In the matter of Pasta La Vista Pty Ltd [2024] NSWSC 413

Chronology and affidavit evidence

The chronology of events is in relatively narrow scope. Mr Motawa and Mr Salim have a long personal history, having known each other since they were 15 years of age, and commenced to operate an Italian restaurant together under the name "Pasta La Vista" through the Company in late 2018. Each of them contributed funds to the Company, although there is a dispute as to how that occurred and, perhaps understandably, there was a lack of formality in the process. It appears they did not turn their minds to whether the funds they contributed would be treated as loans to the Company, although it is likely that they were loans, where it would be unusual to capitalise the Company by equity to the extent of the funds which were invested. While there is a dispute as to the amount of those funds, it is apparent that that amount was substantial, and that significant assets were at one point owned by the Company, funded by the amounts which the parties had contributed to the business, and used in the business, although they have now been lost to the Company and are, possibly, now in Newco's possession.
It appears that the Company opened the business in January 2019, and both Mr Motawa and Mr Salim then worked in it. In September 2020, a form was lodged with the Australian Securities and Investment Commission ("ASIC") indicating that Mr Motawa had transferred his shares in the Company to Mr Salim. Mr Salim contends that an agreement was reached to that effect, on the basis that the shares would be retransferred by Mr Salim to Mr Motawa after Mr Salim had made a borrowing which did not go ahead; Mr Motawa denies that there was any agreement to that effect, although he acknowledges that the matter was discussed. It is not necessary for me to reach a finding as to those matters, where I find below that the Company should properly be wound up, having regard to the current position in respect of its assets and the undisputed evidence as to its financial affairs.
It is common ground that, by about November 2020, a dispute arose between Mr Motawa and Mr Salim, and Mr Motawa claims that he was excluded from the business at that time, when Mr Salim advised an employee, who then advised Mr Motawa, that Mr Salim did not wish to see Mr Motawa return to the shop. Ordinarily, as Mr Turnbull who appears for Mr Salim points out, one would not expect a shareholder and employee in an apparently successful business, to simply cease to attend work, because he was told by an employee that the other shareholder did not wish him to return. There is a suggestion that the parties made some attempt, through third parties, without success, to resolve their difficulties. Again, given the findings which I reach, it is not necessary to reach a conclusion as to the circumstances in which Mr Motawa ceased to work in the business, and as to whether Mr Salim acted unreasonably in that regard, or whether Mr Motawa acted unreasonably in so readily accepting that a single indication that he need not return was sufficient to bring about the end of the parties' relationship.
In the event, the purported share transfer to which I referred was subsequently reversed, or at least ASIC's record of that purported share transfer was corrected; there was a subsequent attempt, which Mr Salim now accepts was not properly founded, to deregister the Company; and, as I have noted above, the Company has lost, by means that are unexplained, the assets which were funded by the parties' contributions to it and its business, and Mr Salim or Newco now operates a business of the same kind from the same premises under the same name. Mr Motawa now also operates a business, with another person, trading under the same name, in a different suburb.
Mr Salim raised, in evidence and submissions, an issue about Mr Motawa's use of a trade mark held by Mr Salim and there is a contest as to whether that trade mark comprises the logo or the Company's name or both. It seems to me that that issue does not advance either party's case. On the one hand, there is a real question as to how Mr Salim could have acquired that trade mark for himself, so far as it related to the name under which the Company operated, where to do so would arguably have diverted a corporate opportunity of acquiring the name with which the Company's goodwill was associated from the Company to Mr Salim. On the one hand, there is also a question as to how Mr Motawa has come, through another entity, to operate another business under the same name, also depriving the Company of any benefit which it would have obtained from that name, had its potential right to that name been acknowledged by either party.
Both parties have led detailed affidavit evidence which outlines the history of relevant matters and their loss of confidence in each other. In his first affidavit, dated 25 September 2023, Mr Motawa refers to amounts that he had withdrawn from his personal accounts to contribute to the Company, although there is a dispute between Mr Motawa and Mr Salim as to the extent of those contributions. As I noted above, it is in any event plain that significant amounts were contributed by both parties to establish the Company's business. Mr Motawa also refers to the circumstances in which he was told that Mr Salim did not wish to see him in the shop, and I have pointed above to the fact that he appears, without protest, to have simply ceased to attend the shop after he was told of those matters, although a dispute subsequently arose when it became clear that he would not receive distributions representing a share of the Company's profit.
By a second affidavit dated 25 March 2024, Mr Motawa refers to significant expenditures made at the time the Company opened the business, and he gives evidence that Mr Salim rather than Mr Motawa was dealing with the accountant and also addresses the circumstances in which he received a wage and received a share of profit. There are, plainly, unresolved issues in that respect, including, in particular, whether PAYG tax was deducted from cash wages paid to Mr Motawa, and whether superannuation contributions were made in accordance with the requirements of the superannuation legislation, but those matters can properly be left for investigation by a liquidator having regard to the lack of clarity in the evidence led in these proceedings in that respect. Although a profit share was distributed to both of the parties, there are disputes as to whether it was the same every month or varied from month to month. No formal process of declaring dividends was adopted, but I do not place particular weight on that matter, where I recognise that there can be, rightly or wrongly, a degree of informality in the affairs of smaller companies.
Mr Motawa also leads evidence of Mr Saad, who worked in the restaurant and leads evidence that he communicated Mr Salim's wish that Mr Motawa no longer attend the restaurant to Mr Motawa. Mr Saad was cross examined as to his evidence, and at least accepted in cross-examination that he had not been asked by Mr Salim to communicate that matter to Mr Motawa. Ultimately, little appears to turn upon that, where it is common ground that Mr Salim expressed that wish, although Mr Salim indicates that it reflected a temporary frustration with Mr Motawa and not a long-term direction that he should not attend the business again; and it is also common ground that Mr Motawa became aware of that matter and acted, perhaps too readily, in accordance with the direction which he maintains he thought he had been given. Mr Motawa also tenders a consent of liquidators, as is necessary in respect of an application for a winding-up order.
Mr Salim in turn reads two affidavits. His first affidavit also refers to the history of the business, his relationship with Mr Motawa, and the circumstances in which he became frustrated with Mr Motawa. Plainly, there are some cases, including oppression cases, where the circumstances which give rise to a falling out between the parties require close scrutiny. This might have been one of those cases, if it were still the position that the Company was operating the business at the premises; its assets were intact; Mr Motawa remained an equal shareholder in the business, with the benefit of the equity in the business and receiving dividends from the business; and his only complaint was that he had been excluded from a continuing role in the day-to-day operation of the business. However, that is plainly not this case, because Mr Motawa's continuing shareholding in the Company is now a shareholding in a shell which has no assets, and Mr Salim contends, either has no liabilities or liabilities of $8,000; the Company's assets have been lost, so that the business is now apparently conducted by Newco, which is apparently associated with Salim; and Mr Motawa is no longer receiving any share of the profits of the underlying business and has not been repaid the monies he contributed to establish it. Mr Salim also addresses the position in respect of the share transfer and the attempt to deregister the Company, which I addressed in the chronology above, and he also refers to his registration of a trade mark with the words "Pasta La Vista". As I have noted above, that matter does not assist him where, Mr Salim's registration of the trade mark might well amount to an appropriation of a corporate opportunity of the Company to register that trade mark for itself.
By his second affidavit dated 5 April 2024, Mr Salim refers to aspects of Mr Motawa's evidence, and gives a partial explanation of the manner in which moneys were expended at the time the business was established, as to which he was cross-examined. It is apparent that that partial explanation does not explain how all of the funds withdrawn from the Company's account were expended.
Mr Salim's second affidavit also annexes financial statements for the Company for the year ended 30 June 2021 which, unfortunately, raise more questions than they answer. In particular, the balance sheet for the Company as at 30 June 2021 records that, at 30 June 2020, it had cash on hand or at bank of $20,429 and other assets, apparently stock, of $6985, and that by 30 June 2021 its cash on hand had declined to $2,767 and its other assets to nil. Those figures do not explain how or why the assets originally acquired by the Company, including items such as point-of-sale systems, signage, and the equipment necessary to operate the business, are no longer reflected on the Company's balance sheet as at those dates. The balance sheet also records that, both at 30 June 2020 and 30 June 2021, the Company had negative equity.
The profit and loss statement in turn contains striking features, as to which Mr Salim was cross-examined, although he was not able to cast any light upon them. In the financial year ending 30 June 2020 and 30 June 2021, the Company incurred low-value asset write-offs totalling nearly $75,000 over the two years, and over $81,000 in what is described as "shop expenses" over the two years, some $50,000 of those expenses being incurred in the six months or so before the Company ceased to operate the business, and it appears, Newco began to do so. Those are, on any view, very substantial write-offs and expenses within a Company that was operating a restaurant, and they were entirely unexplained. It may be that they provide some part of the explanation of the Company's loss of assets, since it was first established, although that proposition is uncertain without any adequate explanation of those expenses.

Submissions and determination

The parties' submissions addressed the breakdown of the relationship between them, and the relevant legal principles to which I will return below. As I noted at the conclusion of the evidence and before the parties commenced oral submissions, it seems to me that this matter can and should be determined on somewhat narrower grounds.
Mr Robinson, who appears for Mr Motawa, refers to the circumstances in which the business was commenced by the Company and to the proposed deregistration of the Company, and to Mr Motawa's not having given authority for that to occur. He submits that Mr Salim has acted in his own interests or unfairly or unjustly, or oppressively, in respect of matters including the exclusion of Mr Motawa from the business, the oddities of which I have addressed above, and Mr Salim's subsequent failure to respond to requests for access to information concerning the business. Mr Robinson submits that it is just and equitable to wind up the Company in the relevant circumstances, where the Company was established to carry on the relevant business, it is no longer possible for it to do so and it has not been possible for it to do so for in excess of 12 months. As I have noted above, it appears that Newco is now carrying on that business, and the circumstances in which the Company's assets have been lost, and may now be used in the conduct of that business by Newco, remain unexplained.
Mr Turnbull in turn addressed the factual circumstances, and, in particular, the circumstances in which, on Mr Salim's case, Mr Motawa abandoned the business, rather than being excluded from it; has delayed in taking steps to wind up the Company; and has traded using the trade mark which, as I noted above, is now held by Mr Salim although it arguably ought to have been held by the Company. Mr Turnbull submits that each of these matters tend against an order winding up the Company. Mr Turnbull also submits that a winding up order will less readily be made in favour of a person who is responsible for the breakdown in the relationship between the shareholders. I broadly accept that proposition, but it seems to me to have lesser weight where the ground of complaint is not only, as I noted above, Mr Motawa's exclusion from the business but also, and more significantly, the unexplained erosion of the Company's assets in the period between its formation and its present position, where it has no assets, and the business which it previously conducted is now apparently conducted by Newco.
Mr Turnbull also submits, and the authorities to which I will refer below recognise, that the availability of other remedies should be taken into account in determining whether to make a winding-up order. It seems to me that that proposition has greater weight where a company continues to operate a business and that is not the case here. While Mr Turnbull referred to the possibility of a buy-out order, it seems to me that there is little or no attraction in such an order in the present circumstances, where it is plain enough that the shares in the Company have no value, because its assets have been lost in the circumstances to which I referred above. Mr Turnbull, in oral closing submissions, rightly recognised that any buy-out order would require a process of adjustment, to seek to assess the value of the relevant shares while the business was being operated by the Company and before its assets were lost. That would be a complex and difficult process, and is likely to be more costly and less effective for the parties than the investigations which would now be made by a liquidator as to the circumstances in which those assets have been lost.
Mr Turnbull in turn addresses the disputed issues as to whether Mr Salim has acted in his own interests, or oppressively or in an unfairly prejudicial manner, but it seems to me that it is not necessary to reach findings adverse to Mr Salim in that respect in order to be comfortably satisfied that the Company should be wound up. He also submits that it is not just and equitable to wind up the Company, where Mr Motawa abandoned the Company and did not refer to it, and where winding up is an order of "last resort". I referred to those principles, and their limited application in the present circumstances, above.
The circumstances in which a winding-up order may be made, on the just and equitable ground, are well established. In Re DJG Securities Pty Ltd [2013] NSWSC 588, which I drew to the parties' attention, I summarised the public interest considerations which apply in that respect and, in Re Munja Bakehouse Pty Ltd [2024] NSWSC 6 at [20]ff, I summarised the circumstances in which a company may be wound up by reason of irreconcilable differences that had developed between its members or where the substratum of the Company has failed. Neither counsel submitted that those decisions did not accurately reflect the applicable principles.
I am comfortably satisfied that a winding-up order should be made in this matter. First, as I noted at the commencement of the judgment, it is plain that the jurisdiction to make that order is available under s 461(1)(c) of the Act, where the Company has suspended its business for a whole year, and the matters to which I will refer below have the consequence that that jurisdiction is properly exercised so as to allow a liquidator to undertake investigations into the circumstances surrounding the Company's cessation of that business and its loss of the assets used in that business.
Secondly, I am satisfied here that it is just and equitable that the Company be wound up, for the purposes of s 461(1)(k) of the Act. It seems to me that several matters support the conclusion that it is just and equitable that the Company be wound up, and the exercise of the Court's discretion to make that order, rather than address any alternative relief. First, as I have noted above, it is apparent that the Company has lost the assets which it originally acquired, with funds contributed by both its shareholders, and the consequence of that is that any value in the business for Mr Motawa has been lost. Second, there are matters which plainly warrant further inquiry by a liquidator, which include the significant expenses incurred by the Company and recorded in its profit and loss statement, to which I have referred above, and the manner in which it now comes to have no assets, notwithstanding that it was conducting an apparently successful business which was generating significant revenue, and that business is apparently now conducted by Newco. Third, in the present circumstances, there is no utility in exploring alternative relief, and no suggestion that the making of a winding-up order will destroy a viable business, because the Company is no longer conducting the relevant business, and all that remains is a shell with no assets other than any rights of action that it may have arising from the events to which I have referred above.
In those circumstances, it seems to me that there is a strong case for the making of a winding-up order, both under s 461(1)(c) and s 461(1)(k) of the Act and that that order should be made. Notwithstanding that this case has been determined on a somewhat narrower basis than it was advanced, by either party, costs will ordinarily follow the event.

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Legislation Cited (1)

Cases Cited (2)