Drum Cafe Australia Pty Ltd v Lieberman [2010] NSWSC 642 | Case summary

1 The plaintiff applies under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand served on it by the defendant. The statutory demand is dated 20 August 2008. The present application is by originating process filed on 17 September 2008, now almost two years ago, I shall return to that matter. 2 The debt or alleged debt to which the statutory demand relates is described as unpaid royalties pursuant to an agreement made on 20 December 2004. Several distinct amounts are said to be due for several distinct periods under the alleged agreement of that date. 3 The plaintiff maintains there is a genuine dispute as to the existence of the debt because there is a genuine dispute as to the existence of the agreement of 20 December 2004 from which the debt is said to arise. 4 It is common ground that Mr Radus and Mrs Radus developed a method of team building for businesses through African music known as "Drum Cafe" and, in or about 2001, were in contact with the defendant about the possibility of introducing their business to Australia. In September 2001 Mr Radus, Mrs Radus and the defendant all signed a document entitled "Contract For Drum Cafe Australia". The plaintiff company, however, did not exist at that time. It was incorporated on 8 October 2001, although by persons not associated with Mr Radus, Mrs Radus and the defendant. At some point thereafter the defendant arranged the acquisition of the company from those other persons. Mr Radus, Mrs Radus and the defendant became directors in January 2002 at the earliest. The search evidence suggests that one or more of them may have become directors in January 2003. Nothing turns on this. 5 The agreement of 20 December 2004 on which the defendant relies is apparently an oral agreement. The defendant sought to place reliance on an unsigned document bearing the date 20 December 2004 but, in the absence of proof of the document's providence and authenticity, it was not admitted into evidence: National Australia Bank Ltd v Rusu [1999] NSWSC 539; (1999) 47 NSWLR 309. But even if the document had been admitted, it would have been of limited use given that it was expressed to be a "Memorandum of Understanding between Warren Lieberman, Lance Radus and Maxine Radus" reached at a meeting at the office of an accountant, Mr Kargas. The plaintiff's company is not mentioned in the document. 6 Mr Radus gives affidavit evidence of a meeting in December 2004 and the accountant's office: "13. In about December 2004 the Defendant attended a meeting with Maxine and me and the Plaintiff's accountant, Evan Kargas. I was inexperienced in business and accounting matters and left most of the negotiating with the Defendant to Evan Kargas. At that meeting Evan kargas said words to the effect to the Defendant: 'It is impossible for Lance and Maxine to pay you 20% of income of the business. The business would simply fold." The Defendant said words to the effect: 'Yes, I see that. Forget about any money up until now. I'm not interests in sharing the income so much as earning a royalty for the use of my trade mark going forward.' They had some discussion then about proposed royalty payments how it should be recorded in the event that the Plaintiff did not have the funds to pay it. 14. A few days after that meeting, I met with the Defendant for dinner. I said to him words to the effect: 'Can we reach some agreement about how this business will operate?' He said words to the effect: 'I have changed my mind about some of the matters we discussed. I do not want to sell my share in the company.'" 7 Mr Kargas also gave an account as follows of a discussion between himself and the defendant at that meeting: "During that meeting I had a discussion with the Defendant including to the following effect: I said: 'I understand that there is an agreement that you will receive 20% of the turnover from the Drum Café business. That figure is unsustainable. If that is what you want from the business then the company will have to be wound up.' He said: 'I agree that the figure is unrealistic. I don't want the company to fold. It has a great future. I'm reluctant to agree on a return by way of a dividend from retained earning because retained earnings is a function of profit and loss of the business which can be very discretionary. I am only interested in royalty payments. Forget about anything claimed by me in the past. That's not worth much and I'm happy to forfeit that. Let's resolve how this will work going forward.' I said: 'I think a royalty payment of about 4-5% is realistic.' He said: 'I want more than that. This business will do really well in the future. I think I should be paid 10% royalties.' I said: 'How about a sliding scale starting at 7% for the financial year ending 2005, 8% for the following year, 9% for the year after that and then 10% for the year after that, remaining at 10% thereafter.' He said: 'I agree with that.' I said: 'My clients can't afford to pay you anything now. Payment must be deferred.' He said: 'That's fine. I am content to defer payment until such time as the company can afford to pay me. But I would like a record kept of this in the accounts of the company.' I said: 'I can put a provision in the company accounts to reflect the agreement. Lance and Maxine would also like the option to buy out your interest in the company once royalties reach 10%.' He said: 'I agree to that as long as I still have an agreement to get royalties.' I said: 'We should document this agreement.' He said: 'I agree.'"

