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High Court of New Zealand Decisions |
Last Updated: 19 December 2014
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV 2002-412-000039 [2014] NZHC 3148
BETWEEN
|
LIBRA DEVELOPMENTS LIMITED
First Plaintiff
RUSSELL ERNEST HYSLOP Second Plaintiff
|
AND
|
LINDSAY ALLAN CLARK Defendant
|
Hearing:
|
4 December 2014 (via AVL link)
|
Counsel:
|
P B Churchman QC for Plaintiffs
L A Andersen for Defendant
|
Judgment:
|
15 December 2014
|
JUDGMENT OF WHATA J
[1] This is the twelfth year of this litigation, and a judgment, on average, every two years.1 Mr Clark failed to discharge his fiduciary obligations to a partnership known as Southern Developments. Chisholm J made a number of orders requiring Mr Clark to account to the partnership for profits from five projects. His Honour framed the relief on a project by project basis, with the valuation of each project to be fixed by reference to a actual or notional winding up date. Specific orders were
made in relation to the cessation of interest payable to Mr Clark for
lending he had
1 Hyslop v Clark HC Dunedin CIV 2002-412-39, 28 July 2003; Hyslop v Clark HC Dunedin CIV
2002-412-39, 25 June 2004; Libra Developments Limited v Clark HC Dunedin CIV 2002-412-
39, 4 February 2005; Libra Developments Limited v Clark HC Dunedin CIV 2002-412-39,
21 March 2005; Clark v Libra Developments Ltd CA CA26.05, 31 October 2006; Libra Developments Ltd v Clark HC Dunedin CIV 2002-412-39, 10 June 2008; Libra Developments Ltd v Clark HC Dunedin CIV 2002-412-39, 30 April 2010; Libra Developments Ltd v Clark HC Dunedin CIV 2002-412-39, 17 June 2010; Libra Developments Ltd v Clark HC Christchurch CIV 2002-412-39, 22 September 2010; Libra Developments Ltd v Clark HC Dunedin CIV
2002-412-39, 21 March 2011; Clark v Libra Developments Ltd [2011] NZCA
493; Libra Developments Ltd v Clark HC Dunedin CIV 2002-412-39, 6 July
2012; Libra Developments Ltd v Clark [2013] NZHC 1578, 27 June
2013;
LIBRA DEVELOPMENTS LIMITED v CLARK [2014] NZHC 3148 [15 December 2014]
made to the partnership. One example of this type of order concerned a
project called the St Albans project. It stated:
Any interest payable to the defendant in relation to this project (at the rate of
10%) will cease on that date...
[2] There is a dispute between the parties as to whether the
“interest” must relate to project specific lending
or simply to the
total lending to the partnership. I understand that the majority of the lending
relates to one project only, which
happens to be the last project to be wound
up. The effect of this is that Mr Clark will be deemed to be owed the interest
on this
lending through to the final dissolution of the partnership. This has
significant implications for the partnership profits.
[3] The plaintiffs therefore apply for the following
orders:
(a) in respect of three of the partnership projects, the defendant must
account to the partnership for the profit received from
each project (actual or
notional) as at the date determined by the Court being either the actual
completion date or the deemed completion
date rather than as at 30 June
2010;
(b) the defendant must account for the total interest receipts without
deduction and that the value of the resident withholding
tax and the relevant
imputation credits be accounted for by him; and
(c) costs on the application.
[4] A further issue is raised by the defendant concerning certification
of CH 2002 recast accounts. The defendant is concerned
about the treatment of
notional interest earned on shareholder loans. This issue could not be resolved
in this hearing as the plaintiff
did not have sufficient time to prepare
argument. Mr Churchman QC is to file submissions and I will endeavour to resolve
the issue
on the papers.
[5] The second order sought was resolved by agreement between counsel that the account taker is best placed to determine the proper accounting treatment of RWT and imputation credits.
[6] The remaining application is opposed by Mr Clark on the basis that
the effect of the first order would be to deprive Mr
Clark of legitimate
interest earnings in relation to monies lent by him for the benefit of the
partnership that are not related to
the three specific identified
projects.
