Cochrane v New Zealand Guardian Trust Company Limited [2018] NZHC 2830 (31 October 2018)

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BETWEEN	GILLIAN WENDY COCHRANE MICHAEL ANTHONY COCHRANE DANIEL JAMES COCHRANE BENJAMIN ALEXANDER COCHRANE Plaintiffs
AND	NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED First Defendant
AND	MARCELYN HALL BARNES Second Defendant

Hearing:	28 May 2018 and 17 August 2018
Appearances:	P J Reardon for Plaintiffs K H Lawrence for First Defendant M E J MacFarlane for Second Defendant
_Judgment:	_{31 October 2018}

Factual background	3
The Will	6
Plaintiffs’ position	18
Marcelyn’s position	20
The issues	23
Was there a partnership?	24
Discussion	40
What were the parties’ intentions in relation to the disputed assets?	46
The legal authorities	48
Discussion	72
Conclusion	88
Were the partnership accounts settled or was there a mistake warranting correction of the
accounts?	89
Legal principles	93
Conclusion	118

COCHRANE v NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED [2018] NZHC 2830 [31 October

[1] A daughter, through her family trust, seeks the transfer of half of the value of two disputed assets to the estate of her father, on the grounds they are partnership property and should not pass to her mother by survivorship. The disputed assets comprise term deposit investments and a family loan, amounting to $931,465.

[2] The main issue is whether the disputed assets are partnership property. If they are, those assets belong to her father’s estate and will benefit the residuary beneficiaries, of which the daughter’s trust is one. If they are not partnership property, the disputed assets pass to her mother, Mrs Marcelyn Barnes (Marcelyn), the second defendant, by survivorship.

[3] Marcelyn was married to Alan Barnes (Alan) for 54 years and had three children, Gillian, one of the plaintiffs’ trustees, Richard, and Alison. All are married with families of their own and have achieved success in their own right.

[4] Marcelyn and Alan were dairy farmers and became debt-free in 1991. They sold the dairy farm to their daughter, Alison, and her husband, Brian, in 1995 but retained 60 acres, on which they built a new home. The 60 acres was, in turn, leased to Alison and Brian, with Alan retaining the dry stock for a hobby farm on dry stock land.

[5] During the 54 years of dairy farming, Marcelyn kept the farming partnership books, completing the financial tax and GST returns, even though she was not formally trained. Those tax returns were filed as partnership returns, the detail of which is explored later in this judgment.

[6] The late Alan Barnes died on 12 September 2013, after being diagnosed with terminal cancer in May 2013. Alan was the husband of the second defendant,

Marcelyn Barnes, and the father of Richard Barnes, Gillian Cochrane (one of the plaintiffs) and Alison Baxter.

[7] Alan Barnes left a will dated 27 August 2013 (the Will). The Will appointed Marcelyn and Richard as executors of the Will and trustees of his estate. Probate was granted accordingly. Richard has subsequently been replaced as a trustee by Neil Campbell.

[8] The Will provided for a life interest to his wife Marcelyn, and the residue to be distributed equally to his children or their trusts. Their daughter, Gillian, is one of the trustees of the Cochrane Inheritance Trust, which is named as a one-third beneficiary in the Will. The trustees are the plaintiffs in these proceedings.

[9] The financial statements and the tax returns of the dairy farming operation were filed in the name of AJ & MH Barnes as partnership tax returns. There was no written partnership agreement recording the terms of the partnership. Marcelyn completed the income tax returns on Inland Revenue (IRD) forms for the purpose of declaring partnership income, namely IR7, IR7P and IR10 forms. Throughout the 54 years of their farming operation, Alan and Marcelyn did not employ an accountant to complete their financial returns and statements.

[10] At the date of Alan’s death, the partnership’s statement of financial position recorded the following assets:

(a) “non-current assets” comprising land held in two rating roll entities at

(e) “current assets” comprising a BNZ cheque account ($9,453) and livestock on hand (valued at $122,226).

[11] Prior to Alan’s death, the two disputed assets were included as partnership assets in the balance sheet for AJ & M H Barnes. They are:

(a) $600,000, which Alan and Marcelyn loaned to their son, Richard, and his wife, Christine; and

[12] These assets were previously recorded as assets in the partnership’s statement of financial position. The $600,000 loan to Richard was made in the 2012–2013 financial year and first appeared in the March 2013 balance sheet. After Alan’s death, there was a change to the recording of these assets, which is the subject of this dispute between the parties.

[13] On Alan’s death, Marcelyn rang the estate’s solicitor, querying why the disputed assets were shown as partnership assets, when the loan to their son came from their joint bank account and the term deposits were from the couple’s marriage partnership. The solicitor sought accountancy advice, as a result of which it was agreed that the disputed assets “should be removed from the balance sheet of the farming partnership, restored back to the joint account of Alan and Marcelyn, and then passed to Marcelyn by survivorship”.

$600,000 to my son Richard and his wife Christine. This was a joint loan by Alan and me out of our personal marriage assets and had nothing to do with the farming partnership. The loan has therefore been removed from the latest Statement of Financial Position.

4. Similarly the assets set out below were incorrectly included in previous farming partnership records. They are all personal assets of my marriage with Alan and have now been removed from the latest Statement of Financial Position:

[15] The accountant made journal entries in the partnership records to remove the disputed assets from the partnership. They prepared the date of death statement of financial position of the partnership as at 12 September 2013, excluding the disputed items.

[16] In issuing these proceedings, the plaintiffs initially sought to remove Marcelyn as a trustee of Alan’s estate, but since the proceeding was filed, both Marcelyn and her son, Richard, have resigned as trustees. They have been replaced by Guardian Trust. Guardian Trust is named as the first defendant and has advised that it will abide the decision of the Court.

[17] When the date of death balance sheet dated 12 September 2013 was sent to Gillian on behalf of the plaintiffs, she challenged its accuracy and requested disclosure of other information. The plaintiffs allege that Marcelyn refused to disclose any documents and the proceeding was then issued. After the filing of the proceeding and the seeking of an order for tailored discovery, the disclosure of the documents revealed that there had been a decision to remove assets from the partnership accounts, thereby reducing the value of Alan’s estate.

