Shakespeares Pie Co v Multipye - [2006] NSWSC 930

No judgment structure available for this case.

CITATION: Shakespeares Pie Co v Multipye [2006] NSWSC 930

HEARING DATE(S): 19 & 20 April, 11 September 2006

JUDGMENT DATE :
12 September 2006

JURISDICTION: Equity

JUDGMENT OF: Austin J

DECISION: Orders that the defendant company be wound up and liquidators appointed

CATCHWORDS: CORPORATIONS - winding up in insolvency - whether defendant could raise at the hearing matters that could have been raised in the application to set aside a statutory demand - admissibility of evidence on such matters - proof of solvency, where company is not trading - significance of related creditors' debts being due and payable where related creditors oppose the winding up - court's discretion to decline to order winding up of insolvent company

LEGISLATION CITED: Corporations Act 2001 (Cth) ss 459A, 459G, 459P, 459S
Retail Leases Act 1994 (NSW) s 14

CASES CITED: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728
ASIC v Plymin (No 1) (2003) 46 ACSR 126
Emmanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) 178 FLR 1
Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711
Iso Lilodw’ Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561
Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103
Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1338
Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1201
Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2006] NSWSC 100
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 39 ACSR 305
White Constructions (ACTU) Pty Ltd (in liq) v White (2004) 49 ACSR 220

PARTIES: Shakespeares Pie Co Australia Pty Ltd (P)
Multipye Pty Ltd (D)

FILE NUMBER(S): SC 4979/05

COUNSEL: N J Kidd (P)
R D Newell (D)

SOLICITORS: PricewaterhouseCoopers Legal (P)
L C Muriniti & Associates (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 12 SEPTEMBER 2006

4979/05 SHAKESPEARES PIE CO AUSTRALIA PTY LTD V MULTIPYE PTY LTD

JUDGMENT

1 HIS HONOUR: This is an application under ss 459A and 459P of the Corporations Act 2001 (Cth), by originating process filed on 14 September 2005, for an order for the winding up of the defendant company ("Multipye") in insolvency, and for the appointment of a liquidator. Orders have been made by me and other judges under s 459R extending the period within which the application for winding up is to be determined.

2 On 28 September 2005 Multipye commenced a proceeding in the Commercial List of this court against defendants including the present plaintiff ("the Pie Company") and its sister company Shakespeares Systems Pty Ltd ("Systems") and their directors, for remedies including damages for losses said to have been suffered by entering into a franchise agreement with Shakespeares Systems Pty Ltd, alleged to have been induced by oral representations made in contravention of the Trade Practices Act, and also equitable compensation or an account of profits by reason of alleged breaches of fiduciary duty.

3 The Pie Company relies on Multipye's failure to comply with a statutory demand. The statutory demand was for payment of $59,093.54 for pies and associated products supplied and delivered. It was served on Multipye's registered office on 31 March 2005. Multipye failed to comply with the demand within the ensuing 21 day period, but it made an application under s 459G to set aside the demand. That application was heard by Macready AsJ, who on 11 August 2005 made an order under s 459H(4) reducing the amount of the statutory demand to $52,776 76, while declining to set the demand aside. No order was made extending the period for compliance with the demand under s 459F(2)(a)(i), and consequently the period for compliance with the amended demand was the period ending seven days after 11 August 2005, the date of the final determination of the application to set the demand aside (s 459F(2)(a)(ii)). Multipye did not comply with the amended demand within that period, or at all.

4 The Pie Company has adduced evidence proving the matters required for the making of the winding up order: affidavits confirming that the net amount of the statutory demand remains due and payable; an affidavit of search; an affidavit of publication; an affidavit of service; and an instrument of consent by the two official liquidators proposed for appointment, Mr Hall and Mr Brown. These matters are not challenged, except for the evidence that the amount claimed is owing.

5 Consequently a presumption of insolvency has arisen under s 459C by virtue of Multipye's non-compliance with the statutory demand. The primary question to be determined at the final hearing of the winding up application is whether the presumption of insolvency has been rebutted by the company, which bears the onus of doing so (Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 at [16] per Santow JA, with whom Meagher and Handley JJA agreed). The extent to which Multipye may seek to rebut the presumption is restricted by s 459S, considered below.

6 In the Expile case at [16], Santow J quoted with approval a passage from the judgment of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728; BC9902928. Amongst Weinberg J's propositions are two that are particularly apposite to the present case:

· "In order to discharge that onus the court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent" (citing Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609 per Hayne J);

· "Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared" (citing In the matter of Simionato Holdings Pty Ltd (1997) 15 ACLC 477; Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd (Federal Court of Australia, Heery J, unreported, 16 March 1998, BC 980078); Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J).

Multipye's appeal and interlocutory applications

7 Multipye has endeavoured to resist being faced with a presumption of insolvency by various means, but it has been unsuccessful.

8 It has appealed from Macready AsJ's judgment. The appeal has not been heard. By an interlocutory process filed on 3 November 2005, Multipye sought an order staying the present proceeding pending determination of the appeal. The application was heard by Barrett J, who delivered his reasons for judgment on 20 December 2005 (Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1338). He rejected the application, essentially on the ground that, in circumstances where Multipye was seeking the stay on the basis of an alleged genuine dispute and offsetting claim, to grant a stay on those grounds would undermine the statutory scheme reflected in ss 459G and 459S (judgment at [26]-[30]).

9 Multipye also sought leave to amend its interlocutory process by the addition of a claim for an order that time for compliance with the statutory demand be extended until the determination of the appeal from the decision of Macready AsJ, or further order. The application for leave was rejected by Barrett J on 24 November 2005 (Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1201 (24 November 2005)), on the ground that the application for such an extension of time would be hopeless in view of s 459F(2)(a)(ii).

Multipye's s 459S application

10 Section 459S(1) has the effect that the defendant company may not, without the leave of the court, oppose the application on any ground that the company relied on for the purposes of its application to set aside the demand, or that it could have relied on, but did not, in such an application. But by s 459S(2) the court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company insolvent.

11 Multipye filed a notice of its grounds of opposition, as required by s 465C. It filed amended Notice of Grounds of Opposition to Winding Up on 9 December 2005, by leave granted by Barrett J pursuant to his judgment of 24 November 2005 ([2005] NSWSC 1201).

12 Multipye made an application to Barrett J for leave pursuant to s 459S to rely on grounds of opposition that were (or could have been) relied on in challenging the statutory demand. The application was dealt with in his Honour's judgment delivered on 20 December 2005 ([2005] NSWSC 1338). His Honour denied the application.

13 The grounds of opposition that were the subject of the s 459S application are set out in full in his Honour's judgment, at [6]. They included allegations that the debt was disputed on various bases, and that Multipye had an offsetting claim or claims (one of which is the subject of the proceeding in the Commercial List). They were identical to grounds 2, 3, 4, 6, 7 and 8 of the current Notice of Grounds of Opposition to Winding Up.

14 His Honour held that a defendant company, in an application for leave under s 459S, must place the court in the position of being "satisfied", by positive findings, that the asserted grounds are material to proving solvency (at [10]). In circumstances where Multipye had put into evidence, on the application, a large volume of material but not a single balance sheet or cash flow statement, his Honour found that the court was not in a position to judge the materiality of the asserted grounds to the question of solvency (at [9], [12]). He held that the reference, in s 459S(1), to a ground that "the company could have relied on" directed attention to whether the ground in question was actually available to be asserted according to the facts and circumstances existing at the time of the s 459G application (at [15]). He rejected a submission that the asserted grounds arose from a change of circumstances that occurred after the application to set aside the demand was filed (at [19]). He found that the circumstances upon which reliance would be based, to support the stated grounds, existed at the time when it was possible for Multipye to challenge the statutory demand; it was just that as to some of them (including the question whether $125,000 had been paid to the vendor of the Mr Goodpie business), Mr Thadani and his advisers had later dug more deeply into the previously available material (at [17]).