Background
[7] The parties to this proceeding were formerly in partnership as property developers in the Dunedin area. The partnership was between Mr Clark and Libra Developments Limited (Libra), a company owned by a trust controlled by Mr Hyslop. Profit and losses were to be shared equally. Matters did not go according to plan. Mr Clark unilaterally dissolved the partnership as at October
2002. He then retained control of all of the partnership assets and all of
the partnership projects. Some of the projects were
completed by Mr Clark who
then retained all of the proceeds. Some of the projects were not advanced
further and no steps were taken
to bring those projects to a conclusion.
Proceedings were commended in 2002 seeking in short, to make Mr Clark account to
the
partnership for his dealings with partnerships assets.
[8] On the question of interest, the background section of the first
substantive judgment2 includes the following reference:
[17] Before the 1999 accounts for Southern Developments were finalised
Mr Craw issued the following memorandum dated 24
March 1999 to Mr
Clark and Mr Hyslop.
“It is agreed that the final profit be apportioned in the following
manner:
1. R.H. [Mr Hyslop’s] wages drawn to be “added back” and
taken from his ½ share.
2. Interest on L.A.C. [Mr Clark’s] funds is to be adjusted
so that L.A.C. first receives as part of his share the amount
of interest before
any profit apportionment.
3. Losses will be utilised by L.A.C. but taken into account in
the final calculation.”
Mr Craw believes that this was based on his
discussions with Mr Clark and Mr Hyslop in July 1998. It is common ground that
the agreed
interest rate for the purposes of the second paragraph was to
be 10% per annum. Mr Clark accepts that he received a copy
of this
memorandum.
[9] Mr Clarke’s concession that the St Albans, Eastbourne and
Law Street
projects were part of a profit sharing arrangement is noted at
[20].
[20] While Mr Clark is prepared to concede that the three properties
included in the Southern Developments accounts – St
Albans Street,
Eastbourne Street and Law Street – were part of a profit sharing
arrangement with Mr Hyslop, he strenuously
denies that the arrangement
involved a partnership or extended to any other ventures in which Mr Hyslop
played a part, namely,
Mobile Batching Systems Limited, Hamilton Building
and Joinery (1998) Limited, A Step Up Building and Joinery and Woodworks
Southern Limited. With the exception of some payments concerning Mobile
Batching Systems Limited these ventures do not feature in
the Southern
Developments accounts.
[10] It also records at [26]:
[26] It seems to be common ground that the relationship between the parties (however it might be categorised) effectively ended on 30 October
2002. Figures prepared by Mr Craw as at that date indicate that after
allowing for Mr Hyslop’s wages but before providing for interest to Mr Clark, the overall Southern Developments profit was $62,922. This figures takes the St Albans, Eastbourne and Law Street properties into account at estimated current market values as at 30 October 2002. However, once wages are added back and interest is calculated from 1997 at the rate of 10% per annum, Southern Developments incurred a deficit of $224,192 as at 30
October 2002.
[11] The plaintiffs’ case was (relevantly) recorded as
follows:
[30] The plaintiffs claim that in February 1997 Mr Clark agreed to
enter into a partnership with Libra (with Mr Hyslop acting
as Libra’s
promoter). The terms of the partnership were that subject to Mr Clark’s
right to interest at 10% per annum
on the funds he injected into the
partnership, profits and losses would be shared equally. Mr Hyslop’s
wages were to be deducted
from Libra’s share of profits. Because
Libra was a corporate entity Mr Hyslop’s bankruptcy had no effect
on
the partnership. If that submission is not accepted then it is the
plaintiffs’ case that the trust replaced Libra as the
partner on the
Hyslop side.
[12] Mr Clark’s evidence is recorded as stating:
[39]... His agreement with Mr Hyslop in respect of St Albans Street was that
Mr Hyslop would be paid a bonus on completion of the development with
that bonus to be calculated as one half of the net profit after deducting a 10%
return on Mr Clark’s investment. ...
