HIS HONOUR: On 18 December 2014, the plaintiff Pran Central Shopping Centre Ltd posted to the registered office of the defendant company, then known as Charlie Lovett Pty Ltd, a purported creditors statutory demand for payment of debt, demanding payment of an amount $28,428.59 described in the schedule to the demand as the amount contained in invoices dated 14 November and 12 November 2014 numbered 103497 and 103592, which invoices were attached and in fact were dated respectively 14 October and 12 November, the October amount being $14,310.41 and then cumulative total in the November invoice $28,428.59.
The amounts claimed were in respect of rent, outgoings and promotion levies said to be due by the defendant to the plaintiff under a lease of retail shopping premises in the Pran Central Shopping Centre in Victoria, in which the defendant operated a franchised Charlie Lovett outlet.
In the absence of evidence to the contrary, the creditors statutory demand would be deemed to have been served on 24 December 2014. However, the evidence establishes that it did not in fact come to the notice of the director of the defendant or its accountant, whose office was the registered office, at that time. On 8 January 2015, a letter dated 7 January was delivered to the registered office and to the principal place of business and the director's residence. It enclosed a copy of the creditors statutory demand. Also on 8 January, the general counsel of the plaintiff sent an email to the defendant's director which, inter alia, enclosed a copy of the 7 January letter attaching the creditors statutory demand. The directors were, unsurprisingly, on holidays, and it appears that the email came to their attention on 12 January 2015. In any event, it was referred to their solicitor at 4.00pm that day. Their solicitor then had a conversation with the plaintiff's general counsel, in the course of which the defendant's solicitor said that his client had received an email of 4 January and a letter dated 7 January enclosing the statutory demand, and also that his client had not received the demand which had been addressed to the registered office. The plaintiff's general counsel responded that the demand had been posted on 18 December and, on a generous calculation, would expire at the latest on 14 January, and repeated that assertion after some discussion about the demand, adding, "We intend to act immediately and commence proceedings to have the company wound up."
On 13 January 2015, the defendant changed its name from Charlie Lovett Pty Ltd to Leasing Holdings Pty Ltd, and its directors caused to be incorporated a new company with the name Charlie Lovett Pty Ltd. No application under (Cth) Corporations Act 2001, s 459G, was filed by 14 January 2015 or, for that matter, at all.
On 16 January 2015, the defendant's accountant received, at the registered office, the 7 January letter and enclosed copy of the creditors statutory demand. He says he never received the original demand. Meanwhile, on 15 January 2015, the plaintiff filed an originating process claiming on order that the defendant be wound up. On 19 January, the plaintiff filed an interlocutory process seeking the appointment of a provisional liquidator, relying in particular on the events concerning the change of name of the company on 13 January.
On 23 January, the matter was before the Court for directions, when directions were made standing over the interlocutory process to 17 February, directing that the defendant serve any evidence on which it relies in relation to the relief sought in the originating process by 6 February, and noting certain undertakings given by the director of the defendant to safeguard the status quo in the meantime.
The defendant has not filed any notice of grounds of opposition as required by Corporations Act, s 465C, but, in the course of argument, outlined the grounds of opposition, amongst which were that there was a genuine dispute as to the debt claimed by the plaintiff, that there were offsetting claims, and that the company was solvent.
On 17 February, by leave, the defendant filed in Court a document entitled "Notice of Motion" but which should be an interlocutory process, seeking orders pursuant to Corporations Act, s 459S, granting leave to oppose the winding up application on the basis that:
there is a genuine dispute between the defendant and the plaintiff about the existence or amount of the debt to which the statutory demand relates; alternatively
that the defendant has an offsetting claim in respect of that debt.
On an application for leave under Corporations Act, s 459S, the first issue is whether there is a serious question to be tried on the ground now sought to be raised which might have been raised on an application to set aside the statutory demand. Here, that involves a preliminary consideration of the company's basis for contending that the debt is the subject of a bona fide dispute, though it does not require decision at this stage whether there is in fact a bona fide dispute. The same applies or may apply to the question of an offsetting claim. The second issue is the sufficiency of any explanation for the ground not having been raised earlier. The third issue is whether the ground now sought to be raised in defence of the winding up application is material to proving that the corporation is solvent [see D.A.G. International Pty Limited v D.A.G. International Group Pty Limited [2005] NSWSC 1036; Guardian Group Australia Pty Limited v Alice Lu & Anor [2005] NSWSC 1299, [69]; Kay Investment Holdings Pty Limited v North East Developments Pty Limited (In Liquidation) (2011) 85 ACSR 610; [2011] NSWSC 1121, [71]-[72]].
The first issue, then, is whether, and to what extent, the defendant has demonstrated an arguable case that there is a genuine dispute as to the existence or amount of the debt on which the plaintiff relies or that it has an offsetting claim.
In the way in which I have just stated the relevant considerations, it should be apparent that this is a preliminary enquiry. It is not necessary on the s 459S application for the defendant to show that there is a genuine dispute, but only that it has an arguable case that there is a genuine dispute - although an assessment of the strengths of that case is relevant to the ultimate exercise of the discretion to grant leave.
