Century 21 (South Pacific) Pty Ltd (in liq) v Century 21 Real Estate Corp

[1996] FCA 170

CATCHWORDS

BANKRUPTCY - deed of variation of contract - whether executed for valuable consideration - what amounts to consideration for the purposes of s. 120 of the Bankruptcy Act - whether deed made in good faith - whether transactions involved any preference, priority or advantage over other creditors or a relevant conveyance, transfer, charge, payment or obligation.

CONTRACT - effect of purported assignment of contract - effect of termination of a licence agreement on sub-licensees - whether purported assignment of sub-licences after termination of head licence amounted to a disposition of property.

COMPANIES - circumstances in which court should "otherwise order" (so as to validate a contract) pursuant to s. 368 Companies Code - application of ss. 120 and 122 of the Bankruptcy Act to Companies Code.

Bankruptcy Act 1966, ss. 120 and 122
Companies Code, ss. 365, 368 and 451

Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364
Barton v Official Receiver (1986) 161 CLR 75
Barton v Official Receiver (1984) 4 FCR 380
Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994]
1 AC 85
Great Western Railway Company v Smith [1875] 2 Ch D 235
The Progressive Mailing House Proprietary Limited v Tabali
  Proprietary Limited (1985) 157 CLR 17
Shevill v The Builders Licensing Board (1982) 149 CLR 620
Re Androma Pty. Limited [1987] 2 Qd R 134
Re Country Stores Pty. Ltd. (1987) 5 ACLC 636
Re Margart Pty. Ltd. (in liq.) (1984) 2 ACLC 709
Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984)
3 FCR 311
Tellsa Furniture Pty Ltd (In Liquidation) v Glendave Nominees
  Pty Ltd (1987) 9 NSWLR 254

CENTURY 21 (SOUTH PACIFIC) PTY LIMITED (IN LIQUIDATION) v CENTURY 21 REAL ESTATE CORPORATION & ANOR
NG 921 of 1992

Burchett J.
Sydney
21 March 1996

IN THE FEDERAL COURT OF AUSTRALIA )
  )
NEW SOUTH WALES DISTRICT REGISTRY )    NG 921 of 1992
  )
GENERAL DIVISION                 )

BETWEEN:CENTURY 21 (SOUTH PACIFIC) PTY LIMITED (IN LIQUIDATION)

Applicant

AND:CENTURY 21 REAL ESTATE CORPORATION and CENTURY 21 AUSTRALASIA PTY LIMITED

Respondents

CORAM: Burchett J.
PLACE: Sydney
DATE : 21 March 1996

ORDERS OF THE COURT

THE COURT ORDERS THAT:

The Respondents bring in, on a date to be fixed, Short Minutes of Orders appropriate to reflect the reasons of the Court.

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 )    NG 921 of 1992
  )
GENERAL DIVISION                 )

BETWEEN:CENTURY 21 (SOUTH PACIFIC) PTY LIMITED (IN LIQUIDATION)

Applicant

AND:CENTURY 21 REAL ESTATE CORPORATION and CENTURY 21 AUSTRALASIA PTY LIMITED

Respondents

CORAM: Burchett J.
PLACE: Sydney
DATE : 21 March 1996

REASONS FOR JUDGMENT

BURCHETT J.:

In this proceeding, the applicant, a company in liquidation, sues the respondents in respect of certain transactions which occurred just before and after the filing on 23 March 1990 of the summons for its winding up.  That date marked the commencement of the winding up (see s. 365 of the Companies Code), and the transactions are said to have collided with ss. 120 and 122 of the Bankruptcy Act 1966, as made applicable to the winding up of the company, and with s. 368 of the Code.

The dealings involving the parties had their source in an agreement made on 4 November 1988 between Century 21 Real Estate Corporation (which I shall call "Century 21"), a
Delaware, United States, corporation, and the applicant, then known by a different name.  The agreement recited that Century 21 had

"developed a plan for the establishment, development and operation of real estate brokerage offices, and [had] devised policies, procedures and office management techniques designed to enable such offices to compete with larger real estate brokerage chains";

that it had

"designed and developed standardised signs, making use of a logo type insignia, cards, stationery business forms, office procedure manuals, centralised advertising programs, sales training programs and personnel management and control systems for franchised real estate brokerage offices";

and that it had

"developed a standard franchise agreement, sales tools and brochures, and a plan for the sublicense [sic] of franchises to licensed real estate brokers (which plan policies, procedures, merchandising techniques, manuals, forms and marketing programs, together with certain `CENTURY 21' marks, are [in the agreement] collectively referred to as the `CENTURY 21 System')".

It was then recited that the applicant (called the "subfranchisor") desired

"to obtain from CENTURY 21 a license [sic] granting the right to use said plans, manuals, systems and forms and the exclusive right to sublicense franchises of the type granted by CENTURY 21 to real estate brokers in the Territory described".

The territory includes Australia.  Guarantees by Messrs H.M. Taylor and A.B. Taylor and another person were then recited.