[13] Chambers J in the first appeal in this proceeding refers to the
agreement
recorded at [40] as is Mr Clarke’s concession at [73]. His Honour then
concludes:3
[75] In summary, therefore, my view of the evidence, in light
of Chisholm J’s findings, is that the relationship
between Mr
Clark and Mr Hyslop evolved so as to contain the following terms:
2. The venture shall be called Southern Developments.
3. Properties and assets purchased for the venture should be bought
and retained in Mr Clark’s name.
9. Either party may terminate the relationship by giving
notice.
[14] I glean no assistance for present purposes from the majority
decision of the
Court of Appeal.
[15] Various orders were sought to enable the pecuniary
implications of the judgment to be determined. In his judgment
of 30 April
2010, Chisholm J touches upon the issue of interest in this
way:4
[35] There are essentially two issues. First, whether any profit that
Mr Clark might make by borrowing against company assets and then
on-
3 Clark v Libra Developments Ltd CA CA26/05, 31 October 2006.
4 Libra Developments Limited v Clark HC Dunedin CIV 2002-412-39, 30 April 2010.
lending to the company at a higher rate (10%) would belong to Mr Clark or the
partnership. Secondly, whether the 10% interest would
continue to run
throughout. In the absence of agreement these matters will have to be
determined by the Court.
[16] The matter finally came back to Chisholm J in December 2010:5
The general frame for the Judge’s assessment of interest provides
some insight into the Judge’s thinking. The Judge summarised
the
plaintiff’s argument as follows:
[15] Remedies need to be assessed on a project by project basis. In
some cases a loss of chance might be an appropriate alternative.
That
situation could arise where the actions of the defendant were shown to have
caused the plaintiffs to lose a commercial opportunity
that had some value:
Mallard Productions Limited v Attorney General. Alternatively, this is
one of those rare cases where it is appropriate to have both a taking of
accounts and equitable damages.
That possibility was recognised by the Supreme
Court in Stephens v Premium Real Estate. This reflects that the projects
in question were development projects where profits could have been made
for the partnership
but, by virtue of the actions of the defendant, were not
made.
[17] The relevant part of the defendant’s argument is then
recorded:
[17] Following dissolution assets of the partnership were to be
distributed in accordance with the rules set out in s 45 and
47 of the
Partnership Act. While the defendant accepts an obligation to account for both
realised and unrealised profits following
dissolution, this is essentially
a valuation exercise and the matter should be approached on the basis of
profits that would
have arisen if the partnership had continued. The purpose is
not to punish the defendant.
[18] The defendant is recorded as rejecting the suggestion that there
should be equitable damages or an obligation to pay on a
loss of
chance.
[19] The Judge’s response to these basic differences is as
follows:
[24] The primary difference between the plaintiffs and the defendant
revolves around the scope of the defendant’s
obligations
following dissolution of the partnership. The defendant’s relatively
narrow approach appears to echo arguments
that have already been rejected by
this Court and the Court of Appeal.
[25] It is worth repeating that the partnership was involved in
five different projects, not just the bricks and mortar. In each case
the broad pattern was the same. The particular asset was acquired with a view
to
development, essentially on the basis that Mr Clark would provide the funding
and Mr Hyslop would provide the expertise. It was
anticipated that the
development phase would provide the rewards.
5 Libra Developments Ltd v Clark HC Dunedin CIV-2002-412-000039, 21 March 2011.
...
[30] On the facts of this case I am satisfied that the principles
discussed in Chirnside are applicable. It is particularly
significant that after unilaterally terminating the partnership Mr Clark took
over sole
control of the partnership’s assets, and excluded Libra and Mr
Hyslop from them. A fiduciary relationship existed. Under
those circumstances
I am satisfied that Mr Clark was under a duty to act equitably and fairly when
bringing each project of the partnership
to a conclusion.
[20] The Judge went on to say:
[33] Whether or not s 41 applies to each of the partnership projects
needs to be considered on a project by project basis.
That exercise will be
undertaken when each project is considered later in this judgment. It is not
disputed that if s 41 applies
both realised and unrealised profits should
be taken into account.
