Audio Connection Australia Pty Ltd v FI Audio Video Pty Ltd

[2010] NSWSC 308

CITATION:	Audio Connection Australia Pty Ltd v FI Audio Video Pty Ltd [2010] NSWSC 308
HEARING DATE(S):	1 April 2010
JUDGMENT DATE :	1 April 2010
JURISDICTION:	Equity
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	1 April 2010
DECISION:	1. Order pursuant to s 472(2) of the Corporations Act 2001 (Cth) that Nicholas Malanos and Paul Nogueira, both of Worrells Solvency and Forensic Accountants, Level 34, 60 Margaret Street, Sydney and Suite 4, Ocean Central, 2-4 Ocean St, Maroochydore Qld 4558, official liquidators, be appointed as provisional liquidators of the first defendant. 2. Order that the said Nicholas Malanos and Paul Nogueira be appointed until further order as receivers and managers of any and all assets held by the first defendant on trust pursuant to the Joint Venture Agreement dated 10 April 2000 which is at Tab 3 of Exhibit JR-1, jointly and severally and without security and with the following powers: a) the power conferred by s 420 of the Corporations Act on a receiver of a property of a corporation other than s 420(2)(d); b) the powers conferred on them in their capacity as provisional liquidators by s 472 of the Corporations Act; and c) the power to investigate and to require the plaintiff, the third defendant, officers and employees of the first defendant to provide information, books and records in relation to the business, assets, liabilities, income and expenses of the Joint Venture the subject of the Joint Venture Agreement, including the matters raised by the third defendant in his affidavit of 31 March 2010. 3. Direct that within 30 days or such further time as the court might allow, the said Nicholas Malanos and Paul Nogueira report to the court and to the plaintiff and third defendant on the results of their investigation. 4. Direct that the said Nicholas Malanos and Paul Nogueira give reasonable access to Mr Joseph Reidiger and to the third defendant, and any agent nominated by either of them in writing, to the books and records of which they take possession provided that this does not interfere with the provisional liquidation or receivership. 5. Direct that the said Nicholas Malanos and Paul Nogueira will be justified in retaining Mr Ian McLean as consultant to report on the above matters and the prospects of the business of the first defendant continuing as a going concern. 6. Give liberty to the said Nicholas Malanos and Paul Nogueira to apply on 3 days’ notice for directions. 7. Order that exhibit RG2 to Mr Gibbons’ affidavit of 31 March 2010 be returned. 8. Stand over the proceedings to the Corporations List at 10am on 17 May 2010. 9. Orders may be entered forthwith. 10. The costs of the interlocutory processes filed on 25 March and 31 March 2010 will be costs in the proceedings.
CATCHWORDS:	CORPORATIONS – appointment of provisional liquidator and interim receiver and manager – strong prima facie case of insolvency – deadlock in management – strong prima facie case for winding up on just and equitable grounds – likely costs of provisional liquidation and receivership may be reduced by retainer of consultant familiar with business
LEGISLATION CITED:	Corporations Act 2001 (Cth)
PARTIES:	Plaintiff: Audio Connection Australia Pty Ltd 1st Defendant: FI Audio Video Pty Ltd 2nd Defendant: Australian Securities and Investments Commission 3rd Defendant: Ray Gibbons and Associates & 2 Ors
FILE NUMBER(S):	SC 2010/075212
COUNSEL:	Plaintiff: J T Johnson 3rd Defendant: In Person
SOLICITORS:	Plaintiff: J T Law 3rd Defendant: n/a

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Thursday, 1 April 2010

2010/075212 Audio Connection Australia Pty Ltd v FI Audio Video Pty Ltd & 2 Ors

JUDGMENT

1 HIS HONOUR: The plaintiff, Audio Connection Australia Pty Ltd ("Audio Connection") is a shareholder, and claims to be a creditor, of the first defendant, FI Audio Video Pty Ltd (“FI Audio Video”). It seeks an order for the appointment of a provisional liquidator to FI Audio Video and an order that a provisional liquidator also be appointed as interim receiver and manager to "the property of the first defendant being the joint venture being managed by the first defendant pursuant to a Joint Venture Agreement dated 10 April 2000, ...”.

