England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BRIGHTON COUNTY COURT
(His Honour Judge Kennedy QC)

		Royal Courts of Justice Strand London WC2A 2LL Thursday, 5th September 2002

Thursday, 5th September 2002

1. LORD JUSTICE TUCKEY: This is an application for permission to appeal by Mr Phillip Orpwood from a judgment of His Honour Judge Kennedy QC given in the Brighton County Court in this partnership dispute.
2. In the course of the trial the parties agreed that in 1987 the applicant became a partner in an existing partnership between the two claimants on the terms of a deed which they had entered into in December 1982, and that he resigned from this partnership with effect from 31st July 1992.
3. The business was that of estate agents and surveyors carried on from an office in Hove. A separate partnership, in which the applicant also became a partner, carried on a similar business from an office in Worthing. The partners involved in the Worthing business were not (at least from the outset) the same. It was the subject of a separate partnership deed and separate accounts were prepared for its business. However, that business was not a success and the Worthing office ceased trading in 1991. Before its demise it had been supported by the Hove partnership, who in the end paid off its overdraft so as to ensure the continuing goodwill of the bank which was also supporting the Hove business. The Hove business's capital accounts showed this support to Worthing as loans to the Worthing office whilst there was any prospect of repayment. When it was apparent that the loans were irrecoverable, the capital accounts of the partners in the Hove partnership were debited with "share of loan to Worthing". The applicant now accepts, if he ever disputed, that this was a proper accounting treatment, although he complains that the defendants have never vouched the amounts debited to his capital account in the last relevant year for which accounts were prepared, that is to say to the year ending the 31st July 1992. The judge in his judgment referred to the applicant's undoubted right to check the figures, as to which he would, if necessary, hear argument. In the event, it does not appear that the appellant did address any argument to the judge about this after he had given his judgment. The two figures which the applicant wishes to see vouched are, first, the figure for his drawings shown in the accounts for the year ending 31st July 1992 in the sum of £14,539, which he disputes, and, second, the amount of the loan to Worthing, which is derived from some part of the figure for sundry creditors and accruals which total £107,329 of which the applicant was told £55,000 odd represented the loans to the Worthing office in relation to expenses, debts etc. The applicant says that he cannot understand why that figure should be so high for this year, given that the Worthing office ceased trading in the previous year.
4. I do not think that relief of the kind which the applicant seeks -- that is to say disclosure by the claimants of the information from which these figures are derived -- is relief which this court will grant to him on appeal, and I do not give him permission to appeal on that basis. However, I do have some sympathy with him about this. As the judge said that he had the right to check the figures and it appears that, for one reason or another, the applicant did not apply to the judge after he had given judgment when the matter was dealt with on the telephone, I do not for the moment see why he should be precluded from making an application to the judge now. I do not encourage him to do this, but I think it is still open to the applicant to apply to the judge to order the claimants to provide such information if he thinks the point is worth pursuing and the claimants will not do so voluntarily.
5. The Hove partnership deed provided for the outgoing partner to be bought out by the continuing partner. This, it was accepted, entitled the applicant on his resignation to be paid the amount outstanding to the credit of his capital account in the balance sheet prepared at the date of his retirement (referred to in the deed as "the succession date") and:

"An amount equal to the same proportion of the value of the goodwill of the partnership as the proportion of the net profits of the partnership to which the outgoing partner was entitled immediately prior to the succession date."

6. Paragraph 5 of the schedule to the deed provided how the value of the goodwill was to be calculated. Sub-paragraph 1(b) said:

"In the event that the succession date shall fall after the end of the third completed financial year of the partnership but prior to completion of the sixth financial year of the partnership the value shall be twice the amount of the average annual net profits of the partnership in the three completed financial years of the partnership next preceding the succession date."

7. Sub-paragraph (c) provided for three times annual average annual net profits after six years. Sub-paragraph (2) said:

"In this paragraph the annual net profits of the partnership means the annual net revenue profits of the partnership as shown in its profit and loss account after taking into account all charges provisions and credits inclusive of those made for depreciation of assets but exclusive of those made in respect of income tax."