[21] For ease of reference s 41 states:
41 Continuing authority of partners for purposes of winding
up
After the dissolution of a partnership the authority of each partner to bind
the firm, and the other rights and obligations of the
partners, continue
(notwithstanding the dissolution) so far as may be necessary to wind up the
affairs of the partnership and to
complete transactions begun but unfinished at
the time of the dissolution, but not otherwise.
[22] The Judge then examined the proper basis for accounting in relation
to the various projects, including three projects located
at St Albans Street
(Units 5 and 9), Hagart-Alexander Drive and Eastbourne Street. I will now
briefly describe His Honour’s
treatment of each of them, as amended where
appropriate to reflect the outcome of an Appeal on his 2010
judgment.
St Albans Street
[23] Chisholm J described the St Albans Street project in the following
terms:
[37] This was the partnership’s first project. The property was acquired by the partnership from one of Mr Hyslop’s companies in early 1997. Thirteen units were built and they were to be sold on what Mr Hyslop described as “sweat equity” basis, which I understand involves a form of long term agreement. By the time the partnership was dissolved on
30 October 2002 three units required completion and settlement.
[38] Since that time one of the units (unit 12) has been sold and settled. The remaining two units (units five and nine) have been rented to the intended purchasers. According to the evidence of Howard Alloo, the
defendant’s solicitor, these two units still have to be completed in
accordance with the unit plan and some work is required
to bring them up to code
compliance certificate standard. Mr Alloo accepted Mr Hyslop’s evidence
that 20 hours physical work
on each unit should be sufficient to complete
them.
[39] Mr Alloo has prepared draft settlement statements as at
30 November 2010 for the sale of unit five (settlement figure $160,166.80)
and unit nine (settlement figure $185,664.36). Those settlement statements
make provision for the payment of rental up to the date
of settlement and for
the apportionment of rates and insurance on settlement.
[24] The central dispute between the parties was the proper date for the
deeming of the completion of the project for accounting
purposes. The Judge
resolved this issue as follows:
[47] I am satisfied that justice will be served if a notional 12 month
period following dissolution is allowed for this project
to be completed. The
account taker is therefore to proceed on the following basis:
(a) This project shall be deemed to have been completed on 30
October 2003;
(b) Any interest payable to the defendant in relation to this
project (at the rate of 10%) will cease on that date;
(c) Units five and nine will be deemed to have settled on that date.
This means that the settlement statements prepared by
Mr Alloo will have to be
amended so that rental up to that date is payable to the partnership and all
outgoings are apportioned at
that date;
(d) The partnership will be responsible for expenses properly incurred
by Mr Clark on behalf of the partnership up to that
date;
(e) All reasonable expenses incurred by Mr Clark in completing the
units and achieving settlement are to be treated as partnership
expenses. I
assume that settlement will be completed before accounts are taken so that
the account taker will have the necessary
information. However, if this is not
the case the account taker will have to estimate those expenses after hearing
from the parties;
(f) Subject to (e) above, Mr Clark will be responsible for all
expenses from 1 November 2003 and will be entitled to any revenue
(I expect that
the only revenue will be rental);
(g) Unless the parties come to some other arrangement, Mr Hyslop is to provide assistance on the basis set out in paragraph 7.4 of his evidence (20 hours per unit free of charge subject to conditions 1 and 3 in his evidence).
Eastbourne Street
[25] Chisholm J described the Eastbourne Street project as
follows:
[75] In 2002 Mr Hyslop commenced a 53 unit titled development at
Eastbourne Street. When Mr Hyslop was adjudicated bankrupt
nine unit titles
were sold by the mortgagee to Mr Clark who continued the development. By the
time the partnership was dissolved
on 30 October 2002 three further units had
been completed. Six sites remained undeveloped.
[76] The current situation is that the development has stalled. The
underlying reasons are relatively complex. I was told
by Johannus Van
Bolderen, a solicitor and an expert witness called by the defendant, that in
order to complete this development a
further staged development plan will have
to be deposited and the units completed. To achieve this all existing unit
holders will
have to consent, although that situation may be improved by the
Unit Titles Act 2010.