15 Grounds 2, 3, 4, 6, 7 and 8 remain in the Notice of Grounds of Opposition to Winding Up. However, as counsel for the Pie Company correctly submitted, the effect of his Honour's decision is that Multipye was barred from relying upon any of those six grounds at the hearing of the winding up application. Counsel for Multipye did not submit otherwise at the hearing. The Notice of Grounds of Opposition to Winding Up contains a broadly expressed application for leave under s 459S of the Corporations Law (sic) but as I understood him, counsel for Multipye did not press that application in relation to the grounds that had been dealt with by Barrett J. If he had done so, I would have rejected the application, so far as it related to those grounds, having regard to the facts and circumstances set out in this judgment.

16 Multipye made an application for leave to amend, heard by Barrett J on 20 February 2006. His Honour granted Multipye leave to make further amendments, to add grounds 13, 14 and 15 (Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2006] NSWSC 100). The hearing of the winding up application proceeded on the basis that Multipye's grounds of opposition included these paragraphs.

17 As to grounds 14 and 15, Barrett J (at [5]-[7]) regarded them as refinements, merely expanding ground 1 by adding a ground of solvency generally (that is to say, without taking into account the debt claimed in the statutory demand).

18 Para 13 asserts that Multipye has a substantial offsetting claim based on a conspiracy to defraud in relation to an alleged licence fee sought and obtained from Multipye by Shakespeares Systems Pty Ltd, in respect of which Multipye is alleged to have received no benefit whatever. Barrett J considered whether the assertion of such an offsetting claim would be prohibited by s 459S. If the alleged offsetting claim was a ground that Multipye could have raised in its application to set aside the statutory demand, s 459S would prevent Multipye from raising it at the hearing of the winding up application. His Honour made a "slight adjustment" to the formulation he had adopted in the December judgment, holding that if the facts and circumstances relating to an offsetting claim, although existing at the time of the application to set aside the statutory demand, were not then known to the company and could not have been ascertained by it, then the company would not be precluded by s 459S from raising the offsetting claim at the winding up hearing (at [16]-[17]). He allowed the notice on grounds of opposition to be amended so as to add the assertion of the offsetting claim, but only on the assumption that what counsel for Multipye had told him about "sham transactions" and key money could be shown to emerge from the subpoenaed documents to which the company previously had no means of access. In his Honour's view, that assumption would have to be made good at the winding up hearing (at [18]).

19 Counsel for the Pie Company submitted, in reliance on Barrett J's February judgment, that it would be permissible for Multipye to rely on ground 13 only if the court concluded, at the hearing of the winding up application, that the facts and circumstances leading to the assertion of that ground emerged from the subpoenaed documents to which the company had no means of access at the time of the s 459G application. I agree with this submission.

20 In the result, the following grounds of opposition remained available to Multipye at the hearing of the winding up application:

Facts

21 From late September 2003 until 10 February 2006 Multipye carried on the business of a shop proprietor in Sydney Central Plaza, selling principally pies and muffins, trading under the business name "Shakespeares Pies". The issues raised by Multipye relate to the negotiations for commencement of this business.

22 Mr Suren Thadani, director of Multipye, was in discussions with Shakespeares about a possible franchise from about March or April 2003. "Shakespeares" comprised several related companies including the Pie Company, and Systems, both wholly owned subsidiaries of Shakespeares Holdings Pty Ltd. Mr Thadani dealt principally with Mr Anthony Gualdi (a director of both the Pie Company and Systems), although occasionally he had discussions with Mr Howard Jones (described by Mr Thadani as the chief executive officer of Shakespeares, though not a director). He acquired Multipye as a shelf company early in the negotiations, after Mr Gualdi told him he would have to set up a company to have a franchise with Shakespeares. The shareholders of Multipye are Mr Thadani and his partner Gabrielle Sit.

Alleged representations

23 Initially Mr Thadani and Mr Gualdi discussed franchise arrangements for a shop in Balmain or a shop in the MLC Centre. Mr Thadani referred to two meetings he claimed to have had with Mr Gualdi, one on 22 March 2003 and the other on about 30 June 2003, each at Shakespeares’ Brookvale offices (affidavit of 10 October 2005 at [7], [24] and [25]). He claimed that Mr Gualdi told him on those occasions that the cost of supply of pies to Multipye would decrease substantially within a short period after Multipye commenced trading, as the number of franchisees increased. He said that on the second occasion, Mr Gualdi told him that at the time, the cost of pies and other stock represented about 40% of the franchisees' operating costs but this would come down substantially as the number of franchisees increased.

24 Mr Thadani claimed to have had a meeting with Mr Gualdi on 23 April 2003 (affidavit of 10 October 2005 at [9]). He said he expressed concern about the need for the business to be profitable because he was borrowing a lot of money and would be mortgaging his house. He said Mr Gualdi told him not to worry, that most of the Shakespeares stores were profitable. Mr Gualdi pointed out that the Balmain store was near a local pub and compared it with a store at Manly that was achieving weekly sales of $25,000.

25 Mr Thadani said Mr Gualdi told him to talk to Mr Jones, who would do some projections using a computer software system. He said he then went to see Mr Jones, whose office was next door to Mr Gualdi's office. According to Mr Thadani's evidence, Mr Jones prepared four projections, each based on altered assumptions relating to turnover, wages for a manager and capital running costs. He said Mr Jones told him that he could expect a profit from the Balmain store as shown by the assumptions. On one scenario, the net profit per annum was $24,256; on another it was $28,266, and another it was $21,000.

26 Mr Thadani said he had another meeting with Mr Jones two weeks later, to discuss the potential profitability of the MLC Centre store. Mr Jones did some projections which showed operating losses on various assumptions about annual sales. Mr Thadani claimed that Mr Jones and Mr Gualdi told him that the figures being used to create the projections were solid figures based on data available from various Shakespeares franchise stores, and that the projections used a scientifically and mathematically sound methodology with a reliability factor of 80%.

27 Mr Thadani said he had another meeting with Mr Gualdi and Mr Jones on about 6 May 2003. This time they discussed the Central Plaza store, which Multipye ultimately occupied. At that stage the shop was conducting a business called "Mr Goodpie", a pie business unrelated to the Shakespeares franchise. Mr Gualdi told him (according to Mr Thadani's evidence) that the trading figures were $11,000 per week but that with Shakespeares pies and coffee the turnover should be $15,000 per week. Mr Jones then prepared projections, including a projection of an annual profit of $31,123 based on a weekly turnover figure of $15,000 per week. Mr Thadani said he was particularly concerned about the Central Plaza store because of the significant additional costs of setting up, arising from the obligation to pay what he called "key money" to the outgoing lessee, eventually in the sum of $125,000. When he expressed his concern, Mr Jones told him again that there was an 80% to 85% chance that the projections would be correct and any deviation would only be relatively small. He said (affidavit of 10 October 2005 at [18]) that Mr Jones assured him that he would not lose any money and would make a profit.

28 Most of the projections to which Mr Thadani referred in his evidence have been tendered. What is striking, having regard to Multipye's allegations, is that at the foot of each page of projections there is a form of disclaimer. In some cases it says:

"This financial projection was prepared using information and assumptions suggested by the store owner. The actual results of this store will certainly vary from this projection. Shakespeares gives no warranties either expressed or implied as to the actual performance of store."

"The actual results of this store will certainly vary from this projection. Shakespeares gives no warranties either expressed or implied as to the actual performance of the store."

29 Additionally, some of the projections bear the following stamp:

30 Mr Thadani gave evidence that, as a result of the assurances and representations as to the Central Plaza store being profitable, given to him by Mr Jones and Mr Gualdi, he proceeded to commit to purchasing the Shakespeares franchise to be operated from the Central Plaza store. He said he would not have proceeded with the acquisition of the store and franchise but for those assurances. He said he proceeded to borrow money secured over his house, making the money available to Multipye so that it could acquire the franchise in the shop. But in cross-examination (Day 1, T 64-65), Mr Thadani agreed that he recalled the stamp on projections saying that Shakespeares did not warrant the accuracy of the projections and he should rely on his own enquiries.

