Booker v You Run the Business Pty Ltd

REASONS FOR JUDGMENT 1 Roger Booker, his wife Elizabeth Booker (together, the plaintiffs), Susanna Coslovich and her husband Nereo Coslovich each hold one share in the capital of You Run the Business Pty Ltd (YRTB). The principal asset of YRTB is the shares it holds in Busy Bookkeeping Pty Ltd (BBPL). BBPL is the franchisor of the Busy Bookkeeping business which provides bookkeeping services to small businesses. It provides services to its franchisees (of which there are about 53) to enable them to carry out their activities. It receives revenue by way of management fees, the proceeds on the sale of franchises, royalties and from the sale of merchandise. The Bookers seek to have YRTB would up and a liquidator appointed. The question is whether those orders should be made. 2 The Bookers and the Coslovichs acquired YRTB in 2003 to purchase BBPL. Mrs Coslovich and Mr Booker were appointed directors of both companies. The Bookers and the Coslovichs prepared, but did not execute, a shareholders agreement. The agreement provided that the Coslovichs (through We Keep the Books Pty Ltd) would be responsible for the administration of the companies, including the maintenance of corporate records and financial accounts and the Bookers (through Booker Accounting Services Pty Ltd) would be responsible for sales, marketing and training. The agreement also provided that all expenditure was to be authorised by Mrs Coslovich and Mr Booker. While the agreement was not executed it appears to have been put in effect, at least in the early years of the companies' operation. 3 In mid-2005 the relationship between the Coslovichs and the Bookers broke down. Mr Booker claims that the Coslovichs restricted his access to the financial records of YRTB and BBPL. This prevented him from understanding the transactions recorded in the accounts. Mr Booker also alleges that YRTB and BBPL were paying "disproportionate amounts" to persons associated with the Coslovichs. Mrs Coslovich rejects the allegations of misconduct and herself asserts that Mr Booker was "not adequately performing his assigned duties" which had "impacted upon the effective running of the franchise business and directly affected the viability and profitability of the franchise business". According to Mrs Coslovich, Mr Booker's performance was so poor she was forced to appoint a "National Sales Manager" (whose appointment has since ended) in order to protect the interests of YRTB, BBPL and the franchisees. 4 The relationship between the parties worsened after 2005. In early June 2007 Mr Booker was denied access to BBPL's bank accounts. He responded by causing the company's banker, the Commonwealth Bank, to temporarily freeze the accounts. Although the evidence is unclear, it appears that on 20 June 2007 there was a meeting of the members of both companies to try and sort out the problems. Little was resolved. The Bookers left after the meeting became "heated and aggressive on both sides". They later found out that resolutions had been passed removing Mr Booker as a director of both BBPL and YRTB and appointing Mr Coslovich in his place. The Bookers claim they had no notice of these resolutions. The Coslovichs dispute this assertion, but no written notice to that effect has been produced. While I have not had need to resolve this dispute, it seems highly unlikely that if the Bookers had notice of the proposed resolution they would have left the meeting. 5 At any rate, on 4 December 2007 the Bookers brought the application to have YRTB wound up in order to secure "the value of [their] investment". They rely on s 461(1)(k) of the Corporations Act 2001 (Cth), the just and equitable ground. They assess the value of their investment to be approximately $300,000 comprising: (a) an initial contribution of $37,500 to facilitate the purchase of BBPL; (b) money paid by the Bookers to BBPL in order to purchase franchises in the Bookkeeping business (which was designed to generate a profit in BBPL); and (c) (unpaid) time invested by the Bookers in the business. Mrs Coslovich opposes the application to wind up YRTB, submitting that there are "more appropriate remedies to address the various issues raised by the Plaintiffs". 6 Since the application was filed further disputes have arisen between the parties. Mr Booker has filed evidence to show that the total credit balance of BBPL's bank accounts is very low and that a number of cheques drawn by BBPL were dishonoured. Mrs Coslovich denies that the companies are insolvent. She explained that administrative errors and Mr Booker's decision to freeze the accounts resulted in a "backlog" which was responsible for the low bank balance and the dishonoured payments. This is just the tip of the iceberg. Other allegations regarding a range of issues have been made on a regular basis by one side against the other. Each allegation has in turn been denied. The only thing that is clear from the allegations and the counter-allegations that have been made is that the parties simply cannot work together. The ill-will that exists between them will never end. 7 Earlier this year the dispute between the parties was referred to mediation before a registrar. The Coslovichs contend that the dispute was settled at the mediation. In substance they say that the Bookers agreed to purchase the Coslovichs' interest for about $150,000. The Bookers contend that no final agreement was reached. They say that they were happy to purchase the Coslovich interest but indicated at the mediation that they were concerned there had not been adequate disclosure of all the liabilities incurred by the companies. Counsel for the Bookers began to prepare, but did not finalise, written terms of settlement at the mediation. Counsel completed drafting the terms on the evening of the mediation and a copy was sent to the Coslovichs the following day. The terms contained the following condition: "These terms of settlement … are subject to and conditional upon: (a) the plaintiffs advising the defendant's solicitors … that they approve the contents of the current financial statements [of the companies] …". The Coslovichs objected to the condition and, accordingly, refused to sign the terms of settlement. They argued that the condition had not been agreed at the mediation. 