Apostolakis v Cafe Italiano Wellington Limited HC Wellington CIV-2011-485-583

[2011] NZHC 1559

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2011-485-583

BETWEEN  GEORGE APOSTOLAKIS Plaintiff

ANDCAFE ITALIANO WELLINGTON LIMITED

Defendant

Hearing:         7 June 2011

Counsel:         M J Moohan for Plaintiff

P S J Withnall for Defendant

Judgment:      24 June 2011

JUDGMENT OF WILLIAMS J

In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 10.30am on the 24th June 2011.

Solicitors:

Collins & May Law, Lower Hutt

P S J Withnall, PO Box 10201, Wellington

GEORGE APOSTOLAKIS V CAFE ITALIANO WELLINGTON LIMITED HC WN CIV-2011-485-583 24

June 2011

Introduction

[1]      On 30 March this year His Honour Associate Judge Gendall made orders appointing an interim liquidator for the defendant company (referred to here for convenience, as Caffé Italiano).1  The orders were made ex parte.

[2]      The consideration of whether final orders for liquidation should be made now falls to me.  Before me I have an affidavit and reply affidavit from Mr Apostolakis, together with the report of the interim liquidator Mr Allott.  I also have an affidavit from Mr Giurioli, the other owner of the defendant, and Ms Hamer, the company’s former accounts clerk.

[3]      Mr Apostolakis argues that the defendant is insolvent and that the relationship between him and Mr Giurioli has suffered a complete breakdown in trust and confidence.  On these two grounds, he says, liquidation is the only proper course.

[4]      Mr Giurioli argues that the defendant remains profitable and that, with debt restructuring, could trade its way out of its present difficulties.   He says that liquidation is a disproportionate response to the difficulties between himself and Mr Apostolakis,  and  that  a  better  alternative  is  to  allow  Mr  Giurioli  to  buy Mr Apostolakis out.

Facts

[5]      The facts are as follows.

[6]      The company was incorporated in March 2006 with Mr Giurioli as its sole owner.  In early to mid 2007 Mr Apostolakis joined Mr Giurioli in the company as a

50 percent  shareholder.     Mr  Giurioli  ran  the  company  while  Mr  Apostolakis

continued to own and operate the Carlton Cafe in Kilbirnie.

1 I note however that this application does not relate to two other Caffé Italiano cafes located in other parts of the city and operated, so far as I am aware, by another company or companies.

[7]      This changed in early 2010 when, for personal reasons, Mr Apostolakis sold his cafe and began to take an active role in Caffé Italiano.

[8]      Mr Apostolakis  says  that  at  that  time  he  found  that  Caffé  Italiano  was overstaffed and overstocked with far too much of the stock being time expired.  This caused concerns and he took over the running of the accounts for the company.  He cancelled a contract for services with Webtec – which employed the company’s accounts  person  Ms  Hamer.    He  also  cancelled  automatic  rental  payments  for premises  occupied  by  a  company  called  Serio  which  is  wholly  owned  by Mr Giurioli.

[9]      It is necessary to mention the background to the Serio rent issue.

[10]     The defendant’s business is located at 229 Cuba Street.  Serio’s business is

located at 22 Vivian Street.  Caffé Italiano did operate a wholesaling business out of

22 Vivian Street but in September 2010 this aspect of the business was transferred to Serio in return for satisfaction of debts owed by Caffé Italiano.   Serio was the primary supplier of Italian foodstuffs to Caffé Italiano.  Rental payments continued to  be  made  by Caffé  Italiano  for  22  Vivian  Street  even  after  Serio  took  those premises over.  Mr Apostolakis says that should not have happened, but Mr Giuroli says this was in part-payment for ongoing supplies to Caffé Italiano even after Serio took over.

[11]     Needless to say Mr Apostolakis says that Mr Giuroli was feathering his own nest by inflating Caffé Italiano’s orders (because, as I have said, the latter owned Serio).  Mr Giuroli says that is untrue.

[12]     In December 2010 the Bank of New Zealand requested the owners of Caffé

Italiano to provide a financial report for the nine month period ending December

2010.     That  became  available  to  Mr  Apostolakis  sometime  between  11 and

28 February 2011.  It indicated that the company was in serious financial difficulty.

[13]     During the weekend of 26-27 February 2011 Serio’s premises at Vivian Street were entered and extensive stock and equipment removed.  Most of the stock and

equipment  belongs  to  Serio  but,  at  least  according  to  Mr Giurioli,  some  Caffé Italiano equipment was also taken.  Mr Giuroli estimates the value of the removed stock and equipment at $50,000.

