Ewen Stewart and Associates Pty Limited v Blue Mountains Virtual (No. 3)
[2011] NSWSC 575
•17 June 2011
Supreme Court
New South Wales
Medium Neutral Citation: Ewen Stewart & Associates Pty Limited v Blue Mountains Virtual (No. 3) [2011] NSWSC 575 Hearing dates: 31 May 2011 Decision date: 17 June 2011 Before: White J Decision: Refer to para [32] of judgment
Catchwords: CORPORATIONS - winding-up - winding-up in insolvency - plaintiff seeks winding-up on basis of non-compliance with statutory demand - where defendant has leave under s 459S Corporations Act 2001 (Cth) to dispute existence or amount of the plaintiff's alleged debt - whether plaintiff a creditor - advances initially made as subscriptions for shares to be issued - parties later agreed that advances should be treated as a loan until a shareholders' agreement entered into or shares issued - loan has become repayable as reasonable time for entering into shareholders' agreement and issuing shares has long passed - defendant owes plaintiff sum claimed - defendant insolvent and winding-up ordered Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Ewen Stewart & Associates Pty Limited v Blue Mountains Virtual Air Helitours Pty Limited (No. 2) [2011] NSWSC 113
Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527; (2004) 22 ACLC 955; (2004) 185 FLR 130
Handevel Pty Limited v Comptroller of Stamps (Vic) [1985] HCA 73; (1985) 157 CLR 177
Prime Wheat Association Limited v Chief Commissioner of Stamp Duties (1997) 42 NSWLR 505Category: Principal judgment Parties: Ewen Stewart & Associates Pty Ltd (Plaintiff)
Blue Mountains Virtual Air Helitours Pty Ltd (DefendantRepresentation: G Carolan (Plaintiff)
P Rodionoff (Defendant)
Benetatos White (Plaintiff)
Ai Strategic Lawyers (Defendant)
File Number(s): 2010/314251
Judgment
HIS HONOUR : This is an application that the defendant be wound up in insolvency. The plaintiff relies upon the presumption of insolvency arising from non-compliance with a statutory demand. On 15 February 2011 I gave the defendant leave under s 459S of the Corporations Act 2001 (Cth) to dispute the existence or amount of the plaintiff's alleged debt ( Ewen Stewart & Associates Pty Limited v Blue Mountains Virtual Air Helitours Pty Limited (No. 2) [2011] NSWSC 113).
The principal issue is whether the plaintiff is a creditor of the defendant. In its statutory demand it claimed that a debt was due of $196,198.76 arising from 28 payments claimed to have been made by it to the defendant between 2 May 2005 and 26 February 2008. The payments were described in the statutory demand as " loan funds subscribed to the Debtor company ". There is no dispute that the defendant company is insolvent if it is indebted to the plaintiff for the amount claimed, or for any material amount. The plaintiff did not dispute that if it is not a creditor, the court has no power to wind up the defendant on its application ( Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527; (2004) 22 ACLC 955; (2004) 185 FLR 130 at [67], [70], [78] and cases there cited).
The defendant contends that the payments made by the plaintiff were not by way of loan, but were a subscription for shares. No shares have been issued, but the defendant says that it is prepared to issue the number of shares to which the plaintiff's payment entitles it as soon as the plaintiff indicates that it is prepared to accept those shares.
The defendant was incorporated on 20 May 2005. At that time its sole director was Mr David Arnott. All of the shares are held by Exnall Pty Limited, a company associated with Mr Arnott. The defendant was incorporated for the purpose of establishing a tourism venture at Echo Point, Katoomba. The venture was intended to provide customers with a computer-simulated helicopter tour of the Blue Mountains.
On 23 May 2005 an agreement called Heads of Agreement was entered into between Mr David Arnott, the plaintiff, and a Mr John Heath. The agreement recited that Mr Heath and the plaintiff had agreed to invest in the helicopter simulator development at Echo Point, Katoomba. The agreement provided for Mr Heath and the plaintiff to provide funding for the " seeding stage " of $35,000. Clause 7.1 provided as follows:
" 7.1 Provided the seeding stage demonstrates that the development is financially viable, the Parties agree to enter into agreement to proceed with further stages of the Development. John [Mr Heath] and Ewen [the plaintiff] to have 46 per cent of the equity of the new entity shared equally. "
The plaintiff made an initial payment to the defendant on 2 May 2005 of $6,750. That was in anticipation of the Heads of Agreement. It made two further payments on 6 and 11 June 2005 bringing the total amount of funds subscribed by it to $17,500.
