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Shazbot Pty Ltd v Warner Capital Pty Ltd (No 6) [2024] NSWSC 81 (9 February 2024)

Last Updated: 24 October 2024

Case Name:	Shazbot Pty Ltd v Warner Capital Pty Ltd (No 6)
Medium Neutral Citation:	[2024] NSWSC 81
Hearing Date(s):	Written submissions on costs ending 25 October 2023; further oral submissions 17 November, 1 December 2023
Date of Orders:	9 February 2024
Decision Date:	9 February 2024
Jurisdiction:	Equity
Before:	Parker J
Decision:	See [133]
Catchwords:	PARTNERSHIP – accounts – third parties ordered to account to partnership firm jointly and severally with partners – form of orders – no set-off between third parties’ liabilities to account and distributions to partners PARTNERSHIP – winding-up – directions – lodgement of future tax returns – obtaining of advice on lodgement of past tax returns COSTS – multiple claims involving multiple parties and having mixed success – application of rule that costs follow the event – order in favour of successful plaintiff on partnership claims and subsequent account to quantify defendant’s liability – order against unsuccessful plaintiff for costs solely referable to unsuccessful non-partnership claim – indemnity costs – informal offer not distinguishing between plaintiffs – indemnity costs refused
Legislation Cited:	Nil
Cases Cited:	Akierman Holdings Pty Limited v Akerman (No 3); In the matter of Akierman Holdings Pty Limited (No 2) [2021] NSWSC 869 Doppstadt Australia Pty Ltd v Lovick & Son Pty Ltd  [2014] NSWCA 158  Global Consulting Services Pty Ltd v Gresham Property Investments Ltd (No 3) [2019] NSWCA 208 Harris v Harris [2013] NSWSC 1157 Lahoud v Lahoud [2006] NSWSC 126 Leda Pty Ltd v Weerden (No 2) [2007] NSWCA 283 Meekin v Gersbach (Supreme Court of New South Wales, 6 August 1997, unrep) Murray v Feros [2019] NSWSC 260 Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 3) [2023] NSWSC 527 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 4) [2023] NSWSC 1001 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 5) [2023] NSWSC 1322 Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336 Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121 Waters v P C Henderson (Aust) Pty Ltd [1994] NSWCA 338
Texts Cited:	JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015 LexisNexis) R I’Anson Banks, Lindley & Banks on Partnership (16th ed, 1990, Sweet & Maxwell R I’Anson Banks, Lindley & Banks on Partnership (21st ed, 2022, Thomson Reuters
Category:	Costs
Parties:	Shazbot Pty Limited (First Plaintiff) Steven Barry Kugel (Second Plaintiff) Warner Capital Pty Limited (First Defendant) Anthony John Warner (Second Defendant) Clarence Street Partners Pty Limited (Third Defendant) Debtfree Pty Limited (Fourth Defendant)
Representation:	Counsel: E Finnane (Plaintiffs) C Wood SC (written submissions on costs); J Anderson (17 November and 1 December) (Defendants) Solicitors: Uther Webster & Evans (Plaintiffs) Emerson Lewis (Defendants)
File Number(s):	2015/119465
Publication Restriction:	Nil

JUDGMENT

1. These proceedings have mainly been concerned with a partnership dispute. The Court has previously made orders for the parties to account for assets of the partnership appropriated by them following an informal termination of the partnership business. This judgment deals with three issues:

(1) the form of the final orders consequent upon the account;

(2) further orders and directions for completing the winding-up of the partnership’s affairs; and

(3) the costs of the proceedings to date.

2. My most recent judgment in the proceedings was delivered in November last year: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 5) [2023] NSWSC 1322 (“J5”). The nature of the proceedings was set out, and the main parties identified, at J5 [2]-[3]:

... The principal protagonists were Steven Barry Kugel (the second plaintiff) and Anthony John Warner (the second defendant). Mr Warner and Mr Kugel are insolvency practitioners who previously operated an insolvency practice together. The practice was conducted through two companies which were jointly owned by the parties and of which they were both directors. One was named CRS Warner Kugel Pty Ltd (“CWK”), and is now named Clarence Street Partners Pty Ltd (the third defendant). The other was Debtfree Pty Ltd (“Debtfree”, the fourth defendant).

The business relationship between Mr Warner and Mr Kugel ended (at the instance of Mr Warner) in September 2014. Nearly all of the insolvency administrations on which the practice was working were retained by Mr Warner. He also obtained, from Mr Kugel, ownership of Mr Kugel’s shares in CWK and Debtfree, which he thereafter operated himself.

3. The reference to the transfer of the shares in Debtfree from Mr Kugel to Mr Warner was a simplification. The shares were actually held by Mr Kugel through his company Shazbot Pty Limited (“Shazbot”), the first plaintiff, and were transferred to Mr Warner’s company Warner Capital Pty Limited (“Warner Capital”), the first defendant. The two companies were made party to the proceedings because a claim was made on behalf of Shazbot for Warner Capital to account for the value of the Debtfree shares. That claim played a subordinate part in the proceedings.

Background and procedural history

4. The proceedings were commenced in 2015. Before my most recent judgment, I had delivered four earlier judgments. There had also been an appeal.
5. I delivered my principal judgment in October 2018: Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 (“J1”). Relevantly for immediate purposes, I found that the practice, to the extent that it involved liquidations, administrations, personal bankruptcies and Part X arrangements, had been conducted by CWK as trustee for a partnership constituted by Mr Warner and Mr Kugel personally. There had been an informal division of some of the assets of the practice between the parties, but I found that this had not been complete or final.
6. This meant that, for administrations taken over by Mr Warner, later collections of fees which had been earned but not billed as at the date of dissolution (“WIP”) would have to be accounted for as partnership income. Similarly, the capital value, if any, of the “book” of administrations taken over by Mr Warner would have to be accounted for as a partnership asset (Mr Warner contended that it was actually a liability). The WIP for the handful of administrations taken over by Mr Kugel, and assets appropriated to the parties as part of the informal division, would also have to be accounted for. Shazbot’s claim concerning the shares in Debtfree also succeeded.
7. There followed a debate between the parties about the form of the orders which should be made to reflect my conclusions, and to provide for the further conduct of proceedings. In August 2019, I delivered a judgment resolving the issues which had been debated: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114 (“J2”). In September, I made orders agreed by the parties to give effect to my judgment. Those orders included declarations about the practice having been conducted by CWK as trustee for a partnership consisting of Mr Warner and Mr Kugel. I also made orders for accounting by Mr Warner, CWK and Debtfree, and by Mr Kugel and Shazbot (Shazbot had received at least some of the practice assets appropriated to Mr Kugel as part of the informal division).
8. There was an appeal from my September 2019 orders, which was decided in June 2020: Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121 (“CA”). The appeal was largely unsuccessful. The orders in favour of Shazbot concerning the Debtfree shares were set aside. But the partnership declarations and orders for account which I had made were not disturbed.
9. Following the delivery of the Court of Appeal’s judgment, directions were made in the usual form for the accounting stage of the proceedings. Strictly speaking, the principal protagonists for the purposes of that stage of the proceedings were the two individual partners, Mr Kugel and Mr Warner. The partners’ companies only had an interest to the extent that those companies were ordered to account to the partnership. But no distinction appears to have been recognised by the two groups of parties in their conduct of the accounting stage of the proceedings and it is convenient to continue to refer to them as the plaintiffs and the defendants.
10. In accordance with the directions, the parties prepared and filed statements of account, objections etc. They were able to resolve many of the issues by agreement among themselves. In February of last year, there was a hearing before me to determine the accounting and quantification issues which remained in dispute. I delivered my judgment on those issues in May: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 3) [2023] NSWSC 527 (“J3”).
11. By the end of the February hearing, two issues were in dispute (J3 [8]). The first was the value to be attributed to the book of administrations taken over by Mr Warner. Initially it was contended for the plaintiffs that the book had a substantial positive value by way of “goodwill”, and for the defendants that it had a substantial negative value. In course of the hearing, the plaintiffs’ position shifted. They abandoned their claim for positive goodwill and simply opposed the defendants’ claim for negative goodwill (J3 [16]-[18]).
12. The second issue was the value to be attributed to the “Insolvency Experts” website which had been used to promote the practice and was taken over by Mr Kugel. The defendants claimed that the website had a substantial value, for which Mr Kugel should account. The plaintiffs denied this.
13. The plaintiffs succeeded on both issues. I concluded that the defendants failed to establish that the book had a substantial negative “goodwill”, still less what that value of the alleged liability was. I also concluded that the defendants failed to establish their claim that the Insolvency Experts website had a substantial value (J3 [159]).
14. Following delivery of my judgment in May, negotiations took place to finalise the quantification of the accounts being taken. Those negotiations were interrupted by an application by the plaintiffs (which was contested) to vary my September 2019 orders under the slip rule. I delivered a judgment dealing with this application in August: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 4) [2023] NSWSC 1001 (“J4”).
15. Following delivery of my August judgment, the parties were able to agree on the principal amounts for which they were liable to account. I made orders in a form agreed by the parties to record their agreement on the figures. These orders were made on 6 September.
16. There remained a debate about how much pre-judgment interest should be allowed, and about the costs of the proceedings. The parties exchanged written submissions on these issues.
17. The parties also undertook to formulate undertakings to deal with the completion of the winding-up, and in particular the question of tax. But these steps were delayed, and I decided to determine the question of interest, while reserving the question of costs. This resulted in the November judgment to which I have earlier referred. In that judgment, I dealt with the interest issues and invited the parties to calculate the pre-judgment interest in accordance with my decision.
18. The proceedings returned to the Court on 17 November. At that point orders had been prepared to deal with the interest liabilities. But the precise figures for interest were not agreed. I also raised some concerns with the parties about the form of the proposed orders (and the September orders).
19. The proceedings were adjourned for further mention and, in the interim, I sent a memorandum to counsel outlining my concerns, and also addressing what further orders should be made for winding-up the partnership’s affairs. The matter returned to Court on 1 December, at which point I heard further argument.