2 Initially the plaintiff sought the appointment of Mr John Vouris as liquidator. As a result of matters raised during the hearing of the application it now seeks the appointment of Messrs Nicholas Malanos and Paul Nogueira as provisional liquidators and interim receivers and managers. The reason for that is whilst the directors of the first defendant and, it seems, the financial records of the first defendant, are located in Sydney, the business of the company is conducted from the Sunshine Coast in Queensland, and it is thought that the cost of a provisional liquidation and receivership might be reduced by the appointment of insolvency practitioners with local offices.

3 The proposed appointees, Messrs Malanos and Nogueira, are partners of a firm with offices at Maroochydore in Queensland.

4 The second defendant to these proceedings is the Australian Securities and Investments Commission. It is joined because the other shareholder of the first defendant and a party to the Joint Venture Agreement was deregistered on 3 August 2008. That was a company called Ray Gibbons and Associates Pty Ltd (“Ray Gibbons and Associates”).

5 The third defendant, Mr Ray Gibbons, was a principal of that company. He is also a director of FI Audio Video. The only two directors of FI Audio Video are Mr Gibbons and a director of the plaintiff, Mr Joseph Reidiger.

6 The appointment of provisional liquidators is sought on the ground that the first defendant is insolvent and there is a deadlock in the management of its affairs.

7 It appears that the business of FI Audio Video has been to act as a retailer of audio and visual equipment acquired from wholesale companies.

8 According to Mr Gibbons the original intention in establishing the first defendant was for it to operate as a wholesaler with a small retailing component, but (according to him) as a result of the insistence of Mr Reidiger the company altered its business to that of a retailer.

9 On 10 April 2000 a Joint Venture Agreement was entered into between FI Audio Video, Audio Connection, Ray Gibbons and Associates, a Mr David Payes and a company called Solo Tibia Pty Limited. It is said that the latter company was associated with a Mr Ian McLean.

10 In the agreement, Audio Connection, Ray Gibbons and Associates, Mr Payes and Solo Tibia Pty Limited were defined as "the Joint Venturers." FI Audio Video was defined as the “J V Company”.

11 Clause 2.1 provided that:

“ The Joint Venturers hereby confirm and agree that they have associated themselves as a Joint Venturers upon and subject to the provisions set out in this Agreement for the sole purpose of carrying on the Business. ”

12 Clause 2.2 and Clause 4.1 provided that the Joint Venturers would establish the J V Company to act as nominee of and manager of the Joint Venture and to hold all assets of the Joint Venture on behalf of the Joint Venturers in accordance with the terms of the agreement. The “Business” was defined as meaning “the retail sales and distribution of audio visual home entertainment and related services enterprise to be conducted initially from premises based in Noosa, Queensland”.

13 Clause 3 provided that the Joint Venture was not to constitute a partnership.

14 Clause 5 provided that any net profit of the Joint Venture was to belong to the Joint Venturers and apportioned between them in “the Financial Proportion". This meant 25 per cent or any other such percentage that might be determined in accordance with the agreement.

15 Clause 5.2 provided that the assets of the Joint Venture from time to time would belong to the Joint Venturers and the Joint Venturers would be liable to contribute to the losses if any of the Joint Venture pro rata to their respective Financial Proportion. The shares in FI Audio Video were to be held by the shareholders in Financial Proportions.

16 It appears to me that the effect of these provisions is that FI Audio Video was to hold the assets deployed in the Joint Venture on trust for the Joint Venturers.

17 Clause 38 provided that the directors of FI Audio Video were to cause that company to prepare an annual budget. The annual plan was to record the business plan and commercial strategies to be adopted.

