Option Funds Management Ltd v Tung Chit Real Estate Investment Australia Ltd

These proceedings are a dispute between the participants in a venture to develop four parcels of land at Magenta on the NSW Central Coast.

The plaintiff is Option Funds Management Ltd (Receivers and Managers Appointed) (OFM). The third defendants are the receivers of OFM. They were appointed by the first defendant, Tung Chit Real Estate Investment Pty Ltd. The second defendant is Zhao’s Brothers Investment Pty Ltd (Receiver and Manager Appointed). In what follows, unless the context otherwise requires, the abbreviations which I have given to the parties refer to them as they were before the appointment of receivers. Although irrelevant to these reasons, I also note for completeness that OFM and Zhao’s Brothers were acting as trustees.

The original parties to the venture were OFM, Tung Chit and Zhao’s Brothers in accordance with the terms of a joint venture agreement (JV Agreement). Those terms included that the parties’ respective “Percentage Interests” in the “Joint Venture” (whatever it was as a matter of law) were held as tenants in common (OFM 39%; Tung Chit 51%; Zhao’s Brothers 10%), which reflected how they held as tenants in common the four parcels of land that were the subject of the venture.

As part of their arrangements, the parties also incorporated Magenta Shores Development Pty Ltd (Development Manager) as the vehicle to undertake the venture. The shareholdings in the Development Manager were OFM 39 shares; Tung Chit 56 shares; and Zhao’s Brothers 5 shares. Nothing turns on the reason why the shareholdings of Tung Chit and Zhao’s Brothers in the Development Manager are not in accord with their interests in the venture.

OFM was unable to make the financial contributions required of it to the venture. Tung Chit lent OFM the funds OFM needed to make those contributions and, in return, OFM granted Tung Chit security over OFM’s assets and undertaking, including its interest in the venture. There was no dispute that OFM has defaulted in its obligations to Tung Chit, which has purported to appoint the receivers.

The receivers have since exchanged a contract to sell to Golden Stone Fund Pty Ltd OFM’s interest in the land which is the subject of the venture. While Golden Stone was not a party to these proceedings, it would have to be given an opportunity to be heard before the Court granted the relief sought by OFM because that relief may be adverse to Golden Stone’s rights under its contract with the receivers. That relief included a declaration that the appointment of the receivers was “invalid on the specific ground that receivers cannot be appointed by one partner over another partner in a partnership, or over partnership property”.

The proceedings were efficiently conducted over two days almost exclusively by reference to the various agreements between the parties. There was no material dispute about the facts.

For all the complexity of the agreements, there were only two questions which the Court had to determine. These arose because OFM contended that the venture was a partnership, so that the appointment of the receivers was invalid because a creditor partner could not take a security (and hence enforce by appointing a receiver) over a debtor partner’s interest in the assets of the partnership. OFM submitted that the correct course was for the partnership to be wound up by the appointment of a receiver who would then sell all of the land comprising the venture rather than just OFM’s interest in it.

Tung Chit, supported by the other defendants, contended that it was irrelevant whether or not the venture was a partnership, because the right being exercised by the receivers and over which Tung Chit had security was a personal right of OFM’s under the JV Agreement to withdraw from the venture. Assuming the venture was a partnership, that right could not be partnership property and its exercise by the receivers could not fall within the principles relied upon by OFM.

The two questions, and their resolution for the reasons set out below, were:

Mr G Sirtes of Senior Counsel appeared with Mr A Hourigan of Counsel for OFM. Mr D L Cook of Senior Counsel appeared for Tung Chit. Ms L O’Keeffe, Solicitor, appeared for Zhao’s Brothers. Mr R Glasson of Counsel appeared for the receivers. Zhao’s Brothers and the receivers adopted the submissions put by Mr Cook SC on behalf of Tung Chit.

The proceedings turn on the effect and operation of these agreements:

Having identified the various agreements, it is convenient to make five preliminary observations.

First, the dispute between the parties was very narrow. For example, there was no dispute that:

Second, to keep quotations from the various agreements within reasonable bounds, where I have extracted sections from the agreements, I have not extracted the definitions for defined terms used in those sections unless necessary to understand the extract or to resolve some dispute.

