AX Business Systems Pty Ltd (ACN 072 265 635) v Quality Image Pty Ltd

Introduction 1 The applicant, AX Business Systems Pty Ltd ("AX"), has applied to the Court to review the decision of Deputy District Registrar Efthim, made on 15 December 2003 dismissing AX's application to set aside the respondent's ("Quality Image") statutory demand dated 7 April 2003 pursuant to s 459G of the Corporations Act 2001 (Cth) ("the Act"). The applicant seeks an order that the statutory demand be set aside pursuant to s 459H of the Act and that the period for compliance with the statutory demand be extended.

Background 2 The application arises out of the operation of a business in Orange, New South Wales, known as "The Xerox Shop", which engaged in the sale of photocopier equipment and the supply of consumables and services associated with that equipment. The Xerox Shop was operated by Quality Image until June 2000. Quality Image is the holder of a Fuji Xerox sales and service dealership licence for a designated region of Victoria and New South Wales, and is the only entity able to grant a sub‑licence in that region. 3 The relationship between AX and Quality Image was one of agent and sub‑agent, although there is an issue between the parties as to the circumstances out of which the sub‑agency arose. What is agreed is that in August 1999 Mr Edward Watts, a director of Quality Image, contacted Mr Steven Anderson, the sole director of AX, who was working in Tasmania as a photocopier salesman, and proposed that Mr Anderson take over the operation of the Xerox Shop in Orange as a sub‑agent of Quality Image. The substance of Mr Watts' proposal is in dispute but it is not necessary to resolve that dispute for present purposes. 4 According to Mr Anderson, Mr Watts offered him a sub‑agency for $100,000 on a "walk‑in, walk‑out" basis including stock‑in‑trade and plant and equipment used in the conduct of the business. Mr Anderson said that Mr Watts told him that he would have to employ staff, operate the business and pay Quality Image a monthly agency fee. 5 Mr Watts said that he did not say that Mr Anderson would have the right to operate as a sub‑agent for $100,000, but had explained to Mr Anderson that he would require approximately $100,000 in order to start up the sub‑agency, purchase stock, parts and office equipment and cover the lease of premises, vehicles and salaries. According to Mr Watts he told Mr Anderson that the initial fee for the sub‑agency would be $125,000, with monthly payments of $10,000. 6 Mr Anderson arrived in Orange around September 1999 and initially worked for Quality Image as a salesman in the business. Towards the end of October 1999, AX became the sales agent for Quality Image. It obtained equipment from Quality Image on consignment and sold it on Quality Image's behalf to Quality Image's customers. Upon the sale of the equipment, payment was made to Quality Image, which was to account to AX for AX's commission on the sale. It was agreed that at this stage that AX paid an agency fee of $6,500 per month and that AX received 100% commission on profit from sales. Quality Image contended that this was an interim arrangement in order to assist AX who was having trouble liquidating assets and to ascertain its ability to run the business. This arrangement operated until 1 July 2000. 7 Prior to July 2000 the parties had discussions regarding the terms of the sub‑agency agreement. The figure of $100,000 was discussed, which according to AX was a fee for the purchase price of the business. Mr Watts asserted that the $100,000 was a figure used by him in order to give Mr Anderson an estimate of the cost of purchasing stock, office equipment, taking over the lease of the premises and covering other expenses. Mr Watts said that he discussed with Mr Anderson that there was also a capital payment to be made for the right to operate as a sub‑agent and that Mr Anderson did not have that capital available to him. 8 Subsequently, around May or June 2000, the parties agreed that AX would takeover the business on 1 July 2000 but that the invoices rendered for payment would require payment to be made to Quality Image which would account to AX in respect of the commission due to it. It was agreed that Quality Image could take 30% of the sales commission payments due to AX and apply it in reduction of the $100,000 payable by AX. According to AX, this application of the commission was to enable AX to pay off the $100,000 purchase price whereas Mr Watts contended that it was used for the purpose of paying the costs of stock on hand, office, equipment leases, lease of premises and initial employee wages, which was in the order of $100,000. The agency fee was increased from $6,500 per month to $10,000 per month. AX was to render invoices to Quality Image, who would in turn account to AX for commission due under the agreement. The agreement was never committed to writing. 