[18] In the absence of any written partnership agreement, the plaintiffs submit that the financial statements completed by Marcelyn constitute “representations” of partnership affairs and represent the parties’ intentions under s 18 of the Partnership Act 1908.¹They say that the documents are consistent with the fact that Alan and Marcelyn were in a business partnership and that the disputed assets were partnership property. The disputed assets were the property of the partnership and they say Alan’s estate was entitled to a one-half share of the disputed assets, namely $465,732.50.

[19] The plaintiffs submit Marcelyn’s intention was to diminish the debt which had accrued to Alan’s estate with the effect that Marcelyn would benefit as the surviving partner. As a consequence, this disadvantaged the beneficiaries of Alan’s estate, including the plaintiffs. The plaintiffs submit that the disputed asserts were unlawfully removed after the partnership was dissolved and Marcelyn was in breach of partnership rules and her fiduciary duties as a trustee of Alan’s estate. They further submit that Marcelyn failed to avoid a conflict of interest; received an unauthorised personal benefit; failed to act in the best interests of the beneficiaries, and failed to disclose a breach of duty promptly to the beneficiaries.

[20] Marcelyn submits the disputed assets were owned by her and her late husband. They were not partnership assets and therefore Alan’s half–share of these went to her by survivorship, as they never formed part of Alan’s estate and she is entitled to retain them. The disputed assets consist of:

(a) The loan to Richard and Christine, which was a joint loan by Alan and Marcelyn out of their joint personal assets. This loan was not the subject of any written agreement but was paid out of the Barnes’ joint bank account and had nothing to do with the farming partnership. It was previously recorded in the partnership records by mistake and was subsequently removed.

(b) The term deposits, which were also incorrectly included in previous partnership records. They are all joint personal assets from Marcelyn and Alan’s marriage.

[21] Marcelyn denies she breached her fiduciary duty as a trustee and the allegations of any breach are relevant only if the Court finds the disputed assets were partnership assets. Marcelyn submits she corrected unpublished accounts, which did not constitute a removal of assets in order to diminish the estate.

[22] The allegation of breach of partnership rules and fiduciary duties is addressed, following the determination of the issues set out below.

[23] To determine the key issue in this case as to whether the disputed assets are partnership property, I will deal with the following questions:

[24] Over the 54 years of Alan and Marcelyn’s farming operation, Marcelyn undertook the financial accounts for their farming business and sought advice, not of an accountant, but of IRD. Her evidence describes the way in which she dealt with the financial accounts as follows:

Alan and I did not have an accountant. I had successfully managed our financial accounts over the 54 years to Alan’s death, even though not formally trained. It was something that I was very proud of. My books were done with the aim of making sure that I had paid the right GST and tax to the IRD. I would often be in contact with the IRD to make sure I got the tax right, and used the forms they said to use for our tax. I did not have any legal or accounting advice about how that should be done, or the keeping of the business and personal assets and incomes separate.

[25] All of the farming operations and the couple’s personal transactions and savings were operated from the one personal joint bank account. Marcelyn described how she included both personal and farming transactions in the financial accounts to ensure their tax obligations were met.

... we had the one personal joint bank account (later Silver Service) with the BNZ. I did the accounts from this. I made sure that every transaction was put into a corresponding category and that my transactional summary balance was the same as the bank statement. I included everything even our savings and money loaned to Richard and his wife Christine. This was my way of keeping track of what we had and what was owed to us. Other bank interest that did not go through the BNZ was put in by journal entries and these were balanced by the corresponding bank accounts.

I was not an accountant and was doing the accounts this way to ensure our tax obligation was fully met. I did not see the need to pay for a professional to do something that I was capable of and enjoyed doing to meet our needs. In particular in our retirement we were not running a major farming enterprise, and the personal component was straightforward (our savings and deposits and the family loans).

[26] As a result of the advice she received from IRD, Marcelyn completed the tax returns by way of a partnership tax return under the IRD number 13-708-681. The profits and losses were shared equally between Marcelyn and Alan, with the partnership income split equally between them in their personal tax returns.

[27] As Marcelyn described, she included all their income, both farming and personal interest on the IR7 partnership income tax return. She described it as follows:

We included all our income, farming and personal interest on the IR7 when filing with the IRD. I did not know of any other way to present our personal interest. By doing it this way we were able to divide the total income 50/50 for paying our individual IR3 tax return. That had nothing to do with our farm partnership. There was no partnership of investing and savings and making family loans. The same thing happened with the IR10s which included, for statistical purposes only, assets that were both personal and farming.

[28] Marcelyn prepared the balance sheets, showing assets and liabilities, with the equal split of income and included an Owners Account, detailing superannuation, superannuation withholding tax, interest, and interest withholding tax. The balance sheets formed the basis of tax returns, which were completed on IR7, IR7P (partnership income/loss attribution) and IR10 partnership tax return forms to IRD. Marcelyn signed declarations that they were a correct statement of the partnership’s financial position.

[29] There is no partnership agreement and nor is there any documentation recording the nature of the partnership, apart from the financial statements and IRD tax forms. In the absence of a partnership agreement, the plaintiffs submit that the financial return documentation, including the partnership tax forms, the resident withholding tax certificates and depreciation records, constitute “representations” of partnership affairs. The plaintiffs say these represent the parties’ intentions under s 18 of the Partnership Act and therefore bind the partnership under s 9 of that Act. This is particularly so, say the plaintiffs, for the last financial year before Alan’s death ending

[30] Two witnesses were called in support of the plaintiffs’ claim. Gillian gave evidence asserting that everything, including the disputed assets, was jointly owned as tenants in common. Consistent with how her parents always dealt with ownership issues, she contended that the assets shown in the partnership accounts were partnership property and that there was no mistake by her mother, until after her father’s death. When challenged as to her assertion that everything was owned as tenants in common by her parents, apart from sighting a partnership tax return on her mother’s table at one of her visits, Gillian told the Court that that is how things were run when she left home. She asserted it has continued since:

Q. So are you now saying that you saw more documents than on the occasion in May when you, as Mrs Barnes says, took a sneak look?

A. Definitely not. I’ve never seen their bank account statements at all, it was how it was run when I left home and how it’s been run now.