18 Clause 38.7.2 provided that unbudgeted operational expenditure or any capital expenditure in excess of $5,000 required the approval of all directors.

19 Clause 34 contained an agreement to submit any dispute to mediation. Clause 34.2 provided that this would not prevent a party applying to a court at any time to prevent irreparable damage.

20 It seems that in about 2002 Solo Tibia Pty Ltd sold its shares in FI Audio Video to the remaining Joint Venturers, although the mechanism for the transfer seems not to have been fully implemented. Mr Reidiger deposes that on 30 June 2008 Audio Connection acquired Mr Payes’ interest in the Joint Venture and shares in FI Audio Video.

21 Leaving aside for the moment the deregistration of Ray Gibbons and Associates, the result of this would be that there are two remaining Joint Venturers, namely, Ray Gibbons and Associates and the plaintiff, Audio Connection.

22 As Ray Gibbons and Associates is currently deregistered, it is not in a position to enforce the Joint Venture Agreement, nor to enforce any fiduciary or other obligation that might arise from it.

23 There has been a number of disputes between Mr Gibbons and Mr Reidiger in relation to the conduct of the business of FI Audio Video. Part of that dispute relates to the expansion of the business to the operation of retail premises at Kawana Waters in Queensland. Mr Reidiger deposes that Mr Gibbons raised the idea of expanding the business to that location. He says that the company entered into a lease of premises there and took out a loan of $50,000 from the National Australia Bank to fit out the premises. He says the rental payments associated with that business are approximately $4,000 per month and the repayment of the loan facility with respect to fit-out is about the same.

24 Mr Reidiger deposes that the Kawana Waters business has not been profitable since it commenced trading and still does not generate a profit. There seems to be no dispute about this, but Mr Gibbons says that Mr Reidiger failed to comply with the terms on which the directors of FI Audio Video agreed to establish the business at Kawana Waters. He deposes that he and Mr Payes considered the proposed venture to be high risk and resolved that they would only agree to its proceeding if Kawana Waters were separately managed as a profit centre.

25 It is unnecessary to go into the details of the allegations as to how this condition was said to have been breached or ignored by Mr Reidiger. Suffice it to say that Mr Gibbons contends that the expenditure of the Kawana Water business, including the lease payments, has been made on the purported authority of Mr Reidiger alone and that the expenditure was unauthorised.

26 Mr Gibbons says that the amounts involved are around $250,000 and says that if Mr Reidiger were to repay this amount the business would not have a cash flow problem, creditors could be paid and the business could resume profitable trading provided competent management were employed.

27 Mr Gibbons does not suggest that Mr Reidiger acknowledges any obligation to pay such a debt and on the evidence before me there appears to be no prospect that he would voluntarily do so.

28 On 20 January 2007 the then Joint Venturers and FI Audio Video entered into a deed called a repayment deed. Pursuant to that deed, FI Audio Video agreed to pay Ray Gibbons and Associates and Mr Gibbons $4,000 per month as repayment of what was called "Gibbon’s [sic] loan account” until the loan account was paid in full with that payment to be made as a priority to any payments made to Mr Payes or Mr Reidiger of their respective loan accounts with FI Audio Video.

29 It is common ground that although some payments were made pursuant to that deed, those payments have ceased. According to Mr Gibbons irregular payments of $4,000 were made for a time from funds provided by Mr Payes. It seems clear that the company does not presently have the cash with which to make payments due under that agreement.

30 Mr Reidiger deposes that in order to keep FI Audio Video trading, Audio Connection has been purchasing superseded and obsolete stock from FI Audio Video at cost price. Audio Connection carries on a business of selling and distributing audio video home equipment and related services in Sydney by retail. Mr Gibbons says that Audio Connection has in fact been buying high value stock at cost, freighting it to Sydney at the cost of FI Audio Video, and presumably selling it at a margin. I apprehend that Mr Gibbons or Ray Gibbons and Associates, if it were reinstated, would wish to contend that Audio Connection would be liable to account for any profit derived by it in this way. Whether or not Audio Connection or Mr Reidiger would be liable to account for any profits from such trading, there is uncontested evidence that the money received by FI Audio Video from the purchase of stock by Audio Connection is the source of funds from which FI Audio Video has been able to date to pay wages, creditors and rent. Mr Reidiger through his counsel says that he is not prepared to continue that course of action.