Final orders on accounts

20. The relevant orders of September 2019, as varied by the Court of Appeal and the slip rule judgment, were:

1. Declare that from 19 September 2007 in acting as company liquidators, company administrators or bankruptcy trustee under the name “CRS Warner Kugel” the second defendant and the second plaintiff (“the Partners”) carried on business in partnership within the meaning of the Partnership Act 1892 (NSW) (“the Partnership Firm”); and to the extent that the business was in the name of the third defendant (including the holding of shares in the fourth defendant by the third defendant), was conducted as trustee for the Partnership Firm.

2. Declare that from 19 September 2007, in acting as trustee of personal insolvency agreements under Part X of the Bankruptcy Act 1966 (Cth) under the name “Debtfree”, the second defendant acted as a partner of the Partnership Firm; was part of and to the extent that that part of the business was conducted in the name of the fourth defendant, it was conducted as trustee for the Partnership Firm.

3. Declare that the Partnership Firm was dissolved by agreement between the parties on 22 September 2014.

...

6. Order that:

(a) The second and third defendants account for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at the date of the account) which formed part of the company liquidation, company administration or bankruptcy trustee work in progress of the Partnership Firm as at 22 September 2014;
(b) The second and fourth defendants account for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at the date of the account) which formed part of the Part X agreement work in progress of the Partnership Firm as at 22 September 2014;
(c) The second plaintiff account for collections which would in the ordinary course have been made of work in progress of the Partnership Firm as at 22 September 2014 for the following company liquidations:

[six companies were listed].

7. Order that:

(a) The second and first plaintiffs account for the capital value of all assets of the Partnership Firm received or appropriated by them after 22 September 2014, less the amount of any debts or liabilities of the Partnership Firm assumed by either of them;
(b) The second and third defendants account for the capital value of assets of the Partnership Firm received or appropriated by either of them after 22 September 2014, less the amount of any debts or liabilities of the Partnership Firm assumed by either of them;
(c) The account in (b) is to include the 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).

21. Five distinct accounts were to be taken, defined in orders 6(a), 6(b), 6(c), 7(a) and 7(b). Separate accounts were ordered for collection of fee income (orders 6(a), 6(b) and 6(c)) and assets (orders 7(a) and 7(b)) because of the possibility that they might be treated differently for taxation purposes (see J2 [36]-[37]).
22. The orders to account for the income and assets appropriated by Mr Warner were each made, jointly and severally, against him and one of the companies controlled by him (CWK, in the case of orders 6(a) and 7(b); Debtfree, in the case of order 6(b)). Similarly, the order to account for assets appropriated by Mr Kugel (order 7(a)) was made, jointly and severally, against him and Shazbot. The reasons for this are explained in J4 [26]-[31]. Arguably, in each case the company’s liability to account should have been limited to the income or assets received by it. But both parties were content to proceed on the basis that the companies would be jointly and severally liable for the whole of the income or assets appropriated by the partner who controlled them, whether or not those companies received the full benefit of those appropriations.
23. The consent orders which I made in September 2023 fixing the parties’ principal liabilities were:

1. The court declares that the principal amount for which the second and third defendants are liable to the Partnership Firm upon the taking of accounts pursuant to Orders 6(a) and 7(b) of the judgment made on 16 September 2019 ... (“the Judgment”) is $1,694,632.55, comprising:

a. The principal sum of $1,492,402.18, pursuant to the account under Order 6(a); and
b. The principal sum of $202,230.37, pursuant to the account under Order 7(b).

2. The court declares that the principal amount for which the second and fourth defendants are liable to the Partnership Firm upon the taking of accounts pursuant to Order 6(b) of the Judgment is of $68,987.03.

3. The court declares that the principal amount for which the second plaintiff is liable to the Partnership Firm upon the taking of accounts pursuant to Order 6(c) of the Judgment is $33,432.30.

4. The court declares that the principal amount for which the second and first plaintiffs are liable to the Partnership Firm upon the taking of accounts pursuant to Order 7(a) of the Judgment is $160,441.89.

5. The court declares that the account between the second plaintiff and the second defendant as partners of the Partnership should be finalised, and the remaining proceeds of the Partnership recovered and distributed between the second plaintiff and the second defendant by the following method:

a. The sums set out in paragraph 1 should be set off against the sums set out in paragraphs 3 and 4, to the intent that the principal amounts of the net liabilities owing by the accounting parties to the Partnership, after such set-off, are as follows:

i. Second and first plaintiffs: nil;
ii. Second and third defendants, jointly and severally: $1,500,758.36; and
iii. Second and fourth defendants, jointly and severally: $68,987.03.

b. Judgment should be entered for the second plaintiff:

i. Against the second and third defendants jointly and severally in the principal sum of $750,379.18, being half the sum of the second and third defendants’ liability to the partnership (post set-off); and
ii. Against the second and fourth defendants jointly and severally in the principal sum of $34,493.52, being half the second and fourth defendants’ liability to the partnership;
iii. With consideration being reserved as to the amount of interest on the above sums for which judgment should be given.

c. The monies in court should be paid out of court to the second plaintiff, with 50% of the amount of those monies when paid to be credited towards the liability in paragraph 5.b.i above.

6. Judgment for the second plaintiff against the second and third defendants jointly and severally in the sum of $750,379.18.

7. Judgment for the second plaintiff against the second and fourth defendants jointly and severally in the sum of $34,493.52.

8. Reserve for consideration the amount of interest attributable to the principal judgments given in paragraphs 6 and 7.

9. Order that the monies paid into court in these proceedings be paid out to the second plaintiff.

24. The defendants have appealed against the orders made in September 2023. On appeal, they maintain the contention, which I rejected in my May judgment, that the book of insolvencies taken over by Mr Warner had a negative value. They claim that, if their contention is correct, the outcome of the asset account by Mr Warner and CWK (order 7(b) of September 2019) will be in their favour (why CWK would get the benefit of this may be questionable, but does not need to be considered for present purposes). As a consequence, they seek to have the orders of September 2023 set aside. They have not however made any application for a stay of those orders.
25. In the absence of a stay, the filing of the appeal does not affect the Court’s obligation to proceed to make final orders on the interest question. As already mentioned, the parties have now agreed on the calculations of interest and have presented orders to give effect to my November 2023 judgment on interest. Those orders relevantly provide:

1. The court declares that the amount of interest for which the second and third defendants are liable to the Partnership Firm, attributable to the principal sums for which they are liable as set out in paragraph 1 of the orders made on 6 September 2023 (the "6 September 2023 Orders"), and calculated to 6 September 2023, is $681,537.05, comprising:

a. interest of $582,755.55 attributable to the principal sum of $1,492,402.18, pursuant to the account under Order 6(a); and
b. interest of $98,781.50 attributable to the principal sum of $202,230.37, pursuant to the account under Order 7(b).