Negotiations for the "Mr Goodpie" business

31 It appears from Mr Thadani's evidence that in commercial terms, he negotiated with Mr Gualdi to acquire a shop in Central Plaza conducted by the proprietor of a business called "Mr Goodpie", on the basis that he would run the shop as a Shakespeares Pies franchise. The transaction was to involve the proprietor of Mr Goodpie receiving an amount of $125,000, the characterisation of which has become a matter of debate.

32 Initially the transaction was envisaged as a purchase by Multipye of the Mr Goodpie business from its proprietor, Georgie Porgie's Family Restaurants Pty Ltd. Mr Thadani's e-mail to Mr Jones dated 4 August 2003 indicates that he and his solicitor were expecting, at that stage, that the lease of the shop would be transferred into the name of Multipye. In that e-mail Mr Thadani claimed that he would be paying over $125,000 to get the lease assigned. The proprietor's solicitors sent Mr Thadani a draft contract of sale on 21 August 2003 which provided for a sale price of $125,000, including goodwill of some $104,000.

33 Mr Thadani gave evidence of a conversation he had with Mr Gualdi on 26 August 2003. He said Mr Gualdi told him it was necessary to "secure the site" and for that purpose he needed a cheque from Mr Thadani for $125,000. Mr Thadani said he asked for some paperwork, and Mr Gualdi rang someone called "John" who faxed him an invoice, which Mr Thadani annexed to two of his affidavits. It is a tax invoice dated 26 August 2003 from Mr Goodpie directed to Multipye in the sum of $125,000 for "sale of business … including equipment installed at settlement", in accordance with a list of items said to be attached to the invoice and signed by both parties to the contract (the list of items is annexed to Mr Thadani's affidavit of 23 February 2006, but it is not signed). It appears that when the invoice was prepared, it was still contemplated that the Mr Goodpie business would be sold direct to Multipye. Mr Thadani did not immediately hand over a cheque.

34 The correspondence annexed to Mr Thadani's affidavit of 4 November 2005 indicates that at some stage after the commencement of negotiations for the acquisition of the Mr Goodpie business, it was decided that the transaction should not be structured as a purchase of the business by Multipye, but instead Systems would buy the business and would grant Multipye a franchise and licence. On 1 September 2003 Systems entered into a contract for the purchase of the Mr Goodpie business from Georgie Porgie's Family Restaurants Pty Ltd as vendor, for the purchase price of $125,000, of which $104,471 was attributed to goodwill and $20,529 was attributed to equipment. The contract provided for completion 7 days after the contract date, but time was not of the essence.

35 Mr Thadani’s solicitor, Mr Muriniti, raised a number of points about the transaction. Mr Muriniti's evidence is that on about 8 September 2003 he received documents indicating that the head lease of the shop would be assigned by the proprietor of the Mr Goodpie business to Systems, which would then grant a sublease, and when he considered the provisions of the head lease he formed the view that the provisions of the head lease (clause 12.4) prevented a sublease from being granted. Subsequently the solicitors for Systems proposed a licence agreement, but Mr Muriniti formed the view that even a licence agreement would constitute a breach of the head lease unless the consent of the lessor was first obtained. Mr Muriniti referred to a letter dated 12 June 2003 provided to Mr Gualdi by Shakespeares' solicitors, in which they reviewed the head lease and drew attention to clause 12.4, according to which a franchisee of the lessee's business could not be granted exclusive possession but could be a licensee, provided that the lessor's consent was obtained. That, according to Mr Muriniti, was the same concern that he had raised.

36 Mr Thadani gave evidence of negotiations conducted by him and Mr Muriniti, with Mr Gualdi and others, during September 2003. According to his evidence, Mr Gualdi told him more than once not to listen to Mr Muriniti, because Mr Muriniti was not a franchise lawyer and was causing delay that would only add to the cost of the transaction. Mr Muriniti told Mr Thadani not to pay any money until satisfactory documentation had been produced. At one stage Mr Thadani handed over a cheque and then, on advice, told Shakespeares not to bank it and that it would be cancelled. Mr Muriniti told his client in late September 2003 that there was something seriously wrong with the deal because the documents did not coherently relate to one another. Amongst the unresolved matters was absence of consent to Multipye's occupation by Westfield, the landlord.

37 Mr Thadani said he attended a meeting with Mr Gualdi at the Shakespeares offices on 12 September 2003. He said Mr Gualdi told him it was necessary for him to pay Mr Gualdi the money for the acquisition of the Mr Goodpie business. According to Mr Thadani, Mr Gualdi handed him a document which he described as an "acknowledgement to assure you that the money will be handled appropriately". Mr Thadani said he handed Mr Gualdi a cheque for $125,000 in favour of Systems.

38 The document handed by Mr Gualdi to Mr Thadani is headed "Acknowledgement" and is dated 12 September 2003. The parties are Systems and Multipye. The document recited that Systems intends to purchase the Mr Goodpie business at Central Plaza; that it had offered Multipye a Shakespeares Pies franchise to be conducted in the Central Plaza premises and a licence agreement incorporating the terms of the lease to be assigned to Shakespeares on completion of the purchase of the business; and that Systems had agreed to sell Multipye the plant and equipment purchased as part of the purchase of the business. The document recited that Multipye had conditionally advanced to Systems three amounts: $40,000 as a contribution towards fitout; $27,500 for the GST inclusive purchase price of plant and equipment; and $100,000 for a licence to use goodwill of the business. The operative part of the document provided that Multipye irrevocably authorised Systems to deposit those three amounts into the business account of Systems to be used by it at its discretion. The funds were to be treated by Systems as an advance from Multipye for the proposed franchise fee payable under the franchise agreement, and to be applied towards the purchase price of the plant and equipment of the business for the beneficial ownership and use of Multipye. Multipye was said to have acknowledged and authorised Systems to apply the funds to the purchase of the business. There was provision for a refund of $127,500 to Multipye if it elected not to enter into the franchise agreement and licence.

39 In subsequent e-mails Mr Thadani repeatedly asked for an invoice so that he could obtain a GST refund. It appears from the correspondence that he believed that the whole of the $125,000 he paid was "GST inclusive". But while the instrument of acknowledgement says that the $27,500 paid for plant and equipment was GST inclusive, it does not say the same about the $100,000 described as "for licence to use goodwill". Mr Thadani's affidavit and correspondence indicates that James O'Reilly of Shakespeares told him he believed that goodwill may not attract GST but he would look into it. Mr Thadani appears to have thought that Mr O'Reilly's investigation might confirm his entitlement to a refund of $12,500, but instead, on 11 March 2004 Mr Thadani received an invoice from Systems in the sum of $137,500, said to be in relation to a franchise fee of which $12,500 was claimed in relation to GST.

40 The acknowledgement document suggests that the bulk of the payment was to be characterised as a payment for goodwill. But Multipye refers to the schedule of figures headed "Shakespeares Central Plaza", produced under subpoena directed to Systems. One of the amounts shown in the list is $125,000, described as "Lease Payout". But the words "Lease Payout" have been struck through by hand, and the words "Goodwill, Keymoney?" have been inserted.

41 There is evidence that on 17 September 2003, $125,000 was deposited into the account of Mr Goodpie (Exhibit D2, page 245).

42 Mr Muriniti gave evidence of his negotiations with the solicitors for Systems about the terms the terms of the franchise and licence agreement. On 17 September 2003 they sent him drafts of amended franchise and licence agreements, but he was still unsatisfied about some aspects of the transaction. On 25 September 2003 the solicitors for Systems wrote to Mr Muriniti saying that timing and commercial realities had reluctantly put the franchisor in a position whereby the offer of a franchise would be withdrawn if a copies of the executed licence and franchise agreements were not provided by close of business on the following day, Friday 26 September. Mr Muriniti gave evidence that his retainer was terminated by Multipye on 25 September.