The agreement continued, by cll. 6A and 6B, under the heading "GRANT OF LICENSE [sic] TO SUBFRANCHISOR", as follows:

"A.For and in consideration of payment of a franchise fee of Four Hundred Fifty Thousand US Dollars (US$450,000.00) by Subfranchisor to CENTURY 21, and the execution of this Agreement, CENTURY 21 grants to Subfranchisor the exclusive right to sublicense certain CENTURY 21 marks and to grant CENTURY 21 franchises to licensed real estate brokers in the Territory described below (hereinafter called the `Territory') and to use the CENTURY 21 System on the terms and conditions set forth herein.  For the purpose of this Agreement, the phrase `CENTURY 21 Marks' means certain trademarks and service marks, including the name `CENTURY 21', which have been registered under the Australian Trade Marks Act, 1955 (Cwth) or for which registration has been applied for under that Act together with certain other slogans, logos or other indicia of the CENTURY 21 system set forth in Exhibit 2, which is incorporated herein by reference, and as may be added to from time to time.  Subfranchisor shall pay the initial franchise fee in the amount of Four Hundred Fifty Thousand US Dollars (US$450,000.00), without interest, not later than ten (10) days from the date this Agreement is executed by Subfranchisor.

B.Except as expressly authorised herein, nothing herein contained shall be construed as authorising or permitting Subfranchisor to use and/or sublicense the CENTURY 21 System and the CENTURY 21 Marks outside the Territory or for any purpose other than the sublicense of franchises to licensed real estate brokers upon substantially the same terms as such franchises are sub-licensesd [sic] by CENTURY 21 in the County of Orange, State of California, United States of America, with due allowances for the differences in commercial practice, law and custom within the Territory in accordance with the terms of this Agreement, and for the purpose of servicing those franchises.  It is expressly agreed that the ownership of all right, title and interest in and to said CENTURY 21 System and CENTURY 21 Marks is and shall remain vested solely in CENTURY 21, and all usage thereof by Subfranchisor and its franchisees shall inure to the exclusive benefit of CENTURY 21.  Subfranchisor hereby agrees to use each of the CENTURY 21 marks in full compliance with the rules prescribed from time to time by CENTURY 21.  Subfranchisor shall execute any and all instruments and documents, including but not limited to the form of Registered User Agreement which is attached hereto and incorporated herein by reference as Exhibit 3, which in the opinion of CENTURY 21's counsel are necessary or advisable to protect and maintain the CENTURY 21 marks.  Subfranchisor shall, if reasonably deemed necessary by CENTURY 21's counsel, at Subfranchisor's sole expense, enter into Registered User Agreements with each franchise granted pursuant to this Agreement and file said Registered User Agreements with appropriate government authorities within the Territory.  The material and information now and hereafter provided or revealed to Subfranchisor under and pursuant to this Agreement are revealed in confidence and Subfranchisor agrees that upon the expiration, termination or assignment of this subfranchise for any reason all manuals, bulletins, instruction sheets, forms, marks, designs and other material furnished to Subfranchisor under and pursuant to this Agreement and then in Subfranchisor's possession, shall be returned to CENTURY 21 or turned over to the assignee approved by CENTURY 21, and Subfranchisor shall immediately cease using the CENTURY 21 System and Marks.

It is understood that CENTURY 21 is constantly working to improve upon its franchise system.  CENTURY 21 reserves the right to make changes from time to time in the CENTURY 21 System and CENTURY 21 Marks to be used by Subfranchisor and its franchisees."

By cl. 6C Century 21 reserved rights of approval over the form and content of literature, signs and other material involving the Century 21 name.  By cl. 8 the subfranchise was granted for a term of 25 years "unless sooner terminated as hereinafter provided".  By cl. 9, the subfranchisor agreed to pay to Century 21 a monthly service fee "equal to ten percent (10%) of Subfranchisor's total gross receipts" as defined.  Detailed obligations were entered into, which it would be wearisome to set out in these reasons.  But they included an obligation accepted by the subfranchisor

"to adopt a policy and procedure manual substantially identical to that used from time to time by CENTURY 21 or its subsidiaries, subject only to changes approved by CENTURY 21 to conform to local laws and business practices, and to require its real estate franchisees to adhere to the policy and procedure manual."

(Clause 10G.)  The clause ended with an acknowledgment by the subfranchisor of the need for "uniform high standards throughout the world", and an agreement "to do its part in maintaining such standards". 

Clause 10I provided:

"Subfranchisor shall maintain an adequate staff to ensure responsible service assistance to franchisees; shall furnish referral forms to all franchisees; shall, in accordance with the market conditions in the Territory, act as an information centre for referral business not only within its Territory but throughout all areas in which CENTURY 21 real estate franchises are sub-licenced [sic]; and shall advise franchisees in all phases of
operation, including staff selection, training, office location, layouts and advertising."

Clause 10J required the applicant to trade under a name approved by Century 21, and contained the obligation: "Without the written consent of CENTURY 21, Subfranchisor shall not use the CENTURY 21 Marks and System for any purpose other than the sub-licensing and servicing of real estate franchises to licenced [sic] real estate brokers".  Clause 10L set numbers of franchised real estate brokerage offices to be opened by 31 December 1991, including 77 in New South Wales, 50 in Queensland, 30 in Victoria, 11 in Western Australia, 11 in South Australia and various numbers in New Zealand, Hong Kong, Malaysia and Singapore.  The clause concluded:

"In the event Subfranchisor does not grant the number of franchised real estate brokerage offices required by this Paragraph 10 L within any one or more specific Australian States or within any one or more of the other countries (including the colony of Hong Kong) comprising the Territory by December 31, 1991, then CENTURY 21 may, as its sole remedy for Subfranchisor's failure to grant the required number of franchised offices, elect, in its sole discretion, to terminate this Agreement only as it applies to any one or more of the specific Australian States or any one or more of the other countries comprising the Territory where Subfranchisor failed to meet the minimum number of franchised offices (`the laggard part of the Territory') and said laggard part of the Territory shall revert to CENTURY 21 and any and all franchise agreements entered into by Subfranchisor with real estate brokers or others involving the use of the CENTURY 21 name or service marks within the laggard part of the Territory shall within thirty (30) days, at the option of CENTURY 21, be assigned to CENTURY 21 or its nominee and the gross receipts from franchisees from and after the date of said reversion shall be paid over by Subfranchisor to CENTURY 21 or its nominee.  Immediately upon said reversion to CENTURY 21 of the laggard part of the Territory, Subfranchisor shall cease to use the Century 21 System and Marks within the laggard part of the Territory."