Third, the Court does not accept Mr Sirtes SC’s submission that in considering the JV Agreement and the Management Agreement, primacy should be given to the JV Agreement. This is because it is clear from their terms and their simultaneous execution that the documents comprise the entire framework of the contractual relationship between the parties to those agreements and that they must be read together.

The relevant parts of the JV Agreement which support that conclusion are:

The relevant parts of the Management Agreement which support that conclusion are:

Fourth, while the JV Agreement and the Management Agreement each define “Party” and “Parties”, the agreements have been inconsistently drafted with those terms capitalised and not capitalised for no apparent reason. Therefore, nothing can be drawn from whether capital or lower case forms of those words are used.

Fifth, in part the argument proceeded on the basis that the Court should start with the JV Agreement and Management Agreement and, if of the view there was not a partnership, look at the subsequent conduct to see if something had changed so that the parties had come to behave as in a partnership. I do not accept this approach, in particular where there is no pleading of variation, abandonment or any similar legally cognisable departure from those original contractual arrangements. Subsequent conduct would undoubtedly be relevant to establish an estoppel, but OFM did not pursue that aspect of its claim.

The Court accepts Mr Cook SC’s submission that even if the venture is a partnership, the receivers have relevantly not been appointed over, and are not exercising, a right that is a partnership asset. The submission proceeds in the following steps, which the Court finds to be correct.

Clause 8 of the JV Agreement gives each party a right of withdrawal (withdrawal right):

It is clear beyond argument that the right conferred by cl 8 is a right personal to each party and could not be partnership property even if there were a partnership.

Under the GSA, OFM granted Tung Chit this security:

“Other Property” and “Personal Property” are defined in the GSA:

The combined effect of those definitions is to cast the definition of “property” as widely as possible. To be specific in this case, the withdrawal right is “Other Property” as a “right” of OFM as Grantor.

By the Appointment, the receivers were appointed receivers and managers of the secured property, being defined in Schedule 1 to the Appointment in identical terms to that set out in [25] above.

The receivers have therefore been appointed as receivers and managers of the chose in action which is the withdrawal right.

In addition to their powers conferred by the general law, under cl 9.3(r) of the GSA, the receivers have this specific power (exercise power):

The Umbrella Deed records and gives effect to the use by the receivers of the exercise power to exercise OFM’s withdrawal right under the JV Agreement, including the consent of the other parties to the venture, all of which is set out in the recitals to the Umbrella Deed:

Mr Sirtes SC made two answers to the reasoning set out in the preceding paragraphs.

His first answer was that cl 8 of the JV Agreement conferred a “right to seek consent to withdraw” which would not fall within the definition of secured property under the GSA. The Court rejects this for two reasons.

First, it does not reflect the language of cl 8, which does not even include an express reference to seeking consent, as opposed to proceeding with the consent of the other parties. Obviously enough, the obligation (a more apt description than “right”) to seek consent is implicit in the requirement to proceed with the other parties’ consent.

Second, even if it were a “right to seek consent to withdraw” so as to begin the process of withdrawal, that right would itself be “Other Property” under the control of the receivers. In other words, the same reasoning as is set out in [24] to [29] above would apply to reach the same result.

The second answer, as I understood it, was that if the result was as contended for by the defendants, the appointment of the receivers over the withdrawal right was void as a matter of law. This was because it was said to be an illegitimate circumvention of the general law that a receiver could not be appointed by one partner to enforce a debt owing from another partner over the latter’s interest in the partnership assets. The proper course was for a receiver to be appointed to wind up the entire partnership with the debtor partner’s surplus (if any) on winding up being payable to the creditor partner. It was said that the vice of what was being done was that there would not be a potential surplus on dissolution to which Tung Chit’s security interest could attach.

Even if the venture were a partnership, this submission is rejected. That is because partners are entitled to regulate by agreement their “interests …in the partnership property and their rights and duties in relation to the partnership” (see s 24 of the Partnership Act 1892 (NSW)). The withdrawal right is part of such an agreement. Whatever the common law position, the fact that in this case the exercise of the right by the receivers will result in another partner having a debt owed to it satisfied does not derogate from the receivers’ right on behalf of OFM to exercise OFM’s withdrawal right under the JV Agreement. That there will be no dissolution is also not to the point. The parties’ arrangements insofar as withdrawal was concerned mean that no dissolution would be required (and in fact was actively opposed by the other parties/hypothetical partners).