43 Mr Thadani said that he attended Shakespeares' Brookvale premises on 26 September 2003 and signed some papers. He claimed in his evidence that he was given only the back page of the franchise agreement to sign (affidavit of 10 October 2005, at [2]). He also said (at [26]) that he entered into the franchise arrangements with Systems in reliance on the representations by Mr Gualdi and Mr Jones of which he gave evidence.

44 A copy of the franchise agreement is in evidence. It is dated 26 September 2003, and the parties are Systems as Franchisor, Multipye as Franchisee, and Mr Thadani as Guarantor and Nominated Operator. The Pie Company is not a party to the agreement. The agreement provides for payment by Multipye of certain fees including a Franchise Fee of $100,000 plus GST and an equipment price of $27,500 including GST, as well as monthly royalty payments and an advertising levy based on gross receipts. Although the Pie Company is not a party, there are provisions requiring the Franchisee to purchase all Products (as defined) from the Franchisor or suppliers arranged by it (clause 6.10). The document is signed on the last page by Mr Thadani in several capacities. He has not signed any of the other pages.

45 Also in evidence as a copy of a licence agreement dated 26 September 2003 between Systems as licensor, Multipye as licensee and Mr Thadani as guarantor. Again the Pie Company is not a party. The agreement recites that pursuant to a Deed of Covenant and Consent the licensor will become lessee of the Central Plaza shop. The licence agreement purports to annex a copy of the Deed of Covenant and Consent, but it is not annexed to the copy of the document that is in evidence, and was apparently not executed until much later.

46 Mr Muriniti gave evidence that for the purposes of the Commercial List proceeding he caused a number of subpoenas to be issued, including subpoenas to Sparke Helmore, the solicitors acting for Shakespeares in 2003, and Landerer & Co. Sparke Helmore produced a copy of a letter dated 11 September 2003 forwarding a copy of the proposed franchise and licence agreements and seeking approval under clause 12.1 of the lease. Mr Muriniti said that the file produced by Landerer & Co did not contain that letter and there was nothing on the files of either firm to indicate whether Landerer & Co ever gave any answer to the request or whether the consent was ever given.

47 Mr Muriniti also caused a subpoena to be issued to Westfield. In its initial response to the subpoena, Westfield produced no documents relating to an assignment of the lease of the Central Plaza shop. Mr Muriniti said he wrote to Westfield in December 2005 about the matter. Subsequently he had a telephone conversation with a person who claimed to be general counsel for Westfield, and who told him that the deed of assignment had been overlooked. On 9 December 2005 Westfield wrote to the Court enclosing further documents, including a "Deed of Covenant and Consent" between Trust Company of Australia Ltd as lessor, Georgie Porgie's Family Restaurants Pty Ltd as transferor and Shakespeares Systems Pty Ltd as transferee. The document is dated 15 June 2005.

48 There is some evidence about payments made by Multipye in connection with the franchise arrangements, in addition to the payment of $125,000 to which I have referred. On 6 October 2005 Mr Muriniti wrote to Shakespeares' solicitors concerning the claim in the varied statutory demand for approximately $52,777. Mr Muriniti drew attention to two payments by Multipye to the Pie Company of $20,000 each, by way of separate cheques deposited on 21 and 27 August 2003. There is evidence of bank replies to trace requests confirming these payments. Mr Muriniti queried why the Pie Company should have been paid these sums and he questioned why a proper accounting had not been provided. He asserted on behalf of Multipye a claim to interest on the money paid. He referred to payments made by Multipye to or at the direction of Systems on 14 August 2003, in sums of $38,500, $9,721 and $2,970, claiming that there had been no proper accounting for these amounts. He alleged that there were "significant indicia at hand" evidencing a joint venture or partnership between the Pie Company and Systems and asserted that the Pie Company was jointly and severally liable with Systems for all moneys received by Systems, in addition to the $40,000 which the Pie Company had received directly.

Financial arrangements

49 Mr Thadani made several payments foe the purpose of establishing his business as a Shakespeares franchisee. Apart from the payment of $125,000, there were fit out costs and other expenses. He has given some confusing affidavit evidence about the funding of those expenses, but fortunately he has annexed some documents.

50 According to Mr Thadani's evidence, Multipye has been funded from loans provided to the company by him as a director, and by Ms Sit. It appears from the documentation that on about 6 August 2003 Multipye entered into a business finance agreement with Westpac Banking Corporation to assist with the purchase of a Shakespeares Pies franchise, for a business development loan to a limit of $245,000, with a redraw option, supported by a fixed and floating charge granted by Multipye. Mr Thadani guaranteed the company's borrowing, and Ms Sit guaranteed it to a limit of $280,000. The guarantees were supported by mortgages over the properties owned by Mr Thadani and Ms Sit in Frenchs Forest and Dee Why, and a mortgage by Ms Sit of her property in Curl Curl. By February 2004 the facility had been drawn down to its limit.

51 Mr Thadani said that in addition to the business development loan, he had a line of credit, apparently personally, with Westpac from which he began to draw money in October 2003 to fund the business. He said that as the company continued to suffer losses, he continued to draw upon the line of credit to underwrite losses, and that by 31 January 2006 the line of credit was drawn down to $137,375.

Events after commencement of the business

52 Mr Thadani gave evidence of franchise meetings he attended in November and December 2003 at Shakespeares' office at Brookvale. He said that at the December meeting Mr Neil Whittaker (co-director of the Pie Company and Systems with Mr Gualdi) announced that there would be a price increase for the supply of pies from March 2004 (for example, the price of the minced beef pie was to increase from $3-$3.70).

53 Mr Thadani said that on 8 December 2003 he went to the Brookvale offices with Ms Sit, to see Mr Gualdi and confront him with the poor turnover figures of the Central Plaza business. Mr Thadani said he told Mr Gualdi that the shop was only turning over $11,000 per week, and reminded Mr Gualdi that Mr Goodpie had been turning over $11,000 and that Mr Gualdi had told him that the shop would turnover $15,000 per week when it became a Shakespeares franchise. Mr Gualdi responded by saying that Mr Goodpie was in fact turning over $7,000 per week and that with the Shakespeares products the turnover should be $11,000, as it was. That meant, according to Mr Thadani, that the business was operating at a loss.

54 Mr Thadani said, in his affidavit of 10 October 2005, that he had been in occupation of the Central Plaza store for approximately 18 months, and during that time the best the store could do was turnover of $10,000 per week, compared with the $15,000 scenario projected by Mr Jones and a best case projected scenario of $25,000 per week.

55 According to Mr Thadani, Multipye suffered losses averaging approximately $4000 per week and he was not able to draw a salary for himself, although he worked on average for six days per week in the store, for approximately 60 hours per week. He said the store was kept open seven days per week and his stepson Alex also worked in the store and managed it on the day that he was not in the store himself. He said he paid Alex only $10 per hour for the 25 hours per week that he worked. He claimed that he prepared a profit and loss statement as at 16 May 2005 showing that the company's losses were about $1,008,912.52. From that time, he said (affidavit of 10 October 2005 at [32]) the average operating loss per week continued at $4000, until the business was closed.

56 Mr Thadani gave evidence that on 2 December 2004 he had a conversation with Mr Whittaker, during which Mr Whittaker threatened to cut off the supply of pies to Multipye unless Mr Thadani came to an arrangement about money claimed to be owing. From approximately November 2004 all goods provided by the Pie Company to Multipye were paid for by cash on delivery. Eventually the statutory demand was served on 31 March 2005.

57 Mr Thadani has complained that he has not received a proper accounting for money paid by Multipye to the Pie Company and Systems. His evidence indicates that he requested periodic statements of account from the Pie Company's accounting division on many occasions and although they were promised, he claimed not to have received a single periodic statement of account.