Important provisions, having regard to what subsequently occurred, were contained in cll. 18 and 19.  Clause 18A provided:

"Upon any material breach by Subfranchisor, CENTURY 21 may, in addition to any other remedy herein granted or granted by law, elect to terminate this Agreement.  If CENTURY 21 elects to terminate, it shall notify Subfranchisor by registered mail at its place of business and upon the failure of Subfranchisor to correct the breach within thirty (30) working days, this contract shall be terminated without recourse to any legal formalities or court procedures."

Clause 19A provided:

"Upon the termination of this Agreement, Subfranchisor agrees to change its corporate name and the name of the unit trust (`Century 21 South Pacific Investment Trust') [the applicant is the trustee of a unit trust] within thirty (30) days to eliminate the words `CENTURY 21' therefrom.  In addition, any and all franchise agreements entered into by Subfranchisor with real estate brokers or others involving the use of the CENTURY 21 name or service marks shall within thirty (30) days, at the option of CENTURY 21, be assigned to CENTURY 21 or its nominee and the gross receipts from franchisees from and after the date of said termination shall be paid over by Subfranchisor to CENTURY 21 or its nominee.  Immediately upon termination Subfranchisor shall cease to use the CENTURY 21 System and Marks, deliver up to CENTURY 21 all materials supplied pursuant to this Agreement and permit CENTURY 21 to inspect the Subfranchisor's premises in order to ensure that Subfranchisor has complied with the terms of this paragraph."

By cl. 30 it was provided that the agreement should "be construed and governed by the laws of the State of California, U.S.A.".  A detailed "REGIONAL POLICY AND PROCEDURE MANUAL" was annexed to the agreement.  This included quite specific provisions plainly enough designed to ensure that the subfranchisor would maintain regular training courses and programmes, on an ongoing basis, for the benefit of franchisees.  To illustrate, one of several such courses was specified "so that a minimum of one Management Training Course is offered every 60 days in the Region" (cl. 7.1.16).

As I have made clear, cl. 19A is a clause of significance for the dispute that later developed.  That clause was the subject of amendment by a "DEED OF VARIATION OF SUBFRANCHISE AGREEMENT", made on 8 March 1990 between the same parties.  The deed recited (inter alia) the earlier agreement, that by virtue of the rights given to it under that agreement the subfranchisor had entered into franchise agreements, granting the right to use the system developed by Century 21 and its marks, and that it was desired to amend the agreement

"in such a way as to minimise any harm to the reputation and goodwill of the Century 21 name and the Century 21 System in the Territory and to the real estate brokerage businesses of the Franchisees in the event of termination of the Subfranchise Agreement by ensuring in all respects the continuity of the operations of the Century 21 network in the event of such termination". 

The deed varied cl. 19A by deleting its first and second sentences and replacing them as follows:

"Upon the termination of this Agreement, the Subfranchisor shall forthwith take all such steps and do all such things as may be reasonably necessary or desirable to effect the change of its corporate name and of the name of the unit trust (`Century 21 South Pacific Investment Trust') as expeditiously as possible so as to to [sic] eliminate the words `Century 21' therefrom.  In addition, any and all franchise agreements entered into by Subfranchisor with real estate brokers or others involving the use of the Century 21 name or service marks shall, immediately upon termination of this Agreement by Century 21 (and without the need for either the Subfranchisor or Century 21 to perform any further act or do any other thing) be assigned to Century 21 or its nominee notified to Subfranchisor in writing at any time prior to such termination becoming effective and the gross receipts from all franchisees in respect of the period on and from the date of such termination and assignment shall forthwith be paid over by the Subfranchisor to Century 21 or its nominee.  In the event of the termination of this Agreement and the assignment of subfranchise agreements as aforesaid, Century 21 shall promptly account to Subfranchisor for the gross receipts from all franchisees in respect of the period prior to such termination and assignment."

Clause 4 of the deed also contained, under a heading "Subfranchise Agreement Confirmed", a provision as follows:

"Century 21 and the Subfranchisor hereby acknowledge and agree that the Subfranchise Agreement is only to be amended or altered in the manner contemplated by this Deed and that in all other respects the terms and conditions of the Subfranchise Agreement are confirmed."

Pursuant to the agreement of 4 November 1988, numerous franchise agreements were entered into by the applicant in accordance with a form approved by Century 21.  In those agreements, the applicant was called "CENTURY 21 Regional".  The agreements recited Century 21's ownership of marks and its development of "a system for the promotion and assistance of independently owned real estate brokerage offices", involving use of Century 21 marks, copyrights, trade secrets, etc.  By recital C it was recited:

"CENTURY 21 International [a reference to Century 21] has granted CENTURY 21 Regional the right to sublicense certain CENTURY 21 Marks, and to franchise the CENTURY 21 System to licensed real estate brokers ... ".

