Sweetman, K.I. & Ors v Australian Thoroughbred Finance Pty Ltd & Ors [1995] FCA 409

CATCHWORDS

PARTNERSHIP - whether a horse breeding syndicate constituted a partnership - distinction between "partnership" and "venture".

PROCEDURE - application to amend pleadings at a late stage when the proceedings were ready for hearing - whether allowance of the amendments would be unjust - whether the substantive issue raised by the amendments is reasonably arguable - whether it would be unconscionable for the party to raise the claims contained in the amendments.

Commonwealth v Verwayen (1990) 170 CLR 394

Income Tax Assessment Act 1936 (Cth) - s.6(1)

KENNETH IRWAN SWEETMAN, LAURENCE VICTOR CLARK

RAY ALEXANDER RUSSELL, HENRY EGGERS

PETER ALLAN SIMPSON, BARRY MARTIN POLINSKY

KRIS GEOK KHOON TAN, BARBARA ANNE ROBINSON-TAN

ELLISON EDWARD BENNETT, NORMA JUNE BENNETT

HENRY MILTON BAILEY, MARK WILLIAM HALLET

JAMES BERESFORD LOEL v AUSTRALIAN THOROUGHBRED FINANCE PTY LIMITED, MORTGAGE ACCEPTANCE NOMINEES LIMITED and OTHERS

and RODERICK STUART McDONALD, JARPAN MANAGEMENT SERVICES PTY LIMITED, BRIAN KING and NSW BLOODSTOCK PTY LIMITED

No G 504 of 1991

Davies J.

19 June 1995

Sydney

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No G 504 of 1991

)

GENERAL DIVISION )

BETWEEN: KENNETH IRWAN SWEETMAN

LAURENCE VICTOR CLARK

RAY ALEXANDER RUSSELL

HENRY EGGERS

PETER ALLAN SIMPSON

BARRY MARTIN POLINSKY

KRIS GEOK KHOON TAN

BARBARA ANNE ROBINSON-TAN

ELLISON EDWARD BENNETT

NORMA JUNE BENNETT

HENRY MILTON BAILEY

MARK WILLIAM HALLET

JAMES BERESFORD LOEL

Applicants

AND: AUSTRALIAN THOROUGHBRED FINANCE PTY LIMITED

First Respondent

MORTGAGE ACCEPTANCE NOMINEES

LIMITED and OTHERS

Second Respondent

RODERICK STUART McDONALD

Third Respondent

GREG FARROW

Fourth Respondent

JARPAN MANAGEMENT SERVICES PTY LIMITED

Fifth Respondent

BRIAN KING

Sixth Respondent

NSW BLOODSTOCK PTY LIMITED

Seventh Respondent

Coram: Davies J.

Date: 19 June 1995

Place: Sydney

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The second respondent have leave to amend its defence within 10 days of the date of judgment.

2. The motion be otherwise dismissed.

3. The costs of the motion be costs in the cause.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No G 504 of 1991

)

GENERAL DIVISION )

BETWEEN: KENNETH IRWAN SWEETMAN

LAURENCE VICTOR CLARK

RAY ALEXANDER RUSSELL

HENRY EGGERS

PETER ALLAN SIMPSON

BARRY MARTIN POLINSKY

KRIS GEOK KHOON TAN

BARBARA ANNE ROBINSON-TAN

ELLISON EDWARD BENNETT

NORMA JUNE BENNETT

HENRY MILTON BAILEY

MARK WILLIAM HALLET

JAMES BERESFORD LOEL

Applicants

AND: AUSTRALIAN THOROUGHBRED FINANCE PTY LIMITED

First Respondent

MORTGAGE ACCEPTANCE NOMINEES

LIMITED and OTHERS

Second Respondent

RODERICK STUART McDONALD

Third Respondent

GREG FARROW

Fourth Respondent

JARPAN MANAGEMENT SERVICES PTY LIMITED

Fifth Respondent

BRIAN KING

Sixth Respondent

NSW BLOODSTOCK PTY LIMITED

Seventh Respondent

Coram: Davies J.