2. The court declares that the amount of interest for which the second and fourth defendants are liable to the Partnership Firm, attributable to the principal sum of $68,987.03 for which they are liable as set out in paragraph 2 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $15,910.52.

3. The court declares that the amount of interest for which the second plaintiff is liable to the Partnership Firm, attributable to the principal sum of $33,432.30 for which he is liable as set out in paragraph 3 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $12,674.74.

4. The court declares that the amount of interest for which the second and first plaintiffs are liable to the Partnership Firm attributable to the principal sum of $160,441.89 for which they are liable as set out in paragraph 4 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $78,369.49.

5. The court declares that the interest liabilities of the partners should be dealt with in the same manner as the corresponding principal liabilities as set out in paragraph 5 of the 6 September 2023 Orders, such that:

a. the interest sums set out in paragraph 1 should be set off against the interest sums set out in paragraphs 3 and 4, to the intent that the net liabilities for interest owing by the accounting parties to the Partnership, after such set-off, are as follows:

i. second and first plaintiffs: nil;
ii. second and third defendants, jointly and severally: $590,492.82; and
iii. second and fourth defendants, jointly and severally: b. Judgment should be entered for the second plaintiff for interest as follows:

b. against the second and third defendants jointly and severally for interest

i. in the sum of $295,246.41, being half of the sum of the second and third defendants' interest liability to the partnership (post set-off); and
ii. against the second and fourth defendants jointly and severally for interest in the sum of $7,955.26, being half of the second and fourth defendants’ interest liability to the partnership.

6. Judgment for the second plaintiff against the second and third defendant jointly and severally for interest in the sum of $295,246.41.

7. Judgment for the second plaintiff against the second and fourth defendants jointly and severally for interest in the sum of $7,955.26.

8. The judgments in paragraphs 6 and 7 are to take effect as of 6 September 2023.

26. The making of the declarations in orders 1 to 4 is not controversial. The declarations use the language of liability when, strictly speaking, what is involved in the award of the interest is the exercise of a discretionary power. But no point is taken about that.
27. The problem arises from proposed orders 5 to 7. The same difficulty arises with orders 5 to 7 of the September 2023 orders, which have already been made. In my memorandum to counsel, I set out the following preliminary view:

The “set-off” orders (orders 5 to 7 of 6 September 2023) are unworkable. In the first place, they purport to provide for set-off between the parties’ obligations to the Partnership Firm and the parties’ entitlements to distributions from the Partnership Firm. This conflates liabilities to the Partnership Firm with liabilities to opposing parties, and the distribution will ultimately depend on what is recovered (less enforcement costs), which cannot be known at this point. Secondly, the orders purport to provide for the set-off to involve parties (Clarence Street Partners Pty Ltd, Debtfree Pty Ltd and Shazbot Pty Ltd) who are not partners in the partnership.

28. At the hearing on 1 December, counsel’s principal submission was that the concerns raised in the memorandum did not present a problem. Counsel made no application to have the September 2023 orders varied and urged me to make the interest orders in the form submitted.
29. Counsel for the defendants understandably left it to counsel for the plaintiffs to make the running. He stated that the defendants did not seek any variation of the September 2023 orders. Formally, I understood counsel to submit that the making of further orders should be deferred until after the appeal had been decided. But in the end, counsel did not argue against the making of orders in the form prepared by the parties.
30. Counsel for the plaintiffs, in his written submissions, began by reminding me that, in the form in which I originally made them, the September 2019 orders provided for the appointment of a receiver and for the accounting parties under orders 6 and 7 to account to the receiver so appointed. As is noted at J4 [16], the parties combined to persuade the Court of Appeal to set aside the appointment on the footing that they could conduct the account and cooperate amongst themselves to wind up the partnership’s affairs without incurring the expense of a receiver. As a result, reference to the receiver was removed from those orders by the Court of Appeal.
31. Counsel acknowledged, albeit not in so many words, that the removal of the reference to the receiver from the accounting orders did not alter the fact that the accounting represented a liability to the partnership firm. That is expressly stated in the declarations made in orders 1 to 4 of both the September 2023 orders concerning principal liabilities, and the equivalent proposed declarations concerning interest liabilities. Counsel nevertheless observed that the partnership was not a legal entity, but a “relationship”.
32. Returning to my concerns about the proposed set-off orders (orders 5 to 7), counsel referred me to forms of order in textbooks, and court decisions, upon which it appears the proposed orders were modelled. Those “standard” orders provided, at the end of the account, for a set-off between the amounts due from the partners, with judgment being entered accordingly. So far as the point about the companies not being partners was concerned, counsel submitted that mutuality is not necessary for a set-off in equity: JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015 LexisNexis) at [39-060](e).
33. Counsel added that, while the effect of the orders was that Mr Warner was not liable to pay to the partnership firm the whole amount appropriated by him, notionally he was accounting in full, and then receiving a distribution of his half share. The companies had no entitlement to receive any distribution of the partnership assets, not being partners themselves. Counsel submitted, however, that those companies’ liabilities were discharged to the extent that the individual partner with whom they were jointly and severally liable satisfied his liability through the process of “set-off” provided for by the orders.
34. Counsel emphasised in his submissions that the form of orders 5 to 7 in the September 2023 orders, and in the proposed orders, had been agreed by the parties as a result of careful consideration. I should proceed, counsel submitted, on the basis that the parties had taken advice on practical matters such as the likelihood of successful enforcement against the companies, and the desirability of obtaining a judgment which could be the subject of enforcement action in the ordinary way. Counsel urged me not to second-guess what the parties had done and to make orders in the form sought.
35. In his written submissions, however, counsel anticipated that I might consider that the presence of the companies might still give rise to a problem which I considered to be intractable. In that event, counsel proposed that: order 5 be deleted; reference to the companies be removed from orders 6 and 7, leaving the judgment standing against Mr Warner; and there be judgments against the companies for the full amounts for which they were liable, with Mr Kugel being appointed as receiver for the purpose of enforcing those judgments on behalf of the partnership.
36. I did not think that counsel’s arguments in support of orders 5 to 7 dealt with the problem which I had perceived. The standard form of order to which counsel referred me is quite understandable in cases where the accounting which takes place is between two partners only. That was so in the decisions to which counsel referred me. But the point in the present case is that Mr Warner’s companies are non-partners who are liable to account but have no entitlement to a “set-off” for distributions from the partnership. The judgments in orders 6 and 7 are not consistent with the liabilities declared by orders 1 to 4 so far as those companies are concerned; the judgment amounts are only half of the declared liabilities.
37. The problem with counsel’s argument about satisfaction of joint and several liabilities was that there has been no actual satisfaction of the companies’ liabilities; the figures will only work if Mr Warner actually pays, in full, the judgment debts that have been entered against him. If he does not (and I have been told that this is a possibility), then, unless it is possible to enforce full payment of their declared liabilities from the companies, the partnership’s receipts will be reduced and the calculations will need to be re-done.
38. As to counsel’s point about equitable set-off, it may be accepted that there are circumstances in which mutuality at law is not required. There must, however, be some basis on which equity will recognise that the debtor is in entitled to a set-off against the plaintiff. In the present case there is simply no reason why the companies would be entitled to a set-off against their liabilities under the declarations. It was not suggested that the companies had any entitlement in equity to receive the distributions which would flow to the individual partners upon the winding up of the partnership.
39. A feature of the appeal underlines the practical difficulties with the orders. I have found and declared Debtfree (jointly and severally with Mr Warner) to be liable to the partnership firm in the sum of $69,000. There is no challenge on appeal to that finding or that declaration. There is no legal obstacle to the full enforcement of Debtfree’s (or Mr Warner’s) liability. Yet because Mr Warner is challenging other components of the “set-off” calculation, he can plausibly contend that everything will have to wait until that challenge has been resolved, and Mr Kugel, seemingly, accepts this. The same logic may apply to the much larger liability of CWK and Mr Warner under declaration 4 (see [25] above).
40. The parties could have achieved something similar to a set-off by way of agreement. They could have agreed that the companies would only have to pay half of the liabilities recorded against them in the declarations. But this would effectively have been a permanent surrender of half of the partnership’s entitlement against those companies. I did not understand that this was the basis on which I had been asked to make the orders. If I have misunderstood the parties, they can tell me.
41. I indicated to counsel for the plaintiffs in the course of the hearing that I considered that the problem raised in my memorandum had not been solved. As already noted, counsel had proposed some orders against the possibility that I might reach this view. But at the hearing, his position changed. He indicated that he was not pursuing any alternative to the orders agreed by the parties.
42. I made it clear that (subject to anything counsel for the defendants might say) I was open to replacing orders 5 to 7 (both in the existing and the proposed orders) with judgments consistent with declarations 1 to 4. This could readily have been done for the companies, by entering judgment in favour of the partners jointly and severally and having them appoint an independent solicitor to enforce the judgment for the benefit of the partnership, or by appointing a receiver as counsel had originally canvassed. Entering judgment against Mr Warner would have been more complicated, but the problems were not insuperable. Counsel, however, would not countenance this; it was made clear to me that it was a matter of instructions.
43. The impasse is most regrettable. But I do not think that I can be compelled to make orders without being satisfied that there is a proper legal basis for them. In these circumstances, I will make the declarations in proposed orders 1 to 4, but will not make orders 5 to 7. I can do nothing about the existing orders 5 to 7. The existing declarations and the declarations I have made record the parties’ liabilities in accordance with my decisions and the accounting parties remain obliged, as a matter of law, to satisfy those liabilities. If the parties decide to alter those liabilities by agreement among themselves, or wish to propose some other method of enforcing them curially, a further application may be made.