Clause 1 provided as follows:

"CENTURY 21 Regional hereby grants to Franchisee, and Franchisee hereby accepts the non-exclusive right and the obligation to use the CENTURY 21 System and certain CENTURY 21 Marks, as they are set forth in the CENTURY 21 Policy and Procedure Manual (hereinafter called the `P&P' Manual), but as it may be from time to time revised and or supplemented by CENTURY 21 International and adapted for use in Australia and notified to Franchisee from time to time for the operation of a licensed real estate agent's office (hereinafter called `the Office' or `the Business') upon the terms and conditions set forth in this Agreement (which non-exclusive right is hereinafter called the `Franchise')."

The term of the franchises was five years, but there was provision for renewal.  There was an obligation to "operate under the trade name" specified in the agreement, called the "Franchisee's CENTURY 21 trade name".  Detailed provisions were made about the use of this name.  By cl. 6A, the applicant was obliged to "impart to Franchisee its real estate brokerage, selling, promotional and merchandising methods and techniques associated with the CENTURY 21 System", and to "maintain a staff to give assistance and service to
Franchisee".  Provision was made for the Franchisee to pay an initial franchise fee and a service fee calculated at a percentage of gross revenue earned (inter alia) from "transactions in which CENTURY 21 Marks or the CENTURY 21 System are directly or indirectly used". 

Pursuant to cl. 12B, the applicant represented:

"CENTURY 21 Regional has been authorised and licensed by CENTURY 21 International to offer this Franchise on the terms stated herein at the Approved Location specified [in the Franchise Agreement]".

By cl. 15A, which was headed "RIGHTS RESERVED BY CENTURY 21 INTERNATIONAL", it was provided:

"Franchisee expressly understands and agrees that CENTURY 21 International retains the ownership of all right, title and interest in the CENTURY 21 Marks and the CENTURY 21 System, goodwill and trade secret information licensed to Franchisee pursuant to this Agreement."

Detailed obligations were incurred by the Franchisee, involving the acceptance of a degree of control to be exercised by the applicant and the acceptance of Century 21's right (as was specified in cl. 15B) "to modify the CENTURY 21 Marks, CENTURY 21 System and other products and items delivered pursuant to this Agreement and to modify the standards, specifications and other requirements ... ".

Clause 25 provided that the agreement should be "construed according to the laws of the State of New South Wales", and cl. 28 included a provision:

"CENTURY 21 Regional reserves the right to assign, pledge, hypothecate or transfer this Agreement, provided that such assignment, pledge, hypothecation or transfer shall not affect materially the rights and privileges granted to Franchisee herein."

For some time, at least on the surface, things seemed to go well; but, late in 1989, the executives of Century 21 were told that the applicant had serious problems.  It was admittedly in material breach of the agreement with Century 21, and it was also under threat of the appointment of a receiver by its bank, National Australia Bank.  An expert report, to which I shall later make reference in some detail, suggested it needed an infusion of some three or four million dollars of equity capital in order to survive.  After the bank had been persuaded to hold its hand temporarily, the applicant requested Century 21 to agree to the introduction of a new party as a holder of equity in the applicant, a company called Centennial Development Corporation Pty Limited (Centennial Development), which was controlled by a Mr Henry.  Mr Henry proceeded to attempt to assess the position of the applicant with a view to determining whether the proposed investment should be made by his company.  Whilst his ultimate position was still undetermined, Century 21 took the preliminary step of giving a notice under cl. 18A of the subfranchise agreement.  That notice, dated 15 February 1990, cited a series of breaches that had occurred.  It included the following:

"TAKE NOTICE THAT:

1. Pursuant to sub-paragraph 18A of the Subfranchise Agreement between Century 21 South Pacific Pty Limited (formerly Ligon 189 Pty Ltd) (`South Pacific') and Century 21 Real Estate Corporation (`Century 21') dated November 4, 1988 (the `Subfranchise Agreement') and by reason of each of the material breaches of the Subfranchise Agreement hereinafter described, Century 21 has elected to terminate the Subfranchise Agreement.

1. In the event that each and every one of the said breaches has not been corrected by South Pacific to the reasonable satisfaction of Century 21 within thirty (30) working days of the date upon which this Notice is received by South Pacific, the Subfranchise Agreement shall terminate forthwith, without recourse to any legal formalities or court procedures whatsoever."

On 6 September 1989, Mr Michael Ahrens of Baker & McKenzie, solicitors for Century 21, had had a conversation with Mr John Moravek, Senior Vice-President and General Counsel of Century 21, in which a question was raised whether cl. 19A was effective.  It was suggested there was a doubt whether a Court would make an order for specific performance under that clause.  Mr Moravek expressed the view that there might be "an opportunity by way of trade off shortly to get Taylors [Messrs H.M. and A.B. Taylor, who were in control of the applicant] to sign a supplemental document".  It was agreed the matter should be given priority.  On 29 September 1989, Baker & McKenzie suggested the applicant be called upon to execute a novation agreement, stating the opinion that the
provisions of the agreement between Century 21 and the applicant entitled Century 21 to make such a requisition.  I think it is quite clear that what was envisaged was reliance upon the part of cl. 6B (quoted above) requiring the subfranchisor to "execute any and all instruments and documents ... which in the opinion of CENTURY 21's counsel are necessary or advisable to protect and maintain the CENTURY 21 marks".  However, the proposed novation agreements were never executed.