Q. Well if you’ve never seen the bank statements and you don’t actually know how many bank statements or bank accounts there might have been how could you give the evidence you did about their use with the payment of what you called “partnership debts”?

A. As I said Mum hated paying bank fees and she would go and complain to the bank if they charged her 20 cents. So she had it all in one account with the least bank fees.

[31] Gillian conceded that she was aware that her parents’ bank account involved partnership and non-partnership transactions, but contended that her parents’ partnership business included the business of investing money, obtained from the farming operation. On this basis, she asserts that her parents’ investments and the loan to her brother, Richard, was part of the partnership business.

[32] Mr McGlinn, the accountant called by the plaintiffs, considered Alan and Marcelyn saw the business partnership as including all joint endeavours, for the purpose of generating income together. He based his conclusions on the documents, which included the disputed assets as partnership assets in the partnership tax return, with income being split equally between the partners and their personal tax returns. He also observed that the partnership IRD number had been assigned to all the partnership assets including the disputed assets.

[33] However, he accepted that the documents may not tell the whole story. He acknowledged that Alan and Marcelyn operated only one bank account, which included transactions of a personal nature and transactions of a business or partnership nature and that it could not be called a partnership account. He also accepted that there were personal assets in the balance sheets, with the personal items separated out correctly and that the Owners Account section of the balance sheet included items which were not partnership items, being the equivalent of a current account in a normal business partnership. He described the account as being “a mishmash of items”.

[34] Marcelyn had given evidence explaining the source of money from the mixed bank account, which was used to purchase farm or plant equipment such as a new hay baler or hay rake. She provided this evidence to refute Gillian’s allegation that her parents used their term deposit monies for the purchase of major partnership assets, such as the hay baler, the hay rake, and other items, where withdrawals from the bank term deposits, such as Rabobank, in the name of Mr and Mrs Barnes, were transferred “by the partnership to the partnership cheque account to enable it to” make the purchases. Marcelyn explained that she and her husband chose to use their own personal money, if the partnership business required a payment or they chose to spend the money on personal items outside the farming operation.

[35] Mr McGlinn conceded that had the accounts been prepared conventionally, there would have been a current account, in which monies utilised for the purchase of partnership assets or farming plant, would have been recorded as advances to the partnership, rather than being part of the partnership property. As Marcelyn recounted, the financial statements were prepared by her, with the aid of MYOB software and

there is no provision in that system for a current account. He accepted that the right amount of tax was paid by each of Alan and Marcelyn, with the income being allocated ultimately to the taxpaying partners from the partnership and declared under their IR3 return. However, his view was that once income was declared in the partnership return, it was partnership income, even though there were discrepancies and inconsistencies in the accounts.

[36] Marcelyn refuted the evidence of Mr McGlinn and Gillian. She denied that she and Alan were in a partnership, as she did not consider that she:

... had a partnership. I did not know anything about tenants in common, I’d never heard of it before.

[37] In explaining why she chose partnership returns to divide income for the best tax outcome, she told the Court:

[38] She described that she operated a single mixed bank account and that she used the MYOB computer package, which meant she put everything, including farming, in one return, as IRD advised her. She included the Owners Account in the financial statements and in the IR7 and IR3s. However, she was emphatic that the loans and term deposits and interest on them were not partnership assets, because these were she and Alan’s savings over 54 years and were not in a partnership at all. She repeated this on a number of occasions.

[39] Mr Winfield-Smith, a chartered accountant called by Marcelyn, challenged Mr McGlinn’s conclusion that the financial statements prepared by Marcelyn were representations to third parties. He emphasised that the correct amount of income attributed to both Alan and Marcelyn was paid by them. He considered that the preparation of financial statements, which are forwarded to IRD, ensured the correct tax is paid, but were not general purpose financial statements or constituted a representation as such. Because Marcelyn was not an accountant, he considered that anyone reading her MYOB reports could not have expected her to be complying with the principles and standards that accountants use.

[40] Section 4(1) of the Partnership Act provides that to be in a partnership, at least two parties must carry on business in common with a view to profit.

(1) Partnership is the relation which subsists between persons carrying on a business in common with a view to profit.

[41] It is plain that Marcelyn and Alan conducted their dairy farming operation as a business for profit. Although Marcelyn, under cross-examination, contended that she was not aware that she and Alan were in a partnership, it appears plain on the accounting evidence that their financial affairs were handled as a partnership, involving a partnership IR7 tax form, the partnership income loss attribution form IR7P, and the summary of financial information form IR10. In addition, the financial statements for 2013 and previously, were financial statements for AJ and MH Barnes, with assets being described separately for personal matters, under the heading “Owners Account”.

[42] Mr MacFarlane for Marcelyn accepted that even the most basic of partnership tests demonstrate that the farming business, being the one conducted by Alan and Marcelyn together and for profit, must have been a partnership at law, whether Marcelyn understood that or not.

[43] I am satisfied that Marcelyn and Alan were operating a farming partnership for profit. I am not satisfied, however, that the partnership involved the business of investing, whether as a farming operation or as part of the later “hobby farm only” business, as Marcelyn described. For reasons discussed further in the judgment,²I cannot uphold the plaintiffs’ submission that Marcelyn and Alan were in the business of farming and investing. They conducted their farming operation as a partnership, with the intention of making a profit, and such income earned from the partnership assets were jointly pooled in their joint bank account as term investments. Theirs was not a business of investment.

[44] I do not consider this finding, however, to be critical, because the issue of whether the partnership involved the business of investing is not the real issue in this case. The issue is whether the disputed assets in the partnership accounts are partnership property. Having found that Marcelyn and Alan conducted their farming operation as a farming partnership, the inclusion of the disputed assets in the partnership accounts, prior to Alan’s death, requires an analysis of the intention of the parties in relation to those disputed assets.

[45] I turn, then, to consider what the parties’ intentions were in relation to the disputed assets.

[46] For the plaintiffs, Mr Reardon submits that the partners in any partnership can enter into an agreement, as between themselves, which overrides general partnership law. In the absence of any agreement between Alan and Marcelyn in this case, he submits there is no statement by Alan that he expected his beneficial interest in the declared partnership assets to go to his surviving spouse, Marcelyn. The issue, Mr Reardon contends, is whether the partners treated the disputed assets as partnership property. Even if an item is jointly owned, he submits it will not go by survivorship to the surviving partner if it belongs to the partnership.