8 There was a hearing for the purpose of deciding whether a concluded agreement had been reached. Counsel for the Bookers deposed that it was made clear at the mediation Mr Booker was "not prepared to settle unless he was first shown the accounts and given an opportunity to consider whether he was content with them". That is the reason Counsel included the condition in the terms of settlement. Mrs Coslovich said that final agreement had been reached at the mediation. She described what happened at the mediation as follows: [Counsel said that the Bookers wanted] … a list of creditors, a current Profit & Loss and Balance Sheet to be provided. I advised Counsel that these reports could not be provided until Monday and that this would be to late as we required the matter to be settled today. We agreed to provide the financials requested on the basis that we would indemnify the Bookers for any liabilities not in the normal course of business ... I am satisfied that no concluded agreement for the sale of the Coslovich interest was reached. For one thing the parties contemplated that their agreement would be reduced to writing and signed. This did not happen. Additionally, it is clear that the Bookers, who had for some time only been given limited information about the companies' affairs, would not agree to purchase the Coslovich interest until they had an opportunity to review the financial records. As Counsel said, it was made clear that "settlement was contingent upon … [the Bookers] being satisfied with the accounts." 9 After the hearing on the settlement issue, but before handing down a ruling on that issue, I suggested to the parties that YRTB should appoint a business broker to sell the shares in BBPL. I indicated that this might be the most effective way of resolving their dispute and unwinding their relationship. The parties adopted the suggestion and Max Kurz of KE Business Advisory Services Pty Ltd was appointed to value BBPL and find a purchaser for the BBPL shares. The process of finding prospective purchasers has proved to be slow. It has also created further complications. The Bookers have expressed an interest in purchasing the shares which, in turn, has resulted in the Coslovichs (who are in de-facto control of YRTB and BBPL) denying them access to information they sought due to a perceived conflict of interest. The sale process is continuing. 10 In this case it is not necessary for me to resolve all the issues in dispute between the parties. Nor is it necessary to determine who, if anyone, is to blame for bringing about the current impasse between the Bookers and the Coslovichs. What is clear is that the present situation cannot be allowed to continue. It is neither fair nor reasonable from anyone's perspective, especially that of the Bookers. 11 In Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 380 Lord Wilberforce said that a company may be wound up on the just and equitable ground: [I]f [the applicant] can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that if broken, the conclusion must be that the association must be dissolved. And the principles on which he may do so are those worked out by the courts in partnership cases ... The reasoning of Lord Wilberforce is directly applicable in this case. 12 In Johnny Oceans Restaurant Pty Ltd v Page [2003] NSWSC 952 Palmer J wound up a company on just and equitable grounds on the basis that there had been "a complete deadlock between the two opposing camps, that there [had] been an irretrievable breakdown in the relationship between the members of the company, and that the company's operations in the future [would], therefore, not be able to be conducted in any commercially viable and sensible way". In Clarke v Bridges [2004] FCA 394 I wound up a company on just and equitable grounds on the basis that there was a deadlocked board. 13 These authorities make it clear the YRTB should be wound up. 14 There is also the following practical consideration. Once the shares in BBPL are sold, YRTB's reason for existence will come to an end. It will have the funds from the sale of the BBPL shares but its shareholders will never agree on how those funds should be re-invested. All that is left to be done is for YRTB to distribute the money to its shareholders and then be wound up. Put simply, if YRTB is not wound up now, it will be wound up in the future. YRTB is a company whose purpose has come to an end. 15 Placing YRTB into the hands of a liquidator will have another significant benefit. It seems inevitable that the current sale process will be subject to further dispute if the parties are left to their own devices. In the circumstances, it is better that an independent officer takes control of, and supervises, the sale process. I should add that I am of the opinion that the appointment of a liquidator will not adversely affect either the sale of the BBPL shares or the activities of BBPL and its franchisees. It is only YRTB, the holding company, which is being placed under the control of the liquidator. 16 For the foregoing reasons I will order that YRTB be wound up and that Adrian Lawrence Brown be appointed as its liquidator. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.