Evidence concerning Multipye's solvency

58 According to Mr Thadani's evidence, Multipye has been able to pay and continues to pay its debts as and when they fall due, from the loans provided to the company by him as a director, and by his partner Ms Sit. He said that all of the company's debts have been paid as and when they fell due. Mr Thadani's evidence is that the company has no trade creditors, and no creditors of any kind pressing for payment except the Pie Company. The result, he said (in his affidavit of 10 October 2005), was that Multipye had become indebted to Ms Sit in the sum of approximately $300,000 and to him in the sum of approximately $70,000. He said those loans bore interest, so that the total indebtedness of Multipye to Mr Thadani and his wife was approximately $450,000 as at 10 October 2005. In his affidavit of 3 November 2005 he estimated that Multipye was indebted to him and Ms Sit in the sum of $590,000. His calculation was an estimate, said to depend on some work being undertaken by an accountant whose report had not come to hand.

59 Mr Thadani said he did not intend that the company would trade again in the future. He said he wished to keep it on foot for the sole purpose of recovering contingent assets, especially his claim to damages or equitable compensation from the Pie Company and Systems in Commercial List proceeding No 50146 of 2005. He has offered to undertake to the court not to cause the company to trade in the future, and to cause it to be wound up as soon as his claims have been resolved.

60 The company's tax returns for the financial years to 30 June 2004 and 30 June 2005 show losses for both of those years. Although there is no income tax return after that date, Mr Thadani's evidence is that the company was in a loss position in the period from July 2005 to 10 February 2006 when it ceased to trade. Consequently, according to Mr Thadani, Multipye has no income tax liability.

61 Mr Thadani has provided a balance sheet for Multipye as at 31 January 2006, 10 days before it ceased to trade, and a profit and loss statement for the period from 1 July 2005 to 31 January 2006. The balance sheet shows assets including cash on hand of nearly $8,000, a rental bond of over $33,000 and shop equipment at cost, depreciated, of about $60,000. Liabilities are said to include trade creditors of nearly $132,000, loans from Mr Thadani and Ms Sit of over $163,000, and the Westpac loan standing at $213,430. Overall, the balance sheet shows a substantial deficiency of liabilities over assets, in excess of $200,000. The profit and loss account shows a net loss of nearly $33,000.

62 These financial statements must be assessed in conjunction with Multipye's expert accounting evidence. Multipye relied on a report dated 15 February 2006 by Scott Turner, a chartered accountant and registered company liquidator, who is a sole practitioner in the areas of insolvency, corporate advisory and litigation support matters, with over 20 years experience in these fields.

63 Mr Turner reviewed the company's financial statements as at 31 January 2006. He also had access to a payables reconciliation as at 31 January 2006, also provided by Mr Thadani, and took into account discussions with Mr Thadani and Mr Muriniti, and also the summons in the Commercial List proceeding, and an interest calculation on moneys utilised to establish the franchise, also prepared by Mr Thadani. He explained that the information supplied to him had not been the subject of any audit or independent verification, and that he had no opinion on the accuracy or reliability of the information he had been given. Importantly, therefore, the factual input upon which Mr Turner's views was based is exclusively or principally from Mr Thadani.

64 Mr Turner expressed the opinion that the company:

· is solvent on an asset/liability test which includes contingencies;

· has sufficient current assets to meet current trade creditors whose claims are not disputed.

65 It seems to me, from my reading of the report, that Mr Turner relied on a number of assumptions in reaching his opinions. On my reading, the assumptions included the following:

66 Mr Thadani's evidence has, in effect, addressed assumptions (i), (ii), (iii) and (v), but not (iv). I shall return to assumption (iv) below.

67 Mr Turner relied on a restated balance sheet, said to reflect a work-out process in order to realise all available assets and meet the liabilities that were due and payable. The restated balance sheet eliminated plant and equipment as an asset (hence increasing the net deficiency) but it introduced a contingent asset of approximately $443,000 reflecting the claim in the Commercial List proceeding, leading to adjusted net assets of $94,748.

68 Mr Turner said that the Commercial List proceeding, if successful, would benefit the stakeholders of the company. In his opinion, if the company proceeded into liquidation, the liquidator would have only limited funds and, subject to his review of the proceeding and sources of potential funds available from creditors and litigation funders, it was probable, in Mr Turner's opinion, that the proceeding might not be continued. He said that to allow the company to continue the proceeding would avoid unnecessary costs of liquidation and would be more beneficial to the stakeholders.

69 The company's balance sheet and Mr Turner's restated balance sheet did not include within creditors the Pie Company with respect to the amount of $52,777 claimed in the varied statutory demand. Instead, Mr Turner treated this amount as offset against the Commercial List claim. Nor did the financial statements include a debt said to be owing by Multipye to Systems in the sum of $90,000. Mr Thadani gave some evidence about this debt. He said that $21,000 relates to equipment that he alleges was faulty; $40,000 formally recorded as owing to Systems has been paid; and the balance of the $90,000 represents royalties and advertising levies normally owed to Systems but the obligation is disputed because, according to Mr Thadani's allegation, there was effectively no Shakespeares franchise from about January 2005 because Shakespeares dismantled the franchise network so as to promote a new franchise arrangement under the name "Jesters Pies" in competition with the company's business.

70 Mr Thadani told the court that he was prepared to give a personal guarantee to the Pie Company in respect of any monies found by the court to be due and owing by reason of the alleged debts that are the subject of the statutory demand. He gave some evidence of his financial position, saying that he has requalified as a master seaman and is qualified to take a position as master of a vessel, for which he would expect to earn $120,000 or more per annum. The net income derived by him and Ms Sit from their properties, other than their residence at Frenchs Forest, is a little over $30,000 per annum.

Findings as to Multipye's Grounds of Opposition to Winding Up

71 For the reasons explained above, the grounds that currently survive are grounds 1, 5, and 9-15.

72 Grounds 1 and 14 are assertions of Multipye's solvency, first as assessed but for the Pie Company's claim in the varied statutory demand, and second if account is taken of the contingent asset constituted by the Commercial List proceeding. In my opinion Multipye's evidence has not succeeded in rebutting the presumption of insolvency.

73 As the principles enunciated by Santow JA in the Expile case (at [16]) show, solvency does not depend on establishing a positive value for net assets in the company's balance sheet. Section 95A requires the court to consider whether the company is able to pay all of its debts, as and when they become due and payable. Where the company is trading, the application of this test requires careful attention to cashflow. Here, however, the company is not trading and its only activity is to pursue the Commercial List litigation and defend the present proceeding. The debts that it incurs to its lawyers in doing so are being met by Mr Thadani and Ms Sit, and Mr Thadani has given some evidence about his financial capacity. In circumstances such as these, the requirements of s 95A might be satisfied even though the fruits of litigation will not ripen for a period of years. The question will be whether there is a probability that creditors will forego payment in the meantime and whether other assets may be realised to meet the legitimate demands of creditors who require payment. Those issues mean that it is relevant, though not determinative, to look behind the balance sheet and investigate the value and liquidity of the company's assets and the rights and attitude to payment of the company's creditors.

74 I shall make some findings about the following aspects of the balance sheet and restated balance sheet as at 31 January 2006: the rental bond; prepaid legal expenses; plant and equipment; the "contingent asset" of the Commercial List proceeding; trade creditors; the loans by Mr Thadani and Ms Sit; and the loan by Westpac.

Rental bond

75 Counsel for the Pie Company submitted that the rental bond has no realisable value. Mr Turner proceeded on the basis that the bond was a cash deposit of $33,374, which would be released to Multipye when it vacated the premises on 10 February 2006, given Mr Thadani's statement to him, recorded in his report, that all amounts of rent had been paid.