Winding-up directions

44. One of the consequences of my 2018 judgment was that all of the income generated by the insolvency practice was, in law, income of a partnership firm constituted by Mr Warner and Mr Kugel personally, rather than income received by CWK as trustee of a unit trust, the tax rates for which would have been appreciably lower. Similarly, any income accounted for in favour of the partnership firm, whether actually or notionally by way of “set-off”, would be partnership income of the individual partners.
45. The focus of the debate about winding-up directions was on compliance with the partnership firm’s tax obligations. In particular, questions arose about whether there was a requirement to submit a tax return or tax returns on behalf of the partnership and, if so, about the need for negotiations with the Tax Office and the obtaining of external tax advice, or further directions from the Court, or both.
46. The questions were initially raised as part of the debate which took place before the delivery of my August 2019 judgment and the making of the final orders in September 2019 (see J2 at [45]-[49]). It has always been common ground that a partnership is not a taxable entity as such; the individual partners are obliged to include in their tax returns for the relevant year the income which they have received from the partnership. But while a partnership is not a tax paying entity, there is still an obligation to lodge a separate partnership tax return, under a partnership tax file number (“TFN”), which records the income and expenditure of the partnership for the year and the distribution of the net income (or loss) to the partners.
47. During the operation of the business between 2007 and 2014 no such partnership returns had, of course, been submitted. Nor do any concrete steps seem to have been taken since 2018 to do so. I was informed when the issue arose again last year that the partners had obtained advice on the question, but I was not provided with that advice and was told it was privileged.
48. Counsel for the plaintiffs proposed to the Court a series of undertakings which had been agreed between the parties in order to address this question. The undertakings obliged the parties to make a joint approach to the Australian Taxation Office, inviting the ATO to appoint a liaison person for the purposes of discussing what tax returns, if any, should be lodged. The parties were also to appoint a tax agent to undertake any reporting obligations which might eventuate, and to meet any costs (including the tax agent’s fees) jointly. As I understood it, the parties accepted that the tax agent would, as a first step, apply for a partnership TFN.
49. Counsel for the plaintiffs urged me to accept the undertakings in the form proposed, which do not actually require the lodgement of partnership tax returns for the period from 2007 to 2014. Counsel reminded me that I had considered the question of ordering a general partnership account for that period in the course of deciding what orders to make in consequence of my 2018 judgment, and had decided not to. Counsel quoted my conclusion at J2 [50]:

On reflection, I have decided not to order any accounting between the parties for the period up to 22 September 2014. No party has requested it. I think the Court should simply focus on the orders required to do equity between the parties in these proceedings. That can be achieved by making orders for an account of uncollected income and of the capital value of partnership assets as at 22 September 2014. I do not propose to make any direction that the receiver restate the accounts or lodge tax returns for the period up to 22 September 2014. Whether he needs to do so will depend upon the attitude of the Tax Office and any advice the receiver may obtain on the question.

50. Counsel noted that the Court of Appeal, in considering the appeal from my September 2019 orders, did not make any orders about tax returns.
51. Counsel also submitted that the parties could not, on any view, be required to lodge tax returns as a condition, by way of “doing equity”, of the grant of relief. This was in response to a query which I had raised. Counsel pointed out that the parties’ substantive rights had been determined by the final orders of September 2019, and no conditions had then been imposed on the grant of relief. No party had sought such an order.
52. Counsel appeared somewhat reluctant to concede that tax returns would have to be lodged in the future. The furthest that counsel was prepared to go was to accept that the matter could be brought back before the Court at some point next year and, perhaps, considered at that point.
53. I accept counsel’s submission that no question of the Court imposing obligations as a condition of the grant of equitable relief arises. Counsel is, with respect, right in saying that the final relief in the proceedings was granted in the form of the orders in September 2019. But that does not mean that the Court has no interest in the issue.
54. In my view, the proper analysis of the position the Court has been in since final orders were made is that the Court is exercising its powers under s 39 of the Partnership Act 1892, which provides:

39 Rights of partners to application of partnership property

On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or the partner’s representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm.

55. The business of the partnership has long since ceased, but its “affairs” continue, and will continue until the monies due as a result of the accounting process have been collected (even if notionally) and distributed. It is notable that, while one or other of the partners must make an application to the Court, the winding-up of the partnership is, as a matter of language, done by the Court. The Court’s role is, it seems to me, somewhat similar to that which it plays when exercising jurisdiction over the administration of a trust.
56. In the present case, the winding up of the partnership has in effect been delegated to the partners. It follows, in my view, that there is no need for undertakings. The Court has power to direct the partners, and that is what it should do.
57. I also think that it is proper for the Court, in supervising the winding up of the partnership’s affairs, to direct the lodgement of tax returns covering income of the partnership even though the partners have not specifically asked for that. It does not seem to be disputed that the monies due to the partnership firm as a result of the accounting process will, when collected (including monies collected notionally) be income of the partnership, or that the partners have a legal obligation to lodge partnership returns covering this income. In my view, it is a necessary step in completing the winding-up.
58. The lodgement of personal tax returns by the partners containing partnership income is a different matter. It falls outside the scope of the winding-up. I accept that it is not for the Court to give directions to the partners in that regard.
59. I must say that I have some difficulty understanding the apparent reluctance of the partners to accept that partnership returns will be required in the future. Some monies (including monies owing by Mr Kugel) will remain due to the partnership firm whatever the outcome of the appeal. It is not suggested that nothing will be collected. I simply cannot see that there can be any doubt that it will become necessary to lodge returns when collections (even if notional) are made. The partners in fact appear to accept that it is necessary to apply for a partnership TFN.
60. Nor do I see why it should be necessary to ask the ATO to appoint a liaison officer before lodging the partnership tax returns. In the ordinary course, if income is received in a year, then the returns should simply be lodged. There is no occasion to wait until a request is received from the ATO.
61. Having said all of this, I can see that the lodgement of partnership tax returns covering the period while the practice was operating (from September 2007 to September 2014) would be expensive and there are real questions about the utility of the process given that (as I assume) the individual partners would long ago have lodged their personal tax returns for those years. There may be questions about whether it would now be open to them, or the ATO, to amend those returns; if so, the lodgement of partnership returns might have no consequences for the Revenue.
62. It would not be right for the Court to require the lodgement of partnership returns for past financial years if that would be futile. In my view, the proper course is for the partners to obtain advice on that question. I note that in the final sentence of J2 [50] I contemplated that the receiver might need to obtain such advice.
63. At the hearing on 1 December, I proposed to counsel for the plaintiffs that I would adjourn the proceedings until 31 October this year by which time it should be clear whether income has been received for the 2023-24 financial year. Counsel was content with this. On reflection, however, the advice about the lodgement of tax returns for past financial years might as well be obtained now. I propose to bring the date forward so that the matter can return to Court at some point after that advice has been obtained. I will order that the proceedings be re-listed on 30 April, but if that date is not suitable to the parties, they may approach my Associate to vary it.
64. I have redrafted the undertakings proposed by the parties, recasting them as directions and incorporating the conclusions set out above. In order to save time, I propose to make the directions in my redrafted form now, but if there is any problem with the wording the parties may apply to have that wording varied.

