Update

Duke Group Limited (in liquidation) v Pilmer & Others
Supreme Court of South Australia (Mullighan J) - 30 January 1998

A recent decision of the Supreme Court of South Australia illustrates the potential liability of the members of a national partnership.

Nelson Wheeler's Perth office was retained to provide the shareholders of Kia Ora Gold Corporation NL (which later changed its name to The Duke Group) with a takeover report concerning the price of Western United Limited shares. The report was required pursuant to The Listing Rules of the Australian Stock Exchange. The report concluded that the price of the Western United shares was fair and reasonable and the Kia Ora shareholders subsequently gave their approval to the takeover.

Nelson Wheeler's valuation of the Western United shares turned out to be grossly inflated. Kia Ora paid approximately $112 million to complete the takeover. It transpired that the company was only worth about $5 million.

In an action brought by the liquidators of the Duke Group, the Court held that damages of over $94 million were payable. Liability for damages was apportioned between Nelson Wheeler and the directors of Western United (who had been aware of the overvaluation).

An important issue arose as to the liability of the individual partners of Nelson Wheeler. The plaintiff argued that Nelson Wheeler was a national firm of chartered accountants and consequently all of the national partners of Nelson Wheeler were jointly and severally liable to pay damages to the plaintiff. Nelson Wheeler argued that its organisation was merely an association of firms in different centres in Australia. It maintained that it did not operate a partnership but a federation of separate and distinct firms.

The Court considered the origin of the Nelson Wheeler organisation.

• A meeting had taken place in 1972 between representatives of accounting firms from Brisbane, Sydney, Melbourne, Adelaide and Perth. That meeting resolved that the parties would work together to form a national partnership and to co-ordinate business.
• A deed was subsequently drawn up recording the terms of the arrangement. The deed expressly purported to exclude the law of partnership. It envisaged a structure whereby the various firms would carry on independently but would co-ordinate for mutual benefit, using a single name.

The law of partnership required the Court to consider the reality of the business organisation, not just the documents creating the affiliation between the firms.

The Court found that the reality of the Nelson Wheeler organisation was that it practised as a national partnership.

• The organisation promoted itself as a national firm (in fact, there was a passage in the takeover report describing the firm as "a national firm of practising accountants with world-wide affiliates and associates").
• Representatives of the different offices of Nelson Wheeler participated in a national conference, co-ordinated relationships with national clients, and formed national committees to provide a consistent approach in such functions as auditing.
• The Nelson Wheeler offices also standardised fees, arranged referral work to one another and created common publications and brochures. The various offices of the organisation also co-ordinated to obtain national professional indemnity cover.
• All of the offices went by the name "Nelson Wheeler" and used common signage, stationery and advertising.

Having considered all of these factors, the Court concluded that the national organisation was, in reality, a partnership. The legal tests for partnership were met, namely; the organisation carried on the business of chartered accounting and this business was carried on in common between the various offices with a view to a profit.

The Court held that all of the members of the national organisation were liable to the plaintiff.

Commentary

This decision is a warning to those seeking to limit liability by way of separate partnership. Simply disavowing partnership - even by way of formal documentation such as a deed - will not necessarily insulate individuals from joint and several liability. If the reality of a business organisation is that it operates with members contributing to a common business venture for common profit there is a likelihood that a conclusion will be drawn that the organisation is, in truth, a partnership.