76 There are a number of problems with Mr Turner's analysis. One, which I note in passing, is that according to some evidence before me, the bond may have been in the form of a banker's undertaking by Westpac at the request of Multipye for the sum of $29,165.22, rather than a direct deposit. But assuming there was some deposit amount, the lease term does not expire until December 2007 and it appears that Multipye unilaterally vacated the premises without securing the agreement of the franchisor or the landlord. The evidence includes a notice of intention to vacate premises directed to Systems dated 9 February 2006, on stated grounds that are obviously contentious. The Pie Company's counsel submitted that there was no basis for thinking that in these circumstances the rental bond would ever be returned to Multipye. Without going quite that far, my view is that the amount of the bond could not, in the circumstances, be treated as a fund likely to be available for payment of debts as and when they fell due.

Prepaid legal expenses

77 According to the balance sheet, the company's assets included pre-paid legal expenses in the sum of $23,500, presumably on the basis that it was entitled to receive legal services up to this amount. Mr Turner brought this item to account at full value on the ground that the amount in question would be used to meet costs as incurred.

78 If this item constituted a balance sheet asset on 31 January 2006, it must be doubted whether the asset has been consumed in the meantime, given the amount of legal activity in the present matter. The question for the court to decide relates to the solvency of the company now rather than on 31 January 2006. For that purpose, my view is that this asset has not been shown to have remained in existence.

Plant and equipment

79 Plant and equipment were recorded in the balance sheet at a book value of $62,103, largely composed of shop equipment which, according to Mr Thadani's information supplied to Mr Turner, was fixed to the premises. Mr Turner concluded that the ability to realise plant and equipment was limited, and accordingly in the restated balance sheet he wrote that figure down to zero. In my opinion no greater value can be attributed to it for the purpose of assessing the company's solvency.

The "contingent asset" of the Commercial List proceeding

80 This is by far the most important asset, in terms of size, brought to account by Mr Turner. In his report he recorded this asset at $442,982. He said the amount related to the estimated recovery of funds of $216,191 paid to establish the franchise, plus losses incurred during the trading of the franchise in the sum of $206,361, and interest in the sum of $73,207, less the varied amount of the statutory demand in the sum of $52,777. He remarked that "subject to legal proceedings", he had taken up the full amount of the estimated recovery "pending final quantification".

81 It is not appropriate for me to embark or a determination of the matters in issue in the Commercial List proceeding. The question before me is a different one, namely whether Multipye has discharged the onus of proving solvency by showing that its claims have a realisable value in excess of the company's liabilities so that it is able to meet the claims of creditors as and when they fall due.

82 It need not matter that it may take a substantial period of time before the Commercial List proceeding is heard and determined. The materiality of the length of time until realisation depends upon the company's arrangements with creditors. If they are all content to wait, then arguably it is immaterial. In this respect I disagree with the submissions made on behalf of the Pie Company.

83 At its centre, the Commercial List proceeding seems to depend on the claim that the defendants or some of them made misleading forecasts of business takings before the franchise agreement and licence agreement were entered into, inducing Multipye to enter into those contracts. The misleading conduct is said to have occurred partly by what was said by Mr Gualdi and Mr Jones to Mr Thadani at various meetings, and partly through Mr Jones providing computer projections of profits to Mr Thadani. To succeed, the claim will have to overcome the vagueness of the representations of which Mr Thadani has given evidence, and the fact that most of the written projections contained statements that no warranty was made as to actual performance, and in some cases there were statements advising the shop owner to rely on his or her own inquiries. Those disclaimers not only affect the representations contained in the projections, but they also tend to give colour to the surrounding conversations. Additionally, it will be necessary to show that, the extent that the representations were forecasts, they were not based on reasonable grounds at the time when made.

84 I agree with the submission by counsel for the Pie Company that in these circumstances, the outcome of the Commercial List proceeding can only be described as uncertain. It follows, in my view, that it would be imprudent to record the claim for the full value of the amount claimed, for the purpose of calculating the company's financial position and solvency.

Trade creditors

85 Mr Thadani's evidence in October 2005 was that the company had been able to pay its debts as and when they fell due and that the company used the money lent to it by Mr Thadani and Ms Sit. But a somewhat different picture emerged from Mr Turner's report. The balance sheet recorded trade creditors of $131,966. Mr Turner noted that the balance sheet included debts that were disputed and considered not due and payable by the company, totalling $14,708. However, his restated balance sheet recorded trade creditors at $20,752, on the basis that the only creditors included were those whose debts were considered due and payable. Clearly he was relying on information supplied by Mr Thadani for that conclusion. Mr Thadani's payables reconciliation was tendered in evidence and he was cross-examined about it. According to Mr Thadani's explanation of the payables reconciliation, a sum of $92,947.34 said to be payable to Systems, and a sum of $14,538.97 said to be payable to the Pie Company, were disputed. Mr Turner seems to have accepted this of the purposes of preparing his restated balance sheet. In my view Multipye's evidence does not establish that the "disputed" amounts can be disregarded the purposes of determining solvency.

86 Multipye's evidence about trade creditors does not include the Pie Company's claim for $52,777 under the varied statutory demand. That amount, and the "disputed" amounts claimed by Shakespeares, impact on solvency because they exceed the company's immediately realisable assets by a substantial margin and they are claimed to be immediately due.

87 Because of s 459S, as interpreted by Barrett J in his December judgment as modified by his February judgment, Multipye's attempt to establish that these claims are genuinely disputed or are subject to offsetting claims cannot be put forward now, unless the foundation for Multipye's contentions had not arisen or, if it had, it could not have been ascertained by the company at the time of the s 459G application. Of the grounds of opposition available to it at the hearing of the winding up application, only ground 13 would, if made out, extinguish the debts owing to the Pie Company and Systems. Therefore the question of solvency turns on whether ground 13 could have been ascertained at the time of the s 459G application. I shall return to this later.

The loans by Mr Thadani and Ms Sit

88 The balance sheet as at 31 October 2006 records loans by Mr Thadani and Ms Sit at $163,341. In his report Mr Turner noted that Mr Thadani had told him that there was presently no intention to repay the amount or to pursue repayment. On the other hand, according to Mr Thadani's evidence at the hearing, the amount owing to him and Ms Sit is substantially greater than $163,341, and the whole amount is due and payable.

89 Counsel for the Pie Company submitted that the mere fact that a creditor is not pressing for payment does not make the debt anything other than a due debt for the purposes of ascertaining solvency: Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103. Later cases have not been entirely consistent on this point. Palmer J's observation, in Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 39 ACSR 305, at [54], that "the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand", was cited with approval in ASIC v Plymin (No 1) (2003) 46 ACSR 126 and Emmanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) 178 FLR 1. But in Iso Lilodw’ Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561, Davies AJ said he thought Palmer J's statement of principles might imply a level of legality or inflexibility that would be inconsistent with the point that the ultimate issue is a question of fact. And in White Constructions (ACTU) Pty Ltd (in liq) v White (2004) 49 ACSR 220, McDougall J suggested that Palmer J's observations were not intended to lay down exhaustively the circumstances in which indulgences granted by creditors will be taken into account (see Ford's Principles of Corporations Law, looseleaf, at [20.100]).

90 The facts of the present case are special. Here it is less important, in assessing the solvency of the company as a matter of fact, that the debts owed to Mr Thadani and Ms Sit are legally due and payable, than that the creditors are the owners of the company who wish to keep it alive so they can cause it to pursue litigation for their benefit. In such a case it would be plausible for the court to find, absent other circumstances, that the company was solvent notwithstanding the existence of large related-party debts that were immediately due and payable in a legal sense. It is unnecessary for me to reach a final view on this matter because, in my opinion, Multipye has failed to rebut the presumption of insolvency for other reasons.