Costs

65. No order has yet been made as to the overall costs of the proceedings. The principal question debated in the parties’ submissions was the incidence of costs. The plaintiffs also seek orders for indemnity costs and interest on costs. I was also asked to deal with the costs of the slip rule application, but there is no need, as I have already done so: see J4 [49](2).

Incidence of costs

66. Both parties agreed that the traditional rule in partnership actions was that, generally, the costs of proceedings for the winding up of a partnership were paid out of the partnership assets. But that general rule did not apply in all cases. In Meekin v Gersbach (Supreme Court of New South Wales, 6 August 1997, unrep), McLelland CJ in Eq stated, at 2:

The distinction to be drawn is between proceedings which are necessary for the administration of partnership assets where there is no relevant fault on either side, on the one hand, and proceedings which are rendered necessary by reason of the default of one of the partners, on the other. When the proceedings are caused by such default there is normally good reason not to order payment of costs out of the partnership assets, but rather to order costs against the partner in default, at least up to the conclusion of the hearing ...

67. His Honour went on to quote from the 16th edition of Lindley & Banks on Partnership (R I’Anson Banks, Lindley & Banks on Partnership (16th ed, 1990, Sweet & Maxwell) at [23-112]:

... it has long been an established rule that all the costs of dissolution proceedings should be paid out of the partnership assets, unless there is a good reason for making some other order. Where, however, such proceedings are, in reality, commenced in order to obtain an adjudication on some disputed claim between the partners, the unsuccessful litigant will normally be ordered to pay the costs up to the date of trial.

