Plaintiffs v Defendants

Supreme Court of Victoria|2007-11-29|Before: ROBSON J

CORPORATIONS - Franchise agreement - Appointment of administrators by franchisor - Debt disputed by franchisee to franchisor - Adjournment of second meeting of creditors - Balance of convenience - Sections 436 and 439A(2) of the Corporations Act 2001.

2 Timber & Hardware Seymour Pty Ltd conducted a hardware business at Seymour. Speaking generally, the evidence establishes that prior to July 2006 the company ran the business under a franchise or a name other than Mitre 10. Shortly prior to July 2006, the company was approached by Mitre 10, a well known hardware franchise organisation, and asked to convert the business to a Mitre 10 franchise.

3 The evidence establishes that Mitre 10 took control over the conversion of the business to a Mitre 10 franchise, including removing most of the existing stock on hand and replacing it with Mitre 10 stock. The evidence also establishes that so far as Mr and Mrs Holman and other members of staff could see, Mitre 10 did very little record keeping at the time the stock removed and the new stock introduced.

4 Since Mitre 10 business got up and going, there has been a continuing dispute between the company and Mitre 10 over several matters, including the suggestion that the amount of stock that the company has been invoiced for by Mitre 10 is greater than that in fact delivered. Further, there has been complaints that credits claimed for faulty stock and such like have not been properly treated by Mitre 10. Further there have been disputes about stock which was supposedly delivered by agents.

5 All told these disputes now add up to $712,000. On the other hand, the claimed indebtedness of the company to Mitre 10 has ran up to $1.2m. At one stage earlier this year, when the dispute had not been resolved, the parties did meet and it was agreed by Mitre 10 that they would freeze, so to speak, their claim for $600,000 whilst the issues were sorted out.

6 The issues were not sorted out, and after at least one phone call - and Mr O'Bryan for the administrator says there may have been more - Mitre 10 warned the Holmans that they were going to exercise their security and appoint an administrator over the company.

7 When entering into the franchise agreement with Mitre 10, the company entered into a security document which gave Mitre 10 security over the assets, and undertaking of the company to secure any indebtedness to Mitre 10. There is nothing unusual about the security. The security could be crystallised on the failure by the mortgagor to pay any moneys owed to Mitre 10.

8 On 18 September 2007, administrators were appointed and they have held their first meeting of creditors. In addition to Mitre 10, there are some trade creditors. There is $400,000-odd owed to related parties such as the Holmans; there is $200,000-odd owing to the National Australia Bank which is secured over a property owned by the Holmans. On the basis of the claimed debt by Mitre 10, $1.2-odd million, the company has a deficiency of assets over liabilities. If the company succeeds on its disputed debt and that debt were reduced to $500,000-odd, then bearing in mind the loans by related parties, the company would be clearly solvent.

9 There is no dispute that the Corporations Act 2001 permits a secured creditor that is owed money and has exercised its security to appoint an administrator. The plaintiffs in this case concede that Mitre 10 is owed several hundred thousand dollars; the precise amount is uncertain, depending upon the interest and other charges that they say are disputed and that the company should not bear.

10 The plaintiffs' case is that Mitre 10 has abused the power given to it by s 436C of the Corporations Act. It is well understood that it is improper for a person to seek to wind up a company on a disputed debt. As well as there being statutory defences to such a procedure, that is an abuse of process. Where that is established, it is possible to restrain even the issuing of the application to wind up, if it has been threatened.

11 For the purposes of this hearing, I am prepared to assume that similar principles apply to the appointment of an administrator. The difficulty that the plaintiffs face is, as I have mentioned above, the existence of the undisputed element of the debt being approximately $500,000. What is alleged by the plaintiffs is that the administration procedure has been improperly used to make it more difficult for them to ventilate and pursue the disputed debt, or to sort the disputed debt out. In my opinion, that constitutes a serious issue to be tried and I think that whether or not I should give an interlocutory injunction depends on the balance of convenience.

12 I am proceeding on the assumption, and no doubt Mitre 10 will correct me if I am wrong in due course, that the company has a franchise agreement with Mitre 10. The Trade Practices Act 1974, and in particular the Trade Practices (Industry Code -Franchising) Regulations 1998 (No 162 of 1998) make it compulsory for franchise agreements to contain certain terms. They include terms that go to resolving disputes between the franchisor and franchisee and lay out procedures for dealing with disputes including how the dispute is to be conducted, the number of days and so forth people have got to do things, invoking mediation and so forth. See Part 4 of the Regulations.

13 The Code does not deprive a party of its legal rights. I am concerned in this case that the company asked for a copy of the franchise agreement and that was not provided. It seems likely that if a franchise agreement had been provided, that one or other of the parties would have availed themselves of the dispute resolution procedures set out in the Code.

14 It seems ideally suited to the facts of this case. This cannot be the only case where a dispute over stock deliveries has arisen under a franchise agreement. I would imagine they arise every day, and that is the very thing the Code is directed to. I think the fact that the plaintiffs have asked for a copy of their franchise agreement and were not given it does add weight to the allegation that the actions of Mitre 10 might constitute an abuse of s 436 of the Corporations Act.

15 I should make it clear that I do not make any such finding against Mitre 10. Mitre 10 has not been joined to the proceedings at this stage and is not present and is not able to refute these allegations. It may have complete and full answers to each and every allegations. At this stage I am merely commenting on the allegations.

16 That brings me to the next point. I think it is improper that this proceeding should proceed without an undertaking from the plaintiffs that they will either join Mitre 10 to these proceedings or take proceedings against Mitre 10, because the allegations they make are not about the conduct of the defendants, the administrators, whose conduct to date, as far as I can see, have been blameless. As far as I have been informed, the administrators have handled the matter quite properly, even going so far as fully ventilating the plaintiffs' complaints in their report. In fact so fully that counsel for the plaintiffs was happy to rely upon their report to establish the extent of the plaintiff's dispute with Mitre 10.

17 The plaintiffs complaints are about the conduct of Mitre 10. In my view, appropriate claims should be made against it and relief should be sought against it to either restrain it from using the administration procedure or whatever. It is not my function to suggest the nature of the relief, but there should be some appropriate relief sought against it and perhaps ancillary relief against the administrators.

18 On the balance of convenience, it appears that there would be little inconvenience incurred by adjourning the second meeting of creditors to a date to be fixed. Of course there will be some inconvenience, there will be some expense and the plaintiffs will have to undertake to pay those costs if the court decides that they should do so.

19 On the other hand what is the inconvenience or what is the detriment to the plaintiffs if the meeting is not adjourned? There is the risk that the resolution will be passed to wind-up the company, that could do irreversible damage to the business and the company. I consider that the detriment in the event of an order not being made is quite significant and far outweighs the detriment that will flow from an order being made.

20 In those circumstances I propose to order that until 4.15 p.m. on 12 December or further order, that Part 5.3A of the Corporations Act operate with respect to the company so that the time for holding the second meeting of creditors pursuant to s.439A(2) be extended to a date to be fixed and that the hearing of the plaintiff's interlocutory process be adjourned to 12 December 2007.

21 I will make those orders on the usual undertaking as to damages to be given by both Mr and Mrs Holman, and I will also require an undertaking that the plaintiffs take such proceedings as they think fit which rely upon the allegations that Mitre 10 has abused its powers to appoint administrators of the company.

Trade Practices (Industry Code -Franchising) Regulations 1998

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