The defendant concedes that the rent and outgoings apparently payable under the lease of the subject premises in respect of November and December 2014 has not been paid. For the contention in those circumstances that the debt does not exist, it relies on the (Vic) Retail Leases Act 2003, s 31, which provides as follows:
31 Payment of rent when landlord's fit out not completed
(1) This section applies to a retail premises lease if -
(a) the liability of the tenant to pay rent under the lease starts when the tenant enters into possession of the retail premises (whether or not the tenant is required to enter into possession by a specified date); and
(b) the landlord has obligations under the lease concerning the fit out of the premises (that is, the landlord is required to provide some or all of the fit out before the tenant enters into possession of the premises).
(2) The retail premises lease is taken to provide that -
(a) the tenant is not liable to pay rent, or any other amount payable under the lease by the tenant (such as an amount payable for outgoings), in respect of any period before the landlord has substantially complied with the landlord's obligations concerning the fit out of the premises; and
(b) except on reasonable grounds of safety, the landlord is not entitled to deny the tenant possession of the premises merely because the landlord has not complied with those obligations.
The lease in question is for a term of 10 years commencing on 27 May 2014 and ending on 26 May 2024. Clause 3.1 provides that the lessee must pay the annual base rent specified in item 2 of the schedule, which was $13,977 (plus GST) to the lessor or as directed by equal monthly instalments in advance on the first day of each month. Clause 3.2, which is relevant for later purposes, provided that rent, outgoings and promotions levies "must be paid free of deduction, set-off or counterclaim". Clause 29 (entitled "Fit-Out of the Premises") provided for the lessee, having obtained the lessor's approval, to carry out certain fit-out work "from the commencement date" to be completed "by the end of the fit-out period" and provided that the lessee must not commence trading in the premises before the lessor certifies that the lessee's work is practically complete. Clause 30.1 provided for the lessor to undertake certain works performed "prior to the commencement date". Clause 30.1(b) provides:
(b) The Lessor must install:
(1) internal timber framed bi-fold doors to the shopfront;
(2) external wall finish in timber panels treated for exterior use;
(3) window mullions to split large sections of glass;
(4) shopfront and bulkhead; and
(5) glass frontage to all sides of the shop,
In accordance with the construction drawings issued by Michael Gillett to Michael Amler via email 23 October 2013.
For the purposes of the present application, the evidence indicates that the construction drawings so issued specified in respect of the wall finish:
Finish: Clear non-yellowing sealer (mat finish).
Clause 30.2 of the lease then provides, by subclause (b):
Despite any provision in this lease to the contrary, the lessee is not obliged to pay annual base rent from the commencement date until the end of the fit-out period.
Clause 30.1(a) requires the lessor's works to be
At least for the purposes of the present application, the evidence establishes that the lessor did not install the specified finish to the raw timber panels and a photograph of the finish in fact installed manifests that.
Ms Nasser of the defendant discussed this issue with the centre manager Mr Gillette in August 2014. She said:
Michael, the external timber panels that the landlord installed is not what was agreed to.
He replied:
The landlord has already spent too much money on the fit-out so we are not going to change the timber panels. If you want to change the panels then you can do it yourself at your own costs. You received enough incentive money.
At least so far as the evidence indicates, the defendant was, by then, in possession and continued thereafter to pay rent at least until and including the October 2014 rent.
The defendant submits that it is at least arguable that the tenant is not liable to pay rent or any other amount payable under the lease pursuant to Retail Leases Act, s 31(2)(a). The plaintiff submits that the section does not apply because liability of the tenant to pay rent under the lease did not commence when the tenant entered into possession of the premises, but 6 weeks thereafter. It seems to me that that gives rise to a not straightforward question of construction of Retail Leases Act, s 31(1)(a), on which counsel have not yet at least been able to find any relevant Victorian authority and which would require further consideration and argument to elucidate.
The plaintiff also submitted that it could not be said that the landlord had not "substantially complied with the landlord's obligations concerning fit-out" as referred to in subsection (2)(a), it being suggested that the use of the incorrect finish to the exterior timber panelling did not amount to anything other than substantial compliance. However, there is some evidence in Ms Nasser's affidavit as to the criticality of the appearance of the premises - that is, a rustic look and feel that is meant to be earthy and organic - to the Charlie Lovett brand and, if anything, that was reinforced by her oral evidence when required for cross-examination.
It seems to me that I could not conclude, on the material presently available, that it was unarguable or indisputable that the landlord had substantially complied with the landlord's obligations. It is true that the defendant remained in possession, but that of itself says nothing on the question of substantial compliance. It is also true the defendant continued to pay rent, apparently without protest, which might say something on the topic but may also be explained as a tenant who was unaware of its legal rights under Retail Leases Act, s 31, at that stage.
I am satisfied - on the preliminary basis that an evaluation is to be made on an application of this kind - that there is a plausible contention requiring investigation that, by operation of Retail Leases Act, s 31, the debt claimed in the demand is not due and payable. That is to say, it may well be that, when it comes to the winding up application, with further argument, the Court can be persuaded that there is not a genuine dispute. But on the limited material before the Court and given the preliminary nature of this application, I am satisfied that it is sufficiently arguable that there is a genuine dispute to satisfy that element of the test.