68. In Murray v Feros [2019] NSWSC 260 (a case referred to by both parties in their submissions), at [51]-[52], I described proceedings of the type referred to in Lindley & Banks’ second proposition, by way of shorthand, as “adversarial”. The current edition (R I’Anson Banks, Lindley & Banks on Partnership (21st ed, 2022, Thomson Reuters) at [23-204]-[23-206] emphasises the court’s overriding discretion but is otherwise in substantially the same terms.
69. Counsel for the plaintiffs submitted that for the purposes of determining the incidence of costs, a distinction needed to be made between two stages of the litigation. The first stage lasted until September 2019, when I made final orders, including orders for accounts to be taken. The second stage consisted of the proceedings consequential upon those orders.
70. In the first stage of the proceedings, counsel for the plaintiffs submitted, the plaintiffs had succeeded. Costs should follow the event. Counsel acknowledged that the second part of the proceedings involved accounting proceedings subject to the traditional rule. But counsel submitted that the major issues at the hearing before me last year were contested issues, involving expert evidence from both parties, on which Mr Kugel succeeded. Counsel submitted that the accounting proceedings had in substance been adversarial and the plaintiffs should likewise have an order for costs for that stage of the proceedings.
71. Counsel for the defendants began by observing that the parties had, on the Court’s findings, adopted a partnership structure which involved two corporate entities being used as the receptacles for partnership assets and liabilities, namely CWK and Debtfree. Counsel noted that this increased the complexity of the accounting exercise. Counsel also submitted that once the Court had determined that there was a partnership, there was no dispute about the need for orders to be made for dissolution. Counsel characterised the dissolution as a no-fault one.
72. Counsel also noted that in the course of the first stage of the proceedings the plaintiffs had made claims for breach of duty against Mr Warner. Those claims had been made against Mr Warner as partner, and also as director of CWK and of Debtfree. There were also allegations against Mr Warner of misleading and deceptive conduct.
73. Counsel submitted that the argument at the 2018 hearing focused on the legal character of the insolvency practice conducted by Mr Warner and Mr Kugel. Mr Kugel, it was said, had “walked away” from the practice to pursue other business choices. His allegations of breach and of misleading and deceptive conduct had failed. Once the Court had concluded that a partnership had existed, dissolution had been relatively uncontroversial.
74. Counsel acknowledged that the first stage of the proceedings had contained “some aspects” of ordinary commercial litigation, and “some features” of partnership litigation. Counsel accepted that the litigation during this period was “adversarial” at least so far as it involved the claim that the insolvency practice was conducted as a partnership. But counsel noted that the plaintiffs had not succeeded on all issues. Counsel submitted that the appropriate costs order was that the plaintiffs should receive 60% of their costs of the proceedings for the relevant period. Alternatively, the plaintiffs’ costs (but not the defendants’) should be paid out of partnership assets.
75. So far as the second stage of the proceedings were concerned, the account, in counsel’s submission, involved “a novel question” as to whether the book carried a premium or a discount to the WIP. Counsel also pointed out that the accounting process involved the valuation of other assets distributed when the partnership engaged in the partial and informal winding up of the partnership in 2014. It also involved the valuation of the liquidations taken over by Mr Kugel. By that stage there was no question of breach; this had all been dealt with in the first part of the litigation.
76. Counsel submitted that the accounting proceedings were not adversarial but were rather a necessary step to the finalisation of the partnership. In counsel’s submission, the parties should bear their own costs of that aspect of the proceedings.
77. In order to address the parties’ submissions, it is necessary to say something about the way in which the claims in the proceedings developed.
78. The original statement of claim, filed in April 2015, named Shazbot and Mr Kugel as the first and second plaintiffs, and Warner Capital and Mr Warner as the first and second defendants. Neither CWK nor Debtfree was named as a party.
79. The statement of claim recounted the background to the establishment of the practice in September 2007 (see J1 [52]-[66]). It was specifically alleged that Mr Warner and Mr Kugel agreed to conduct a partnership for the conduct of an insolvency practice between themselves as individuals. Alternatively, it was alleged that the partnership was between Shazbot and Warner Capital.
80. It was alleged that, as a partner, Mr Warner was obliged to ensure that upon dissolution of the partnership business a full accounting was given to Mr Kugel for his share of all of the partnership assets. Equivalent obligations were said to arise from Mr Warner’s duties as a director of CWK and Debtfree. In addition, Mr Warner was alleged to have made express promises and representations to the effect that a full accounting would be, or had been, given. These promises and representations were alleged to have been misleading and deceptive. The plaintiffs had allegedly relied on them, Mr Kugel by leaving the business, and Shazbot by transferring its share in Debtfree to Warner Capital for nil consideration.
81. In particular, the statement of claim pleaded that, as at September 2014, WIP had been accrued both by CWK and by Debtfree (defined as the “WIP Assets”). It was alleged that the WIP Assets belonged to the partnership, but had been retained by Mr Warner, and not accounted for, following the informal dissolution of the partnership.
82. The prayers for relief in the statement of claim included a declaration of a constructive trust over 50% of the proceeds of the WIP assets. There was also a claim for damages (or “equitable damages”) based on the allegations of breach of duty and misrepresentation against Mr Warner. But in addition, there was a claim that Mr Warner was liable to account for partnership assets appropriated by him. The claims for relief included a claim for an account “in respect of any and all amounts found to have been the property of the Partnership that the Defendants, jointly or severally, have taken to deny the plaintiffs of their shares [sic], including but not limited to the WIP Assets”.
83. In the second half of 2017, the proceedings came before me as a result of a pleading dispute. The dispute was triggered by a disagreement as to how the WIP should be accounted for if the plaintiffs’ claims succeeded. It was being contended for Mr Warner that later expenditure on the administrations in question would be deducted from the WIP outstanding as at September 2014.
84. This debate raised the broader question of how and when quantum would be determined if the plaintiffs’ claim succeeded. Both parties accepted, in the course of the argument, that this would not be a task for the trial judge. Rather, the trial would be concerned only with questions of liability to account, and, perhaps, with issues of principle arising in that account. The assessment of any damages which the plaintiffs might recover (in lieu of an account) was not discussed, but the parties evidently assumed that this too (if pressed) would be deferred.
85. In the course of the argument on the application, I raised with counsel for the plaintiffs a number of aspects of the existing pleading. In the end, I made directions for a further round of pleadings to clarify the parties’ cases. In October 2017, an amended statement of claim was filed on the plaintiff’s behalf. As part of the changes, the plaintiffs abandoned the allegation of a partnership between Shazbot and Warner Capital, confining the alleged partnership to one between Mr Warner and Mr Kugel. CWK was also joined as the third defendant.
86. A further amended version of the statement of claim was filed in December 2017 and yet a further version in February 2018, shortly before the beginning of the hearing. In the final version, the prayer for relief in the nature of an account was abandoned. It was replaced by a claim for damages based on Mr Kugel’s alleged entitlement to a half share of the practice’s assets. But while in theory those damages could have been assessed immediately, the prayers for relief sought that the assessment be undertaken by a referee following the Court’s decision. This was of course consistent with the position taken by the parties that no question of quantum would arise at the hearing. The hearing was, in fact, conducted on that basis, and evidence going only to quantum was not read.
87. I now return to the parties’ submissions, beginning with the first stage of the proceedings. As already noted, counsel for the defendants accepts that the plaintiffs should receive an order in their favour on account of his success on the partnership issue. But I agree with counsel that the plaintiffs were not wholly successful.
88. I do not however agree with the form of orders proposed by counsel to reflect that lack of complete success. To discount the costs by 40% (by awarding the plaintiffs only 60% of the costs of the proceedings) would be merely a guess (Akierman Holdings Pty Limited v Akerman (No 3); In the matter of Akierman Holdings Pty Limited (No 2) [2021] NSWSC 869 at [121]- [123]). And ordering that the plaintiffs’, but not the defendants’, costs be paid out of the partnership assets would have the result that half of those costs would be borne by Mr Kugel. In my view this would be equally arbitrary, and even less reflective of the merits of the case.
89. In my view the proper course is, to the extent that the first stage of the proceedings involved adversarial claims, to apply the rule that costs follow the event (Uniform Civil Procedure Rules 2005 (NSW), r 42.1), but to do so distributively, so as to take account of success and failure on those different claims (I have described this approach in more detail in Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336 at [30]- [45] and Akierman at [54]-[86]).
90. As we have seen, from the outset Mr Kugel made a claim for a half share of the alleged partnership assets, including, in particular, the WIP. That claim was, in substance, successful. Mr Kugel had to come to court to pursue it. The value of the claim was significant.
91. It is true that initially the claim was for an account, but at the time of the hearing it was framed as a claim for damages based on loss of partnership entitlements. But in my opinion this is not a difference of significance for present purposes. It is also true that the Mr Kugel claimed a share of the whole of the WIP accrued by Debtfree, and succeeded only as to the Part X component, but I see this as a subordinate issue which was not “clearly dominant or separable”: cf Waters v P C Henderson (Aust) Pty Ltd [1994] NSWCA 338 at p 3, quoted in Akierman at [67].
92. Furthermore, the claim was, in my view, the dominant one in the first stage of the proceedings. In order to succeed, Mr Kugel had to establish that there was a partnership between him and Mr Warner personally; that the WIP was a partnership asset; and that there had been no final accounting between the parties as part of the informal winding up of the partnership. Mr Kugel succeeded on each of those issues, which were responsible for most of the legal and evidentiary dispute at the 2018 hearing.
93. It follows, I think, that Mr Kugel should receive an order for the general costs of the first stage of the proceedings against Mr Warner. Mr Kugel has also succeeded in obtaining an order for account from CWK, which resisted his claim on the same grounds as Mr Warner did. CWK should also be ordered to pay his costs from the date of its joinder in October 2017. But there are, in my view, two qualifications.
94. The first qualification concerns the claim for the value of the shares in Detbfree. Although this may not have been entirely clear in the pleadings, as a matter of proper legal analysis, the claim was advanced in the name of Shazbot which was the party whose shares had been transferred. The defendants to the claim were Warner Capital and Mr Warner personally. Although one form of that claim succeeded at the hearing, it ultimately failed on appeal. Shazbot should therefore pay the costs of Warner Capital, and of Mr Warner, solely referable to the claim.
95. The second qualification concerns the claims for damages for misleading and deceptive conduct, and for breach of duty, against Mr Warner. Those claims were not ultimately pressed, or, to the extent pressed, did not succeed. The factual basis for the claims of course would have overlapped with the factual bases of the partnership issues on which Mr Kugel was successful. But any of Mr Warner’s costs solely referable to those claims should be paid by Mr Kugel.
96. I turn now to the second stage of the proceedings. For practical purposes, they have been concerned with accounting pursuant to orders 6 and 7 of the September 2019 orders. There has been some reference to directions for the winding up of the partnership, particularly in this judgment, but overall, that has not been a major, or seperable, issue. The appropriate course is to make orders dealing with the costs of the proceedings up until the final quantification of the parties’ entitlements pursuant to the accounts.
97. The accounting proceedings have been complex and somewhat unusual. In the first place, there was no order for a general account to be taken; rather, there were five specific accounting orders. Secondly, the accounting parties included persons who were not partners.
98. Analysed in terms of cost following the event, the proceedings involved four separate accounts by four different accounting parties, or pairs of accounting parties. Those accounting parties were: Mr Warner and CWK, so far as the accounts under orders 6(a) and 7(b) were concerned; Mr Warner and Debtfree, so far as the account under order 6(b) was concerned; Mr Kugel and Shazbot, so far as the account under order 6(c) was concerned; and Mr Kugel alone, so far as the account under order 7(a) was concerned.
99. Strictly speaking, each account involved a contest between the partnership interest on the one hand, and the accounting party on the other. Had the order for an appointment of a receiver stood, the accounting proceedings would have been conducted by the receiver against the accounting party. But for practical purposes each account was prosecuted against the accounting partner (and any co-accounting party) by the other partner.
100. It is convenient to begin with the accounting for WIP collected or appropriated by Mr Warner, CWK and Debftree (orders 6(a) and 6(b)). It may be correct that at the hearing there was little debate about quantum. Nevertheless, it must be remembered that the case put by the defendants was that there was no obligation to account at all. It seems to me that where a party refuses to account, and is unsuccessful, then that party may properly be required to bear the costs of not only determining the existence of the obligation to account, but also the quantification of that obligation. I see nothing unfair about that. It is always open to the unsuccessful party, once ordered to account, to make an offer as to quantum which can then be relied upon in the quantification proceedings. There is no evidence before me that any such offer was made here.
101. Similar observations apply to the order to account with respect to assets of the partnership appropriated, and liabilities of the partnership assumed, by Mr Warner or his associated companies (order 7(b)). Again, the defendant’s contention was that there was no obligation to account because the informal account undertaken by the parties was final. That contention failed, making it necessary to determine the value of the assets and liabilities retained by Mr Warner and his associated companies. Furthermore, the contention made on behalf of Mr Warner that the book of administrations retained by him was a liability, which occupied a significant portion of last year’s hearing, and upon which Mr Warner was unsuccessful, arose on this account.
102. The orders for account with respect to WIP collected and assets and liabilities assumed by Mr Kugel or Shazbot, in my view, stand in a different position. There was never any dispute that, if the claims against Mr Warner succeeded, Mr Kugel would also have to account. Furthermore, the number of liquidations retained for the purposes of the account under order 6(c) was minimal. And Mr Warner’s contention that the Insolvency Experts website retained by Mr Kugel had substantial value arose under order 7(a). This was the other major issue dealt with at last year’s hearing, and again, Mr Warner was unsuccessful.
103. In these circumstances, I do not think that an order simply making the costs of conducting accounts payable out of the partnership assets would properly reflect the parties’ responsibility for those costs. I am satisfied that the accounting proceedings mainly arose out of positions taken by Mr Warner on which he has been unsuccessful. In short, the proceedings were mainly adversarial.
104. It follows, in my view, that Mr Warner should pay Mr Kugel’s costs of the second stage of the proceedings. But again, I think there are two qualifications.
105. First, any identifiable costs associated only with the accounts by Mr Kugel (orders 6(c) and 7(a)) should be excluded. So too should any costs solely referable to Mr Kugel’s contention (ultimately abandoned at last year’s hearing) that the book had a positive value.
106. It remains to deal with the fact that Debtfree was an accounting party with respect to some of the WIP collections (order 6(b)) and CWK was an accounting party with respect to both WIP collections and assets and liabilities appropriated by Mr Warner (orders 6(a) and 7(b)). I will deal first with Debtfree.
107. I do not think that any cost order should be made against Debftree. Debtfree was not joined as a party to the proceedings until after the case had, in substance, been decided. Debtfree therefore cannot properly be said to have opposed the making of accounting orders in the way in which Mr Warner did. Furthermore, the account for which Debtfree was involved did not include any of the major issues debated at last year’s hearing.
108. CWK is not in quite so favourable a position as Debtfree. CWK was joined to the proceedings before the 2018 hearing and did, alongside Mr Warner, oppose the making of the accounting orders which have been made. CWK also stood to benefit from the unsuccessful contention that the “book” of administrations represented a liability. But it did not stand to benefit from the other unsuccessful contention from last year’s hearing, namely that the Insolvency Experts website obtained by Mr Kugel has substantial value which should be brought to account in favour of Mr Warner.
109. A further analysis of the costs of the accounting proceedings for the purpose of identifying the costs for which CWK should be jointly and severally liable alongside Mr Warner, even if possible, would hardly be worth the effort. I think reasonable justice will be done by ordering Mr Warner alone to pay Mr Kugel’s costs (subject to the qualifications mentioned) and making no order against CWK or Debtfree.