8 Beyond attempting to introduce into evidence the unproved document to which I have referred, the defendant has taken no steps to give evidence about the meeting of December 2004. The defendant has, however, produced accounts of the plaintiff company in which "royalty deductions" of $29,510 for 2005, $50,664.17 for 2006 and $57,297.24 for 2007 are recorded as expenses. These amounts correspond with amounts in the statutory demand. The accounts concerned are for the 2006 and 2007 years. The 2006 document is signed by Mrs Radus as a director but carries no other director's signature. There is also a signed report of the accountants Kargas & Co Pty Limited, but this makes it clear that that firm relied on information provided by the directors and conducted no verification, validation, audit or review. There is no signature at all on the accounts for the 2007 year. 9 It is clear on the evidence that there is a genuine dispute as to the existence of the royalty agreement on which the defendant relies. On the material before the court there were oral discussions on or about 20 December 2004 giving rise at the most to questions of the kind that would normally be explored in accordance with the principles in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353. That would remain the case even if the defendant were to get into evidence the unsigned "Memorandum of Understanding". 10 The task of the court upon an application such as this is not to come to a conclusion on the question whether money is payable by one party to the other. It is merely to decide whether there is a dispute as to the indebtedness and, if so, whether that dispute is a genuine dispute. I refer in this connection to the well known formula in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785. There is on those principles, a genuine dispute in this matter. The alleged debt will be shown to exist, if at all, only if properly constituted debt proceedings are brought by the defendant and a full factual inquiry is undertaken at that level. 11 I therefore order the statutory demand dated 20 August 2008 served on the plaintiff by the defendant be set aside. I shall invite submissions on costs in a moment. Before doing so, I desire to make some observations about the history of these proceedings. 12 The originating process was, as I have said, filed on 17 September 2008. Thereafter, the matter was before the court on no less than 16 occasions for directions. The first such occasion was on 17 October 2008, the last on 29 March 2010. On many of these occasions the matter was simply stood over to a later date by consent. Directions in relation to evidence seem to have been first made on 13 July 2009, more than nine months after the proceedings were initiated. Those directions were not complied with by the defendant, at least on the face of the court file. Directions regarding evidence were again made on 29 March 2010 and the matter was at that point listed for hearing today. Again, there was no compliance by the defendant, and when the matter came before me today the defendant sought a further adjournment so that he could put on evidence. I refused that application and proceeded with the hearing in the course of which the solicitor for the defendant sought and was granted without opposition leave to file in court an affidavit of limited compass. 13 It must be emphasised that s 459G applications are not to be approached by the parties as some form of holding pattern or a formalised negotiation arena while they try to settle their differences. The procedure is expected to be a swift and efficient one under which the existence or non-existence of a genuine dispute is determined promptly and in a relatively summary way so that it can be seen without undue delay whether grounds for the presentation of a winding up position exist. A simple matter such as this should not have been before the Registrar on numerous successive occasions in the way that it was. 14 The new Practice Note SCEq 4 states in paragraph 27 that the parties to a statutory demand case must agree on a timetable that makes it ready for hearing promptly after its first return date before the Corporations Registrar. That is a requirement to which the Registrar will in future give particular attention. Parties will not be allowed simply to stand statutory demand matters over by consent time and time again. If the expectation outlined in paragraph 27 of the practice note is not taken to heart by the parties in the way that they are meant to observe it, then the Registrar will refer the matter to the Corporations Judge and a hearing date will be allocated promptly so that the matter can be brought to a head.

Drum Cafe Australia Pty Ltd v Lieberman

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