insolvencies. That is common ground. It was the basis for the respondents not pressing their claim (in support of which they adduced evidence) that on a hypothetical sale of the book the hypothetical purchaser would have been prepared to pay a premium to acquire the book.

4. [54]

   It is unnecessary to consider whether under s 595(1) the payment of a “discount” by the hypothetical vendor to the hypothetical purchaser of a book would breach the subsection. On one view, such a payment might have the object of preventing the appointment or nomination of other persons as liquidator. But that is not an issue raised by the respondents’ Notice of Contention. It was not the subject of submissions and can be put aside.

5. [55]

   In my view, for the hypothetical purchaser to accept a substantial “discount” payment for the acquisition of the whole of the book would involve his or her acceptance of a monetary benefit. Even if it be assumed that the “discount” paid reflected the parties’ agreement as to the negative value of the book as a whole, the receipt of a sum certain in advance of acquiring the book, where the purchaser could take steps to reduce his or her future liability for expenses by resigning or obtaining the leave of the court to resign (if required), would be an immediate monetary benefit.

6. [56]

   I do not accept that cl 8.23 affects this conclusion.

7. [57]

   The appellants submitted that an arrangement permitted by cl 8.23 could not be prohibited by cl 3.21. That may be accepted.

8. [58]

   The appellants also submitted that an arrangement contemplated by cl 8.23 would mirror the appellants’ proposed structure for payment of a discount sum. That is not so. Clause 8.23 (and the clauses which precede it) are addressed only to an insolvency practitioner’s acceptance of an appointment for a particular administration. This is reflected by the requirements for disclosure to creditors in a particular administration and, in particular, the requirement that moneys received in advance be accounted for as “funds of the administration”.

9. [59]

   The effect of this latter requirement is that if all of the moneys paid are not required to fund the insolvency practitioner’s administration, the surplus must be accounted for, either to the creditors, or to the party providing the funds.

10. [60]

    The “discount” payment the appellants contended a hypothetical purchaser would have required is not of the kind contemplated by cl 8.23.

11. [61]

    The respondents’ Notice of Contention on this issue should be upheld. This is itself a sufficient reason for dismissing the appeal. No hypothetical purchaser of the book could require or accept a “discount” payment without breaching his or her professional obligations.

The second issue

1. [62]

   I accept the appellants’ submissions that it was not an answer to their claim that a hypothetical purchaser would have required payment of a “discount” to take over the book and a hypothetical vendor would have been prepared to pay such a “discount”, that there was no evidence of any such transaction in the “market”.

2. [63]

   The primary judge’s reasons included the following (J3 at [90]):

3. [64]

   There is a reason in principle why the valuation of the book should be different. That is because there was no market for the acquisition of the book. Instead, the orders required a valuation of the book on the hypothetical basis that there could be a purchaser desirous to acquire the book and the partners could be desirous of selling it. In Spencer v The Commonwealth of Australia, Griffith CJ said at 431-432:

4. [65]

   The absence of an actual market for a transaction contemplated by the orders of 16 September 2019 is not a reason for not carrying out the valuation exercise required by those orders.

5. [66]

   Nonetheless, for the book to have a capital value, either positive or negative, the hypothetical vendor and purchaser must not only be assumed to be willing, they must also be able to dispose of and acquire the book for a price. It is now common ground that the vendor could not extract a price for sale of the book. For the reasons above in relation to issue 1, the hypothetical vendor could not demand a price to acquire the book.

The third and fourth issues

1. [67]

   As noted at [30] above, ground 3 of the Notice of Appeal did not identify with any particularity why the primary judge erred in not accepting the evidence of the appellants’ expert witnesses, Mr Hird and Ms McCallum.

2. [68]

   One of the reasons the primary judge did not descend into a critical analysis of their opinions was that his Honour found that those opinions did not address the ability of the insolvency practitioner to resign from unfunded administrations. It is desirable to address issue 5 before coming back to issues 3 and 4.

The fifth issue

1. [69]

   It is noted at [47] that Ms McCallum opined that insolvency practitioners had an obligation to complete the administrations over which they had been appointed and could not “down tools” if costs became too excessive or the work became too onerous.

2. [70]

   As a general proposition that should be accepted. But it does not address the question as to when an insolvency practitioner can relieve himself or herself of those obligations by resigning.

3. [71]

   In the case of court appointed liquidators, s 473(1) of the Corporations Act relevantly provided (as at 22 September 2014) that:

4. [72]

   Section 545 provided:

5. [73]

   It follows that in the case of the court appointed liquidations, the hypothetical vendor would not pay a “discount” to a hypothetical purchaser to acquire the administration of those liquidations for two reasons. The first is that it would be a breach of his or her professional obligations to do so. The second is that it would make no financial sense to do so because the vendor could meet his or her obligations by complying with his or her obligations to provide a report and by resigning.

6. [74]

   In the case of the bankruptcies and Part X administrations, the position is more complex.

7. [75]

   Section 180 of the Bankruptcy Act 1966 (Cth) provides:

8. [76]

   Thus, the bankruptcy trustee does not have the right to resign because the bankruptcy is unfunded. But the court has a discretion to allow resignation for that reason. The authorities suggest that any such application for resignation would be likely to be accepted (In Re Trocevski (Trustee), Moran A Bankrupt [2023] FCA 355 at [4], [9], [25]; Re Abdulrahman (Bankrupt) (No 2) [2011] FCA 899 at [3], [9]-[12]; Re Gollant [2017] FCA 1158 at [10], [13], [14], [20]).

9. [77]

   The primary judge concluded (J3 at [103]-[104]:

10. [78]

    That conclusion should be accepted.

11. [79]

    The elaborate analyses of the appellants’ witnesses, and the responsive analyses of the witnesses called for the respondents, failed to address the real issues.

12. [80]

    In these circumstances there is no reason this Court should embark upon a detailed analysis of their evidence, or the asserted details of the individual files, as the appellants asserted with respect to the third and fourth issues The primary judge was right not to do so.

13. [81]

    For these reasons I propose that the appeal be dismissed with costs.

14. [82]

    KIRK JA: I agree with White JA.