Conclusion as to solvency
93 In my opinion Multipye has failed to rebut the presumption of insolvency that arose when it did not comply with the varied statutory demand. Moreover, the facts would lead me to conclude that the company is insolvent even if there were no presumption in operation. There are two components of the balance sheet leading to that conclusion. One is the existence of the debt to the Pie Company in the varied statutory demand, together with the disputed debt to Systems of over $90,000. For reasons I shall give, Multipye has not succeeded in showing, for the purposes of s 459S, that the only pertinent ground of opposition to the winding up, ground 13, could not have been ascertained at the time of the s 459G application.
94 The other component of the balance sheet leading to my conclusion about insolvency as the Westpac debt. It appears to have become immediately due and payable, and there is no evidence before me that Westpac has agreed with Multipye or Mr Thadani to desist from demanding payment from the company.
Ground 13
95 Multipye claims that the documentation that purports to reflect on a transaction, under which a franchise fee of $100,000 was paid, is a sham to disguise an illegal payment of key money. Section 14(1) of the Retail Leases Act 1994 (NSW) provides that a person must not, as lessor or on behalf of the lessor, seek or accept the payment of key-money or lease preparation expenses in connection with the granting of a retail shop lease. But s 14(3) says that the section does not prevent a lessor:
"(d) from seeking and accepting payment for goodwill of a business from a purchaser of the business, but only to the extent that the goodwill is attributable to the conduct of the business by the lessor," or
"(e) from seeking and accepting payment of plant, equipment, fixtures or fittings that are sold by the lessor to the lessee in connection with the granting of the lease," or
"(f) from seeking and accepting payment for the grant of a franchise in connection with the granting of the lease".
"Retail shop lease" is defined to include any agreement for the grant of a valuable right of occupation of premises for use as a retail shop, whether or not the right is a right of exclusive occupation.
96 In my view the evidence falls well short of supporting Multipye's contention. The evidence adduced on behalf of Multipye shows that the original proposal that Multipye would buy the Mr Goodpie business for $125,000, including a substantial component of goodwill, was varied on the advice of Multipye's solicitor. In its new form, the transaction involved Systems buying the Mr Goodpie business for the same price of $125,000, a substantial component of which was goodwill. As one would expect, Multipye was required to pay approximately the same amount as it would have paid had it purchased the Mr Goodpie business directly. I infer that the sum of $127,500 provided for in the acknowledgement document of 12 September 2003 included the $125,000 that was referred to in other documents and discussed in correspondence.
97 The acknowledgement document described part of the payment in the sum of $100,000 as for a licence to use goodwill of the business. However, the amount of $100,000 was characterised as a franchise fee in the franchise agreement. The franchise and license agreements were the final agreements reflecting the arrangements between Systems and Multipye. According to that documentation, Multipye's payment was, as to $100,000, a franchise fee and as to $27,500 payment for plant and equipment. If that characterisation is correct, the payments were exempted from the key money prohibition by ss 14(3)(f) and (e) respectively.
98 In my opinion, the evidence does not provide any plausible basis for regarding the characterisation in the documents as a sham. The transaction was not one in which Georgie Porgie, as proprietor of the Mr Goodpie business, sought to deceive Multipye into paying what Georgie Porgy new was illegal key money, and the evidence provides no basis for believing that Systems (and certainly not the Pie Company) knowingly participated in any such deception.
99 Specifically, the fact that the parties decided to proceed without solicitors when the final documents were executed is not, in itself, evidence of a conspiracy to act illegally or fraudulently. On the contrary, the evidence indicates that Systems was under pressure to complete the transaction and was becoming frustrated with the delays associated with the issues raised by Mr Muriniti.
100 I do not regard the handwritten endorsement on the schedule of figures for Shakespeares Central Plaza, striking out the words "Lease Payout" and writing in the words "Goodwill, key money?", as having any sinister significance. The person who wrote those words appears to have been confused about the character of the payment, but the matter is clarified in the documents.