9 On 1 July 2000 AX began to operate the Xerox Shop pursuant to the agreement. Mr Anderson said that by November he had paid $80,000 in part payment of the purchase price in three instalments ("the bulk payments") but that Quality Image did not provide him with any acknowledgement as to the purpose for which the payments were received. He said that by March 2001 Quality Image had received the remaining $20,000 due by its retention of 30% of the sales commission otherwise due to AX. 10 Mr Watts acknowledged that Quality Image had received some lump sum payments, but said that they were applied in reduction of other liabilities and payments due by AX. They were not applied in discharge of the debt of $100,000, being the capital payment outstanding. Quality Image's name had not been removed from equipment and other leases and AX began to fall behind on payments due in respect of those leases. Quality Image, as the leaseholder, paid the accounts on behalf of AX. 11 Mr Anderson asserted that Quality Image did not account to AX for the bulk payments or indicate the purpose for which they were received. In response, Mr Watts asserted that an accounting was made of all monies owed by AX and that AX was informed where money was retained on account of the 30% commission and where it was applied to AX's outstanding debt. Mr Anderson asserted that the balance of the purchase price was paid in or around March 2001. This was denied by Mr Watts. 12 By early 2001 the parties were in dispute about the application of monies paid by AX to Quality Image and the ownership of the business. The amount of commission to be retained by Quality Image in reduction of outstanding debts was reduced from 30% to 15%. 13 In August 2001 the parties entered into a written trial agency agreement which provided for the indebtedness of AX to Quality Image to continue to be reduced by Quality Image retaining 15% commission on sales. 14 Mr Anderson asserted that following the written agreement he continued to query where the 15% commission offsets were being applied and that Mr Watts ignored him. Mr Watts said that his staff continually gave Mr Anderson written information as to the allocation of the commission and any other payments to be made against the outstanding debts of AX. The agency fee was reduced from $10,000 to $7,000 in May 2002. 15 From late 2001 to early 2003 AX began to withhold agency fees at those times where it felt that Quality Image was not giving it the requisite information regarding the allocation of commission offsets. 16 On 18 February 2003, Mr Anderson wrote to Mr Watts informing him that he felt he was left with no choice other than to relinquish the Xerox Shop agency. On 21 February 2003 the solicitors for Quality Image wrote to AX claiming that it owed money to Quality Image and informing AX that it could no longer represent itself as an agent of Quality Image and that it must cease to have any association with the Xerox Shop. The Xerox Shop was subsequently closed by AX. According to AX this was because of the solicitor's letter, whilst Quality Image said that AX had relinquished the agency in its letter dated 18 February 2004. 17 The statutory demand dated 7 April 2003, and served on AX Business Systems on 8 April 2003, required AX to pay Quality Image $125,205.30 for agency fees under the agreement between Quality Image and AX in relation to the operation of the business trading as "The Xerox Shop" in Orange, New South Wales. 18 Mr Anderson was unsure why the invoices the subject of the statutory demand were not consecutive and whether the amounts claimed had been paid by AX. He said that Quality Image had not provided receipts for many of the payments made by AX from July 2000 to February 2003, and that in that time AX had paid Quality Image in excess of $500,000. Mr Watts said that the invoices only related to unpaid agency fees, and that they were not consecutive because some of the agency fees had in fact been paid. It was these unpaid agency fees that became the subject of the statutory demand. Quality Image asserted that it had properly accounted for monies received by it and had produced a reconciliation, which showed that AX owed Quality Image the sum of $520,486.32. AX denied that it was indebted to Quality Image.