Crafted Furniture Pty Ltd v Rugged Luxe Pty Ltd

1. Paragraphs 1 to 4 of the interlocutory process filed on 13 October 2021 be dismissed.
2. Each party to bear their own costs.
3. The administrators' costs to be costs in the administration of the defendant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 On an urgent basis, the applicant, Crafted Furniture Pty Ltd, seeks the appointment of provisional liquidators to the first respondent company, Rugged Luxe Pty Ltd (administrators appointed), under s 472(2) of the Corporations Act 2001 (Cth).

Background 2 The chronology of pertinent events is as follows. 3 Rugged was incorporated in January 2018, with its sole director and shareholder since that date being Justin Burden. 4 In January 2019, a commercial relationship commenced between Crafted and Rugged. That developed so that from about mid-2019 there was a licence arrangement between the companies whereby Rugged marketed and sold furniture on the retail market which it sourced from Crafted as a wholesaler. Rugged did this through Crafted-branded retail stores in, first, Bayswater Road, Rushcutters Bay, and, later, Pacific Highway, Crows Nest. In July 2020, the lease on the Rushcutters Bay store was terminated whereafter Rugged opened a new store in Oxford Street, Paddington. 5 The floor stock in the stores, which I understand to have been there for retail marketing purposes so that customers could see the stock and thereafter make their orders which would be supplied by Crafted, consisted of products exclusively supplied by Crafted. 6 By January 2021, the relationship began to sour. Crafted complained that Rugged was in breach of the licence agreement, appeared to be trading while insolvent and had refused to supply financial information as required by the licence agreement. A statement of account in April 2021, showed that $84,194.36 was due and payable by Rugged to Crafted. The earliest outstanding items had been invoiced in February 2020 and had been due from the middle of March 2020, i.e., more than a year previously. 7 In April 2021, Crafted issued a termination notice to Rugged for repeated breaches of the license agreements, and sent a letter of demand to Rugged for moneys owing. Thereafter, Mr Burden rebranded the showrooms as Cura Furniture and on 3 May 2021 incorporated Cura Furniture Pty Ltd with Rugged as the sole shareholder. 8 In May 2021, an "accountant for Justin Burden" asked the lessor of the Paddington store to transfer the lease from Rugged to Cura Furniture. I infer that it was Mr Burden's intention to continue to trade furniture from the same store but as the business of Cura Furniture rather than as the business of Rugged. There is evidence that Cura Furniture marketed furniture supplied by Crafted as its own. 9 On 15 July 2021, Crafted served a statutory demand on Rugged in which it demanded payment of its outstanding account, still in the sum of $84,194.36. 10 On 18 September 2021, there was a reallocation of the shares in Cura Furniture such that Rugged's shareholding was reduced to 1 of the 10 issued shares, and the remaining 9 shares were transferred to Mr Burden. That is to say, to the extent that there is any value in the shareholding in Cura Furniture, 90% of it was transferred to Mr Burden. 11 On 20 September 2021, Crafted filed an originating application for the winding up of Rugged in reliance on the statutory demand. The winding-up application is listed before a registrar of the Court for hearing on 27 October 2021, i.e., next week. 12 It appears that in the intervening period, Mr Burden continued to try to have the lease of the Paddington store assigned from Rugged to Cura Furniture. Ultimately, on 6 October 2021 solicitors acting for the lessor advised solicitors acting for Rugged by letter that, having received notice of the application for the winding-up of Rugged, the lessor does not agree to assign the lease to the related company. That was expressed to be on the basis that the assignment "may be determined to be a transaction to defeat the interests of a creditor and be voidable." 13 Meanwhile, on 5 October 2021, Mr Burden commenced discussions with Jason Tang of Cor Cordis, insolvency practitioners, with a view to possibly appointing administrators to Rugged. On the evidence of Mr Tang, the discussions continued on 6 and 8 October and included the following: (1) The possibility of a deed of company arrangement (DOCA), with no specific intended proposal being flagged but Mr Burden saying that "he would want to put a proposal 'to save the company', and that it would likely be funded by a related company named 'Cura'"; (2) Mr Burden said that he had been accused by Crafted of "Phoenixing", which he denied, and "instead had simply been forced to start again after the termination of his licence"; (3) Mr Burden said that no stock of Rugged had been transferred across to Cura Furniture which was a new brand; and (4) The possibility that if there was a voluntary administration and subsequently a DOCA was approved by creditors, the lease might be able to be retained. 14 On 8 October 2021, Mr Burden signed three documents, namely: (1) The minutes of a meeting of the sole director of Rugged recording resolutions that: (a) in the opinion of the director, the company is insolvent or is likely to become insolvent at some future time and that administrators of the company should be appointed; (b) Jason Tang and Andre Lakomy of Cor Cordis be appointed as administrators of the company; and (c) an instrument of appointment of administrators be executed by the company; (2) An instrument of appointment by Rugged of Messrs Tang and Lakomy as administrators; and (3) A letter to Messrs Tang and Lakomy advising them of their appointment as administrators of Rugged. 15 On 13 October 2021, the current interlocutory process was filed by Crafted in which in addition to the relief already mentioned, i.e., that provisional liquidators be appointed, relief was sought declaring the purported appointment of the administrators invalid, null and void and of no effect or alternatively declaring that the administration of the company should end because the provisions of Pt 5.3A of the Act are being abused. 16 On 14 October 2021, being the first return day of the interlocutory process, the solicitor appearing for Crafted indicated that at the hearing that was listed for today only the relief with regard to the appointment of provisional liquidators would be pressed with the other relief being able to be dealt with, if necessary, on a subsequent occasion. 17 The administrators have taken a neutral stand on the relief sought by Crafted. As mentioned, an affidavit by Mr Tang has been filed and is relied on by the administrators. It sets out the circumstances of the appointment of the administrators as well as some additional matters, relevantly: (1) The only physical assets of the company of which the administrators are aware is "display stock" of its furniture located at the Paddington store. (2) As the company sold furniture on a made-to-order basis, it would appear not to have any actual inventory beyond the display stock. (3) The display stock has been inventoried and valued. Whilst not revealing the value on account of commercial sensitivity, Mr Tang noted that Crafted had previously offered to purchase the floor stock from Rugged for $24,107.92 including GST. (4) Mr Burden is trading his new business, Cura Furniture, from the store even though the store's lease is still held by Rugged and it contains display stock owned by Rugged, and there may have been business opportunities otherwise diverted from Rugged to Cura Furniture, but given the early stage of the administration Mr Tang has not been in a position to investigate that. (5) In the meanwhile, Mr Tang has left Rugged's stock at the store on the basis that moving it and storing it elsewhere would involve significant cost and as it has been inventoried it could not be dealt with without detection. (6) The first meeting of creditors in the administration is arranged for tomorrow, 20 October 2021, at 11.30 am. 18 Additional significant debts of Rugged would appear to be approximately $100,000 owed to the Deputy Commissioner of Taxation and $100,000 on a small business loan owed to Prospa Advance Pty Ltd in respect of which there is a registered security interest.