Date: 19 June 1995

Place: Sydney

REASONS FOR JUDGMENT

The subject of the principal proceedings is a thoroughbred breeding venture named the "Hallmark Classic Breeding Venture". The concept of the venture was developed by a firm of accountants, Beattie McDonald, and the formation of the venture as promoted by them. Clients of the firm and others were encouraged to invest in the venture on the footing that taxation benefits and profit would flow to participants in the scheme.

The concept was that a financier, Mortgage Acceptance Nominees Limited ("MANL") would purchase a group of thoroughbred mares which had been selected by the promoters. If an investor took up a 1/15th interest in the venture, that investor would lease a 1/15th undivided share as tenant in common in each of the mares from MANL. Moneys borrowed and sums which each of the investors were required to contribute to the venture were to be used to cover the operational expenses of the venture, which was a 4 year venture. The first year's rents payable to MANL, interest and all the operational expenses of the venture for the first year were prepaid. After
the first year, the venture was expected to be self-sufficient save for a requirement that an additional sum was required in the second year from each of the investors. Income was to be received from the sale of bloodstock. For the third and fourth years, profits were anticipated. The result of the prepayments and of a small loss for the second year was that each of the investors was to obtain the benefit of a taxation deduction in those two years. I take these facts from those of an analogous syndicate, the Trinity Park Stud Breeding Venture, it being said that the basic facts were analogous.

It was anticipated that the investors would be entitled to their individual taxation deductions arising from their individual obligations to MANL for rent and their obligations in respect of interest. It was anticipated that the individual investors would also be entitled to deduct losses arising from the venture, being a partnership for taxation purposes. Section 6(1) of the Income Tax Assessment Act 1936 (Cth) defines "partnership" as "an association of persons carrying on business as partners or in receipt of income jointly ...".

A private offer memorandum which was distributed by the promoters to the investors and others to attract investment in the venture specifically stated that "A partnership at general law will not exist." and that "A partnership for income tax purposes will exist." Notwithstanding the intent of the promoters that a partnership at general law would not exist, I am of the opinion that it is reasonably arguable that, in the operation of the venture, the investors carried on a business in common with a view to profit and that they were a partnership. Thus, if transport or veterinary fees had been incurred by the manager of the venture and remained unpaid, I think it is reasonably arguable that the creditor would be able to sue each and every investor as being liable for the debt.

A venture is not necessarily distinct from a partnership. In United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10, Mason, Brennan & Deane JJ, put the matter this way:-

"The term `joint venture' is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, `adventure') will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership."

These proceedings were commenced in 1991. The applicants were investors in the scheme. They sue a number of respondents including MANL on various causes of action. One matter raised against MANL was the allegation that the private offer memorandum had been distributed so widely, being not limited to clients of Beattie McDonald, that there was an offer to the public and that the private offer memorandum did not satisfy the requirements as to prospectuses laid down in the NSW Companies Code. In its defence to that claim and in its cross-claim against the investors for the sums which it claimed to be due by each under the terms of the lease and mortgage which each investor had executed in respect of his or her 1/15th undivided interest in each thoroughbred mare, MANL did not raise any issue as to partnership. The matter is now ready for trial, though it will not be fixed for trial
until a decision has been given in the proceedings concerning the Trinity Park Stud Breeding Venture, a decision which is now reserved.

Counsel for MANL seeks to amend MANL's cross-application, defence and cross-claim as follows:-

"FURTHER AMENDED CROSS APPLICATION

A.1 The cross applicant claims an order that the first to third and sixth to thirteenth cross respondents pay the total of the sums referred to in schedule A hereto and interest thereon from such date and at such rate as may be just.

DEFENCE

18.A In further answer to paragraphs 26-29 of the re-amended statement of claim MANL says and the fact is that by reason of the matters set out in paragraphs A.1-A.4 of the further amended cross claim the interests acquired by the applicants were interests in a partnership agreement and as such by virtue of paragraph (g) of the definition of `partnership interest' in s.5 of the Companies (NSW) Code were not prescribed interests.

FURTHER AMENDED CROSS CLAIM

A.1 On or about 29 June 1990 the first to thirteenth cross respondents (in the following paragraphs A.2-A.5 called `the cross respondents') constituted themselves in partnership with one another to carry on the business of breeding thoroughbreds with a view of profit.

A.2 In pursuit of their objectives as such partners, the cross respondents together leased from MANL thirteen thoroughbred mares. The terms and conditions of such leases are set out in paragraphs 1, 2 and 4 of this cross claim.

A.3 In entering into the leases with MANL referred to in paragraph A.2 the cross respondents intended to, did claim and were allowed as expenses of the partnership the instalments due by way of rent under the leases as outgoings incurred by that partnership in carrying on a business for the purpose of gaining or producing assessable income, such outgoings being deductible under the Income Tax Assessment Act 1936.

A.4 But for their constitution of a partnership between themselves the cross respondents could not have so claimed and been allowed such expenditure as deductible under the provisions of the Income Tax Assessment Act 1936 in that the instalments due by way of rent under the leases would have been in the nature of capital rather than revenue outgoings or alternatively could not have formed part of the partnership loss collectively declared by the cross respondents.

A.5 By reason of the matters set out in paragraphs A.1-A.4 of this cross claim and by virtue of the Partnership Act 1892 the first to fourth and the sixth to thirteenth cross
respondents are jointly liable to pay to MANL all money due and owing under the lease agreements referred to in paragraph 1 of this cross claim."

As can be seen, MANL now wishes to raise two new issues. The first issue which is raised by way of defence is that the interests acquired by each of the applicants in the Hallmark Classic Breeding Venture were interests in a partnership and, as such, were not within the definition of "participation interest" in s.5 of the Companies Code and were not prescribed interests. Therefore, MANL seeks to say that it matters not whether or not there was an offer to the public. The other matter which is sought to be raised is a claim by MANL that each of the investors is jointly liable with all other investors for the whole of the sums due and owing under the totality of the leases and mortgages which were executed between MANL and the investors.

In my opinion, the amendment to the defence should be allowed. It is reasonably arguable that the interests which were promoted in the private offer memorandum were interests in a partnership, notwithstanding the denial by the private offer memorandum that this was so and notwithstanding that, on entry into the venture, each of the investors was required to undertake individual responsibilities to MANL. It would be unjust not to allow MANL to raise this issue, which will not require additional evidence, in answer to the claim made against it under the provisions of the Companies Code.

In order to understand the other issue, it is necessary to examine in more detail the documents executed as between MANL and each of the investors. In each
case, four documents were executed, a lease agreement, a thoroughbred investor agreement, a mortgage and a management agreement. MANL, I assume, had a copy of the private memorandum before the transaction took place. MANL would have understood that the venture was being promoted on the footing that the venture did not constitute a partnership and therefore that each of the investors was to be liable to MANL only for the obligations which he or she individually undertook. This point was also made by the investor agreement, which was an agreement between a management company and each particular investor, and which provided for the management by the manager of the bloodstock. Clause 2(b) specifically provided that:-

"... Nothing in this Agreement whether alone or read in conjunction with any other agreement shall constitute a partnership of any kind between the Investor and the Manager nor shall it constitute a partnership or other agreement or arrangement of any kind between the Investor and other Participants collectively or individually ..."

The lease which MANL entered into with each investor was carefully drawn to refer to that investor as a lessee and to that investor's 1/15th undivided interest as tenant in common in each of the mares. The term "Lessee" was stated in the singular. The "Total rent" was specified as "$142,605.16 per one fifteenth (1/15)th share".

Similarly, the rent was specified as $35,651.29 payable on 29 June 1990, 1991, 1992 and 1993 and the residual value was stated as "$29,600 per one fifteenth (1/15)th share".

The third document was a mortgage between MANL and the individual investor, the security being the investor's 1/15th interest in the bloodstock. The fourth
agreement was an agreement between MANL and the individual investor which acknowledged MANL's interest as mortgagee in the thoroughbred investor agreement and in the bloodstock. Under that agreement, the Manager agreed with MANL to perform and observe its obligations contained in the thoroughbred investor agreement.