[26] Chisholm J resolved that Mr Clark was obliged to complete the project.
On that basis Chisholm J directed:
[90] The account taker is therefore to proceed on the following
basis:
(a) This project shall be deemed to have been completed on
31 December 2006;
(b) Any interest payable to the defendant in relation to this
project will cease on that date;
(c) The partnership will be responsible for outgoings such as rates up
to 31 December 2006 and thereafter Mr Clark will be
responsible;
(d) All expenses reasonably incurred in obtaining title to the units
shall be treated as a partnership expense. Again
I assume that this will
be completed before accounts are taken so that the account taker will
have the necessary
information. If this does not prove to be the case the
account taker will have to estimate those expenses after hearing from the
parties;
(e) It is to be assumed:
(i) Each unit would have sold for $297,000 gross;
(ii) The expenses for each unit would have been in line with those incurred in building the Law Street units (subject to a credit of $2812 per unit for the cladding and any adjustment that might be needed to reflect the other directions that I have made in relation to Law Street). Hopefully, the parties will be able to present an agreed figure to the account taker. If not,
the account taker will have to determine the issue after hearing from the
parties.
[27] The Court of Appeal, however, accepted Mr Andersen’s submission that Mr Clark was not under any obligation to complete the development given the absence of any contractual obligation to do so. The Court resolved that the result was simply a matter of valuing the remaining land in its undeveloped state. The matter was remitted back to the High Court for further consideration.6 On
re-considering the matter Chisholm J resolved:7
[6] Having consider all matters, I am satisfied that the valuation
should be undertaken as at 31 December 2006 which is the
date utilised in the
judgment of 21 March 2011. That timeframe makes reasonable allowance for the
winding up of this project and
also takes into account the litigation between
the parties to the extent that it was relevant to this project. Given the court
of
Appeal’s conclusion, any later date would not make the slightest sense.
On the other hand, if allowance is to be made for the
litigation an earlier date
would be unrealistic (the Court of Appeal’s decision confirming that there
was a partnership was
delivered on 31 October 2006).
[7] I do not accept the defendant’s contention that the winding
up of the partnership should be approached on a global
basis. Throughout this
litigation the matter has been approached with reference to individual projects.
Moreover, it is inherent
in the Court of Appeal’s decision that it also
considered the matter on the basis of individual projects. For example, even
though the Court of Appeal considered that this Court had gone outside the scope
of the relevant question when setting the date for
Hagart Alexander Drive, it
commented “the Judge appears to have reached a sensible conclusion
on the valuation issue
and we would hope that the parties could resolve it
without further litigation”.
[28] The Judge then turned to the question of interest. He
noted:
[9] I do not accept that interest should cease to run as at the date
of dissolution. Notwithstanding the actions of Mr Clark,
it is appropriate for
there to be a reasonable timeframe for the project to be wound up during which
interest should continue to
run. But once the project is wound up and Mr Clark
has the full benefit of the assets it would be grossly unfair for interest to
continue. Interest will therefore cease on the same date as the assets are to
be valued, namely, 31 December 2006.
Hagart-Alexander Drive
[29] Chisholm J describes the Hagart-Alexander Drive project as
follows:8
6 Clark v Libra Developments Ltd [2011] NZCA 493, (2011) 9 NZBLC 103,378.
7 Libra Developments Ltd v Clark [2012] NZHC 1601 (footnotes omitted).
[94] This block of land at Mosgiel was purchased in 2001. It
was subdivided off a larger block of land and there
were issues about boundaries
and a paper road. Title was not obtained until 2002. A valuation indicates
that as the land stands
it is capable of subdivision into seven
allotments.
[95] After the Cargill Hotel project was completed the defendant took
steps, it seems around 2004 or 2005, to acquire the road
reserve. To date those
steps have not borne fruit.
[96] A valuation obtained by the plaintiff in August 2007 indicated a
market value of the land at $650,000 (including GST).
