The decision of Fragar v Fragar [2024] NSWSC 193 (Hmelnitsky J) (4 March 2024), in the Supreme Court of New South Wales illustrates an unpleasant family dispute which arose because the terms for the transition of the family farm to the son were left informal.
This is an analysis.
The facts
The parents, Barry and Linda Fragar, together with their son, Jeffrey, purchased Talgong a farming property near Tottenham in central western NSW in 1989. [see image at the end]
Barry, Linda and Jeffrey farmed the land and were recorded on the title as co-owners, as joint tenants. They called it a ‘three-way partnership”, with a 33% interest each. There was no formal partnership agreement. The terms were reflected in the annual financial accounts.
The farm supported two families – the parents and Jeffrey’s family consisting of wife Kathy and their three children. They all lived on the farm.
By 2012, the farm had been trading at a loss for some years and cash was scarce. The partnership had extensive liabilities.
Barry who was aged 79 and Linda 74, had been farming for their whole adult lives. They wanted to retire but wanted to have enough funds to buy a house off the farm and to provide an income. Family meetings to discuss a succession plan were held with the family accountant / business adviser.
Jeffrey (aged 47) had spent his adolescence and his entire adult life working Talgong in the three-way partnership with his parents without taking partnership drawings of any significance. He wanted to continue farming but did not want to increase the debt on the farm to pay out his parents because servicing the increased debt was not viable.
In February 2013, Talgong was valued at $1,920,000. After deducting liabilities, the net assets of the three-way partnership were $1,434,000.
At a family meeting in February 2013, Barry, Linda and Jeffrey discussed a succession plan. It was agreed that Kathy contribute her inheritance and become a partner. Kathy contributed her inheritance of $300,000 as a partnership contribution and it became a four-way partnership. Kathy and Jeffrey were each 33% partners and Barry and Linda were each 17% partners.
In July 2013, Barry and Linda purchased a caravan for $32,554.03 and a Toyota Landcruiser for $29,069.65. In February 2014, Barry and Linda purchased a unit in Dubbo as their retirement home for which they paid $385,000 and moved into the unit. These purchases were all paid from partnership funds contributed by Kathy and were recorded as a reduction in partners funds in the accounts of Barry and Linda.
In mid-2014, Barry and Linda retired, and a two-way partnership was formed between Jeffrey and Kathy, each with a 50% partnership interest. The new two-way partnership took over the assets and liabilities of the four-way partnership. No change was made to the title to the property to reflect the two-way partnership. It remained in the names of Barry, Linda and Jeffrey as joint tenants. Barry and Linda’s partners fund balances were now recorded as loans (at call and interest free).
In November 2013, Barry and Linda executed new wills. Their new wills provided that the whole estate was to be left to the survivor, and on the survivor’s death, the outstanding partner’s loans were to be forgiven. The bulk of the estate (the unit and other assets) were to pass to the other two children, Joanne and Ken, who were ‘off-farm’.
In a Statutory Declaration made at the same time, they explained that only nominal provision was made for Jeffrey in their wills because ownership of Talgong will pass to him by survivorship and because the partnership loans or balances will be forgiven.
The four-way partnership was wound up informally. The family accountant / business adviser and the family appeared to assume that the financial accounts which were prepared for the dissolution of partnership were enough, along with the new wills. No Deed of Dissolution of Partnership was prepared to clarify the status of loan accounts and the transfer of partnership assets and liabilities. The title to the property was not transferred.
Barry and Linda received $482,551.94 from the partnership, over time, funded by mainly by Kathy. An amount of $602,391.03 was recorded in the balance sheet as the balance of their loan accounts. That amount ‘disappeared’ after 30 June 2016. As we will see, the likely reason it ‘disappeared’ is that it was treated as an asset, for the purposes of the calculating their eligibility for, or the amount of, the age pension.
The informality of the winding up of the partnership sowed the seeds for dispute.
According to the Court, this is how the dispute arose:
“A key aspect of Barry and Linda’s plan for retirement had been that they would receive a full age pension from Centrelink. For some time, that is what occurred. However on about 24 October 2018, Barry and Linda were notified that their continued ownership interest in Talgong disentitled them to the full pension and a sizable debt was raised. This was undoubtedly a source of distress and hardship for both of them. Linda and Barry could not afford to repay the debt and they could not hope to get any financial assistance either from Joanne or Ken. Linda says that Jeffrey refused to provide financial assistance, although I doubt that there was any realistic prospect of Jeffrey being able to assist at that point, save by selling Talgong which would reasonably have been seen by him as a completely unacceptable solution to the problem.” [88]
“At about this time, the parties began to correspond about the question of the ownership of Talgong. It soon became apparent that Barry and Linda considered themselves still to hold a sizable interest in Talgong. Linda’s evidence is that the existence of the Centrelink debt caused her and Barry to want to sever the joint tenancy of Talgong. Once severed, so their thinking went, their two-thirds interest in Talgong could be sold.” [90]
“On 26 July 2019, Barry and Linda signed a document severing the joint tenancy over Talgong”. [91]
After Barry died in November 2019, Linda commenced the proceedings, seeking a court order that the property be sold under section 66G of the Conveyancing Act 1919.