On 5 December 1989, Deloitte Haskins & Sells, the well known accountancy firm, produced a report to the directors of the A.H. Taylor group of companies, of which the applicant formed part.  The report commenced by pointing out that it was "a brief preliminary investigation into the current financial position and viability of the A.H. Taylor/CENTURY 21 group of companies".  It referred to "the incompleteness of the financial records", and stated that "[i]n our view the accounting records should be brought up to date as a matter of urgency in order that a more accurate assessment of the current financial position and on going funding requirements may be made".  The report noted a recent increase in borrowing from National Australia Bank to 15 million dollars "which on a close down basis would now indicate there would be a deficiency of cover for the Bank of some $2,363,440."  There was added a comment: "In the statement we have not ascribed any value to the Century 21 franchise."  The report also states that

"the company is undercapitalised and certainly in the short term is not capable of meeting its on going commitments and funding the proposed expansion of the franchise network.  We believe that the additional funding requirements should be met by an equity injection as opposed to additional borrowings.  ...  We again stress the importance of bringing the accounting records of the group up to date in order that a proper assessment of its position may be made and in order that any equity investor may carry out any due diligence investigation without delay."

There was reference to a programme of disposition of property holdings and real estate businesses, and to a request of the bank "for a reduction in the group's indebtedness".  At the head of a list of recommendations made by the accountancy firm was the seeking of an equity partner for the applicant, as to which the comment was made: "It is likely that equity in the order of $3 to $4 million is required."  Speedy disposal of assets and the bringing of accounting records up to date were also recommended.  A faint lightening of the gloom was provided by the cautious conclusion:

"In our view if the group's level of indebtedness is reduced in line with managements [sic] plans and an equity investor introduced, then the CENTURY 21 franchise network should be capable of continuing its expansion and returning profits in the foreseeable future as franchisees come on stream and become income generating."

The obtaining of this report had been recommended by National Australia Bank and authorized by the applicant.  Inevitably, discussions with the bank followed.  At first, on 22 December 1989, the bank pressed for the appointment of a receiver, but ultimately it relented.  On 15 January 1990,
Century 21 wrote to the bank urging it to allow some further time to enable the applicant to obtain equity capital.  The letter noted the bank's acknowledgment (so it asserted) of the invalidity of "any purported pledge to the NAB of rights flowing from the CENTURY 21 subfranchise agreement".  At about the same time, on 16 January 1990, a memorandum from counsel for Century 21 to its solicitors reawakened, if they had ever become dormant, the corporation's concerns about the securing of the assignments of franchise agreements for which cl. 19 provided.  The questions were raised:

"How would the appointment of a receiver by the National Australian Bank [sic], or any other type of insolvency proceeding, effect [sic] our rights under the Subfranchise agreement to receive the assignment of the Broker Franchise Agreement?  Will a receiver be able to block or halt the assignment?  What could we do in the interim to protect our right of assignment?"

During this period of crisis, Century 21 commenced to make what became a series of loans to the applicant to enable it to discharge various debts.  On 19 January 1990, a loan of $70,000 was made without interest.  By 30 March 1990, the total of such loans had grown to $433,748.  It was while this series of loans was being made that the applicant was asked by representatives of Century 21 to execute the deed of variation to which I have referred. 

One of the issues in the case is whether that deed was executed "for valuable consideration" within the meaning of s. 120(1)(a) of the Bankruptcy Act, which was introduced into the
law governing the liquidation of companies by s. 451 of the Companies Code.  For that purpose, valuable consideration does not have to be fully adequate consideration, nor need it be equal, or even nearly equal, to the value of the property.  What is required is that it be real and substantial, rather than merely nominal, trivial or colourable: Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 369; Barton v Official Receiver (1986) 161 CLR 75. It must also be borne in mind that the consideration need not appear on the face of the deed, for "the court is bound to consider the broad effect of the arrangement embodied in the deed, and should not confine itself, in any narrow sense, to the technical language of the document": Official Trustee v Mitchell at 370.  This law is relevant to the present case.  For Mr A.B. Taylor has given an account of the execution of the deed of variation which seems to me to lead fairly to the inference that it was executed in consideration at least of one of the advances, an advance of $20,000. 

The circumstances deposed to by Mr Taylor are the following.  Early in March 1990, the applicant urgently required $20,000 to pay a pressing creditor, the landlord of premises occupied by the applicant in Adelaide.  He spoke to a senior representative of Century 21, who said: "I will again arrange for Baker & McKenzie to provide the necessary paper work and cheque."  The same day, one of the solicitors at Baker & McKenzie, a Mr Duthie, telephoned him and said: "I am preparing the documents for the $20,000 but I have also been instructed to prepare another legal document for you to sign." Mr Taylor asked for the legal document to be sent to the applicant's solicitors, Messrs Dunhill Madden Butler.  Mr Duthie replied: "All right, but I think my client will not advance any more money unless you sign this document."  On 8 March 1990, a solicitor of Dunhill Madden Butler brought to the applicant's offices the deed of variation which both the Messrs Taylor executed without reading it.  That was the day after one advance of $20,000 and the day before a further advance of $32,500.  It seems to me that the failure of the Messrs Taylor even to read the document is a clear indication that they recognised its execution was the price of the advances they required, and was unavoidable.  Indeed, that was the effect of what Mr Duthie had told Mr A.B. Taylor.  And there is documentary confirmation.  Mr Duthie wrote a memorandum to the solicitor acting for the applicant at Dunhill Madden Butler, Mr Bonnell, on 7 March 1990 forwarding the deed of variation which, according to the memorandum, was intended to be executed on that day.  The memorandum continued: "Once this document is finalised I propose to attend at the offices of South Pacific for execution of this document and documents relating to the provision of the $20,000 advance."  There was a clear implication carried by this statement; the making of the advance hinged on the execution of the deed of variation.  An inference arises that the deed was "finalised" on 7 March, and the payment was then made on the faith of an understanding between the solicitors as to its execution the following day.
     Another basis is put forward by Century 21 to support the proposition that the deed of variation was founded upon valuable consideration.  That basis relies on the provision in cl. 6B of the original agreement requiring the subfranchisor to "execute any and all instruments and documents ... which in the opinion of CENTURY 21's counsel are necessary or advisable to protect and maintain the CENTURY 21 marks".  If this provision is applicable, the deed of variation is supported by the consideration that moved the agreement itself.  In my opinion, cl. 6B is applicable.  In urging the contrary, counsel for the applicant argued that the provision in cl. 6B is concerned quite narrowly with the protection of the marks of Century 21 by the execution of documents such as registered user agreements.  But the expression "any and all instruments and documents" is extremely wide, and it is only limited in cl. 6B by the "opinion" of Century 21's counsel that the instrument is "necessary or advisable to protect and maintain the CENTURY 21 marks".  The evidence I have already adverted to makes it plain that, whether "counsel" means the Senior Vice-President holding the office of General Counsel of the corporation or Baker & McKenzie, this condition was satisfied.  Both concurred in the view that the deed of variation was at least advisable to protect and maintain the marks.