The defendant obtained a
valuation in November 2010 which showed that by that time the value of the land
had dropped to $290,000
(excluding GST).
[30] As with the issue concerning Eastbourne Street, the plaintiffs
contended that the defendant had an opportunity to complete
the project. The
defendant denied this. The Judge, however, did not accept that there was some
wider duty resting on the defendant
to complete this development. In his view
it was simply a matter of notionally winding up this component of the
partnership operation
on the basis it was fair to the parties. He proposed to
take a pragmatic approach, namely that the value of the property was as
indicated in the plaintiffs’ valuation on 9 August 2007. He then
noted:
[101] Given that approach, the account taker is to proceed on the
following basis:
(a) This project should be deemed to have been wound up on 9
August 2007;
(b) Any interest payable to the defendant in relation to this
project shall cease on 9 August 2007;
(c) The market value of the land shall be that shown in the 9
August valuation;
[31] As foreshadowed above, the Court of Appeal, however, noted that the Judge in adopting a pragmatic approach was technically outside the scope of the questions he was asked to determine. The Court therefore referred the matter back to him for further consideration.9 On reconsideration, Chisholm J resolved that the property was to be valued as at 31 December 2006 and interest (if any) would cease on that
date.10
9 Clark v Libra Developments Ltd, above n 2.
[32] For completeness the Court of Appeal also had this to say about
interest:
[81] Finally, we have already noted Mr Churchman’s point about the
interest accruing on advances made by Mr Clark to the
partnership. Our
findings on appeal may lead to the need to adjust the accounting process if any
injustice to Libra or Mr Hyslop
arises in consequence. We simply flag this
issue without comment and leave it to the parties to raise in the High Court
should it
become necessary.
Assessment of applications
[33] The essential issue for me to resolve is whether the
orders relating to cessation of interest related
only to the
lending on the specific projects. Mr Churchman’s basic contention
is that upon the notional sale
of the assets of the three specific projects, the
sum on which interest is payable by the partnership to Mr Clark is reduced by
the
notional sale proceeds as at the date of the notional sale. The defendant
submits that only the interest payable for lending on the
specific project was
to cease.
[34] Mr Andersen further submits:
(a) there is no specific statement in any judgment that the
plaintiffs’ view
on reduction of interest is correct;
(b) the orders made by Chisholm J do not vest any property in Mr Clark
before the distribution date of 30 June 2010 and does
not support the
plaintiffs’ claim that deemed profit from one project should be treated as
the receipt of cash that would be
offset against advances on other projects to
reduce the interest on such advances;
(c) Mr Clark’s position is consistent with orders that interest
ceases on specific projects on the specified date as there
would be no need for
such orders if distribution took place on those dates.
[35] I agree with the plaintiffs’ construction of the judgment for
the following
reasons.
[36] First, this case is about requiring Mr Clark to account as a fiduciary to the partnership. Presumptively any orders made should be consistent with ensuring that Mr Clark disgorges any profit that should be in the hands of the partnership. As the Court of Appeal said:11
[55] We now address the nature of Mr Clark’s fiduciary obligations
to Libra and Mr Hyslop. It is fundamental that partners
owe a duty of good
faith to each other and that this duty extends beyond dissolution of the
partnership until the completion of the
winding up. The duty precludes a
partner taking advantage of information, business connections or opportunities
belonging to
the partnership in order to secure private advantage or
profit to the exclusion of the other partner or partners without their
consent.
In this respect, the fiduciary obligations of partners are similar to those of
joint venturers.
[56] The duty of good faith also requires that former partners continue
to act equitably towards each other in the winding up
of the affairs of the
partnership in a way which is fair to all concerned. This obligation was
recognised by Blanchard J in Sew Hoy as encompassing an obligation not to
prevent or hinder the former partner from participating in an opportunity
belonging to the partnership.
However, Blanchard J was careful to qualify this
obligation as arising in relation to partnership assets of a kind falling within
s 41 of the Partnership Act. The duty to act equitably has also been recognised
in the case of joint venturers after termination
of the venture: see the joint
judgment of Blanchard and Tipping JJ in Chirnside v Fay.