31 There is a very strong prima facie case that the first defendant is insolvent. Mr Reidiger deposes that the company can no longer trade and is without funds. There is evidence that its payments of rent on premises at Noosa are in arrears and that there are overdue tax debts dating back to June 2009, including unremitted PAYG amounts going back to July 2009. Mr Gibbons deposes that:

" If Mr Reidiger were immediately to reimburse [FI Audio Video] for the $200,000 unauthorised expenditure [FI Audio Video] would not have a cash flow problem and could pay down its creditors and could resume normal trading. "

It appears that in the absence of such reimbursement, the company is not able to pay its debts as they fall due.

32 In saying that I am not, of course, expressing a final view as to the company's financial position as this is an interlocutory application and the evidence has been abbreviated, but, nonetheless, there is strong prima facie evidence of insolvency.

33 It is common ground that board meetings of FI Audio Video have not been held. Each of the directors blames the other for that state of affairs. Mr Gibbons complains that he has been denied financial information in relation to the company's business. He asserts that he has been denied the opportunity to participate in the management of the company's business. Prima facie there are also strong grounds for an order for the winding-up of the company on the just and equitable ground.

34 On 3 February 2010, Mr Reidiger sent an email to Mr Gibbons saying that he was calling an "extraordinary director's meeting [sic]" within 48 hours to discuss the appointment of an administrator. A meeting - it was unclear whether it was a meeting of directors or purportedly of shareholders, but I assume of directors - was eventually held on 25 February 2010. There were disputes about the agenda with Mr Gibbons complaining no agenda had been provided by Mr Reidiger. Mr Gibbons also complained that he had been denied financial information. The meeting broke up before any resolution was passed in relation to the appointment of an administrator. There are conflicting accounts as to how that came to be.

35 Mr Gibbons complains that Mr Reidiger has refused to respond to his emails and deletes the emails he sends. Mr Reidiger complains that on 7 February 2010, Mr Gibbons forwarded to the suppliers to FI Audio Video Mr Reidiger's email advising of his intention to call a director's meeting to discuss the appointment of an administrator. Mr Gibbons also sent to the company's suppliers a statement of his complaints about the management of the company and of Mr Reidiger's actions. The result is that a number of suppliers have suspended the company's account and at least one has advised that it would be exercising its rights to retention of title on stock supplied by it to the company.

36 In these circumstances there is a powerful claim for the appointment of a provisional liquidator. Moreover, as the company appears to hold its assets on trust for the Joint Venturers, there is also a strong claim for the appointment of the provisional liquidator as receiver and manager of trust assets.