Indemnity costs

110. The plaintiffs seek costs on an indemnity basis from 4 May 2017. They rely on a Calderbank letter of that date. The letter followed a mediation which took place about a week before. It was relevantly in the following terms:

We have considered your clients’ evidence in this proceeding, especially the evidence that has been served in relation to the method of calculating the undisclosed WIP. Our clients consider that the methodology adopted by your clients of calculating the WIP is incorrect. Our clients consider that your clients are likely to fail both in relation to liability and damages. Whilst our clients consider that there will be some discount on the cash value of the WIP as at 22 September 2014, our clients do not consider that any such discount would be significant.

Ultimately, your clients have been unable to provide any answer to the central complaint in this proceeding, namely that Mr Warner failed to tell Mr Kugel about the WIP (and, indeed, the cash in Debtfree) as at 22 September 2014 or thereafter in circumstances where he considered WIP to constitute an asset of the business.

We note that this matter is likely to take 7 days plus in the Supreme Court. All parties are likely to expend significant costs in this matter, which they have done to date. In light of the likely costs of this proceeding and without any admissions, we are instructed to make the following commercial offer to resolve the proceeding:

1. The Defendants to pay the Plaintiffs the sum of $685,000 within 30 days of a deed being executed by the parties, which is on account of our clients’ portion of the unbilled WIP as well as our clients’ entitlement to the value of Debtfree.
2. Within 30 days of a deed being executed by the parties, any funds of the partnership currently held on account in Court be released and paid to the Plaintiffs.
3. Each party to pay their own legal costs and disbursements with the intent that all existing orders be vacated, and
4. Simultaneously with the payment of the sum of $685,000 to the Plaintiffs and the release of the funds held on account in Court to the Plaintiffs, each party will release the other from any claims they may have for any reason whatsoever at any time in the future.

If this offer is agreed, we will submit a deed for execution between the parties.

111. Paragraph 2 of the offer provided for the release, to the plaintiffs, of monies in Court. According to an affidavit filed by the plaintiffs’ solicitor, Mr Garvin, these were partnership monies. By 2023 the funds in Court amounted to $34,000. On this basis Mr Garvin calculated the effective value of the offer as $668,000 ($685,000 less half of $34,000). In the same affidavit Mr Garvin noted that the plaintiffs’ 2016 calculations of the recoverable WIP were more than $1.5 million. As ultimately determined, the principal value of the liability to account for WIP collected (order 6(a)) was $1.49 million.
112. On the strength of this, counsel for the plaintiffs stated that “[t]he amounts for which the defendants are, on balance, liable to account to the plaintiffs following the accounting, exceed [the sum offered], net of interest”. Counsel submitted that the defendants’ failure to accept the offer had been unreasonable. That was because: Mr Warner was well placed to see that the offer involved a discount, because he had taken most partnership assets, including the book; before the end of 2016, Mr Warner had estimated the value of the gross collectable WIP as over $1.5 million; the proceedings were well advanced at the time of the offer, with most evidence prepared; and the offer involved a substantial compromise, by way of the plaintiffs receiving nothing from the defendants for all the costs they had incurred to date.
113. Counsel for the defendants submitted that the offer was made at a time when the litigation was shifting, that substantial amendments were later made to the pleadings, and this resulted in the case being run on a different footing. Indeed the final orders actually made were different even from the orders sought in the last iteration of the statement of claim. Counsel also pointed to several limitations of the offer. These included: it was conditional on a deed being executed (but did not set out its terms); and it failed to engage with other complexities associated with the account (including the amounts payable by Mr Kugel and Shazbot) or how the costs associated with completing the administrations were to be accounted for.
114. Counsel for the defendants further noted that 24 affidavits had been relied upon in the accounting hearing last year, and only one of those predated the offer. Even if attention were confined to the hearing in 2018, a number of the affidavits relied upon at that hearing postdated the letter. Counsel submitted that the defendants had not had a proper opportunity to consider the plaintiffs’ case as it would ultimately be put in “developing and fluid proceedings”. They had had no opportunity to consider the plaintiffs’ case on the accounting stage of the proceedings at all.
115. In reply, counsel for the plaintiffs submitted that the offer was not conditional on a deed, but merely required a deed to be entered as part of its performance. Counsel also referred to the decision of Leeming JA (sitting as a single judge) in Global Consulting Services Pty Ltd v Gresham Property Investments Ltd (No 3) [2019] NSWCA 208. In that case, his Honour made an indemnity costs order on the basis of a Calderbank offer which provided for the proposed settlement to be recorded in a formal deed. And in Harris v Harris [2013] NSWSC 1157, another case referred to by counsel, Kunc J awarded indemnity costs where a Calderbank offer provided for the proposed settlement to be approved by the Court.
116. In response to the defendants’ submission that the offer failed to engage with complexities associated with the further accounting proceedings, counsel for the plaintiffs submitted that: Mr Warner was well placed to know, and did know, the value of the WIP (having given an estimate of gross collectable WIP of over $1.5 million); that he knew he had other partnership assets which he needed to account for; and he knew that Mr Kugel had received minimal partnership assets. Counsel submitted that the later accounting complexities were, in these circumstances, of little significance. Nor were the evidentiary shifts in the case. The offer in the letter “was a good deal for Mr Warner and he should have accepted it.”
117. In evaluating these submissions, I think that that informal nature of the “offer” is relevant. It would have been open to the plaintiffs to make a formal offer under the Rules. In order to do so, they would have had to specify, exhaustively, the final orders sought by them, either following the hearing on “liability”, or quantify the judgment sought following the completion of the account sought. Had they done so, and had the orders ultimately made been more favourable than the orders so specified, they would be entitled to indemnity costs unless the defendants were able to demonstrate affirmatively that there was good reason to depart from that prime facie entitlement.
118. The plaintiffs however chose not to take this course. Instead, they made an informal offer. Even if it be established that the terms of the offer were more favourable than the orders ultimately made against the defendants, that of itself does not entitle the plaintiffs to indemnity costs, or give rise to any presumption in their favour. The plaintiffs must demonstrate affirmatively that the rejection of the offer was unreasonable. In a complex case such as the present, I think the onus is a significant factor.
119. Mr Garvin’s evidence about the monies in Court, and his calculation of the effective value of the offer, were not contested. With respect, however, I find the calculation a little difficult to understand. It seems to me that the effective value of the offer from the defendants’ point of view was not $658,000, but $702,000 ($685,000 payable under clause 1 together with half the value of the monies released to the plaintiff under clause 2). But there was no debate about this in the submissions and in the end, I do not think it affects the result.
120. On its own, I do not find the fact that the offer took no account of the complexities of the subsequent accounting proceedings particularly compelling. The total amount for which Mr Warner was found liable, excluding interest, as a result of the accounting orders, was $1.76 million (of which CWK was jointly and severally liable for $1.69 million). It is true that Mr Kugel’s entitlement was only to half this amount, and that to obtain these orders in his favour Mr Kugel had to account himself (in the assessed sum of $0.19 million). But on any view, the ultimate benefit to Mr Kugel from the orders greatly exceeds the amount offered, even without taking account of the interest which would have accrued between the date of dissolution (September 2014) and the date the offer was made (May 2017).
121. But there are other complexities which are not so easily set aside. The most obvious is that Mr Warner was not the sole defendant; there were other parties as well. CWK and Debtfree can be put aside because they had not been joined when the offer was made. But Warner Capital had been, and the claim against it ultimately failed. With the benefit of hindsight, it can be seen that Warner Capital had no obligation to pay anything in May 2017, and was indeed entitled to recover its costs of the claim against it concerning the Debtfree shares.
122. This point was not addressed by counsel for the plaintiffs (or counsel for the defendants) in their submissions. As we have seen, counsel for the plaintiffs asserted that the “offer” was a good one from Mr Warner’s point of view, perhaps intending to refer to Mr Warner individually. But the application made by counsel was for me to make an order for indemnity costs against “the defendants” jointly and severally, which must mean Waner Capital as well as Mr Warner. Obviously, there is no basis for an indemnity cost order against Warner Capital. Counsel’s submissions simply did not address the possibility of making such an order against Mr Warner alone.
123. In my view, this reinforces the submission by counsel for the defendants about the form of the “offer”, and the point I have made about its informal nature. If a formal offer had been made, or a deed had been drawn up, it would have been necessary to consider Warner Capital’s involvement (and Shazbot’s involvement) in the proceedings.
124. It is fair to say that the WIP claim was probably always the dominant issue in the proceedings. If the “offer” had been “accepted”, the parties might perhaps have agreed that Mr Warner alone should pay the settlement sum to Mr Kugel, and Warner Capital would waive any claim for costs. But this possibility was not addressed in the plaintiffs’ evidence or their submissions, and I do not see why I should speculate about it now.
125. I do not think that the decision in Global or Harris assists the plaintiffs. In neither case, so far as it appears from the judgments, was the question of uncertainty raised as an objection to making an indemnity costs order. That may not be surprising, as in each case the settlement offer was in relatively simple terms and did not involve the complexities affecting different parties which appear in the present case.
126. In the end, I am not satisfied that the collective failure to “accept” the “offer” by the defendants was unreasonable. I decline to make an indemnity costs order as sought by the plaintiffs.