It follows, in my opinion, that valuable consideration supported the deed, both on the basis that the advance of $20,000 (as well as the further advances thereafter made) was a quid pro quo for its execution, and also on the basis of the stipulation already contained in the subfranchise agreement.  Either way, the consideration was substantial, and certainly not nominal, trivial or colourable.

A further requirement of s. 120, in cases where it applies, is the requirement of good faith. What that means was also discussed in Official Trustee v Mitchell (supra, at 371-372).  Good faith is concerned with "the actual state of mind of the person who took under the disposition".  In the present context, one may ask, as Gibbs J. asked in Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232 at 256, whether Century 21 took the benefit of the deed of variation "without notice that any fraud or preference contrary to the statute [was] intended". The applicant relies on the knowledge which Century 21 certainly had of the precarious, not to say hopeless, situation in which the applicant stood. But if, as I have held, the subfranchise agreement entitled Century 21 to call for the further protection it sought, the difficulties into which the applicant had fallen could not convert Century 21's reliance on its existing right into the taking of some action that lacked good faith.

The argument for the applicant depended on the proposition that the deed was entered into in contemplation of the imminent termination of the subfranchise agreement, which in the normal course, so the argument runs, would be likely to leave the applicant with valuable rights arising out of a large number of sublicences granted by it to franchised real estate agents.  The gravamen of the case then put forward is that the deed of variation, and the subsequent actions of Century 21, transferred these valuable rights from the applicant to itself.  Although I think the validity of the deed of variation must be determined upon the facts as they were at the time of its execution, it is convenient at this point to give some account of what happened thereafter.

On 23 March 1990, the solicitors for Century 21, Baker & McKenzie, made it clear in writing to the solicitors for the applicant, and to the solicitors for Centennial Development, that the consent of Century 21 to any proposed investment by Centennial Development in the applicant would not be forthcoming unless a request, complying with the requirements of Century 21, was received before 5.00 pm on Wednesday 28 March 1990.  I accept that, from Mr Henry's point of view, the attitude so taken up was unreasonable.  It left him very little time to finalise his arrangements with the applicant, something he found himself unable to achieve.  There was still much to be done, particularly because the applicant's books of account were in what could only be described as a mess.  But that was not the fault of Century 21, which had attempted to assist in the rescue of the applicant, no doubt for its own good commercial reasons, by the making of very substantial advances.  Those advances were unlikely to be recoverable.  From the point of view of Century 21, matters had got to the stage where it was imperative to take whatever steps could properly be taken to avoid further damage to the reputation and goodwill of its marks and business and, if possible, to take steps to recover lost ground.  Nothing concrete had come out of the efforts of Mr Henry to match the infusion of three to four million dollars of equity capital that was urgently required, on a reasonable reading of the report, already well over three months old, of Deloitte Haskins & Sells. 

Accordingly, on 30 March 1990, Century 21 terminated the subfranchise agreement, relying on the notice given on 15 February 1990.  On 2 April 1990, a memorandum was sent out to all franchisees advising them that "CENTURY 21 International [i.e. Century 21] has assumed management control of the Franchise Network throughout Australia, New Zealand and Papua New Guinea".  The document asserted there had been an assignment to a "new regional franchiser Century 21 Australasia [the second respondent]".  It continued:

"Under an assignment such as this, the `assignee' (Century 21 Australasia) assumes the duties and benefits described in the Franchise Agreement, while the franchisee now owes its contractual duty to the franchisor.  The assignment was anticipated in the Franchise Agreement which you signed, and is specifically described in your Franchise Agreement at page 52, paragraph 28.  In short, Century 21 Australasia assumes the duty of service to the franchisees, who now owe service fees and other obligations contained in the agreements to Century 21 Australasia.  No new franchise agreements need to be signed.  We will continue to review old contracts to maintain conformity and will contact you directly, should we need to clarify and change anything."

The document continued with a series of statements obviously designed to assure franchisees that Century 21 was taking action to solve the problems of the franchise network.  As regards those problems, there was evidence of the development, particularly in Western Australia, of a great deal of discontent over the performance, or lack of performance, of the applicant.  It is extremely probable that this evidence states no more than the truth, since the applicant's desperate situation is likely to have engrossed the attention of those in control of the company, who might otherwise have been attending to the needs of franchisees. 