There was no dispute about the applicable principles.

As to partnerships, the statutory starting point is ss 1 and 2 of the Act. Section 1 provides that “Partnership is the relation which exists between persons carrying on a business in common with a view of profit”. Section 2 sets out the rules for determining the existence of a partnership, including in s 2(1)(3) that “receipt by a person of a share of the profits of a business is prima facie evidence that a person is a partner in the business”.

The essential propositions relied upon by OFM appear in the judgment of Mason J (as his Honour then was and with whom Barwick CJ, Gibbs and Wilson JJ agreed) in United Builders Pty Ltd v Mutual Acceptance Limited (1980)144 CLR 673 at 687-688:

It is important to note that Mr Cook SC expressly agreed with the propositions in the passage just reproduced. His point was that, even accepting that the secured property included whatever interest OFM had in the partnership assets (assuming a partnership), the receivers were not exercising a right in relation to that interest.

Reliance was also placed on these observations of the High Court in Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd (2010) 242 CLR 508 at [22] to [24]:

As for joint ventures, the Court was referred to the oft-cited passage from the judgment of Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10-11:

Pausing here, and with the greatest respect, in my opinion commercial legal practice has moved on since 1984 such that some qualification of the proposition in the first sentence of the passage just quoted is required. In my respectful opinion, where (as here) sophisticated commercial parties with the assistance of lawyers enter into something called a joint venture agreement and not a partnership agreement, that is an indication (I do not say it is more) that their relationship is not intended to be a partnership. The experience of a modern Australian commercial court today is that joint venture agreements (so called) are generally entered into precisely when partnerships are not intended. In making these observations, I am not to be taken as suggesting anything more than a rule of thumb that must yield to the facts and circumstances of any particular case. Nevertheless, I consider it applies and has not been displaced in this case.

Finally, I would add the helpful list of features of joint ventures which appears in W D Duncan, Joint Ventures Law in Australia (3rd ed, 2012, The Federation Press) I return to this in [62] below.

The Court answers this question “no” generally for the reasons advanced by the defendants and which are incorporated in what follows. I will then explain why OFM’s contentions are rejected.

There are a number of reasons why the Court does not accept the venture is a partnership.

First, where many of the features of the parties’ arrangements point in both the direction of a partnership or joint venture (as the parties accepted was this case), I accept Mr Cook SC’s submission that a critical distinguishing feature of a partnership – mutual agency – was completely missing in this case. There is no contractual provision between the parties permitting this and no evidence that any one of them ever attempted to do so. In reaching this conclusion I express my respectful agreement with this analysis in Duncan (at pp 26-27):

Second, and contrary to any suggestion of mutual agency, it is the Development Manager who is to undertake the venture on behalf of the parties as “principal contractor” and is to pay them the profits of the venture. So much appears from clauses 5 and 6 of the Management Agreement, which include:

Third, the parties consistently refer in the JV Agreement and the Management Agreement to their activity as a joint venture and to themselves as joint venturers, with a strict adherence in every aspect to their respective “Percentage Interests” which reflect their ownership of the properties they have contributed to the venture as tenants in common. I repeat my observation in [43] above. The most convenient example of this is the critical cl 5 of the JV Agreement, together with the relevant definitions in cl 1. In that regard, the reference to an “unincorporated Joint Venture” is in my view close to, if not already, a term of art, and a strong indicator against an intention to create a partnership. The clauses include:

The fourth reason requires attention to certain provisions of the JV Agreement and the Management Agreement. The JV Agreement includes cl 10 (also an example of inconsistent capitalisation of “parties”):

The Management Agreement includes cl 2:

Three things need to be said about these clauses.

First, cl 10 of the JV Agreement negatives a partnership. In United Builders there was no doubt that the parties were in a partnership (there was a deed of partnership), and it was accepted as fundamental that each partner had a beneficial interest in each of the partnership assets. That is not the case here. The parties are insistent at every turn in the JV Agreement and Management Agreement that their interest is as tenants in common in fixed shares, reflecting their status as such in relation to the properties which they have put into the venture (see cl. 5.2 of the JV Agreement set out in [49] above).