101 Nor do I regard the evidence concerning late execution of the Deed of Covenant and Consent as supporting any contention that the documentation was a sham. It is consistent with the idea that such a deed was contemplated, but the people responsible for attending to it allowed the matter to slip. If there were any argument, under the terms of the head lease, that the failure to obtain the lessor's consent prior to commencement of the licence invalidated the licence, any such claim made by the lessor or by Systems would be open to a defence of estoppel having regard to the fact that eventually, consent was formally given. Late execution of the document was not associated with any denial on behalf of the lessor or the franchisor of Multipye's right of occupation of the shop. Multipye took possession of the premises in September 2003 and remained in possession until 10 February 2006. The lessor never terminated, or threatened to terminate, Multipye's occupation of the shop. The absence of formal consent did not cause Multipye any loss.
102 Even if Multipye could establish, against Systems, that the transaction was a sham and/or that Systems received illegal key money or knowingly participated in a scheme for payment of illegal key money to Georgie Porgie, it would not thereby establish an offsetting claim against the Pie Company. Multipye's contention that there was a joint venture between the Pie Company and Systems seems to be designed to overcome this problem, but I can see nothing in the evidence that would support a plausible argument that a joint venture was created. The evidence indicates, not surprisingly, that the Shakespeares group organised its business operations so that Systems was the franchising company and the Pie Company was the supplier of product. Any evidence that, from time to time, those involved in the operations did not clearly distinguish between one entity and the other would not, itself, be a ground for asserting that the entities were in a joint venture or otherwise that they accepted joint and several liability for one another's debts.
103 As noted earlier, Barrett J left open the question whether the pursuit of ground 13 at the hearing of the winding up application was barred by s 459S. According to Barrett J's reasoning, with which I respectfully agree, the issue is whether Multipye could have raised ground 13 as an offsetting claim in the s 459G application. That, in turn, depends upon whether, at that time, Multipye knew or could have ascertained the facts and circumstances upon which ground 13 is based. The onus of establishing these matters is on Multipye.
104 Multipye's contention is that it discovered the relevant matters only when documents were obtained on subpoena in the Commercial List proceeding, including the documents obtained from Sparke Helmore, Landerer & Co and Westfield. But it did not show that it endeavoured to investigate those matters at the time of the s 459G application, or that if it had done so, it would not have succeeded. One can readily infer that solicitors would be unlikely to disclose the contents of their files, except upon instructions or under compulsion, but I see no reason for concluding that Westfield, if asked for a copy of the Deed of Covenant and Consent at that earlier time, would have refused to co-operate. In any event, the evidence in fact uncovered by Multipye as a result of the subpoenas fell a long way short of establishing the offsetting claim asserted in ground 13. My conclusion is that Multipye is prevented by s 459S(1) from asserting ground 13, but if that were not so, ground 13 has not been proven.
Other grounds
105 Ground 5 alleges that the winding up application is an abuse of process, on the ground that the Pie Company is seeking a winding up order for the purpose of preventing Multipye from pursuing its meritorious claim for damages against the Shakespeares companies and others in the Commercial Division. I agree with counsel for the Pie Company that there is no proper foundation in the evidence for an inference of improper purpose. The Commercial List proceeding was commenced some two weeks later than the winding up proceeding. There is some evidence that Mr Muriniti was threatening proceedings before the winding up application was made, but that evidence falls well short of grounding an inference of improper purpose.
106 Section 459A of the Corporations Act says that in an application under s 459P, the court may order that an insolvent company be wound up in insolvency. It is plain from the use of the word "may" that the court has a discretion to decline to make the order even though insolvency has been established. Grounds 9, 10, 11 and 12 are not grounds of opposition to the making of a winding up order, in the sense that the court may decide to make a winding up order on the ground of insolvency even if one or more of these grounds is established. These grounds identify factors that might influence the court to decline to make a winding up order notwithstanding that the company is found to be insolvent. In other words, these four grounds are matters going to the court's discretion, also invoked in ground 15.
107 I do not regard grounds 9, 10, 11 and 12 as having any significant weight on the discretionary issue. The allegation of breach of fiduciary duty in ground 9 depends partly upon contentions of misrepresentation and other misleading conduct that I considered when I examined the "contingent asset" for the purposes of determining insolvency; and partly on allegations relating to improper purpose and abuse of process that I considered in my examination of ground 13. Ground 10 is not easy to understand, but it seems to refer to the conduct of Systems as well as the Pie Company, conduct examined in those other two contexts.