The memorandum sent out on 2 April 1990 was followed by a further memorandum of 4 April 1990.  This further memorandum sought to explain the situation to franchisees.  It referred to the applicant's licence "to use the Century 21 name and system, and to license franchisees to use the Century 21 name and system throughout Australia, New Zealand and Papua New Guinea."  It mentioned the Notice of Termination, and stated:

"The Sub-franchise Agreement provided that upon termination the South Pacific [i.e. the applicant] would transfer (`assign') its contracts with franchisees to [CENTURY 21] or its subsidiary.

The [period of notice] expired on Thursday, March 29, 1990 and [CENTURY 21] formally terminated its Sub-franchise Agreement with Century 21 of the South Pacific. 

Pursuant to that termination, the South Pacific Region lost all rights to utilize the Century 21 name and system, and to license franchisees under the name Century 21.

Most importantly, the franchise agreements were legally and automatically assigned (or transferred) from the South Pacific Region to [CENTURY 21's] subsidiary, Century 21 Australasia Pty. Ltd."

The memorandum went on to make it clear that Century 21 Australasia regarded itself as "obligated to perform all the services described in the standard franchise agreement".  It claimed that the franchisees owed their duties to it.

The evidence indicates that by the law of California  (which, it will be remembered, governed the subfranchise agreement, according to its terms, but did not govern the agreements sublicensing rights to the franchisees, which were governed by the law of New South Wales), it is legally possible to have an assignment of the burdens as well as of the benefits of a contract.  That is not so by our law.  The position is conveniently stated in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 at 103, where Lord Browne-Wilkinson said:

"It is trite law that it is, in any event, impossible to assign `the contract' as a whole, i.e. including both burden and benefit.  The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation."

However, his Lordship added:

"Although it is true that the phrase `assign this contract' is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned ... ."

But what is the effect of the purported assignment in the present case?  Since it could have effect only in respect of the benefits of the franchise agreements, it could not transfer anything unless those agreements continued to confer benefits on the applicant, as subfranchisor, after the termination of the agreement between it and Century 21.

What is immediately striking about the situation is that the applicant had a licence from Century 21 enabling it "to sublicense certain CENTURY 21 marks and to grant CENTURY 21 franchises ... and to use the CENTURY 21 System on the terms and conditions [of the agreement]".  The Century 21 marks were of the essence of the franchises granted to the individual real estate agents.  Without those marks, they could not operate under the Century 21 name.  But the marks were only sublicensed to them.  Of its very nature, a sublicence depends upon the continued existence of the licence under which it is granted.  When the trunk of the tree is severed at its base, the branches also must fall.  The most obvious example of a similar legal situation is to be found in the law of leases.  If the lease of a lessee who has granted a sublease is forfeited, the sublessee loses his estate together with the lessee himself: Great Western Railway Company v Smith [1876] 2 Ch D 235 at 253; Hammersmith and Fulham London Borough Council v Top Shop Centres Ltd [1989] 2 All ER 655 at 669. It may, of course, be that the sublicensee has rights by estoppel or otherwise against the head licensor, in this case Century 21. But that possibility is irrelevant to the question whether the sublicence can continue to exist as between the sublicensor and the sublicensee after the termination of the sublicensor's own licence.

Even if the contractual documents were to be construed, not as creating a licence and sublicences, but as conferring on the applicant the power of an agent to bring into existence what are really contractual licences made between Century 21 and the franchisees, coupled with rights as well as duties inhering in the applicant, there would remain enormous difficulty in the way of finding any valuable right of the applicant which survived the termination of the subfranchise agreement.  That is because it is at least clear that the sublicences contemplated the continuance of an active and important role to be performed by the sublicensor.  It was to receive from Century 21 and to pass on to the sublicensees a flow of updated material constituting the evolving Century 21 System, and it was to provide the link between sublicensees and Century 21.  Upon the termination of the agreement between the applicant and Century 21, the whole foundation of the sublicences was gone.  If, on the assumption under discussion, the sublicences continued to exist in theory until the taking of some step by the sublicensees in the exercise of a contractual power to terminate for repudiation or fundamental breach (see The Progressive Mailing House Proprietary Limited v Tabali Proprietary Limited (1985) 157 CLR 17 at 30-31; Shevill v The Builders Licensing Board (1982) 149 CLR 620 at 626-627), their existence was as a mere shade from which the substance had already departed. The applicant was unable to go on using the marks and the system for any purpose, and was thus unable to perform the services of subfranchisor, so that it could not require the franchisees to continue to pay for those services. There was no other basis for it to receive any ongoing benefits under the agreements of sublicence involving the marks and goodwill of Century 21. In addition to the legal difficulty, of course, there were also the practical problems inherent in its insolvency. Both aspects of the position unite to explain why Deloitte Haskins & Sells ascribed no value to the Century 21 franchise when assessing the worth of the applicant.

Accordingly, there was, by virtue of the deed of variation and the steps taken upon termination of the subfranchise agreement, either no disposition or, alternatively, any rights assigned were wholly unenforceable and liable to immediate termination by the exercise of an unfettered right then possessed by each of the franchisees.  In fact, on the evidence, the franchisees in some cases entered into fresh agreements (to be implied from the conduct of the parties) with the second respondent, and in other cases abandoned the franchise network.  Either way, each franchisee must be taken to have elected to terminate its contract of sublicence with the applicant.