[47] Marcelyn disagrees that the disputed assets had anything to do with the partnership, except to the extent that as profit or farmland sale proceeds, they were connected to their dairy farming business. However, the disputed assets were never

intended to be partnership assets, as certain documents show, and Marcelyn was merely correcting the financial statements which had been prepared to reflect what she understood the true position to be.

[48] There is no survivorship between partners of beneficial interests in partnership assets, whether owned jointly or not.³It is for the partners to agree what partnership assets are partnership property.⁴The normal rules of partnership property can be displaced by the express agreement of the partners. Section 22 of the Partnership Act provides:

The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing.

³Lindley & Roderick Banks on Partnership (20th ed, Thomson Reuters, 2017) at [19-13].

[49] There are six relevant authorities, referred to by the parties, dealing with the survivorship of the beneficial interest in jointly-owned property on dissolution of a partnership.

[50] The first decision is the decision of Nicholls J in Barton v Morris.⁵Miss Barton and Mr Morris lived together as husband and wife, purchasing a property with the intention of using it for a guest house business, which was to be run as a partnership. When they purchased the property, Nicholls J observed that:⁶

The conveyance, which was executed by both of them, included an expressed declaration to the effect that they held the property upon trust for themselves as beneficial joint tenants. ... it is common ground that Miss Barton and the defendant carried on their business as a partnership at will, with profits and loss being shared equally. There was no written partnership agreement.

[51] Miss Barton kept the partnership’s books and accounts and in her draft financial accounts, she showed the property as an asset of the partnership. Rates were shown as a partnership outgoing, as was interest on a temporary bank loan. Miss Barton died suddenly and intestate.

[52] Miss Barton’s mother, as administratrix of her estate, said that the joint tenancy had been severed or in the alternative, that the proper inference was that the property should be treated as a partnership asset. Mr Morris claimed the property as the survivor of a joint tenancy.

[53] Nicholls J rejected the presumption of severance, where jointly-owned property is brought into a partnership and becomes a partnership asset. He found the evidence clearly established that when the expressed declaration of joint tenancy in the conveyance was executed by the parties, they both knew and intended that the property should automatically accrue to the survivor on the death of a first to die. He said:⁷

In particular, beneficial joint tenancy was Miss Barton’s intention, even though she was providing the lion’s share of the purchase price.

[54] Of relevance to this case, Nicholls J concluded that Miss Barton’s inclusion of the property in the drafts financial accounts did not show an intention on her part, or Mr Morris’ part, that the property was to be held as tenants in common in shares proportionate to their cash contributions to the purchase of the property. Nicholls J said:⁸

That would have represented a fundamental change in the parties’ intention from what was expressed when the property was bought, and I have seen and heard no evidence that either party changed that intention at all.

[55] Miss Barton’s mother’s claim failed and Mr Morris retained the legal and beneficial interest of the property, by survivorship. The Court did not accept that the property had become a partnership asset.

[56] In Bathurst v Scarborow, the parties were partners in a darts business.⁹They purchased a house in which to store partnership stock and jointly instructed a solicitor to act on the purchase, with the property to be held on trust for themselves as joint tenants. On completing the purchase, the solicitor reported to the partners that the property would be registered, in accordance with their instructions, as joint tenants and explained that on the death of one of them, the survivor automatically became the owner of the whole property. The solicitor recorded that the monies which they had borrowed for the purchase were part of the partnership investment in the property, making it partnership property. The solicitor reminded them that if they wished to change the ownership of the property to be held as “tenants in common”, in equal or unequal shares, they would need to take the requisite steps to do so.

[57] Neither of the partners expressed any disagreement with the solicitor’s report and did not take any steps to severe the joint tenancy.

[58] When Mr Bathurst later died, his administrator sought a declaration that the house was the property of the partnership. In the Court of Appeal, Rix LJ said:¹⁰

In my judgment it is necessary to disentangle two separate concepts, even if they bear upon one another. One is whether the property was partnership property. If it was, then there is a strong presumption that the right of

survivorship was not intended to apply. ... The other however is whether the parties nevertheless agreed to vary the normal rule of partnership property, in favour of their own autonomous consent to their being beneficial joint tenants with the standard consequence of that arrangement. ... Ultimately, section 19 is the primary rule.

[59] The English provision of s 19 of the Partnership Act 1980 (UK) is identical to s 22 of the New Zealand Partnership Act, as set out above.¹¹The judgment in Bathurst reinforced the general rule that the mutual rights and duties of the partners may be varied by the consent of all the partners, either expressly or by inference from a course of dealing.

[60] Because the partners chose the joint beneficial tenancy on purchasing the house property and the reporting letter from their solicitor confirmed that there had been an express agreement of a joint beneficial tenancy, the Court held that the documentation overrode the normal partnership rule of tenancies in common.

[54] In my judgment, this solution cannot be a matter of law: for the presumption of the law of partnership, and the favour that the law shows in general towards tenancies in common, strong as those may be, are still subject to the ultimately primary rule of the autonomy of the parties.

[55] ... Ultimately there is no inconsistency between a beneficial joint tenancy and partnership property: the only inconsistency is between the rule of survivorship and the presumption that partnership property is held in common. Ultimately, however, contrary agreement prevails. No case of severance has been made.

[62] The Court declared that both the legal and beneficial interests in the house property belonged to Mr Scarborow, the remaining partner, by survivorship.

[63] In reaching its decision, the English Court of Appeal had regard to the earlier decision of Barton.¹²The Court noted the factual differences between the couple in Barton using their home also as a business, compared to the friends and business partners in Bathurst, who were making an investment in a property which was not a

home for either of them and they were partners already when they purchased the property and it was not fundamental to their partnership business.

[64] There are four New Zealand cases, where the Courts have considered the significance of financial accounts in the context of a partnership contest. Citing Barton as authority of the application of the survivorship rule in partnerships, Vuletic v Vuletic,¹³and Ramage v Alpers,¹⁴are cases where the Court has found that the way in which accounts were drafted was not determinative of assets being partnership property.