[14]     It  transpires  that  Serio’s  premises  were  entered  in  the  name  of  Gastone Limited, the landlord (of which Mr Apostolakis is a 25% shareholder).  The goods were removed by truck by way of distraint for arrears of rentals for the property (it will be remembered that Mr Apostolakis had cancelled the automatic payment).

[15]     Mr Withnall estimated the arrears at about $2,800.  He argued that the action taken was both disproportionate and indiscriminate, when comparing the value of the stock  and  goods  taken  to  the  value  of  the  rental  arrears.     Mr  Moohan  for Mr Apostolakis argued that this matter had nothing to do with Caffé Italiano, it was a matter between Serio and Gastone Limited, its landlord.

[16]     Whatever   the   true   position   here,   those   who   removed   the   materials subsequently discovered that they had no right to do so and the materials were (they said) returned.  Mr Giurioli complained that not all material had been returned.

[17]     A period of intense negotiations ensued throughout in March 2011 with one side or the other making threats to liquidate the company while exchanging offers and counter-offers for one or other to buy his partner out.

[18]     By 28 March 2011 negotiations had broken down, and the application to appoint an interim liquidator was made.

[19]     As I have said an interim liquidator was appointed on 30 March this year.  He prepared  a  report  dated  30  May  which  was  filed  in  this  application.    Having reviewed the company’s accumulated trading losses of $802,322 and its net (and significantly understated) liabilities of $565,182, Mr Allott concluded that the company was, in his opinion, insolvent.   He said that if the Inland Revenue Department were to issue a statutory demand for its total tax liability of $287,000, the company would be unable to comply with that demand.  He also considered that, in light of its poor trading history, the company would be worth significantly less

than $200,000 – the going rate for successful cafes in Wellington – and that with the company’s secured indebtness to the BNZ of $1.16 million and preferential debt to the IRD of $172,000, the company was no longer able to propose a compromise with creditors in terms of Part 14 of the Companies Act or to appoint administrators under Part 15A.

No alternative

[20]     At the conclusion of the hearing of this matter on 7 June 2011, I was advised that Mr Giurioli continued to press for an arrangement whereby he could buy out Mr Apostolakis subject to an appropriate indemnity in relation to both his and Caffé Italiano’s liabilities.  By letter of 3 June, Mr Giurioli had offered such an indemnity but  Mr Apostolakis  did  not  think  the  indemnity  had  any  value.    I  invited  the protagonists  to  find  a  way  through  the  impasse  so  as  to  avoid  liquidating  the company and for a time things looked hopeful.  I initially gave the parties seven days for further discussions, and they sought a further seven days to conclude discussions. In the event no agreement has been reached, at least according to the plaintiff’s memorandum filed on 17 June last.  This seems to be because Mr Giurioli has been unable to find a backer to allow him to buy Mr Apostolakis out.

[21]     The report of the interim liquidator appointed at the end of March was, as I have said, that Caffé Italiano is insolvent on a balance sheet basis.  The bank had served formal demands and Property Law Act notices in May, and neither of the shareholders is in a position to agree a path through these difficulties.

[22]     It  is  clear  to  me  therefore  that  the  relationship  of  trust  and  confidence necessary for the operation of a small company akin to a partnership  has been undermined and the owners can no longer work together sufficiently to trade their way out of the company’s straitened circumstances.  Nor is there now any alternative option whereby the two owners can allow one to walk away and the other to retain the business.  There seems no point in assessing who is to blame for this.  There is certainly no evidence to suggest that the breakdown in the relationship between Mr Apostolakis and Mr Giurioli occurred entirely as a result of Mr Apostolakis’

actions.  As in the decision in Re Rongo-ma-tane Farm Limited,2 it is the fact of the breakdown that is important at this stage.   In light of the difficulty the parties are having in finding or indeed funding any alternative path, any delay in liquidating the company will be to the disbenefit of the company, its owners and creditors.   In addition, the company is insolvent and unable to meet its liability to IRD if statutory demand were made.   It is unlikely anyway, to be long before Caffé Italiano will qualify  for  liquidation  under  s 241(4)(a).     It  is  thus  necessary  to  bring  the commercial relationships represented by this company to an end.

[23]     There will be a final order that the defendant be put into liquidation on the ground that it is just and equitable to do so in terms of s 241(4)(d) of the Companies Act 1993.   The applicant will be entitled to costs.   Memoranda can be filed if

necessary.

Williams J

2 (1987) 3 NZCLC 100,145 (HC).