If, however, this view be incorrect, and some value should be attributed to some remaining contractual rights held by the applicant, I would nevertheless be unable to find any lack of good faith on the part of Century 21.  For I would be unable to say that its failure to recognize such fragile and vestigial rights indicated "notice that any fraud or preference contrary to the statute [was] intended", to use the language of Gibbs J. in Re Hyams cited above, or suggested "dishonesty" or "any conscious attempt to defraud any other person", to adopt the language favoured by Fisher J. in Barton v Official Receiver (1984) 4 FCR 380 at 388-389. In my opinion, Century 21 acted in good faith in trying to shore up a collapsing network in the mutual interests of itself and the franchisees. There is no reason to doubt it genuinely took the view, which was open to it, that the applicant could have no remaining interest in the franchise agreements, once its own agreement with the applicant was terminated. The "actual state of mind" of Century 21 was innocent.

I do not think the attempt to take assignments undermines this conclusion.  Century 21 was seeking a formal transfer of contractual relationships.  Its assumption that the legal device of assignment was available to achieve this evinces no necessary inconsistency with an understanding that without the assignment the rights of the applicant would be extinguished anyway.

So far, I have rejected the application of s. 120 of the Bankruptcy Act on the ground that the alleged disposition was not shown to have been made other than in good faith and for valuable consideration, and on the further ground that, relevantly, there was in fact no disposition. The considerations which lead me to these conclusions also support the view that s. 122 of the Bankruptcy Act has no application.  The transactions in question did not involve any preference.  The difference between the option originally contracted for in cl. 19A of the subfranchise agreement and the immediate assignment provided for in the deed of variation did not amount to a "preference, priority or advantage over other creditors" within the meaning of the Act.  The other creditors did not stand to gain anything from the rights in question in any case.  Nor was there a relevant "conveyance, transfer, charge, payment or obligation executed, made or incurred" by the applicant.

The argument for the applicant assumed that if it succeeded in impugning the deed of variation it would be held entitled to the relevant rights under the agreements of sublicence and franchise. Accepting for the moment that those rights did exist immediately after termination of the principal agreement, I do not think the assumption was justified. Clause 4 of the deed, as I have already indicated, provided that "the Subfranchise Agreement is only to be amended or altered in the manner contemplated by this Deed and that in all other respects the terms and conditions of the Subfranchise Agreement are confirmed". In the light of the intention shown by cl. 4 and upon the proper construction of the deed, I do not think there is disclosed an intention to eliminate, come what may, Century 21's option to take an assignment, so that the option was to be destroyed even if the provision for immediate assignment substituted by the deed should turn out to be ineffective. I think in that case the original provision was to stand. In other words, the contract is to be construed as wills are construed, to which the doctrine of dependent relative revocation is applied. There was no intention to revoke the existing provision if the provision to be substituted for it could not take effect. Since Century 21 manifested a plain election to take whatever might be assigned under cl. 19A, and novation actually occurred in all cases except those where franchisees left the network, it seems to me that had the applicant succeeded in respect of the deed of variation its victory would have been Pyrrhic. The rights acquired, in the event, by Century 21 were the very rights which it would have acquired, under the very same new agreements, had it relied upon the option to take assignments given by the original cl. 19A, instead of upon the immediate assignments expressed in the altered form of agreement. For this reason also, neither s. 120 nor s. 122 had any application.

The applicant relied too on s. 368 of the Companies Code.  Subsection 1 of that section provides:

"Any disposition of property of the company, other than an exempt disposition, ... made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void."

Since the deed of variation was made before the commencement of the winding up, this section can only have application if the purported assignments are to be regarded, independently of the varied agreement, as amounting to dispositions of property of the company within the meaning of the section.  I have already indicated that I do not think there was a relevant disposition of property in this case.  See, as to the effect of this, Re Country Stores Pty. Ltd. (1987) 5 ACLC 636, following Re Margart Pty. Ltd. (in liq.) (1984) 2 ACLC 709. Even if there was, it was a disposition in favour of a party absolutely entitled by the terms of the varied agreement to receive the property in the events that had happened. Furthermore, in the peculiar circumstances of this case, as I have already held, the rights constituting the property in question had lost all substance upon the termination of the principal agreement. In those circumstances, if there were dispositions of property, in my opinion the Court should "otherwise order", so as to validate what occurred: cf. Re Androma Pty. Limited [1987] 2 Qd R 134 at 140-142, per Connolly J. The applicant having been guilty of material breach of its contract, as a result of which the contract was justifiably brought to an end, it would be, in the words of Connolly J., "to give [it] a windfall which would be quite unjust" to declare void under s. 368 the transactions that conferred on Century 21 no more than the rights envisaged by the contract as belonging to it in those very events. As to the width of the discretion conferred by s. 368 (and equivalent provisions) and the general considerations it invokes, see Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984) 3 FCR 311, especially at 316; Tellsa Furniture Pty Ltd (In Liquidation) v Glendave Nominees Pty Ltd (1987) 9 NSWLR 254.

For these reasons, the applicant fails upon each of the claims raised by it.  I direct that the respondents bring in, on a date to be fixed, short minutes of orders appropriate to be made in the light of the reasons of the Court.

I certify that this and the preceding thirty-one (31) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett.

Associate:

Date: 21 March 1996

Counsel for the Applicant:       Mr T.M. Jucovic Q.C. with Mr J.E. Sexton

Solicitors for the Applicant:        A.G. Robinson Creais

Counsel for the Respondents:     Mr R.A. Conti Q.C. with Ms J.S. Gleeson

Solicitors for the Respondents:   Kemp Strang & Chippindall

Dates of hearing:                5-8 December 1994 and 27-29 March 1995