[65] In Vuletic, the Court had to determine first, whether the land involved in a vineyard and winery operation constituted partnership assets.¹⁵The contest, between two brothers who carried on the business as a partnership, was whether the two blocks of land were intended to be owned separately by each of the partners or whether the land became partnership property, principally because the land was included in the partnership accounts for the whole period and therefore treated as part of the partnership assets. Gault J, in finding that it was always the intention that the brothers would retain separate ownership of the respective blocks of land in their name, rejected the inclusion in the accounts as determinative of the issue. Gault J said:¹⁶

To be given considerable weight on this question is the evidence given before me by the plaintiff, acknowledging that it was always intended that the properties would be owned separately and that the land was wrongly included in the partnership accounts. That land used in the business of the partnership is shown in the accounts is not determinative of the question whether or not it has become partnership property. An example where it clearly did not is to be found in Barton v Morris ...

In the present case, it appears that the land was included in the accounts for reasons of taxation. However, the cost of servicing the borrowing against the land could equally and quite properly have been charged against partnership income without showing in the accounts the land and the borrowing against

[66] In Ramage, Mr and Mrs Ramage operated a school for the training of nannies and a complementary business of pro-active learning schools, both of which were

¹⁴Ramage v Alpers HC Christchurch M467-68/97 18 August 1999 per William Young J.

incorporated in respective company names with Mr and Mrs Ramage as equal shareholders.¹⁷They were also registered for GST as a partnership and the properties upon which the companies operated were treated, within the accounts of the partnership, as assets of the partnership. The two lots of land, upon which the companies operated their businesses, were registered in the joint names of Mr and Mrs Ramage. The acquisition of the land was largely funded by borrowings and the partnership accounts provided for current account credits in favour of Mr and Mrs Ramage. At the date of his death, Mr Ramage had a current account credit with the partnership of $423,000. One of the questions facing the Court was whether the land had passed, beneficially, by survivorship to Mrs Ramage.

[67] Young J recognised that Barton was a stronger case for the application of the survivorship rule, than the facts in Ramage, but he found that the same result was appropriate. His reasons were:

(a) The properties were put in joint names on the understanding that the survivorship rules would apply.

(b) The accounts of the partnership were prepared by a staff accountant employed by one of the companies (NZCECEL). Although the accounts were reviewed by an accountants’ firm, “there was comparatively little intellectual input into their preparation and form.”¹⁸

The professional who was connected with the joint tenancy discussions was not involved in the way the accounts were structured:¹⁹

and there is no reason to suppose that the accountant who did prepare the accounts was aware of the joint tenancy discussions between Mr and Mrs Ramage and [their solicitor].

... principally just an accounting intermediary between them and their companies. It was not much of a partnership. So it is unlikely that

the implications of the way in which the accounts were drafted (in terms of their inconsistency with survivorship) would have registered with them.

[68] Young J concluded, that in the circumstances, it was “unreal to regard the way in which those accounts were drafted as extinguishing the beneficial joint tenancy”, which was understood to be the basis upon which Mr and Mrs Ramage took title.²¹

[69] In Public Trust v Reesby, Mr and Mrs Reesby jointly owned a farm as joint tenants.²²Prior to the purchase of the freehold of the farm, the couple owned the leasehold interest in the farm and entered into a partnership agreement “prompted by a desire to obtain from the Commissioner of Taxes an allowance of the maximum personal taxation exemption for Mrs Reesby”.²³When purchasing the farm freehold, Mr Reesby made it clear, that “notwithstanding the terms of the written partnership agreement, it was the intention that on his death the whole beneficial interest in the property would pass to his wife by survivorship.”²⁴The Court noted that Mr Reesby’s intention was confirmed by the statement he had made and signed in the Public Trust office, when he was giving instructions for his will, that the “Testator desires it to be noted specifically that the whole of the property is jointly owned and accordingly on his death reverts to his wife as survivor.”²⁵

[70] The balance sheet of the partnership showed the land, livestock, chattels and plant all being classified as partnership property. Barraclough CJ was satisfied that it was the intention of the parties that the freehold interest in the property should, on the death of one of the partners, pass by survivorship to the other. Of the inclusion of the land in the balance sheet, Barraclough CJ held that:²⁶

... the balance sheet as drawn does not correctly set out the true position of the partners ... I cannot see that the balance-sheet referred to, if it does incorrectly set out the position, can defeat the intention of the parties, if that intention is otherwise clearly shown.

[71] The following proposition, based on the above authorities, is contained in the

The fact that jointly-owned property happens to be shown in the firm’s accounts as a partnership asset for taxation purposes does not necessarily mean that it is, or has become, partnership property.

[72] As the above authorities show, the parties’ intentions about the ownership of the disputed assets are determinative of whether the disputed assets are partnership property. Mr Reardon submits that unless Alan had clearly shown an intention to pass on his beneficial interest in the jointly-owned property, his share in the disputed assets must go into his estate.

[73] From the evidence adduced at the hearing and from the disclosed documents, the following factors are relevant to ascertaining the intention of Alan and Marcelyn. The first and perhaps most significant, is the record of Marcelyn and Alan’s will instructions to their solicitor.

[74] On 22 June 2006, their solicitor, Mr Andrews, recorded the couple’s assets and his notation in his file note was:

[75] This solicitor’s record supports Marcelyn’s position that she and Alan viewed the bank term deposits as their joint savings, from which they withdrew funds for partnership and personal transactions, as they chose. The applicable legal principle is that joint bank accounts devolve to the survivor on the death of the other joint account holder.²⁸

[76] The second factor is the instruction to the bank. Two years later in 2008, Alan and Marcelyn signed a bank mandate, being the account operating authority, containing their signatures for their joint bank account. On 30 May 2008, when signing the operating authority, Alan and Marcelyn ticked the account type as “joint”.

²⁷Laws of New Zealand on Partnership and Joint Ventures (online ed) at [105].

The box for ticking “partnership” was not ticked. Marcelyn says that this indicated that the bank account was to be operated as a joint account, not a partnership account, and is evidence that Alan also viewed the bank account as personal, not partnership property. The signing of the bank mandate as a personal account reinforces the couple’s instructions to their solicitors about their cash investments being joint, not partnership property, and supports Marcelyn’s position.