In my opinion, MANL entered into the transaction on the clear understanding that it dealt with each of the investors on the footing that each investor was liable to it only for the amounts which were specified to be due by the investor in the agreements executed between him or her and MANL. It would be unconscionable for MANL now to claim that each of the investors was jointly liable for the total of the sums due by each of the investors to MANL. Had there been a possibility of such a liability, the venture would never have proceeded. It was one thing for an investor to undertake a liability for $142,605.16, the specified rent, for the chance of obtaining the modest taxation benefits and profits which were projected. It is another thing to say that any of the investors would have done so had the investor understood that he or she was undertaking or that MANL would claim that he or she was undertaking a liability for the total rent, over $2m. MANL dealt with each investor on the footing that the investor would be an individual joint owner of bloodstock and would be individually liable for the amounts specified in the lease between MANL and the investor. MANL would have understood that the venture would not have come about had MANL's claim that it dealt with the investors as a partnership been propounded. And MANL understood from the private offer memorandum and from the thoroughbred investor agreement that partnership was expressly denied.

In the circumstances of the case, I doubt that it is reasonably arguable that MANL dealt with a partnership or that each of the investors contracted as a partner with MANL. But even if the matter were reasonably open, I would not allow the amendment as I consider it to be unconscionable that MANL should now claim the totality of the sums due from all investors when it contracted on the footing that they would be liable only for the individual sums specified in their agreements.

The Hallmark Classic Breeding Venture was a venture in which a number of persons saw the potential for income or profit. The investors were looking to taxation benefits and profits. MANL was looking to receiving a favourable return from the difference between the rents and the residuals which would be payable under the leases and the sum which MANL outlaid to purchase the bloodstock. MANL went into the transaction knowing that the venture had been structured on the express footing that the investors were not partners. MANL represented to the investors by its execution of the separate agreements and by the content of the separate agreements that it was dealing with each of the investors as individuals and not as partners. It would be unjust to permit MANL now to resile from that position.

I have dealt with the matter on the footing that MANL is estopped substantively from raising its claim. I am also of the view that leave should not be granted having regard to the lapse of time which has occurred. The cross-claim was first lodged in 1993. Had the present claim been then made, these proceedings could well have had a very different history. Instead of facing a manageable claim for some thousands of dollars, each investor would have faced a claim for several millions of dollars. The claim now sought to be raised would, if allowed, transform the proceedings. This should not be allowed when the facts were at all times known to MANL and when it allowed the matter to proceed to readiness for trial without putting forward the claim it now seeks to raise.

On both bases, I rely upon the principles enunciated in The Commonwealth v Verwayen (1990) 170 CLR 394.

Two other matters should be mentioned. The first is that the solicitor for the applicants has given evidence that, if the partnership issue is raised in the cross-claim, he would consider that there could be a conflict of interest as between some of the applicants and others and that this would require the appointment of other solicitors to act for some of the applicants, a course which would involve delay and cost. In view of my finding above, it is not necessary for me to consider this issue.

The other point raised by counsel for the applicants went to the manner in which the amended pleadings were drawn and to what was said to be a lack of particulars as to the matters which constituted a partnership. As I shall refuse leave to amend the cross-claim and the cross-application, the proposed defence will have to be redrawn. But when it is redrawn, I doubt that much in the way of particulars will be required. It is arguable that, for some purposes at least, there was a partnership between the investors, a business was being carried on, it was being carried on in common and it was being carried on for profit. The crux of the issue between the parties will turn upon the interpretation of the Companies Code and as to how it will apply to the circumstances of the venture which involved, inter alia, the undertaking of individual liabilities. It seems to me that the general nature of the contention made by MANL will be understood and that not much in the way of particulars will be required. The resolution of the issue may, however, be a difficult one.

For these reasons, I shall give leave to MANL to amend its defence within 10 days. I shall refuse the application to amend the cross-application and cross-claim. The costs of the application should, in my opinion, be costs in the cause.

I certify that this and the 10 preceding pages

are a true copy of the reasons for judgment herein of

the Honourable Justice Davies.

Associate:

Date:

Counsel for the 2nd respondent: D.E. Grieve QC

M. Skinner

Solicitors for the 2nd respondent: Smits Newton & Partners

Counsel for the applicants: R.C. McDougall QC

L. Einstein

Solicitors for the applicants: Gadens Ridgeway

Date of hearing: 19 April 1995

Date of judgment: 19 June 1995

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