37 Mr Gibbons opposes that course. He has filed an interlocutory process claiming the following relief:

“ 2. An order under section 472(2) of the Corporations Act – if relevant to the Joint Venture – not to appoint a liquidator provisionally or otherwise until the plaintiff reimburses the first defendant for all unauthorized expenditure in the last two years.
3. An order for the plaintiff to provide the third defendant with a detailed list of all unauthorized expenditure under the terms of the Joint Venture Agreement on behalf of the first defendant in the last two years.
4. An order for the plaintiff to provide the third defendant with the P&L for the Kawana profit centre since inception and any other unauthorized expenditure under the Joint Venture Agreement.
5. An order for the plaintiff not to make any unauthorized expenditure under the terms of the Joint Venture Agreement.
6. An order that Mr James Stewart, who resigned from the first defendant (the Joint Venture Company) at the end of January 2010 be replaced with a competent and experienced onsite manager.
7. An order restraining the plaintiff from transferring inventory or assets of the Joint Venturers from Noosa to Sydney without unanimous approval from the Joint Venture Board, as set out under the terms of the Joint Venture Agreement.
8. An order for the plaintiff to provide a detailed list of all such assets or inventory so transferred in the last 12 months from April 2009, together with the fi cost price, fi sell price (RRP), the amount paid for the goods by the first plaintiff to the first defendant, the amount retained by the plaintiff to pay down the plaintiff’s outstanding balance as a non-preferred creditor, and the amount of freight cost born [sic] by the first defendant in such transfers.
9. An order for the plaintiff to provide all reports requested by the third defendant within two working days.
10. An order for the plaintiff not to instruct, restrict or prevent the first defendant from providing all such reports, financial and otherwise, that will allow the third defendant to properly ascertain the financial position, constraints and operational problems of the first defendant.
11. An order for the plaintiff to remove the block on emails between the first defendant and the third defendant.
...
13. An order under Part 2.1CL (as suggested by ASIC) for relief from oppressive conduct by the Plaintiff (Mr Riediger) against the Third Defendant (Mr Gibbons). ”

38 Mr Gibbons did not identify the basis upon which he would be entitled to the relief sought in the interlocutory process. His only standing is as a director of FI Audio Video. He does not have leave to institute any proceeding to enforce any cause of action that FI Audio Video might have against Mr Reidiger for breach of director's duties and Mr Reidiger is not a party to either the originating process or any interlocutory process. Mr Gibbons is not himself a Joint Venturer and does not have standing to enforce any obligation which the plaintiff might owe to any party to the Joint Venture Agreement.

39 Mr Gibbons’ opposition to the plaintiff's application was mainly based upon the likely costs of provisional liquidation or receivership. It is an unfortunate fact that in many insolvency administrations, the cost of the administration substantially erodes any return to shareholders and creditors. The plaintiff's amendment to its application to seek the appointment of Messrs Malanos and Nogueira as provisional liquidators and interim receivers is designed at least partially to meet that concern, so far as it can be met. I understand Mr Gibbons’ concern that insolvency administration may well erode the realisable value of the first defendant's business and may substantially erode any remaining goodwill of that business. I say any remaining goodwill as it would appear that the goodwill, at least of suppliers, has already been substantially eroded.

40 Nonetheless, it does not appear to me that there is any realistic alternative which will protect creditors from the company’s trading whilst apparently insolvent, protect the directors from potential liability for insolvent trading, provide the means to investigate Mr Gibbons’ complaints (including his complaint of unauthorised expenditure and of the plaintiff's profiting from purchasing goods at cost) and provide information as to the company's financial position.

41 No doubt by an appropriate application Mr Gibbons, as a director, could obtain orders, if orders were required, to ensure the provision to him of records and information as to the company's financial position. However, the other matters would not be addressed otherwise than by the appointment sought by the plaintiff.

42 The plaintiff accepts that it would be appropriate to direct the provisional liquidators and receivers and managers to conduct an investigation and provide a report in relation to the company's affairs and the complaints made by Mr Gibbons. The plaintiff also accepts that it would be appropriate to give a direction that the provisional liquidator and receivers and managers should give reasonable access to both Mr Gibbons and Mr Reidiger, and to their agents nominated in writing, to the books and records of which they take possession, provided of course this does not interfere with the conduct of the provisional liquidation or receivership.

43 Mr Gibbons submitted that a preferable course was to appoint Mr McLean to prepare a report on the company's business and on the prospects of its business being salvaged. He submitted that Mr McLean had the confidence of both parties and was fully familiar with the company's business and would be able to undertake the kind of investigation that the provisional liquidators or receivers and managers would undertake more quickly and at much less cost. I do not know whether Mr McLean would be prepared to undertake such a task and I do not see how I could compel such a course, either with or without his consent, unless by appointing him as receiver and manager. But because Mr McLean is not an official liquidator, such an appointment would not be made without security and I have no reason to think Mr McLean would be prepared to provide security for his performance of the function of a receiver and manager, even if he were prepared to undertake take such responsibilities.