The loan by Westpac

91 This was recorded in the balance sheet as at 31 January 2006 at $213,430. Mr Turner noted that the debt was secured by a fixed and floating charge over the company and also third-party security over the directors' properties. He said, however, that Mr Thadani had informed him that there was currently no default on the loan and that he would continue to meet the requisite repayments. But according to the terms of the finance offer by Westpac which is in evidence (annexed to Mr Thadani's affidavit of 3 November 2005) if the franchise agreement is terminated for any reason, this is a "default event" under the finance facility. The franchise agreement was purportedly terminated by Multipye by its notice to Systems dated 9 February 2006. Prima facie, therefore, it would seem that Multipye is in default and Westpac is in a position to terminate the facility, demand repayment and exercise its security.

92 There is no evidence before me as to Westpac's attitude to demanding repayment upon the happening of a default event. An indulgence by Westpac with respect to the company's repayment of the loan, if it were given, would not affect the conclusion that the debt has become due and payable and on the evidence, Multipye is unable to pay it at the present time.

Conclusion as to solvency

93 In my opinion Multipye has failed to rebut the presumption of insolvency that arose when it did not comply with the varied statutory demand. Moreover, the facts would lead me to conclude that the company is insolvent even if there were no presumption in operation. There are two components of the balance sheet leading to that conclusion. One is the existence of the debt to the Pie Company in the varied statutory demand, together with the disputed debt to Systems of over $90,000. For reasons I shall give, Multipye has not succeeded in showing, for the purposes of s 459S, that the only pertinent ground of opposition to the winding up, ground 13, could not have been ascertained at the time of the s 459G application.

94 The other component of the balance sheet leading to my conclusion about insolvency as the Westpac debt. It appears to have become immediately due and payable, and there is no evidence before me that Westpac has agreed with Multipye or Mr Thadani to desist from demanding payment from the company.

Ground 13

95 Multipye claims that the documentation that purports to reflect on a transaction, under which a franchise fee of $100,000 was paid, is a sham to disguise an illegal payment of key money. Section 14(1) of the Retail Leases Act 1994 (NSW) provides that a person must not, as lessor or on behalf of the lessor, seek or accept the payment of key-money or lease preparation expenses in connection with the granting of a retail shop lease. But s 14(3) says that the section does not prevent a lessor:

96 In my view the evidence falls well short of supporting Multipye's contention. The evidence adduced on behalf of Multipye shows that the original proposal that Multipye would buy the Mr Goodpie business for $125,000, including a substantial component of goodwill, was varied on the advice of Multipye's solicitor. In its new form, the transaction involved Systems buying the Mr Goodpie business for the same price of $125,000, a substantial component of which was goodwill. As one would expect, Multipye was required to pay approximately the same amount as it would have paid had it purchased the Mr Goodpie business directly. I infer that the sum of $127,500 provided for in the acknowledgement document of 12 September 2003 included the $125,000 that was referred to in other documents and discussed in correspondence.

97 The acknowledgement document described part of the payment in the sum of $100,000 as for a licence to use goodwill of the business. However, the amount of $100,000 was characterised as a franchise fee in the franchise agreement. The franchise and license agreements were the final agreements reflecting the arrangements between Systems and Multipye. According to that documentation, Multipye's payment was, as to $100,000, a franchise fee and as to $27,500 payment for plant and equipment. If that characterisation is correct, the payments were exempted from the key money prohibition by ss 14(3)(f) and (e) respectively.

98 In my opinion, the evidence does not provide any plausible basis for regarding the characterisation in the documents as a sham. The transaction was not one in which Georgie Porgie, as proprietor of the Mr Goodpie business, sought to deceive Multipye into paying what Georgie Porgy new was illegal key money, and the evidence provides no basis for believing that Systems (and certainly not the Pie Company) knowingly participated in any such deception.

99 Specifically, the fact that the parties decided to proceed without solicitors when the final documents were executed is not, in itself, evidence of a conspiracy to act illegally or fraudulently. On the contrary, the evidence indicates that Systems was under pressure to complete the transaction and was becoming frustrated with the delays associated with the issues raised by Mr Muriniti.

100 I do not regard the handwritten endorsement on the schedule of figures for Shakespeares Central Plaza, striking out the words "Lease Payout" and writing in the words "Goodwill, key money?", as having any sinister significance. The person who wrote those words appears to have been confused about the character of the payment, but the matter is clarified in the documents.

101 Nor do I regard the evidence concerning late execution of the Deed of Covenant and Consent as supporting any contention that the documentation was a sham. It is consistent with the idea that such a deed was contemplated, but the people responsible for attending to it allowed the matter to slip. If there were any argument, under the terms of the head lease, that the failure to obtain the lessor's consent prior to commencement of the licence invalidated the licence, any such claim made by the lessor or by Systems would be open to a defence of estoppel having regard to the fact that eventually, consent was formally given. Late execution of the document was not associated with any denial on behalf of the lessor or the franchisor of Multipye's right of occupation of the shop. Multipye took possession of the premises in September 2003 and remained in possession until 10 February 2006. The lessor never terminated, or threatened to terminate, Multipye's occupation of the shop. The absence of formal consent did not cause Multipye any loss.

102 Even if Multipye could establish, against Systems, that the transaction was a sham and/or that Systems received illegal key money or knowingly participated in a scheme for payment of illegal key money to Georgie Porgie, it would not thereby establish an offsetting claim against the Pie Company. Multipye's contention that there was a joint venture between the Pie Company and Systems seems to be designed to overcome this problem, but I can see nothing in the evidence that would support a plausible argument that a joint venture was created. The evidence indicates, not surprisingly, that the Shakespeares group organised its business operations so that Systems was the franchising company and the Pie Company was the supplier of product. Any evidence that, from time to time, those involved in the operations did not clearly distinguish between one entity and the other would not, itself, be a ground for asserting that the entities were in a joint venture or otherwise that they accepted joint and several liability for one another's debts.

103 As noted earlier, Barrett J left open the question whether the pursuit of ground 13 at the hearing of the winding up application was barred by s 459S. According to Barrett J's reasoning, with which I respectfully agree, the issue is whether Multipye could have raised ground 13 as an offsetting claim in the s 459G application. That, in turn, depends upon whether, at that time, Multipye knew or could have ascertained the facts and circumstances upon which ground 13 is based. The onus of establishing these matters is on Multipye.

104 Multipye's contention is that it discovered the relevant matters only when documents were obtained on subpoena in the Commercial List proceeding, including the documents obtained from Sparke Helmore, Landerer & Co and Westfield. But it did not show that it endeavoured to investigate those matters at the time of the s 459G application, or that if it had done so, it would not have succeeded. One can readily infer that solicitors would be unlikely to disclose the contents of their files, except upon instructions or under compulsion, but I see no reason for concluding that Westfield, if asked for a copy of the Deed of Covenant and Consent at that earlier time, would have refused to co-operate. In any event, the evidence in fact uncovered by Multipye as a result of the subpoenas fell a long way short of establishing the offsetting claim asserted in ground 13. My conclusion is that Multipye is prevented by s 459S(1) from asserting ground 13, but if that were not so, ground 13 has not been proven.

Other grounds

105 Ground 5 alleges that the winding up application is an abuse of process, on the ground that the Pie Company is seeking a winding up order for the purpose of preventing Multipye from pursuing its meritorious claim for damages against the Shakespeares companies and others in the Commercial Division. I agree with counsel for the Pie Company that there is no proper foundation in the evidence for an inference of improper purpose. The Commercial List proceeding was commenced some two weeks later than the winding up proceeding. There is some evidence that Mr Muriniti was threatening proceedings before the winding up application was made, but that evidence falls well short of grounding an inference of improper purpose.

106 Section 459A of the Corporations Act says that in an application under s 459P, the court may order that an insolvent company be wound up in insolvency. It is plain from the use of the word "may" that the court has a discretion to decline to make the order even though insolvency has been established. Grounds 9, 10, 11 and 12 are not grounds of opposition to the making of a winding up order, in the sense that the court may decide to make a winding up order on the ground of insolvency even if one or more of these grounds is established. These grounds identify factors that might influence the court to decline to make a winding up order notwithstanding that the company is found to be insolvent. In other words, these four grounds are matters going to the court's discretion, also invoked in ground 15.