[77] The third factor is that the interest income from both of the disputed assets was treated as personal, not partnership income, by inclusion in the “Owners Account”. The Owners Account was used by Marcelyn for items that were treated as personal and not partnership property. The plaintiffs point to the internal contradiction that the loan to Richard and the term deposits are shown as partnership assets in the balance sheet, yet the interest from those assets is shown as “personal”, by its inclusion in the Owners Account. Marcelyn’s response is that IRD told her to do it this way and that is what she understood was the correct way to show the asset and the income position.

[78] The same approach was taken by Marcelyn in completing the last two IR3 forms for the financial years 2012 and 2013. Marcelyn did not tick the box to show that interest was partnership interest. It should be noted that the $600,000 loan to Richard was advanced in the 2012/2013 financial year and I understand that the IR3 forms had changed in the last two financial years before Alan’s death, to enable a choice to be made between interest being claimed as partnership interest or personal.

[79] It is evident that Alan and Marcelyn used one joint bank account only, which contained “a mishmash of items”. Plainly, the bank account did not contain partnership property or transactions solely, but was the vehicle for Alan and Marcelyn to use money they obtained from historical farming activity and from the sale of assets outside the farming partnership, to do with as they wished. In the financial statements, the Owners Account (being the personal account) is recorded as retaining interest from their investments and the loan to Richard. Marcelyn did not tick the interest being received from partnership assets, as is available in the IR3 return. In the last two years before Alan’s death, when the distinction was available in the IR3 form, Marcelyn chose it.

[80] It is correct, as the plaintiffs submit, that there are inconsistencies in the way that the farming partnership accounts have been completed. The completion of the IR7s, IR3s, and IR10s contain internal inconsistencies, which both parties accept:

(a) Marcelyn did not include the interest on the term deposits and the loan to Richard as partnership income in the profit and loss statement and balance sheet, underlying the IR10 returns.

(b) The Owners Account in the balance sheet treats the interest on loans and term deposits as the owners’ and not the partnership’s. Yet the

$600,000 loan and the term investments are recorded as current assets in the balance sheet.

(d) There are no entries for sums of money, which were advanced by Marcelyn and Alan to the partnership, such as the hay baler or the payments made to build the couple’s own home or the cowshed.

65 years of age. $310,000 is recorded in the Owners Account, when they should be recorded as advances to the partnership.

(f) The IR7 and IR3 returns are also inconsistent, in that the interest is not identified as coming from the partnership, despite the fact the assets are recorded as partnership assets.

(g) Marcelyn used the partnership and personal IRD numbers inconsistently on the returns and the Resident Withholding Tax certificates.

[81] Those inconsistencies and the inclusion of the disputed assets as assets of the partnership in the accounts raise similar issues to those canvassed in Barton and Ramage. Although there is no express intention from Alan and Marcelyn that the

disputed assets were regarded as personal and joint property, their instructions to their solicitor and to the bank make it clear that the bank account items and their term investments were to be retained as such. As Young J concluded in Ramage, it is unreal to regard the way in which Marcelyn drafted the accounts as extinguishing their beneficial joint tenancy in their investments.

[82] I accept Marcelyn’s submission, that the use of savings from term investments to purchase farming items does not convert term deposit monies to partnership assets. There is no evidence to suggest that Alan approved the balance sheets or profit and loss statements prepared by Marcelyn, nor any one of the Inland Revenue return forms. He never signed them and left such matters to Marcelyn.

[83] Just as the land was wrongly included in the partnership accounts in Vuletic Vuletic “for reasons of taxation,” the inclusion of the disputed assets in the balance sheet of the partnership financial returns, as completed by Marcelyn, followed the advice from Inland Revenue. I adopt Gault J’s formulation that an accounting error is not determinative of the question whether or not assets have become partnership property. Consistent with Barton and the four New Zealand authorities, the personal assets of Marcelyn and Alan should not become partnership assets, as a result of lay accounting practices, inconsistent as they were, adopted by Marcelyn.

[84] There is further support for my conclusion in the different way the two loans to each of Marcelyn and Alan’s children, Alison Baxter on the one hand and Richard on the other, were structured. The loan to Alison Baxter was secured by a mortgage taken by Alan and Marcelyn as tenants in common in equal shares. It was structured and represented as a partnership asset. The loan to Richard is advanced from the joint account and is not structured like the Baxter loan.

[85] The difference in the structure of the loans was explained by a letter from Marcelyn and Alan’s solicitor, Mr Andrews, following Alan’s death. It records Marcelyn’s phone call, noting that Marcelyn could not understand why the loan to Richard and his wife of $600,000 was shown as a partnership asset, when the loan came from their joint bank account. In the same telephone discussion, Marcelyn also

pointed out that the BNZ term deposit and the Rapid Save investment were not assets of the farming partnership but were the assets of their marriage partnership.

[86] After taking accountancy advice, Mr Andrews recorded Marcelyn’s instructions and described the difference in the structure of the loans to their daughter, Alison, compared to the loan to Richard and his wife. He said:

The loan to Alison and Brian of $895,000 came however from a different set of circumstances – the land in question was sold to Alison and Brian and a mortgage was taken back by Alan and Marcelyn as tenants in common in equal shares. That loan is correctly shown as a partnership asset half of which resides within Alan’s estate.

[87] As a result of obtaining Marcelyn’s instructions and accountancy advice, the disputed items were removed from the partnership balance sheet.

[88] I am satisfied that Marcelyn and Alan intended that the disputed assets were jointly-owned personal assets and not assets of the partnership. The mistaken inclusion of the disputed assets in the partnership accounts is not determinative of whether they had become partnership property. Marcelyn and Alan’s joint cash investments, their joint instructions to the bank and their solicitor evinced a clear intention that the investments were joint personal property assets. In relation to the

$600,000 loan to Richard, it was advanced from their joint bank account from savings and differed markedly in structure and the source of funds to the partnership loan to their daughter. Both the disputed assets, the loan and term deposits, were jointly- owned personal assets.