The issues and determinations
The issues before the Court and the Court’s determinations were:
- Has Linda made out a prima facie case for the making of orders under s 66G of the Conveyancing Act?
Yes: “there is no general jurisdiction to refuse to grant such an order on the basis of hardship or unfairness” [95] - Was the February 2013 agreement binding? Did an estoppel arise?
No: there was no agreement that Kathy’s payment of $300,000 would be received by Barry and Linda in full and final settlement of their claims as partners. No estoppel arose for the same reason. - Was Talgong a partnership asset? If so, what are the consequences for the parties of the changes in the partnership which occurred in 2013 and 2014?
Jeffrey and Kathy contended it was partnership property while Linda contended it was outside of the partnership. The Court said:
“Land, although not formally conveyed to the partners who constitute a partnership from time to time, may nevertheless be partnership property”. [130]
“These principles are usefully illustrated by Gordon v Scott d(1858) 12 Moo PC 1; (1858) 14 ER 812; [1858] UKPC 14. In that case, Mr Gordon purchased a share in a partnership carried on by Messrs Scott, Dixson and Loxton in Sydney. The business premises, in Barker St, formed part of the partnership property. They were held by Scott, Dixson and Loxton on a lease. Prior to Gordon’s entry into the partnership, the partnership acquired the freehold reversion to the premises in Barker St. The partnership failed. Scott, Dixson and Loxton sold the premises and refused to account to Gordon for the proceeds of sale, on the basis that the premises were bought by them personally, not by the partnership, and that the partnership held only the leasehold interest. As the partnership agreement did not specify precise interests in the premises, and because Gordon had bought “one share of it”, the Privy Council held that Scott, Dixson and Loxton had to account to Gordon for his share of the proceeds of sale of the premises, as Gordon’s payment for entry into the partnership included a payment for all assets of the partnership at that date, which, for all intents and purposes, appeared to include the reversion of the premises. The Council upheld (at 821), the reasoning of Justice Therry, then the “Primary Judge in Equity” of this Court, to the effect that: “as the Respondents had represented the capital of the concern as being of the value of £4000, such capital could only be of that value, by including the freehold of the premises on which such business was carried on, and … it was declared that the land, wharf, and buildings in the pleadings mentioned …. formed part of the joint property of the partnership” (at 818).” [131]
The Court determined that Talgong was an asset of the three-way partnership and became an asset of both the four-way and the two-way partnerships:
“The conclusion I have reached is that there was an informal winding up of the four-way partnership and that the terms of the winding up did affect the parties’ ownership interests in Talgong. Specifically, the partnership was wound up on terms that were reflected in the immediately subsequent financial statements of the two-way partnership, namely that Talgong would thereafter be property of the two-way partnership and that each of Barry and Linda’s partner’s share would be converted to a loan account.” [145]
This had ramifications upon the Centrelink debt claim:
“The conclusions I have reached mean that Centrelink was mistaken to treat Linda and Barry as having a valuable interest in Talgong. They did not. They held a bare legal interest of nominal value. They did however have a loan which may or may not have affected their entitlement in any event.” [89] - Was there a resulting or constructive trust for Jeffrey?
It was not necessary to consider this issue because Jeffrey and Kathy “are to be recognised in equity as the owners of the whole of the farm because that is the basis on which Barry and Linda retired from the farming partnership”. [160] - Is Jeffrey entitled to family provision from his father’s estate?
Yes, but not necessary to decide because the Court held that Barry’s estate did not include a one-third interest in Talgong:
“If [it were], then I would have concluded that Jeffrey (and Kathy, had she claimed) has a very strong financial and moral claim to the whole of Barry’s interest in Talgong. Jeffrey and Kathy’s financial need is, basically, to own Talgong for the partnership to continue and to be able to service the debt which Barry and Linda saddled them with when they retired.” [163]
Linda’s summons was dismissed, and she was ordered to pay Jeffrey and Kathy’s costs.
Comments
When retirement from a partnership triggers a dissolution of partnership, then the terms of the winding up of the partnership are best recorded in a Deed of Dissolution of Partnership.
The comments made by his Honour Justice Hmelnitsky as to the real estate being an asset of the new partnership are of particular interest. As are the comments that former partners have no equitable interest in partnership assets when the assets and liabilities of the ‘old’ partnership are transferred – the former partners interest is as bare trustee.
“Talgong” at sunset, ‘7000 acres of secluded camping areas hosted by Jeff & Kathy F. in a working sheep and cattle farm with seasonal cereal crops’ near Tottenham, in Central NSW. (image and text: www.hipcamp.com)