[37] Second, Chisholm J overtly links Mr Clark’s fiduciary
obligation to the cessation of interest payments:12
[205] On the other hand, I agree that from the date of dissolution (30
October 2002) the defendant’s duty of good faith in winding up the
partnership affairs in a timely fashion needs to be factored into the equation in relation to the Cargill House project (the other projects have already been
dealt with separately). Having dissolved the partnership and taken over the
project without the consent of Libra, Mr Clark’s duty of good faith
required him to take all reasonable steps to wind up the
affairs of the
partnership in a timely fashion. It would be inequitable for the interest to
run beyond the date on which the affairs
of the partnership should have been
wound up if the duty owed by Mr Clark had been discharged.
[38] Chisholm J then resolves the key dates for the winding up of the
projects and links those dates to the cessation of interest:
[215] To summarise: interest in relation to the Cargill House project will cease to run on 30 June 2010. All valuations relating to that project are to be
completed as at that date. Interest will cease to run in relation to the
other projects as indicated at [47], [71], [90] and [101].
[39] Third, at various parts of the 2010 judgment, Chisholm J refers to the completion and/or winding up of the projects for accounting purposes and states that interest is to cease as at the date of the winding up of the project. The logical inference I draw from these repeated references is that the Judge linked the reduction in interest to the gains made from the winding up of the project. The following passage from Chisholm J’s July 2012 judgment is illustrative of his intentions
dealing with the Eastbourne Street project:13
[7] I do not accept the defendant’s contention that the winding
up of the partnership should be approached on a global
basis. Throughout this
litigation the matter has been approached with reference to individual projects.
Moreover, it is inherent
in the Court of Appeal’s decision that it also
considered the matter on the basis of individual projects. For example, even
though the Court of Appeal considered that this Court had gone outside the scope
of the relevant question when setting the date for
Hagart Alexander Drive, it
commented “the Judge appears to have reached a sensible conclusion
on the valuation issue
and we would hope that the parties could resolve it
without further litigation.
[40] Similar references are made at [47] of the March 2011 judgment in
respect of the St Albans Street project and the [101] of
the July 2012 judgment
in relation to the Hagart-Alexander Drive project.
[41] Fourth, in fixing dates for winding up of the three projects,
Chisholm J specifically rejected Mr Andersen’s submission
that the
dissolution of the partnership’s assets should occur on a
global basis, yet the corollary of
Mr Anderson’s approach is
effectively to defer a major accumulating cost (interest) to the partnership
until the final distribution.
The Judge said:14
[9] I do not accept that interest should cease to run as at the date of dissolution. Notwithstanding the actions of Mr Clark, it is appropriate for there to be a reasonable timeframe for the project to be wound up during which interest should continue to run. But once the project is wound up and Mr Clark has the full benefit of the assets it would be grossly unfair for interest to continue. Interest will therefore cease on the same date as the assets are to be valued, namely, 31 December 2006.
[42] Fifth, Mr Andersen’s submission that by taking a project by project approach the Judge meant that only interest payments on specific project lending was to cease does not align with the full context of the litigation. I have essayed what I can glean from the several judgments. The first substantive judgment refers to interest on Mr Clark’s funds to be adjusted so that he first received as part of his share the amount of interest before any profit apportionment. The judgment records that this
was to be 10% per annum.15 Chambers J came to the same view in his
judgment on
appeal.16 The judgment also records that Southern Developments
had a deficit of
$224,192 as at 30 October 2002 in relation to three projects.17
The interest issue is then framed in a subsequent minute as “whether
the 10% interest would continue to run throughout”.
Mr Churchman is then
recorded as rallying against a global approach and seeking an project by project
accounting exercise and
Judge accepted this approach at [33], given his finding
at [30] that “Mr Clark was under a duty to act equitably and fairly
when
bringing each project to a conclusion”. I infer from all of this that a
project by project approach was settled upon to
ensure that the interest cost to
the partnership was adjusted with the winding up of each project. In light of
the terms of the partnership
agreement (as found Chisholm J and Chamber J), the
interest cost was to be reduced at the time the project was completed in advance
of any profit share.