Were the partnership accounts settled or was there a mistake warranting correction of the accounts?

[89] I turn, then, to the third issue, relied on by the plaintiffs, as to whether the accounts, namely the financial statements and the IR3, 7 and 10 partnership income tax returns, constitute settled accounts for Marcelyn and Alan’s partnership, and therefore should not be disturbed.

(d) Marcelyn has acquiesced in the accounts for years and there is acceptance by conduct by Alan.

[91] The plaintiffs submit the mistake alleged by Marcelyn occurred after the dissolution of the partnership, at the time she instructed the removal of the disputed assets from the partnership accounts. Marcelyn had no authority to change the status of the disputed assets.

[92] Marcelyn disputes that they are settled accounts. The accounts present a mishmash and an amalgam of personal and partnership items; Alan never approved them; and the inclusion of the disputed items as partnership assets was incorrect and should have been corrected.

[93] As Alan’s death dissolved the partnership with Marcelyn, the plaintiffs allege that the two rules that apply are:

(a) final accounts (that is, the account after the death of the deceased partner) should follow settled accounts; and

(b) where the partnership is dissolved by death, and the partnership business continues, the deceased’s partner’s share is a debt fixed at the date of death and cannot be subsequently altered unilaterally.

[94] The plaintiffs rely on ss 41 and 46 of the Partnership Act and the legal commentary. Section 41 confers a limited authority on partners, following a

dissolution of a partnership. There is power to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of dissolution, but not otherwise.

[95] Section 46 of the Act provides that the amount due to the deceased partner by surviving partners is a debt accruing at the date of dissolution of the partnership or death.

A final account will usually start from the last settled account, that is, on the basis that the last periodical balance sheet is correct. Save for some proved fraud or error or misrepresentation, the Court will not disturb a settled account.

[97] I have already made the finding that the disputed assets were included in partnership assets in error. The question raised by the plaintiffs is whether the Court should intervene to disallow the removal of the disputed assets from the final statement of accounts for the partnership.

[98] The most relevant authority on the Court’s jurisdiction to reopen accounts on dissolution of a partnership is Tipping J’s decision in Heywood v Parfitt.³⁰

[99] Mr Heywood and Mrs Parfitt lived together as husband and wife. Having previously owned a property, they decided to purchase a hotel and because Mr Heywood at the time was bankrupt, title to the hotel was taken in the name of Mrs Parfitt alone. They ran the hotel as a partnership. There was no partnership agreement, but their accountants treated the parties as being in a partnership, with Mrs Parfitt being credited with 55 per cent of the capital and Mr Heywood with 45 per cent. The income was shared equally. In the accounts prepared by the accountants, the land and buildings of the hotel were shown as a partnership asset. Tipping J said:³¹

There can be no doubt whatever that the partnership accounts were drawn on the basis that the land and buildings of the Croydon [Hotel] were partnership property ... All subsequent accounts up to and including those for the year ended 31 March 1989 were drawn on this fundamental premise. It was only

²⁹P R H Webb and Anthony Molloy Principles of the Law of Partnership (6th ed, Wellington, 1996)

after the relationship between the parties had finally broken down ... that Mrs Parfitt instructed the accountants to treat the accounts on the fundamentally different basis that the land and buildings were not partnership property. That, however was done without any reference to Mr Heywood and the accounts so drawn ... cannot be regarded as in any way binding on Mr Heywood.

[100] Mrs Parfitt applied to the Court to amend the partnership financial statements and tax returns on the grounds of mistake. The partnership had not been dissolved as at the date of hearing. Tipping J rejected Mrs Parfitt’s request to reopen the accounts on the basis of manifest error. He considered such a request was similar to a rectification issue so the party seeking to disturb the account should demonstrate that the written account did not accurately reflect the previous common intention of the parties. Because the accounts for the years 1983 to 1989 had been accepted by Mrs Parfitt, the Judge was not satisfied that the accounts were wrong. Even if he had doubts about the accuracy of the accounts, he considered that Mrs Parfitt had acquiesced in the accounts in circumstances where it would now be quite unfair and unreasonable for the accounts to be reopened.

[101] I consider there are four factors in this case which distinguish it from Heywood

(a) Marcelyn has established that the inclusion of the disputed assets as partnership assets was in error;

(b) the common intention of the partners differs from the partnership financial statements, in that the term investments and the loan to Richard were not intended to be partnership assets;

(c) there will be no revenue adjustment required because the right amount of tax has been paid, as acknowledged by the parties; and

(d) although Marcelyn prepared the accounts, she is not a professional accountant. There was no presentation of accounts for which Alan and Marcelyn were required to acquiesce or to “settle” the position in respect of their assets.

[102] The issue of settled accounts was considered by Fogarty J in Bambury v Jensen.³²In his decision, Fogarty J noted that for there to be a settled account there must first be an identification or acceptance by the parties of it. Usually, one or more of the parties, having agreed to a particular account between them, later raises the issue by way of challenge that it is a settled account issue. Fogarty J stated:³³

The mere statement by one party to the other of how an account stands does not amount to a settled account. The other party must agree that it is right.

[103] The plaintiffs contend that the information in the partnership’s financial accounts are representations to other parties, such as IRD, of the status of assets and the previous accounts were settled, because Marcelyn, who completed them, and Alan, who impliedly agreed, accepted their accuracy. Mr McGlinn gave evidence that financial statements represent the financial transactions over a period of time and the financial position at a point in time, usually a balance date. The financial statements, he says, are then used to represent the financial position and trading results to other parties who rely upon these representations.

[104] Mr MacFarlane challenges that these are settled accounts, relying on both Bambury and Commissioner of Inland Revenue v Allen,³⁴in which Wylie J accepted that a trust’s financial statements could be reopened, because the Commissioner of Inland Revenue had not accepted them, the Commissioner was not a party and the accounts were not settled.

[105] Mr Wingfield-Smith challenged Mr McGlinn’s view about the presentation of financial statements to other parties, when accounts are prepared for taxation purposes only. He disagreed that those partnership accounts were representations of the “financial results”, drawing a distinction between general purpose and special purpose financial statements:

... general purpose financial statements are financial statements that are expected to be shown to the world as a whole, so there is expected regulations

... that you have to disclose. A special purpose financial statement is a financial statement for a specific reason ... we do financial statements purely

³⁴Commissioner of Inland Revenue v Allen HC Auckland CIV-2007-404-1944, 16 December 2009.

for taxation purposes, so you are narrowing down the field of who is actually going to see them and therefore look at them.

