SIMON ANTHONY & ANOR v HOLDGATE & ANOR [2003] NZCA 161 (24 July 2003)

IN THE COURT OF APPEAL OF NEW ZEALAND

CA166/02

BETWEEN SIMON ANTHONY HOLDGATE

Appellant

AND ANDREW NICHOLAS HOLDGATE

First Respondent

AND THE OFFICIAL ASSIGNEE AT AUCKLAND

Second Respondent

Hearing: 23 June 2003

Coram: Tipping J

O'Regan J

Doogue J

Appearances: P A B Mills for Appellant

J L Williams for Respondents

Judgment: 24 July 2003

JUDGMENT OF THE COURT DELIVERED BY TIPPING J

[1]	This appeal from Priestley J is the second time this dispute between the Holdgate brothers has reached this Court.The background and the nature of the issues are fully set out in the Court’s first judgment delivered on 8 April 2002. We do not propose to duplicate that exercise.This judgment should therefore be read with the earlier one.
[2]	The issue which has returned to this Court is whether Simon Holdgate (Simon) is entitled to interest on monies which Andrew Holdgate (Andrew) is liable to pay him.Simon is entitled to interest only if the monies in question amount to “moneys owing” or “any other indebtedness” under the mortgage between the parties.If Andrew’s liability does amount to what we will compendiously describe as “indebtedness”, he must pay interest to Simon from the date when such indebtedness arose to the date of Andrew’s adjudication in bankruptcy on 20 June 1997.
[3]	The competing contentions can be simply stated.Simon argues that Andrew became “indebted” to him immediately upon Andrew’s wrongful withdrawal of funds from the partnership for his own private purposes; or at least from the time accounts were drawn as at 31 March 1992 showing the deficit on capital account in the partnership books.The Official Assignee, who now represents Andrew’s bankrupt estate, argues that no final dissolution account was taken or settled until after Andrew’s adjudication; that such account was necessary for there to be any indebtedness between Andrew personally and Simon personally, and hence that interest had not begun to run at the point of adjudication.The consequence, so it is submitted, is that Simon’s proof of debt, so far as it claims interest, cannot be admitted.Simon, while claiming that the indebtedness arose irrespective of any final accounting, argued alternatively that this was one of those rare cases where a final accounting was not necessary to create indebtedness between the partners following dissolution.
[4]	In this Court’s earlier decision, delivered by Randerson J, an order was made remitting certain issues relevant to the interest question to Priestley J.Those issues were:

[a] Was the partnership dissolved in 1992 or on some other date prior to the date of adjudication?

[b] Having regard to the general principle, and any exceptions thereto, was the debt between Andrew and Simon created on a date earlier than the date of adjudication and, if so, what date?

[c] If a final accounting was necessary, did it take place prior to the date of adjudication?

[5]

There is no longer any issue about the date of dissolution.It occurred in mid-1992 at or about the time of the mortgagee sale of the firm’s principal remaining asset, the car sales yard.The general principle referred to in [b] above is the principle described by Lindley and Banks on Partnership, 18th ed. (2002) at 23-75 (page 612) in these terms:

It is a well recognised rule that, whenever money allegedly belonging or owing to the firm in respect of a partnership transaction is sought to be recovered from a partner, an action for an account is required, unless an account has already been taken between the partners or, exceptionally, taking an account would serve no useful purpose.In such an action, it will, of course, be open to the defendant partner to show that the money is his or even that a larger sum is due to him.