Second, turning to cl 2 of the Management Agreement, reflection discloses a clear logic between the clauses in the two agreements. As between themselves, the parties to the JV Agreement make it clear that their interests are not joint (joint ownership being an indicium of partnership) but several as tenants in common in specific shares. It is only in the agreement with the Development Manager, which otherwise has no interest in the land or any other part of the venture, that it is necessary to specify that the Development Manager obtains no estate or interest, that there is no partnership and that, other than as agreed, no party has authority to bind the other, and that their rights are several and not joint.

I should not pass from considering cl 2 without adverting to an argument between the parties at the bar table that, noting the definition that ““Party” means a party in this agreement”, the parties to the Management Agreement should be understood as OFM, Zhao’s Brothers and Tung Chit of the one part and the Development Manager of the other part. Ultimately, whether it is one or the other does not change my view of the effect of the two clauses across the agreements when read together. Although the contention is certainly arguable, I do not accept it.

There are two reasons why the parties referred to as such in cl 2 are each of the four companies.

First, the Management Agreement might be referred to as the actual operations agreement under which the venture was to be effected. It makes more sense in that agreement that the prohibition against representing oneself as another party’s agent should be a prohibition that fixes on each of the companies individually. None can represent itself as agent of any of the others unless they have agreed otherwise.

Second, I accept Mr Cook SC’s submission that something as simple as the notice provision in cl 13 of the Management Agreement specifying a separate address for each of the four companies is a confirmatory indicator that each of the four companies is a “party” or “Party” under that agreement.

The third point to make about the two clauses is that when they are understood in the way I have set out in [53] to [58] above, taken together they are inconsistent with a partnership between OFM, Zhao’s Brothers and Tung Chit, especially because cl 2 of the Management Agreement expressly excludes that relationship between any of the parties to that agreement.

The fifth reason for the Court’s conclusion is one of fortification and is another manifestation of the absence of mutual agency. Significant documents were always signed by representatives of each of the three joint venturers. There is no attempt for one to sign on behalf of the others.

The sixth reason is also one of fortification along similar lines. It is this affidavit evidence of the financial controller of the venture, an employee since 2017 of the Development Manager, which was neither objected to nor challenged by cross-examination:

Finally, I respectfully adopt the following helpful summary of features which point to a joint venture and not a partnership set out in Duncan (at pp 19-20), against each of which I set out in italics my conclusion as to its application in the present case, with the weight of the presence of those factors favouring a joint venture rather than a partnership:

Turning to Mr Sirtes SC's arguments, insofar as he advanced the contention of partnership by reference to the specific clauses of the agreements to which I have referred above, I do not accept his submissions for the reasons I have already indicated.

Second, much of his argument was devoted to an examination of how the parties conducted themselves during the course of the venture. I have already set out (see [20] above) the difficulty I have with this approach. True it is that, between themselves, there are documents and communications referring to themselves as partners, and documents for third party consumption such as special purpose financial accounts and tax returns that also refer to partners or partnership. The parties conducted a bank account in the name of all three of them. The high point of the examples to which the Court was taken is litigation they conducted in this Court where they pleaded that they were partners.

At first blush, this evidence may seem to be powerful. However, it becomes a completely neutral factor when it is understood that, for tax and GST purposes, the venture had to be treated as a partnership. For tax purposes, the venture was a partnership (see definition of “partnership” in s 995.1 of the Income Tax Assessment Act 1997 (Cth)). For GST, they needed an ABN for a single entity, being the collocation of the three companies. That was also how they had to enter into the agreements that became the subject of litigation and gave rise to the pleading of their status as a partnership.

In my respectful opinion, just as calling your activity a joint venture does not of itself negative partnership, so does calling yourself a partner negative the conclusion that you are not a partnership. Whether or not persons are in partnership depends upon a proper assessment of all the facts and circumstances, most importantly being the contractual arrangements entered into between the parties, which I have considered in some detail in these reasons.

Finally, Mr Sirtes SC relied upon the fact that the parties were pledging their assets to each other for a common purpose as a strong indicator of partnership. That is certainly what they were doing. Again, the difficulty for OFM's case is that the JV Agreement and Management Agreement make it very clear that each of them was retaining their legal and beneficial interest as tenant in common, in particular in the land that each was putting into the venture. That is contrary to the existence of a partnership.

For these reasons, the proceedings will be dismissed. Subject to hearing the parties, costs should follow the event.