107 I do not regard grounds 9, 10, 11 and 12 as having any significant weight on the discretionary issue. The allegation of breach of fiduciary duty in ground 9 depends partly upon contentions of misrepresentation and other misleading conduct that I considered when I examined the "contingent asset" for the purposes of determining insolvency; and partly on allegations relating to improper purpose and abuse of process that I considered in my examination of ground 13. Ground 10 is not easy to understand, but it seems to refer to the conduct of Systems as well as the Pie Company, conduct examined in those other two contexts.

108 Counsel for the Pie Company submitted that ground 11 was considered and rejected by Barrett J in his December and February judgments. That is not quite correct, in my view. Barrett J reached the conclusion, as I have explained, that the winding up proceeding should not be stayed pending the outcome of the appeal, but now the same matter is advanced for another purpose, namely to persuade the court in the exercise of its discretion not to make the winding up order. That said, just as Barrett J took the view that to grant a stay of the winding up application would be contrary to the policy underlying ss 459G and 459S, my view is that it would be contrary to those policies for me to place any significant weight on this factor in the exercise of my discretion to decline to make a winding up order, in circumstances where I have found the company to be insolvent.

109 To the extent that ground 12 contends that the majority of creditors oppose the winding up, it raises a matter worthy of consideration. Here, however, the two largest creditors are the shareholders of the company who stand to gain from litigation which they wish to pursue in the company's name, and the other large creditor is their bank. That weakens the significance of this factor.

110 The remainder of ground 12, and ground 15, raise a matter which, in my view, is the most important discretionary consideration in the present case. The question is whether it is better to leave the company in the control of Mr Thadani, who will cause it to pursue the Commercial List proceeding essentially at his cost, and for his benefit and the benefit of Ms Sit, or to place the company in the hands of arms-length liquidators who will be able to make a more objective assessment of the prospects of success in litigation and investigate avenues of funding not confined to (though not excluding) Mr Thadani and Ms Sit.

111 Having reviewed the evidence concerning Multipye's claims, and perhaps more importantly in this context, having listened to the evidence of Mr Thadani and the other witnesses for Multipye, I have formed the firm conclusion that in this case, given that the company is insolvent, the best course is to put it in the hands of liquidators who can decide what to do about the Commercial List proceeding. I have gained the strong impression that the claims in the Commercial List proceeding have not been carefully formulated and prepared, and are not, at this stage, supported by cogent evidence. It is possible that the evidence will be more compelling if it is presented, fully prepared, in a Commercial List trial. But the evidence presented to me to demonstrate the strength of the claims was unconvincing. I have explained my assessment of the evidence earlier in this judgment, especially in considering the company's insolvency and ground 13.

112 Mr Thadani has a great deal at stake. His participation in the Central Plaza pie shop business has been a financial disaster for him, according to the evidence. He wants to hold the Shakespeares companies and their directors accountable so as to avoid or reduce the adverse financial consequences of his business decisions. He is in no position to evaluate the company's prospects of success in an objective manner, as a liquidator is duty-bound to do. In my judgment, a hard-headed objective evaluation of the Commercial List proceeding is now needed.

113 For these reasons, grounds 9, 10, 11, 12 and 15 do not persuade me to exercise my discretion against making a winding up order. My decision on this point is contrary to the opinion of Mr Turner. However, the exercise of discretion to make or not to make a winding up order when the insolvency ground has been established is a matter for the court rather than any expert witness. I have had the benefit of seeing and hearing the evidence as a whole, whereas Mr Turner has relied very much on Mr Thadani's input.

Objection to admissibility under s 459S

114 At the hearing of the winding up application, counsel for the Pie Company made a series of general objections to the reading of certain affidavits and the tendering of certain exhibits by Multipye. The ground of objection (Transcript page 20) was that the subject of this evidence related to matters that could not be relied upon because of s 459S of the Corporations Act.

115 Section 459S(1) says that in so far as a winding up application in insolvency relies on failure to comply with a statutory demand, the company may not, without the leave of the court, oppose the application on grounds that the company relied on or could have relied on at the hearing of an application to set aside the statutory demand. Counsel's submission was that by tendering the evidence to which objection was taken, the company was endeavouring to oppose the application on grounds prohibited by s 459S(1).

116 Section 459S(1) does not directly deal with the question whether evidence at the hearing of the winding up application is admissible evidence. Instead, by preventing the company from opposing the application on certain grounds, it limits the scope of relevant evidence at the hearing. In the language of s 55 of the Evidence Act 1995 (NSW), it prevents certain matters from being "facts in issue in the proceeding" by narrowing the issues. Nevertheless, the broad definition of relevant evidence, expounded in s 55, remains applicable. Although s 459S prevented Multipye from raising matters it could have raised at the hearing of the application to set aside the statutory demand, it was permitted consistently with s 459S to raise the matters identified in grounds 1, 5, and 9-15 of its Notice of Grounds of Opposition to Winding Up. It was entitled to adduce evidence relevant to those grounds (Evidence Act, s 56).

117 I have reviewed the evidence to which counsel raised the general objection under s 459S, by considering whether that evidence, though it cannot be used in support of grounds that were or could have been raised at the s 459G hearing, is relevant to the grounds of opposition that remain. I have decided that all of the evidence meets the test of relevance in s 55: that is, if accepted, it could rationally affect the assessment of the probability on the existence of the facts remaining in issue in the winding up proceeding. Therefore the general objection to admissibility has been unsuccessful.

Conclusions

118 I have decided that Multipye is insolvent and that the court should make an order under s 459A that it be wound up in insolvency, and accordingly that liquidators should be appointed. I shall appoint Mr Hall and Mr Brown, official liquidators, who have consented to the appointment. I shall order Multipye to pay the Pie Company's costs, as agreed or assessed. Those costs will have the priority over other unsecured debts afforded by s 556(1)(b).

**********

Actions

Download as PDF Download as Word Document

Citations

Shakespeares Pie Co v Multipye [2006] NSWSC 930

Most Recent Citation

Deputy Commissioner of Taxation v Glenleigh Developments Pty Ltd, in the matter of Glenleigh Developments Pty Ltd [2014] FCA 354

Cases Citing This Decision

1

Deputy Commissioner of Taxation v Glenleigh Developments Pty Ltd, in the matter of Glenleigh Developments Pty Ltd [2014] FCA 354

Cases Cited

11

Statutory Material Cited

2

Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548

Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163

Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728

CITATION:	Shakespeares Pie Co v Multipye [2006] NSWSC 930
HEARING DATE(S):	19 & 20 April, 11 September 2006
JUDGMENT DATE :	12 September 2006
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Orders that the defendant company be wound up and liquidators appointed
CATCHWORDS:	CORPORATIONS - winding up in insolvency - whether defendant could raise at the hearing matters that could have been raised in the application to set aside a statutory demand - admissibility of evidence on such matters - proof of solvency, where company is not trading - significance of related creditors' debts being due and payable where related creditors oppose the winding up - court's discretion to decline to order winding up of insolvent company
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss 459A, 459G, 459P, 459S Retail Leases Act 1994 (NSW) s 14
CASES CITED:	Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 ASIC v Plymin (No 1) (2003) 46 ACSR 126 Emmanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) 178 FLR 1 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Iso Lilodw’ Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561 Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1338 Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1201 Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2006] NSWSC 100 Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 39 ACSR 305 White Constructions (ACTU) Pty Ltd (in liq) v White (2004) 49 ACSR 220
PARTIES:	Shakespeares Pie Co Australia Pty Ltd (P) Multipye Pty Ltd (D)
FILE NUMBER(S):	SC 4979/05
COUNSEL:	N J Kidd (P) R D Newell (D)
SOLICITORS:	PricewaterhouseCoopers Legal (P) L C Muriniti & Associates (D)