On 28 June 2005 Mr Arnott wrote to Mr Ewen Stewart of the plaintiff and to Mr Heath in relation to the proposed development. He said:
" My understanding clearly was and is, that I offered you and John a 23% shareholding each in the enterprise to be called 'Blue Mountains Virtual Air Helitours' to be based at Echo Point. The shareholding in the enterprise was in return for you contributing, collectively $250,000 for a collective shareholding of 46%. This cash contribution entitled both you and John to a collective 46% Shareholding in the company and 46% share of profits from the enterprise. Representing the largest shareholder, reasonable control of the enterprise was and is vested with me. The investment was for the Echo Point site only and was not an offer to invest in any other entity other than BMVAH as you specifically declined my offer to be involved in the Holding Company.
I believe that this understanding is reflected in all our correspondences and the heads of agreement. I am surprised that you now wish to change the agreement or feel confused. Bruce Hocking advised that your shares are to be allotted as your investment monies reach certain milestones. Stage 1 shares equal to the value of $35,000 to be distributed to both John and yourself upon full payment of that amount. As funds are paid to the enterprise then more shares are issued until $250 000 equals 46% of the shares in the company.
...
However getting back to the real issue, the fundamentals are the fundamentals and they are: John Heath 23% Shareholding in the enterprise which entitles 23% of profit share for cash investment of $125,000: Ewen Stewart 23% shareholding in the enterprise which entitles 23% profit share for cash investment of $125,000. Control of the Company vested with the largest shareholder. This was always and still is my offer and position. "
Mr Stewart replied on 30 June 2005. He wrote:
" Refering [sic] back to our heads of agreement document, and with the benefit of your explanations in your email, I am fully cognisant of what our agreement entails.
... I believe that the true test of any relationship is the ability of the parties to discuss maters however robustly and then to reach mutually satisfactory decisions and to settle issues amicably. As you so correctly say, 'there remain many issues to discuss, fine tune and document in order to develop a lasting and healthy working relation ship [sic] together.'
David, I believe that this venture is to [sic] valuable to let our business relationship be overbalanced by casual [misunderstandings] , and to that end I wish to advise you that I fully agree with the position which you have set out ... "
On 18 July 2005 Mr Heath and Mr Stewart were appointed as directors of the defendant.
In cross-examination Mr Stewart accepted that it was as a result of the arrangement that he had made with Mr Arnott reflected in this email correspondence that he contributed money to the defendant (T13).
Between 19 January 2006 and 26 February 2008 the plaintiff made another 25 payments totalling $178,698.76 to or on behalf of the defendant.
On 21 January 2008 Mr Stewart on behalf of the plaintiff paid $21,000 to Mr Heath to " obtain all rights and obligations as was held by the Vendor ( [Mr Heath] ) ." Mr Heath had contributed $20,475.
On 15 September 2005 Mr Arnott sent to Mr Stewart and to Mr Heath a draft shareholders agreement. He received no response. He sent a second draft of a shareholders agreement to Mr Stewart in June 2007. Again he received no response. On or about 10 October 2007 he sent a third draft of the shareholders agreement to Mr Stewart. By this time Mr Heath had indicated his intention of ceasing his involvement with the company and it was proposed that the plaintiff acquire his interests. The draft agreement provided, amongst other things, for the transfer of a 46 per cent shareholding in the company by Exnall Pty Limited to the plaintiff upon the plaintiff contributing $250,000. The draft agreement also dealt with other topics, including the right of shareholders to board representation, the establishment of a management team, the engagement of external consultants, and pre-emptive provisions in the event of a shareholder wishing to sell its shares or becoming insolvent.