44 However, the plaintiff through its counsel, does not object to the provisional liquidators and receivers and managers retaining Mr McLean as a consultant if they think it appropriate to do so, to report on the matters upon which they will be asked to investigate and to report on the prospect of the business continuing as a going concern. Given the attitude of both the plaintiff and Mr Gibbons to that, I propose to give a direction that the receivers and managers and provisional liquidators would be justified in so retaining Mr McLean. I do not know whether Mr McLean would be prepared to accept such a consultancy. Nor do I know what his terms for accepting such a consultancy might be. It would be a matter for Messrs Malanos and Nogueira to decide whether such an appointment is warranted.

45 I should add that Mr Gibbons also referred to clause 34 of the Joint Venture Agreement as a reason for not making the appointment sought on the ground that no mediation has taken place as contemplated by that agreement. There is no substance to that objection. It would not be possible to hold such a mediation when the Joint Venturer, Ray Gibbons and Associates, is still deregistered. Mr Gibbons in his own capacity cannot enforce clause 34. In any event, the present application is required, in my view, to prevent irreparable damage as envisaged by clause 34.2.

46 For these reasons and subject to any further submissions that may be made as to the precise form of the orders which should be made, I propose to make the following orders:

1. Order pursuant to s 472(2) of the Corporations Act 2001 (Cth) that Nicholas Malanos and Paul Nogueira, both of Worrells Solvency and Forensic Accountants, Level 34, 60 Margaret Street, Sydney and Suite 4, Ocean Central, 2-4 Ocean St, Maroochydore Qld 4558, official liquidators, be appointed as provisional liquidators of the first defendant.

2. Order that the said Nicholas Malanos and Paul Nogueira be appointed until further order as receivers and managers of any and all assets held by the first defendant on trust pursuant to the Joint Venture Agreement dated 10 April 2000 which is at Tab 3 of Exhibit JR-1, jointly and severally and without security and with the following powers:

a) the power conferred by s 420 of the Corporations Act on a receiver of a property of a corporation other than s 420(2)(d);
b) the powers conferred on them in their capacity as provisional liquidators by s 472 of the Corporations Act ; and
c) the power to investigate and to require the plaintiff, the third defendant, officers and employees of the first defendant to provide information, books and records in relation to the business, assets, liabilities, income and expenses of the Joint Venture the subject of the Joint Venture Agreement, including the matters raised by the third defendant in his affidavit of 31 March 2010.


3. Direct that within 30 days or such further time as the court might allow, the said Nicholas Malanos and Paul Nogueira report to the court and to the plaintiff and third defendant on the results of their investigation.

4. Direct that the said Nicholas Malanos and Paul Nogueira give reasonable access to Mr Joseph Reidiger and to the third defendant, and any agent nominated by either of them in writing, to the books and records of which they take possession provided that this does not interfere with the provisional liquidation or receivership.

5. Direct that the said Nicholas Malanos and Paul Nogueira will be justified in retaining Mr Ian McLean as consultant to report on the above matters and the prospects of the business of the first defendant continuing as a going concern.

6. Give liberty to the said Nicholas Malanos and Paul Nogueira to apply on 3 days’ notice for directions.

7. Order that exhibit RG2 to Mr Gibbons’ affidavit of 31 March 2010 be returned.

8. Stand over the proceedings to the Corporations List at 10am on 17 May 2010.

9. Orders may be entered forthwith.

[Parties addressed.]

47 I did not include the order sought in paragraph 4 of the interlocutory process as that is dealt with by s 472 of the Act.

48 I make those orders and I will hear the parties on costs.

[Parties addressed on costs.]

49 The costs of the interlocutory processes filed on 25 March and 31 March 2010 will be costs in the proceedings.