[106] When the final financial statements were completed for the period up to Alan’s death, the note to the financial statements reads:

These financial statements have not been prepared for external use. They are prepared for tax purposes only and should not be relied on for any other purpose. They are therefore defined as special purpose reports.

[107] Mr Wingfield-Smith said further that there had been no “representation” here of the partnership’s financial result, by Marcelyn and Alan:

I have seen no evidence of that at all, and I can think of no reason why there should be. The IRD does not require financial statements. While the IRD does require an IR10 Financial Statement Summary to be completed it does not ask the taxpayer to distinguish between business assets and non-business or personal assets.

[108] I accept Mr MacFarlane’s submission that there was never any formal presentation of financial statements, either for approval or adoption, by Alan and Marcelyn as partners. Nor is there acquiescence, in the sense expressed by Tipping J in Heywood. Marcelyn did the financial books and returns herself. As she described, she included everything in the accounts, including their joint savings and the loan to Richard, as a way of keeping track of what they both had and what was owed to them. Importantly, it was a way of ensuring the correct amount of tax was paid. Of the “balance money,” it was kept in their joint bank account and savings account.

Alan and I had already been taxed individually with the money that was in our bank account/savings. It was the balance money that we had saved over the

54 years of being together. This is where fortnightly superannuation payments came to be deposited to. This was 13 years for Alan, and 9 years for me, and that came to $310,020 as at Alan’s death.

[110] On Alan’s death, when Marcelyn realised that non-partnership assets had been incorrectly recorded as partnership assets, she raised it with Mr Andrews, their solicitor, who then took appropriate accountancy advice.

[111] The plaintiffs seek an adverse inference to be drawn from Marcelyn’s actions, in bringing this mistake to the solicitor’s attention, because she realised that belatedly, the position was detrimentally affecting her financially. I accept that the financial implications of the mistake may well have been realised by Marcelyn on Alan’s death, because she no longer had the benefit of their joint savings and income for her use. I am satisfied, however, that the disputed assets were clearly intended by both partners to be joint personal assets and the accounts should be corrected to reflect that.

[112] The supervisory jurisdiction of the High Court in equity enables this Court to ensure the correct position is reached between the partners, as the above authorities show. There was no need for an application for rectification in these circumstances.

[113] There is a subsidiary issue that has been raised by the plaintiffs in their submissions, which was not advanced during the hearing, but for completeness I deal with here. The plaintiffs allege that Marcelyn has failed to make adequate discovery for the purposes of rectifying the partnership accounts. They allege further that the interest earned on the partnership loan to Alison has been received by Marcelyn and Alan personally. The case before me focused on whether the disputed assets, namely the term investments and the loan to Richard were partnership assets.

[114] I accept Mr MacFarlane’s submission that there is undisputed evidence that the farm profits, the couple’s inheritances and their superannuation went into their joint bank account. Each of the partners received their interest as tenants in common in equal shares and clearly pooled their resources in the joint bank account. Consistent with the parties’ intentions, the profits from the partnership were to be shared jointly.

[115] Although it is correct that income from a partnership asset will be partnership income, as Mr McGlinn stated, but the receipt of partnership income is subject to the intention of the parties as to the use of it, Mr McGlinn accepted that ultimately the evidence of what the parties intended to do with partnership income, was a matter for the Court to determine.

[116] Mr Wingfield-Smith gave evidence of accountancy practice to include both jointly-owned business assets and jointly-owned non-business assets or personal

assets in financial statements. Their inclusion, (often bank accounts, vehicles and property) does not mean they are business assets. Importantly, the interest generated from such bank accounts does not mean that all the interest is to be treated as business interest. He stated:

It is common for this to happen in the case of partnership tax returns, and it is no surprise that Mrs Barnes says she was told that she should use such a return

The IRD’s concern is not the source of the interest so much as the capture of all interest.

[117] I accept Mr Wingfield-Smith’s evidence. If the partners received the income from the partnership as profit and decided to pool it jointly, as I have found they did here, then that is consistent with the parties’ intention to share their term investments jointly.

[118] The removal of the disputed assets from the partnership’s final accounts was warranted, because they had mistakenly been included in the partnership balance sheets and tax returns as partnership assets. The partnership accounts were not completed by professional accountants and contained inconsistent treatment of personal and partnership assets and transactions. The parties intended the disputed assets to be jointly owned assets and the accounts should be altered to reflect the correct position.

[119] There are three further matters to be addressed for completeness. The first is whether the independent trustee should have taken an active part in the proceedings. Despite the plaintiffs’ argument that it would have been appropriate for the current trustee to argue on behalf of the beneficiaries, the trustee is biding the Court’s decision. This is hostile litigation among beneficiaries. The Guardian Trust did not make a Beddoe application for its involvement and is remaining neutral. I consider this was the correct approach in these circumstances.

[120] The second arises from the plaintiffs’ written submissions, where the issues of acquiescence, laches and the presumption of advancement were raised. These were not furthered to any significant extent, apart from acquiescence, which I have considered under the third issue. I do not propose to discuss those submissions in further detail, because they were not pursued and I consider they are not relevant to these facts.

[121] Finally, the plaintiffs claimed that Marcelyn removed the assets, in breach of the provisions of the Partnership Act and her fiduciary duties. Since I have found that the partnership accounts warranted correction, the plaintiffs’ claims of breach must fail.

[123] The disputed assets, namely the loan to RA and CB Barnes and the term investments shown in the accounts of AJ and MH Barnes, are jointly owned personal property of the deceased, Alan Barnes, and his wife, Marcelyn Barnes and not assets of the former partnership.

[124] 2B costs are awarded to the second defendant, together with disbursements as

Other matters raised	119
Result	122
Costs	124

High Court of New Zealand Decisions

Cochrane v New Zealand Guardian Trust Company Limited [2018] NZHC 2830 (31 October 2018)