8. The reference in this schedule to the balance sheet and the annual net profit of the partnership must be read with the earlier provisions of the deed, which provided for the presentation of an audited profit and loss account and balance sheet each year.
9. The applicant complains that none of the accounts were audited. It seems to me that he must be taken to have waived any such requirement. The relevant accounts, including those for the year ending 31st July 1992, were prepared and certified by accountants, and apart from those for the last year, which the appellant did not see until some time later, the accounts were signed by the applicant and the claimants.
10. In the partners' capital accounts for the final year the applicant's introduction of £20,000 into the business was credited to the claimants, although it was noted on the accounts that these capital accounts were still to be agreed. The applicant said that this was incorrect, and the judge agreed. So the applicant won on this issue. The judge's conclusion about this is recorded in paragraph 3 of the minute of order which was drawn up following his judgment.
11. The principal issues which the judge had to resolve related to the value of the goodwill. First, the claimants contended that, as the applicant had only been a partner for five years, paragraph 5(1)(b) of the schedule applied. The applicant said paragraph 5(1)(c) applied because the partnership had existed for more than six years. The judge agreed with the claimants (that is paragraph 5 of the minute of order). The applicant contends that he was wrong to do so. I do not agree. The deed did not contemplate another partner joining at a later date. The judge was entitled to construe it so that the applicant's share of the goodwill reflected the time he was actually a partner. This was the commercial purpose of the provision, and I can see no real prospect of this court disagreeing with the judge about this.
12. Next the judge had to decide which were the relevant three years for the purposes of the calculation. The applicant won on this issue (paragraph 6 of the minute of order). Then he had to decide on the claimant's contention that the net profits for the relevant years should take account of the net losses made by the Worthing office during the same period. These losses were not included in the accounts prepared for the Hove office. Nevertheless, the judge accepted that they should be taken into account (paragraph 7 of the minute of order). His reasons for doing so appear in paragraph 59 of his judgment, but I am not sure that I follow them. He seems to be saying that these losses should be taken into consideration for the same reason as the loans to the Worthing office were credited to the partners' capital accounts. But this does not follow. It runs counter to the judge's view expressed elsewhere in his judgment that generally the partners should be stuck with the accounts prepared by the accountants. It was not the applicant who was asking for a retrospective theoretical re-analysis of those accounts, as the judge seemed to think, but in this instance it was the claimants who were asking for that to be done. More significantly perhaps, paragraph 5 of the schedule refers to the net profits of "the partnership", and the partnership, governed by that deed, ran the Hove office and not the Worthing office which was the subject of a separate deed. By including the Worthing losses it appears that what the applicant was entitled to for his share of the value of the goodwill was reduced from something in excess of £25,000 to the £7,658 awarded by the judge (paragraph 10 of the minute or order). If he had been awarded the larger amount, the balance between the parties would almost have been struck, since there was £26,000, on the judge's finding, owing on the capital account, and if the applicant had been entitled to something in excess of £25,000 for the goodwill, then the parties would have come out of this litigation quits, or almost quits, and that might well have had a significant effect upon the order for costs which the judge made at the end of the hearing. So this is a point of considerable significance to the applicant and, for the reasons I have given, I think he has sufficient prospects of success to justify the granting of permission to appeal.
13. The last point which the judge had to decide on the valuation of goodwill arose from the applicant's assertion that the accounts should be redrawn to reflect the fact that bank charges and interest and VAT, surcharges and penalties had been incurred by the claimants as a result of their mismanagement of the business and overdrawing their capital accounts contrary to the provisions of the partnership deed. The judge decided this point against the applicant on the basis that the parties were stuck with the accounts. I can see no prospect of the court saying that he was wrong about this, particularly as looking at the accounts it appears that the most significant amounts of penalties and interest were incurred in the year ending 31st July 1991, a year for which the applicant signed the accounts himself.
14. Finally, on the balance which the applicant was ordered to pay on his capital account the judge awarded interest of 15% from 31st July 1992 to 31st March 1993 and 8% thereafter (see paragraph 9 of the minute or order) and all the costs of the proceedings (paragraph 12 of the order). The applicant complains about both these orders, but questions of interest and costs are peculiarly for the trial judge to decide in the exercise of his discretion. I can see no free-standing basis for appealing these orders, although obviously, if the appeal succeeds on the point on which I have given permission, this court will have to reconsider the order for costs which the judge made.
15. What all this means is that I give permission to appeal paragraphs 7 and 10 of the judge's order but none of his other orders. I will also grant a stay of execution pending the hearing of the appeal.
Order: As above. Permission granted to adduce further evidence in the form of a letter of 30th July 2002 from Carpenter Box and the statement of David Thorne dated 22nd July 2002.