Costs of the costs application

127. The plaintiffs have been substantially successful on the present application. Notwithstanding their failure to obtain costs on an indemnity basis, the defendants should pay their costs of this application as part of the costs of the second stage of the proceedings.

Interest on costs

128. The plaintiffs, by their reply submissions, seek orders for interest on costs. This is necessary because the proceedings were commenced before 24 November 2015 and the former version of s 101 of the Civil Procedure Act 2005 applies. The form of the order which the plaintiffs seek is commonly known as a Lahoud order (from Lahoud v Lahoud [2006] NSWSC 126). The Court of Appeal made such an order in Leda Pty Ltd v Weerden (No 2) [2007] NSWCA 283 (at [7]-[9]).
129. In the end, the award of interest on costs was not actively opposed. Although the issue was first ventilated in the plaintiffs’ reply submissions, the defendants did not eventually pursue an opportunity to respond (a timetable providing such an opportunity had been agreed, but was later abandoned by consent).
130. In Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170, Basten JA (Campbell JA agreeing) observed (at [44]) that “the payment of interest is intended to be compensatory, on the basis that the person entitled to costs has been wrongly required to expend money on litigation to enforce established rights”. That observation was referred to with approval by Gleeson JA (Ward and Emmett JJA agreeing) in Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd  [2014] NSWCA 158  (at [403]). His Honour went on to say that, “[t]hus in the absence of any countervailing discretionary factor, it is appropriate that an order for interest on costs be made to compensate the party having the benefit of a costs order for being out of pocket in respect of relevant costs which it had paid.”
131. No countervailing factor has been put before the Court. The instant proceedings are commercial in nature. The parties to them have incurred substantial amounts of costs over a number of years. There has also been no prior costs order to date covering the substantive aspects of the proceedings. In these circumstances, interest should be awarded on costs.
132. Although only the plaintiffs have made submissions seeking interest on costs, such an order should also be made on the costs to be awarded to the defendants against Shazbot on the Debtfree shares claim.

Orders

133. The orders of the Court are:

(1) The court declares that the amount of interest for which the second and third defendants are liable to the Partnership Firm, attributable to the principal sums for which they are liable as set out in paragraph 1 of the orders made on 6 September 2023 (the "6 September 2023 Orders"), and calculated to 6 September 2023, is $681,537.05, comprising:

(a) interest of $582,755.55 attributable to the principal sum of $1,492,402.18, pursuant to the account under Order 6(a); and

(b) interest of $98,781.50 attributable to the principal sum of $202,230.37, pursuant to the account under Order 7(b).

(2) The court declares that the amount of interest for which the second and fourth defendants are liable to the Partnership Firm, attributable to the principal sum of $68,987.03 for which they are liable as set out in paragraph 2 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $15,910.52.

(3) The court declares that the amount of interest for which the second plaintiff is liable to the Partnership Firm, attributable to the principal sum of $33,432.30 for which he is liable as set out in paragraph 3 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $12,674.74.

(4) The court declares that the amount of interest for which the second and first plaintiffs are liable to the Partnership Firm attributable to the principal sum of $160,441.89 for which they are liable as set out in paragraph 4 of the 6 September 2023 Orders, and calculated to 6 September 2023, is $78,369.49.

(5) Direct that the second plaintiff and the second defendant (“the Partners”) cooperate with each other to appoint, within 28 days, a tax agent of the Partnership Firm who shall thereafter (at the joint and several expense of the Partners):

(a) apply for a tax file number for the Partnership Firm;

(b) lodge in due course such tax returns for the Partnership Firm as may be required for the current financial year and future financial years;

(c) obtain advice on whether lodgement of tax returns for the Partnership Firm for past financial years, going back to 2007-2008, or any of them, would be futile in that it would not result in any additional tax being exacted for the income of the Partnership Firm for the year in question;

(d) obtain such other advice on obligations with respect to income or assets of the Partnership Firm with respect to income tax or duty as may be considered necessary by the Partners or may be directed by the Court.

(6) Adjourn the proceedings to 30 April 2024, or such other date as may be arranged with my Associate, for the purpose of reporting to the Court on compliance with orders 5(a) and 5(c).

(7) Order that the first and second defendants’ costs of the proceedings up to 16 September 2019, to the extent solely referable to the first plaintiff’s claims against them, be paid by the first plaintiff.

(8) Order that the second plaintiff’s costs of the proceedings to date, except for the costs of the accounting proceedings after 16 September 2019 to the extent solely referable to accounts under the Court’s orders 6(c) and 7(a) of 16 September 2019, and excluding any costs incurred solely in support of the second plaintiff’s contention that, for the purposes of the account under order 7(b), the second defendant should be charged with a lump sum representing a positive capital value of “goodwill”, be paid by the second defendant.

(9) For the purposes of orders (10) and (11) below the following expressions have the following meanings:

(a) “cost creditor” means a party in whose favour a costs order has been made;

(b) “cost debtor” means a party against whom a cost order has been made;

(c) "X" equals the total amount of costs and disbursements which the cost creditors have paid or are liable to pay to their legal advisers in connection with these proceedings;

(d) "Y" equals the total amount of costs and disbursements allowed on assessment to the cost creditors in connection with these proceedings; and

(e) the "Allowed Percentage" equals (Y/X) x 100)%.

(10) The cost debtors shall pay to the cost creditors interest on costs and disbursements, at the rates prescribed from time to time by operation of r. 36.7 of the Uniform Civil Procedure Rules, on the Allowed Percentage of each amount for costs and disbursements actually paid by the cost creditors, from the date of payment by the cost creditors of each such amount until the first to occur of:

(a) such time as the cost debtors have paid the costs due to the cost creditors under any order made in these proceedings; or

(b) any further order relating to interest on costs in these proceedings.

(11) Grant liberty to apply upon 3 days' notice for any further order pursuant to order (10)(b).

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Amendments

09 February 2024 - date error

27 February 2024 - [133] correction to order (8).

24 October 2024 - Error in case citation number