On 19 December 2007 there was a meeting between Mr Stewart and Mr Arnott at the offices of an accountant, Mr Frank Norman. The purpose of the meeting was to review the draft shareholders agreement that Mr Arnott had offered. Mr Norman prepared a record of the meeting. Mr Stewart acknowledged the record to be accurate (T11). Mr Norman's notes included:
" Blue Mountains Virtual Air Helitours P/L Consultation 19:12:07.
Copyright: David Arnott wants to hold the copywrite [sic] within his company.
Project: We suggest equal equity and input (voting rights). David Arnott wants artistic control. Ewen Stewart not prepared to be a financial investor with fixed interest return as this was not the initial proposal.
Suggest: No further financial input until a clear understanding of rights and responsibilities established and documented. "
On 16 January 2008 Benetatos White, solicitors for the plaintiff, wrote to the defendant as follows:
" We act for Ewen Stewart & Associates Pty Limited and we are instructed by Mr Ewen Stewart.
We are instructed that our client has entered into an arrangement with you to develop and ultimately operate the Virtual Air Helitours business from the Echo Point site. We understand that Blue Mountains Virtual Air Helitours Pty Limited ('the Company') has obtained development approval from Blue Mountains City Council to operate the business from the site and has also entered into a lease of the site.
We note the agreement, in general terms:
1. requires our client to contribute the sum of $250,000.00 towards the establishment of the business (we are instructed that it has currently contributed $192,000.00 of that amount);
2. 50% of the issued capital of the Company will be transferred to our client. "
Benetatos White proposed that they draft a shareholders agreement for Mr Arnott's consideration. They prepared such a document but Mr Arnott did not agree to its details. For example, he did not agree with the proposal that the plaintiff would have a 50 per cent shareholding as he said that the agreement was that the plaintiff would acquire a 46 per cent shareholding on payment of $250,000.
No formal shareholders agreement was entered into. No shares were issued or transferred to the plaintiff. On 3 March 2008 Mr Stewart resigned as a director of the defendant. Mr Arnott deposed that the reason that he did not issue shares to the plaintiff was that he was waiting for a shareholders agreement to be finalised and that the full amount of $250,000 had not been subscribed. He deposed that he had " lost sight of the fact that the shares were supposed to be issued on a progressive basis as funds were provided ".
Mr Arnott deposed that when the plaintiff, through Mr Stewart, paid expenses of the defendant, Mr Stewart did not ever claim that he or the plaintiff was lending the money to the defendant and did not, at the time of making the payments, claim that the money would need to be repaid. Mr Stewart did not give evidence to the contrary.
But for a further agreement between the parties I doubt that the plaintiff would be entitled to recover the moneys advanced. When the payments were made they were not made by way of loan. The essence of the loan is a payment and promise of repayment ( Handevel Pty Limited v Comptroller of Stamps (Vic) [1985] HCA 73; (1985) 157 CLR 177 at 193-194; Prime Wheat Association Limited v Chief Commissioner of Stamp Duties (1997) 42 NSWLR 505 at 512). No promise of repayment was made at the time of the advances. Nor would the amount of the advances be recoverable as a debt as moneys paid for a consideration that had wholly failed. The consideration had not wholly failed. The plaintiff would be entitled to have shares issued or transferred in accordance with the agreement reflected in the email correspondence of 28 and 30 June 2005.
However, it emerged in cross-examination of Mr Arnott and cross-examination of the defendant's accountant, Mr Peter Bray, that from at least about 2007 the parties agreed to treat the payments made by the plaintiff as loans unless and until a formal shareholders agreement was entered into or shares were issued. The financial statements of the defendant record that as at 30 June 2007 it had unsecured liabilities to Mr Heath and to the plaintiff of $20,475 and $91,775 respectively. Both liabilities were described as " unsecured loan ". For the year ended 30 June 2008 the financial statement of the defendant recorded that it had a current liability to the plaintiff of $196,199 described as an " unsecured loan ". The same liability appears in the financial statements for 30 June 2009 and 30 June 2010.
