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Libra Developments Limited v Clark [2014] NZHC 3148 (15 December 2014)

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.”



  1. Libra Developments Limited v Clark HC Dunedin CIV 2002-412-39, 4 February 2005. Note also that a claim against the then second defendant Mr Alloo was struck out by consent in July 2004

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:

  1. Mr Clark and Mr Hyslop shall undertake such projects as they should agree would fall within their overall relationship.

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.

  1. Mr Clark shall be responsible for all the capital requirements of the projects.

  1. Mr Clark or one of his companies shall employ Mr Hyslop and pay him a salary to be agreed between him and Mr Clark.

  1. Mr Hyslop shall apply his expertise and time to the day-to-day running of the projects.

  1. Mr Clark shall account to Mr Hyslop for a half share in the profit of the venture, subject to what was agreed on 24 March 1999.

  1. The interest rate for the purposes of term 2 of the 24 March 1999 variation shall be 10%.

9. Either party may terminate the relationship by giving notice.

  1. Mr Hyslop may require Mr Clark to credit his share of the project to any entity associated with him.


[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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