CRS Warner Kugel - Case Update

The New South Wales Court of Appeal has issued a judgment in the decade-long legal battle between former business partners Steve Kugel and Anthony Warner.

Mr Warner and Mr Kugel are insolvency practitioners who conducted their practice through a partnership known as CRS Warner Kugel from September 2007 to September 2014. The partnership was profitable, with net profits exceeding $1.8 million in each of the last three years that the men worked together.

In September 2014, Mr Warner decided to bring the partnership to an end and continue the insolvency practice by himself. At this time, the firm was working on 461 active insolvency administrations (consisting of corporate liquidations, personal bankruptcies, and personal Part X arrangements), and recorded WIP was about $4.2 million. The significant majority of the work (all but five of the administrations) and assets of the practice, including its employees, remained with Mr Warner. Mr Warner later collected $1.56 million of the $4.2 million in WIP, and accrued a further $5.8 million on the book for work done after September 2014, of which he collected $3.4 million.

In 2015, Mr Kugel commenced proceedings on the basis that the arrangement between the two men was a partnership and he was entitled to share in the compensation resulting from the relevant insolvency administrations. Mr Warner resisted the characterisation of the business relationship as a partnership and argued that the men conducted two separate businesses. The Court ruled in favour of Mr Kugel, finding that the arrangement between the two men was indeed a partnership.

In September 2019, resulting orders for the taking of accounts were made. Those orders were subject to an appeal (which was largely unsuccessful) and subsequently varied on a couple of occasions. The orders as varied (ultimately made in early 2023) required the valuation of the WIP accrued as at 22 September 2014, as well as the valuation of any “residual goodwill” — a proxy for valuing the notional sale price for the book of insolvency administrations in terms of what “premium” an incoming purchaser would be willing to pay for the book as a whole (or, contrarily, what “discount” a purchaser would have required to take the book on).

The orders also required Mr Warner to account for the income collected from 22 September 2014 which formed part of the partnership’s WIP as at 22 September 2014. The taking of the accounts was remitted to the primary judge.

After a further hearing in early 2023, the primary judge directed the parties to bring in short minutes of order giving effect to his reasons. An issue arose as to whether a purchaser could properly have paid a premium for the acquisition of the book or required a discount to take over the book, given section 595 of the Corporations Act 2001 (Cth) and a standard published by the Accounting Professional and Ethical Standards Board (APES 330 Insolvency Services cll 3.20 and 3.21). Section 595 of the Corporations Act prohibits an insolvency practitioner from paying an inducement to secure an appointment as a liquidator, etc. of a company. APES 330 Insolvency Services cll 3.20 and 3.21 similarly precludes the payment of an inducement to secure an appointment, and also imposes conditions on the receipt of funds by an insolvency practitioner prior to accepting an appointment.

The primary judge expressed a prima facie view that cl 3.21 of the APES Standard would be contravened if the hypothetical purchaser were to be paid money by the vendor as an inducement to acquire the book. The primary judge made various other factual findings, including that an insolvency practitioner acquiring the book would not have required such a payment to take over the book given the economics involved, among other reasons.

Mr Warner appealed, arguing that the primary judge erred in not accepting his experts’ evidence that the book had a negative value and finding that a discount payment wouldn’t have been permissible.

The New South Wales Court of Appeal (White JA, Gleeson and Kirk JJA agreeing) dismissed the appeal, finding that both sub-s 595(1) and cl 3.20 of the Standard have the effect that an insolvency practitioner who was a hypothetical purchaser of the book could not pay a premium to take over the book. Similarly, the Court found that it would be an impermissible acceptance of a monetary benefit for a hypothetical purchaser to accept a substantial discount payment for the acquisition of the book.

The Court also accepted the primary judge’s conclusion that a practitioner disposing of their practice would be unlikely to pay a discount, as they could instead simply resign or apply to resign and be replaced, without incurring any costs.

Read the decision HERE.

Professionals involved:

• Counsel for Mr Kugel: Edmund Finnane of 13 Wentworth Chambers and Daniel Farinha of Eleven Wentworth

• Solicitors for Mr Kugel: Uther Webster & Evans

• Counsel for Mr Warner: J Stoljar SC and John Anderson of Eight Selborne

• Solicitors for Mr Warner: Emerson Lewis