[43] Sixth, there is no where any suggestion in the judgments that the
interest related only to lending on specific projects.
There is a reference to
Mr Clark’s evidence about interest of 10% payable on the St Albans
project, but that is plainly in
a context of a discussion about that project.
Further the general reference to “10 %” interest also suggests that
this
was a figure to be applied to accumulated debt, rather than project
specific debt.
[44] Seventh, once the Judge resolved to make Mr Clark account to the partnership on the actual and notional winding up of each project, that left open the question of interest. Chisholm J described the partnership agreement on interest in
this way:18
15 At [17]
16 At [75]
17 At [26]
[200] One of the terms of the partnership agreement was that Mr Clark was
to receive interest at 10% per annum on funds injected
into the partnership by
him. This interest was to be paid before any profit was apportioned.
According to the defendant that
interest component now exceeds $3m in relation
to the hotel project alone and continues to run. That is vigorously disputed by
the
plaintiffs.
[201] The evidence indicates that the purpose of the term was to
compensate Mr Clark for the risk taken by him personally
in injecting funds into
the partnership. On that basis money borrowed by Mr Clark personally and then
injected into the partnership
would attract interest at 10% because the risk
would still rest solely with Mr Clark. This would be so even if the funds had
been
borrowed by Mr Clark at lower rates of interest.
[45] The key question and answer about interest was then
posited:
[218]: Question 9.3: Does the 10% interest continue beyond the date of the
dissolution of the partnership, and if so, for how long? Answer: Yes. St
Albans Street will run until 30 October 2003 in accordance with [47] above. Law
Street will run until the date on
which the project was completed, as determined
by the account taker: see [71] above. Eastbourne Street will run until 31
December
2006 in accordance with [90] above. Hagart Alexander Drive will run
until 9 August 2007 in accordance with [214] above.
[46] The logical implication of this answer (in light of the previous
judgments) is that the interest payable will reduce by
reference to the
proceeds of the actual and notional winding up of the specific projects. Indeed
I understand the parties agree that
this will occur in relation to projects that
were actually wound up. It is difficult then to interpret the balance of the
judgment
as producing a different result for the notional winding up of project
when the Judge had the same objective in mind; that is the
proper disgorgement
of profits by Mr Clark to the partnership on a project by project
basis.
[47] Eighth, I do not accept Mr Andersen’s argument (if I understand it correctly) that as Mr Clark did not actually receive anything on the notional winding up of the projects, he should be entitled to continue to claim the interest until the final dissolution of the partnership projects. He develops this argument by submitting that the notional winding up dates simply serve the purpose of fixing the value of the projects at final dissolution. This is superficially plausible, but it does not bear scrutiny. The Judge was plainly concerned to ensure that the interest cost to the partnership reduced at the time a project was wound up, bearing in mind that Mr Clark had the benefit of the partnership assets throughout the key period. But if
Mr Andersen’s contention is right, Mr Clark would have had the benefit of the partnership assets, the interest on the loan to the partnership, and would not have to account to the partnership for the notional gains until final dissolution. In effect Mr Clark would retain all the major benefits of his wrongdoing (including interest income on the largest partnership debt) while the partnership would receive only the residual value of the partnership assets in 2010 and a relatively modest reduction in interest costs on specified project lending. Chisholm J made plain that this was not
the outcome that he envisaged.19
[48] In summary, the repeated reference to specific dates for cessation
of interest was therefore, on my reading of the judgment,
to ensure that the
partnership was only liable to such interest as should have been paid had Mr
Clark performed his fiduciary responsibilities.
It was not tied to any lending
for specific projects in relation to which there was, it appears, no
evidence.
Result
[49] I make the order set out at [1](a)
above.
Solicitors:
Kensington Swan, Wellington
Albert Alloo & Sons,
Dunedin
19 Libra Developments Ltd v Clark, above n 1, at [205].
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