As to offsetting claims, the defendant raises two complaints" the first is, again, the failure properly to complete the fit-out, and the second is the failure to install signage. The defendant's contention is that breaches by the lessor of its obligations in those respects caused or contributed to the failure of the franchisee and, in turn, to the non-recoverability from the franchisee of the franchise fees, which included the rent and outgoings payable to the lessor.
As it seems to me, there are two difficulties in this context with that propounded offsetting claim. The first is one of causation, although if that were the only difficulty, Ms Nasser's oral evidence fortified the factual basis upon which, at least at this very preliminary stage, an inference of causation might be capable of being drawn. But the fundamental difficulty is that, even accepting that the amount recoverable from the franchisee would have included the rents and outgoings payable to the lessor, it is nonetheless a claim for unliquidated damages, and the rent clause of the lease to which I have referred requires payment of the rent without deduction. The pendency of an unliquidated claim for damages against the lessor which might be enforced at some time in the future is no real answer, in the context of a debate about insolvency, to a liability to pay rent now as and when it falls due. If the offsetting claims were ultimately established, they would not deny the present status of the plaintiff as a creditor, nor would they establish solvency in the context of a debt that is presently due and payable without deduction.
I turn then to the next issue, which is the sufficiency of the explanation for not having made an application under s 459G to set aside the demand. I have already set out the timeframes. While it is possible that actual knowledge of the demand reached the directors on or about 8 or 9 January, it is only clearly established that they received it on 12 January. On relevant assumptions, time for compliance with the demand and time for making a s 459G application expired on 14 January. There was at least some doubt or confusion as to when the demand had been served. Even if one assumes that actual knowledge of the demand were received on 8 January, that allows about 4 working days to make a s 459G application and complete an affidavit that complies with the Graywinter principle before 14 January. If actual notice were not received until 12 January, then there were 2 days in which the defendant might have done that.
While it appears that the defendant did take other steps in response to the demand - by effecting the name change, to which I have referred, on 13 January - I do not think that deprives the defendant of the submission that two, or even four, business days is a very short time in which to comply with the requirements of s 459G in making a proper application to the Court. The late stage at which the defendant or its directing minds gained actual knowledge of the creditor's statutory demand to my mind provides sufficient explanation for not having made an application within time under s 459G.
The Court is not to grant leave under s 459S unless satisfied that the issue to be raised is material to proving the solvency of the defendant. For reasons I have already given, I do not think that the suggested offsetting claims would be material to proving solvency.
As to the dispute as to the debt itself, it is necessary to look at such evidence as there is on the question of solvency. That evidence is slight, and would probably be insufficient on the hearing of a winding up application to meet the strictures of the authorities which indicate what is required to rebut the presumption of insolvency arising from non-compliance with a creditor's statutory demand. If that is to be done, better evidence than is currently available on the question of solvency will be required. But that is not the issue before the Court at this stage. The issue is whether the Court is satisfied that the ground sought to be raised is material to proving solvency. That ground, as is by now evident, is that the debt referred to in the demand does not exist, or that there is a genuine dispute as to whether the debt referred to in the demand, exists.
The evidence on solvency is, as I have said, rather slight. Relevantly, it includes a balance sheet of the defendant and its profit and loss accounts as at 30 June 2014, which disclose assets of $1,000 (cash on hand) and no liabilities, leaving equity of $1,000 and nil gross or net profit for the year.
The evidence indicates that the function of the defendant is to hold leases of premises from which franchisees of the Charlie Lovett group operate Charlie Lovett outlets. In some cases, it holds those leases in its own right. In others, it does so as trustee for the CL Leasing Unit Trust. The balance sheet of the CL Leasing Unit Trust as at 31 July 2014 indicates total current assets of $197,000, noncurrent assets of negative $2,825, and thus total assets of approximately $195,000, against which are shown a current liability of $199,000, leaving a deficiency of net assets of $4,585. A more recent balance sheet of the trust, as at 31 January 2015, shows current assets of $37,000; noncurrent assets of $56,000 and total assets of $93,000. It also shows current liabilities of $22,000, noncurrent liabilities of $76,000, total liabilities of $98,000, and a deficiency of $4,660.
The accounts of the company do not show as liabilities the rent which it is liable to pay under the leases into which it has entered, either in its own right or as a trustee. On the other hand, they do not show, as assets, the licence fees it is entitled to receive or to have the franchisees pay directly to the landlord in respect of those leases. As it seems to me, in all probability, those assets and liabilities set each other off. On that basis, it seems that the solvency of the company, including having regard to its right of indemnity against the trust, is marginal, and that its liability to pay the debt the subject of the demand is likely to be decisive in determining whether or not the company is in fact insolvent.
For that reason, I am satisfied that the issues sought to be raised in respect of the existence of the debt are material to proving the solvency of the company.
The Court therefore orders, pursuant to s 459S that the defendant have leave to rely in opposition to the originating process on the ground that there is a genuine dispute as to the existence of the debt which is the subject of the statutory demand.
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Decision last updated: 17 April 2015