The defendant's accountant, Mr Bray, gave evidence which I accept that in around February 2007 at a meeting with Mr Arnott and Mr Stewart, he was instructed by both directors to record the amount of $91,775 as an unsecured loan until such time as shares were allotted. He said that this was in accordance with the existing practice for the treatment of liabilities of the defendant that obtained before his firm prepared the accounts (T25). Mr Arnott gave evidence as follows:
" They were treated as loan funds until the shareholders agreement was put in place. That was the sole purpose of them being treated as loan funds in the accounting. Mr Bray advised that this was the best accounting way to treat the funds at that particular time. " (T42)
Mr Arnott had previously said (in an unresponsive answer) that the amounts in question were not loans " except for the purposes of accounting as described by Peter Bray. All the funds into BMVAH were capital for shares. "
Mr Bray also said that he was instructed by the directors to record the amounts as loans for " a bookkeeping point of view " until such time as the shares were allotted.
The defendant's balance sheet is required to give a true and fair view of its assets and liabilities. I reject the implicit suggestion that the parties' agreement to treat the payments as loans until shares were allotted or a shareholders' agreement was put in place was not a true agreement, but adopted only for accounting or bookkeeping purposes.
Mr Stewart did not give evidence about his agreement as to how the advances should be accounted for. However, it was clear from Mr Bray's evidence, which Mr Arnott did not contradict, that Mr Stewart agreed to that accounting.
By agreeing that the advances made should be treated as loans until a shareholders' agreement was entered into or shares were issued, the parties by necessary implication agreed that if a shareholders' agreement were not entered into or shares were not issued, that the advances would be repaid. So far as the evidence reveals the agreement was silent as to the time by which the advances were to be repaid. By implication it was a reasonable time.
The accountant employed in the office of Mr Bray to keep the defendant's books was instructed that at least one of the advances from the plaintiff was to be treated as a loan. One of the payments which formed the debt claimed in the statutory demand was a payment of $2,800 in April 2007. The accountant described that transaction on the printout of the bank statement as a loan, evidently as part of her analysis of payments made for the purpose of correctly describing them in the accounts. In accordance with usual practice, that advice would have been provided to her by the defendant's directors. However, this is merely confirmation of what appears clearly from the defendant's balance sheets and which was explained by Mr Bray and Mr Arnott.
The question then is whether the loan has become repayable, given that no shares have been issued and no shareholders agreement has been entered into. It is clear that a reasonable time for those transactions to occur has long passed. On 21 July 2008 the solicitors for the plaintiff served a statutory demand for the same debt as was the subject of the statutory demand served on 27 May 2010. Mr Bray advised Mr Arnott that the amount claimed in that statutory demand was " as per the schedule we have regarding funds contributed by Ewen ". I infer that the plaintiff did not institute winding-up proceedings in 2008 based on the non-compliance with that statutory demand. The present relevance of the demand is that notwithstanding the demand, the defendant did not take any step to finalise a shareholders agreement or to transfer or issue shares to give the plaintiff a shareholding of approximately 36 per cent (being the approximate proportion of the agreed 46 per cent shareholding for a contribution of $250,000 that would be represented by the contribution of approximately $196,000).
Moreover, the company has ceased to trade. Its only asset is a claim against the lessor of premises under a lease dated 10 April 2007. It appears that the defendant was locked out of its premises on 22 April 2009. It has a claim pending against the lessor for alleged unconscionable conduct. It is clear that a reasonable time for the issue of shares and the entry into a shareholders agreement has long since passed. Accordingly, in accordance with the parties' agreement of 2007 that the advances were to be treated as a loan, I am satisfied that the plaintiff's loan has become repayable, and the advances are a debt owed by the defendant.
For these reasons I am satisfied that the plaintiff is a creditor of the defendant for substantially the amount claimed in the statutory demand. I think in fact that the debt claimed was overstated by $525 as the plaintiff included in the debt the sum of $21,000 paid to Mr Heath, whereas it took an assignment of Mr Heath's debt which was not $21,000, but, so far as the evidence discloses, $20,475. Otherwise there was no dispute about the debt other than the question of principle with which I have dealt.
It is common ground that if the defendant owes the plaintiff that sum, it is insolvent.
For these reasons I order that the defendant be wound up. I order that Mr Barry Anthony Taylor of HLB Mann Judd, Level 19, 207 Kent Street, Sydney, be appointed as liquidator of the defendant. I order that the defendant pay the plaintiff's costs. The exhibits are to be dealt with in accordance with the rules.
Decision last updated: 24 June 2011
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