Ewen Stewart & Associates Pty Limited v Blue Mountains Virtual

Judgment 1HIS HONOUR : This is an application that the defendant be wound up in insolvency. The plaintiff relies upon the presumption of insolvency arising from non-compliance with a statutory demand. On 15 February 2011 I gave the defendant leave under s 459S of the Corporations Act 2001 (Cth) to dispute the existence or amount of the plaintiff's alleged debt ( Ewen Stewart & Associates Pty Limited v Blue Mountains Virtual Air Helitours Pty Limited (No. 2) [2011] NSWSC 113). 2The principal issue is whether the plaintiff is a creditor of the defendant. In its statutory demand it claimed that a debt was due of $196,198.76 arising from 28 payments claimed to have been made by it to the defendant between 2 May 2005 and 26 February 2008. The payments were described in the statutory demand as " loan funds subscribed to the Debtor company ". There is no dispute that the defendant company is insolvent if it is indebted to the plaintiff for the amount claimed, or for any material amount. The plaintiff did not dispute that if it is not a creditor, the court has no power to wind up the defendant on its application ( Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527; (2004) 22 ACLC 955; (2004) 185 FLR 130 at [67], [70], [78] and cases there cited). 3The defendant contends that the payments made by the plaintiff were not by way of loan, but were a subscription for shares. No shares have been issued, but the defendant says that it is prepared to issue the number of shares to which the plaintiff's payment entitles it as soon as the plaintiff indicates that it is prepared to accept those shares. 4The defendant was incorporated on 20 May 2005. At that time its sole director was Mr David Arnott. All of the shares are held by Exnall Pty Limited, a company associated with Mr Arnott. The defendant was incorporated for the purpose of establishing a tourism venture at Echo Point, Katoomba. The venture was intended to provide customers with a computer-simulated helicopter tour of the Blue Mountains. 5On 23 May 2005 an agreement called Heads of Agreement was entered into between Mr David Arnott, the plaintiff, and a Mr John Heath. The agreement recited that Mr Heath and the plaintiff had agreed to invest in the helicopter simulator development at Echo Point, Katoomba. The agreement provided for Mr Heath and the plaintiff to provide funding for the " seeding stage " of $35,000. Clause 7.1 provided as follows: " 7.1 Provided the seeding stage demonstrates that the development is financially viable, the Parties agree to enter into agreement to proceed with further stages of the Development. John [Mr Heath] and Ewen [the plaintiff] to have 46 per cent of the equity of the new entity shared equally. " 6The plaintiff made an initial payment to the defendant on 2 May 2005 of $6,750. That was in anticipation of the Heads of Agreement. It made two further payments on 6 and 11 June 2005 bringing the total amount of funds subscribed by it to $17,500. 7On 28 June 2005 Mr Arnott wrote to Mr Ewen Stewart of the plaintiff and to Mr Heath in relation to the proposed development. He said: " My understanding clearly was and is, that I offered you and John a 23% shareholding each in the enterprise to be called 'Blue Mountains Virtual Air Helitours' to be based at Echo Point. The shareholding in the enterprise was in return for you contributing, collectively $250,000 for a collective shareholding of 46%. This cash contribution entitled both you and John to a collective 46% Shareholding in the company and 46% share of profits from the enterprise. Representing the largest shareholder, reasonable control of the enterprise was and is vested with me. The investment was for the Echo Point site only and was not an offer to invest in any other entity other than BMVAH as you specifically declined my offer to be involved in the Holding Company. I believe that this understanding is reflected in all our correspondences and the heads of agreement. I am surprised that you now wish to change the agreement or feel confused. Bruce Hocking advised that your shares are to be allotted as your investment monies reach certain milestones. Stage 1 shares equal to the value of $35,000 to be distributed to both John and yourself upon full payment of that amount. As funds are paid to the enterprise then more shares are issued until $250 000 equals 46% of the shares in the company. ... However getting back to the real issue, the fundamentals are the fundamentals and they are: John Heath 23% Shareholding in the enterprise which entitles 23% of profit share for cash investment of $125,000: Ewen Stewart 23% shareholding in the enterprise which entitles 23% profit share for cash investment of $125,000. Control of the Company vested with the largest shareholder. This was always and still is my offer and position. " 8Mr Stewart replied on 30 June 2005. He wrote: " Refering [sic] back to our heads of agreement document, and with the benefit of your explanations in your email, I am fully cognisant of what our agreement entails. ... I believe that the true test of any relationship is the ability of the parties to discuss maters however robustly and then to reach mutually satisfactory decisions and to settle issues amicably. As you so correctly say, 'there remain many issues to discuss, fine tune and document in order to develop a lasting and healthy working relation ship [sic] together.' David, I believe that this venture is to [sic] valuable to let our business relationship be overbalanced by casual [misunderstandings] , and to that end I wish to advise you that I fully agree with the position which you have set out ... " 9On 18 July 2005 Mr Heath and Mr Stewart were appointed as directors of the defendant. 10In cross-examination Mr Stewart accepted that it was as a result of the arrangement that he had made with Mr Arnott reflected in this email correspondence that he contributed money to the defendant (T13). 11Between 19 January 2006 and 26 February 2008 the plaintiff made another 25 payments totalling $178,698.76 to or on behalf of the defendant. 12On 21 January 2008 Mr Stewart on behalf of the plaintiff paid $21,000 to Mr Heath to " obtain all rights and obligations as was held by the Vendor ( [Mr Heath] ) ." Mr Heath had contributed $20,475. 13On 15 September 2005 Mr Arnott sent to Mr Stewart and to Mr Heath a draft shareholders agreement. He received no response. He sent a second draft of a shareholders agreement to Mr Stewart in June 2007. Again he received no response. On or about 10 October 2007 he sent a third draft of the shareholders agreement to Mr Stewart. By this time Mr Heath had indicated his intention of ceasing his involvement with the company and it was proposed that the plaintiff acquire his interests. The draft agreement provided, amongst other things, for the transfer of a 46 per cent shareholding in the company by Exnall Pty Limited to the plaintiff upon the plaintiff contributing $250,000. The draft agreement also dealt with other topics, including the right of shareholders to board representation, the establishment of a management team, the engagement of external consultants, and pre-emptive provisions in the event of a shareholder wishing to sell its shares or becoming insolvent. 14On 19 December 2007 there was a meeting between Mr Stewart and Mr Arnott at the offices of an accountant, Mr Frank Norman. The purpose of the meeting was to review the draft shareholders agreement that Mr Arnott had offered. Mr Norman prepared a record of the meeting. Mr Stewart acknowledged the record to be accurate (T11). Mr Norman's notes included: " Blue Mountains Virtual Air Helitours P/L Consultation 19:12:07. Copyright: David Arnott wants to hold the copywrite [sic] within his company. Project: We suggest equal equity and input (voting rights). David Arnott wants artistic control. Ewen Stewart not prepared to be a financial investor with fixed interest return as this was not the initial proposal. Suggest: No further financial input until a clear understanding of rights and responsibilities established and documented. " 15On 16 January 2008 Benetatos White, solicitors for the plaintiff, wrote to the defendant as follows: " We act for Ewen Stewart & Associates Pty Limited and we are instructed by Mr Ewen Stewart. We are instructed that our client has entered into an arrangement with you to develop and ultimately operate the Virtual Air Helitours business from the Echo Point site. We understand that Blue Mountains Virtual Air Helitours Pty Limited ('the Company') has obtained development approval from Blue Mountains City Council to operate the business from the site and has also entered into a lease of the site. We note the agreement, in general terms: