MJJK Investments Pty Ltd acting as trustee for the Martha Kennedy Family Trust v Kennedy; Kennedy v MJJK Investments Pty Ltd acting as trustee for the Martha Kennedy Family Trust
[2024] NSWSC 1398
Supreme Court of NSW|2024-10-31|Before: Stevenson J
The background in this matter is set out in my judgment of 14 June 2024 in Aberdeen Bear Pty Ltd v MJJK Investments Pty Ltd. [1] To repeat:
"This is a family dispute relating to the ownership of a business conducted by the sixth defendant, Kennedy Watches & Jewellery Pty Ltd ('the Business'). The Business is a distributor of luxury watches and has franchise distribution agreements with brands such as Rolex, Patek Phillippe, Omega, Cartier, Longines and many others.
The family members are Mrs Martha Kennedy and her sons, James and Justin. The parties adopted the convention of referring to these individuals by their given names and, without intending any overfamiliarity or disrespect, I will do the same.
…
Until the parties entered into the Heads of Agreement, the Business was owned, through a holding company, by the first to third defendants, MJJK Investments Pty Ltd, MJJK Investments No. 2 Pty Ltd and MJJK Investments No. 3 Pty Ltd (together, 'the MJJK Interests') as trustees for three family trusts, the beneficiaries of which were Martha, James, and Justin. Martha controlled those trusts and thus, in effect, the Business.
…
The effect of the Heads of Agreement was to achieve a restructure of the Business whereby, on the happening of specified events, James was to become the owner of 80% of the Business and the MJJK Interests the remaining 20%. [2]
…
Clause 2 of the Heads of Agreement is in these terms:
'Staged decrease of our (We) equity in The Business and increase of your (You) equity in The Business as follows:
Stage/Conditions
a) Refinance NAB/Longreach - Following the execution of this [H]eads of [A]greement, the Business will borrow funds from Longreach, which will fund the repayment of the existing NAB debt in the Business. As part of such repayment, NAB will release the existing personal guarantees. We will not be required to provide a personal guarantee to Longreach. You will be issued equity in the Business, such that the equity holdings in the Business will be: (We 49%, You 51%)
b) Procurement of discharge of NAB mortgages of Rose Bay, Southport and Bondi Beach (as Tax Free Capital) - On or Before 30/06/23 You will repay and discharge these mortgages held by Martha and Justin (provided Martha and Justin must not directly increase the amount owed under such mortgages and ensure all mortgage payments are paid when due. You will not be required to pay more than the amount owed as at the date of this agreement).
c) Procurement of $5.6m sum as Tax Free capital - You will make each of the following payments for the benefit of Martha, on or before the corresponding dates set out below:
i. $3,000,000 - 30/6/24
ii. $866,666 - 30/6/25
iii. $866,666 - 30/6/26
iv. $866,666 - 30/6/27
d) Following the payments in 2(b) and 2(c), You will hold an equity interest in the Business, such that the equity holdings in the Business will be: (We 20%, You 80%)' (Emphasis in original.) [3]
These clauses set out how the 'staged decrease' of the interests of the MJJK Interests in the Business and the 'staged increase' of James's interests in the Business contemplated by the Heads of Agreement would occur.
This was to be done by the three stages set out in subcll 2(a), 2(b), and 2(c).
The first stage, set out in subcl 2(a), was a refinance of the existing facility of the Business with the National Australia Bank ('NAB') such that the 'existing personal guarantees' were discharged, [4] at which stage the shareholding in the Business was to be adjusted so that James held a controlling interest of 51% and the MJJK Interests held 49%.
The second stage, set out in subcl 2(b), was the procurement, inferentially by James, of the discharge by 30 June 2023 of mortgages over three identified properties, evidently owned by Martha and/or Justin and securing personal and not Business obligations. [5]
The third stage, set out in subcl 2(c), was the procurement of four payments 'for the benefit of Martha', totalling a fraction under $5.6 million, to be made annually and commencing on 30 June 2024.
The shareholding consequences of these matters are set out in cl 3:
'The equity position contemplated in Stage 2(b) and 2(c) will be implemented 'immediately' after execution of this agreement and satisfaction of 2(a). If any payment required under Stage 2(b) and 2(c) is not made by You, We are entitled to interest on the $3m sum (see point 2(c)(i)) at 5% per annum from 1/7/24 until paid and to clawback from You any equity interest in excess of 51%.'
Those consequences were, first, that the shareholding in the Business was to be adjusted 'immediately' so that James held 80% and the MJJK Interests held 20%.
However, and vitally, this was subject to the entitlement of the MJJK Interests to 'clawback ... any equity interest in excess of 51%', that is 29% of the shares in the Business, leaving James with 51% and the MJJK interests with 49%. This would occur in the event that 'any' of the payments contemplated by subcll 2(b) and 2(c) were not made.
Thus, the shareholding, immediately after execution of the Heads of Agreement, and after the MJJK Interests were released from their obligations as guarantors to the NAB as contemplated by subcl 2(a), would be 80:20. But this would be conditional on James performing all of his obligations under subcll 2(b) and 2(c), including making each of the four payments listed in subcl 2(c), the final one of which is due on 30 June 2027. That final, unconditional state of shareholding could not be knowable until 30 June 2027." (Emphasis in original.)
James has taken the steps referred to in clauses 2(a) and (b) of the Heads of Agreement.
James accepts that he did not pay Martha the $3 million referred to in clause 2(c) of the Heads of Agreement, but contends that the Heads of Agreement do not impose that obligation on him.
Martha commenced these proceedings on 19 September 2024. By her Summons, Martha seeks to recover from James the $3 million referred to in clause 2(c) as if it were a debt.
James has filed a List Response and Cross-Claim seeking, amongst other things, declarations that the clawback provisions in the Heads of Agreement, to which I referred at paragraph 75 of my earlier judgment, are void as a penalty.
Martha, through her legal team, now accepts that the claim to recover $3 million as a debt against James is not maintainable.
Thus, in their submission, Mr Robertson SC and Mr Walsh, who appeared for Martha, said:
" … cl 2(c) requires "[p]rocurement" of a "$5.6m sum as Tax Free capital" rather than simply a payment of money." (Emphasis in original.)
Martha now seeks to contend, and I understand that this is uncontroversial, that the effect of the Heads of Agreement is that the parties agreed that the payment referred to in paragraph 2(c) would be made by way of capitalising a fixed unit trust in accordance with what the parties referred to at paragraph 7 of the Heads of Agreement as the "Minters tax/restructuring advice".
There is evidence that James had taken some steps in this regard, including circulating, last Friday 25 October 2024, a proposed trust deed.
Martha wishes to contend that, nonetheless, James is in breach of his obligations because, to adopt the words in Mr Robertson's and Mr Walsh's submissions, James did "nothing in aid of the payment contemplated by that clause before 30 June 2024", and still does not, it is alleged, unconditionally agree to do so.
That is, the allegation is that James did not do, and has not said that he is prepared to do, what was required of him by the combined effect of the Heads of Agreement and the Minter's advice.
James contests each of those matters.
Martha now seeks to amend her claim in these proceedings to seek an order that James specifically perform his obligations under the Heads of Agreement, and under clause 2(c) in particular. Martha has, through her legal team, circulated a proposed Amended Summons and Amended Commercial List Statement.
I heard detailed argument this morning as to whether Martha has an arguable claim to seek an order for specific performance. It is not necessary for me to descend into the detail of that argument, save to say that I consider that she has at least an arguable case, assuming that the various factual contentions and questions of construction for which she contends are established.
Mr Bova SC, who appears with Mr Rogers for James, said, and I accept, that James is not in a position to meet this claim and will wish to adduce evidence of, amongst other things, evidence on the question of James' willingness to perform his obligations under 2(c), and, perhaps, to support a claim that the Heads of Agreement be rectified in an identified manner.
It was clear in those circumstances that the matter could not proceed today.
The question comes down to whether I should permit Martha to amend her claim as she proposes, in effect vacate today's hearing date, and allow the matter to proceed on the basis of Martha's proposed amendments; or dismiss the proceedings on the basis that Martha does not seek to prosecute the proceedings in their current form, and that James cannot meet today the proposed amended claim.
The difficulty with the former proposition is that the proposed Amended List Statement does not plead the case that Mr Robertson SC and Mr Walsh have foreshadowed that Martha wishes to make.
The central plank in the proposed Amended Commercial List Statement remains C23, which alleges that:
"[James has] failed to pay $3,000,000 by 30 June 2024 pursuant to clause 2(c)(i) of the Heads of Agreement."
This allegation is unchanged from the current Commercial List Statement.
That is not what Martha's case now is. Mr Robertson suggested that the matter could be dealt with by the provision of particulars concerning clause C23. I do not consider that would be a satisfactory way to deal with the matter.
The fact is that the case Martha now seeks to advance is quite different to that she has pleaded and different to that that she proposes to plead.
In those circumstances, I was tempted simply to dismiss the Summons. On reflection, however, I have concluded that that course is only likely to have the effect of adding even more costs to those the parties are incurring in what is, in substance, a dispute between a mother and her son. It would also mean that there will be a delay in the determination of the question that James wishes to raise in his Cross-Claim in these proceedings, that is whether the clawback provisions are void as a penalty. That is a question the answer to which, surely, each party wants to know.
In those circumstances, I make the following orders:
1. I grant leave to the plaintiffs to amend their Summons in accordance with MFI 1.
2. I decline to grant the plaintiffs leave to file a further Amended Commercial List Statement in the form proposed.
3. I direct that the plaintiffs circulate by 5pm on Tuesday, 5 November 2024 any proposed Amended List Statement.
4. I will stand the matter over for directions before me at 9:30am on 8 November 2024.
5. I order that the plaintiffs pay the defendants' costs of these proceedings to date.
[3]
Endnotes
Aberdeen Bear Pty Ltd v MJJK Investments Pty Ltd; MJJK Investments Pty Ltd v Calvert [2024] NSWSC 722 ("earlier judgment").
"James's interest was to be held by an associated company, the first plaintiff, Aberdeen Bear Pty Ltd. For convenience, I will refer to the majority interest being held by James. Further, by reason of share distributions made since the Heads of Agreement, and which are not relevant to the issues before me, the current shareholding is James, 86.86%, and the MJJK parties the remaining 13.14%. Again for convenience, I will adopt the convention adopted by the parties and refer to the 80:20 split." This footnote appeared in the earlier judgment.
At [1]-[2], [7], [9], [69]-[78].
"Evidently, of Martha." This footnote appeared in the earlier judgment.
"Hence the condition that Martha and Justin not increase debt and ensure that all payments are made." This footnote appeared in the earlier judgment.
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Decision last updated: 05 November 2024