[6]	Priestley J held that no indebtedness arose between Andrew and Simon prior to the taking and settlement of dissolution accounts between them.He held further that the case did not come within the exception which arises when the taking of an account would serve no useful purpose.Ms Mills, for Simon, argued that the Judge was wrong on both points.The first can be dealt with quite quickly.The second will require closer analysis.
[7]	The submission that indebtedness arose when Andrew wrongfully withdrew money from the partnership cannot be sustained.Ms Mills argued that Andrew’s conduct amounted to a breach of the partnership agreement.No doubt it did, but such breach gave Simon a cause of action in damages, not in debt.Damages do not become “owing” unless and until judgment is given.There is then a judgment debt.
[8]	In any event, even if there was a cause of action in debt, as counsel urged, the debt was owed by Andrew to the partnership not to Simon personally.It would not therefore have been indebtedness covered by the mortgage which gives the right to interest.Although, as the Court found in its earlier judgment, Andrew can be a debtor jointly with someone else under the mortgage, that does not mean the mortgage covers monies owing to Simon as a creditor jointly with someone else.Hence it does not cover monies owing by Andrew to Simon and himself as partners.
[9]	Similar difficulties arise with the various other causes of action suggested by Ms Mills, such as an equity of restitution and deceit.It is of the essence of a cause of action for a debt that the amount owing be a liquidated sum.There must be no basis for any argument about quantum as opposed to liability.That is one of the principal reasons why there cannot be indebtedness between partners on a dissolution until accounts have been taken and the precise amount owing by the partner in debit is thereby ascertained.The “no useful purpose” exception must be read against that starting point.
[10]	We move therefore to Ms Mills’ alternative submission which, in the end, became her principal submission, that a dissolution account was unnecessary in this case as it would have served no useful purpose.For that reason, she submitted, the general rule did not apply.We agree that there is an exception to the general rule in the terms formulated by Lindley and Banks.The essential question in the present case is whether, on the facts, the exception can be made out.We can dispose immediately of the rather faintly argued prior proposition that the accounts drawn as at 31 March 1992 were accounts which sufficed for the purpose.They pre-dated the disposal of the partnership’s principal asset by mortgagee sale, and they were clearly not designed as final and settled accounts for the purpose of a dissolution.We do not consider they can be regarded as accounts which were sufficient in terms of the general rule.Before addressing the crucial point, namely whether Simon has shown that further accounts would have served no useful purpose, it is helpful to put that issue into its factual context by rehearsing so much of the background as is relevant to that discrete issue.
[11]	The partnership between the parties was formed in 1983.Each partner’s initial capital contribution was $88,000.00 and there was to be equal sharing of profits and losses.The partnership did not open its own cheque account.It was agreed that Andrew’s personal account was to be employed for the purpose.The partnership engaged in investment, and its main asset was a car sales yard which was subject to a mortgage and leased to a tenant.At the relevant times the partnership accountants were Messrs Blackmore, Hearne and Virtue.They were also Andrew’s personal accountants and took their instructions regarding partnership affairs from him.The Judge found that during 1991 and 1992 Andrew “apparently” applied partnership funds for his own purposes.Simon was unaware of this.The car sales yard was sold by its mortgagee in June 1992. The tenant of the premises had earlier abandoned them owing a substantial amount for outstanding rent.The mortgage arising from a personal loan from Simon to Andrew, and pursuant to which Simon claims interest from Andrew, was entered into about a month prior to the mortgagee sale.
[12]	Late in 1995 Simon asked the partnership accountants to advise how much Andrew owed him in respect of the now defunct partnership.Indeed by then the partnership was more than defunct.As noted above it is now common ground that the partnership was dissolved in June 1992, some 3½ years earlier.At the date of dissolution the most recent partnership accounts were those compiled for the year ended 31 March 1992.It is not clear whether they were in existence at the date of dissolution but in view of the short timeframe it seems highly likely that they were prepared after dissolution.Nothing, however, turns on this point.What we will call the 1992 accounts show Andrew’s capital account in debit in the sum of $84,300.00.Simon’s account is in credit in the sum of $84,142.00.There was no evidence that either partner expressly approved the accounts for dissolution purposes or indeed at all.It is material to note again here that these accounts were drawn before the disposal of the partnership’s principal asset by mortgagee sale.
[13]	We return to Simon’s request in late 1995 that the partnership accountants ascertain what Andrew owed him.That request completely undermines any suggestion that the 1992 accounts sufficed or were intended to suffice for the purpose.The accountants supplied Simon with what he described in his evidence as a copy of the capital account for the partnership for the year ended 31 March 1993.Through his solicitors Simon took issue with an item in the 1993 account and, on the premise of an ensuing adjustment, Simon then contended that Andrew owed him $81,469.00 and sued him for that amount.Andrew did not accept he owed anything.There was then separate litigation brought by Andrew with Simon’s concurrence against the former tenant of the car sales yard.He went bankrupt and quite unexpectedly about $24,500.00 was ultimately received from his bankrupt estate.This receipt was, however, in the nature of a wholly unexpected windfall and does not have any relevance to whether proper accounting was necessary to create indebtedness between Andrew and Simon.
[14]	When Andrew was adjudicated bankrupt Simon filed a proof of debt.He described what he claimed to be owing as a “partnership debt”.The amount of the proof was the sum of $81,469.00 mentioned above.Simon had not obtained any judgment for that or any other amount.The Official Assignee required evidence in support of the proof, and suggested that an accountant’s analysis should be provided.Simon then engaged the Mr Gavigan mentioned in para [14] of this Court’s earlier judgment.Mr Gavigan prepared the spreadsheet mentioned in that judgment, commencing with the 1992 accounts.He made seven adjustments from that starting point.The cumulative effect was to show that Simon was owed $127,300.00 as at 31 March 1995 or thereabouts.After taking advice, the Official Assignee accepted that figure and a corresponding interest component.Andrew did not accept the latter element, hence the present dispute which has been carried by Andrew rather than the Official Assignee as Andrew’s estate in bankruptcy is apparently no longer insolvent.
[15]	An immediately obvious aspect of this sequence of events is that, as a result of Mr Gavigan’s analysis, Simon was found to be owed about $46,000.00 more than the amount for which he had filed his proof of debt.Naturally and appropriately he wishes, and has been allowed, to amend his proof accordingly.The amount established by Mr Gavigan was of course established long after the date of Andrew’s adjudication.It is extremely difficult for Simon to argue that the taking of accounts beyond those as at 31 March 1992 would have served no useful purpose, when the further accounts later taken by Mr Gavigan resulted in Simon’s proof of debt being increased by over 50%.Simon can hardly have the benefit of that increase while at the same time contending that further accounts beyond those of 1992 would have served no useful purpose.This point must we think be fatal to Simon’s contention.
[16]	We simply add that having carefully reflected on all Ms Mills’ submissions we are in no doubt the Judge was right that even without the point just mentioned it could not be said that a proper dissolution account would have served no useful purpose.The Judge’s conclusion was essentially one of fact.We can discern no legal error in his approach.The factual conclusion was open to him on the evidence and indeed we agree with it.A proper dissolution account was essential in the circumstances of this case to ascertain exactly how much Andrew owed Simon after all necessary transactions and issues had been properly investigated.No good purpose would be served by discussing certain legal points which Ms Mills raised.Neither the general rule nor the exception are in doubt.They were accepted by counsel.It is simply a matter of considering the circumstances of this case to see whether the “no useful purpose” exception is satisfied.It is not.
[17]	For the reasons given the appeal is dismissed.The appellant must pay costs to his brother in the sum of $5,000.00 plus disbursements including the reasonable travel and accommodation expenses of counsel, to be fixed if necessary by the Registrar.

Solicitors:

Fraser Powrie, Auckland for Appellant

Sladden Cochrane & Co, Wellington for Respondents