108 Counsel for the Pie Company submitted that ground 11 was considered and rejected by Barrett J in his December and February judgments. That is not quite correct, in my view. Barrett J reached the conclusion, as I have explained, that the winding up proceeding should not be stayed pending the outcome of the appeal, but now the same matter is advanced for another purpose, namely to persuade the court in the exercise of its discretion not to make the winding up order. That said, just as Barrett J took the view that to grant a stay of the winding up application would be contrary to the policy underlying ss 459G and 459S, my view is that it would be contrary to those policies for me to place any significant weight on this factor in the exercise of my discretion to decline to make a winding up order, in circumstances where I have found the company to be insolvent.
109 To the extent that ground 12 contends that the majority of creditors oppose the winding up, it raises a matter worthy of consideration. Here, however, the two largest creditors are the shareholders of the company who stand to gain from litigation which they wish to pursue in the company's name, and the other large creditor is their bank. That weakens the significance of this factor.
110 The remainder of ground 12, and ground 15, raise a matter which, in my view, is the most important discretionary consideration in the present case. The question is whether it is better to leave the company in the control of Mr Thadani, who will cause it to pursue the Commercial List proceeding essentially at his cost, and for his benefit and the benefit of Ms Sit, or to place the company in the hands of arms-length liquidators who will be able to make a more objective assessment of the prospects of success in litigation and investigate avenues of funding not confined to (though not excluding) Mr Thadani and Ms Sit.
111 Having reviewed the evidence concerning Multipye's claims, and perhaps more importantly in this context, having listened to the evidence of Mr Thadani and the other witnesses for Multipye, I have formed the firm conclusion that in this case, given that the company is insolvent, the best course is to put it in the hands of liquidators who can decide what to do about the Commercial List proceeding. I have gained the strong impression that the claims in the Commercial List proceeding have not been carefully formulated and prepared, and are not, at this stage, supported by cogent evidence. It is possible that the evidence will be more compelling if it is presented, fully prepared, in a Commercial List trial. But the evidence presented to me to demonstrate the strength of the claims was unconvincing. I have explained my assessment of the evidence earlier in this judgment, especially in considering the company's insolvency and ground 13.
112 Mr Thadani has a great deal at stake. His participation in the Central Plaza pie shop business has been a financial disaster for him, according to the evidence. He wants to hold the Shakespeares companies and their directors accountable so as to avoid or reduce the adverse financial consequences of his business decisions. He is in no position to evaluate the company's prospects of success in an objective manner, as a liquidator is duty-bound to do. In my judgment, a hard-headed objective evaluation of the Commercial List proceeding is now needed.
113 For these reasons, grounds 9, 10, 11, 12 and 15 do not persuade me to exercise my discretion against making a winding up order. My decision on this point is contrary to the opinion of Mr Turner. However, the exercise of discretion to make or not to make a winding up order when the insolvency ground has been established is a matter for the court rather than any expert witness. I have had the benefit of seeing and hearing the evidence as a whole, whereas Mr Turner has relied very much on Mr Thadani's input.
Objection to admissibility under s 459S
114 At the hearing of the winding up application, counsel for the Pie Company made a series of general objections to the reading of certain affidavits and the tendering of certain exhibits by Multipye. The ground of objection (Transcript page 20) was that the subject of this evidence related to matters that could not be relied upon because of s 459S of the Corporations Act.
115 Section 459S(1) says that in so far as a winding up application in insolvency relies on failure to comply with a statutory demand, the company may not, without the leave of the court, oppose the application on grounds that the company relied on or could have relied on at the hearing of an application to set aside the statutory demand. Counsel's submission was that by tendering the evidence to which objection was taken, the company was endeavouring to oppose the application on grounds prohibited by s 459S(1).
116 Section 459S(1) does not directly deal with the question whether evidence at the hearing of the winding up application is admissible evidence. Instead, by preventing the company from opposing the application on certain grounds, it limits the scope of relevant evidence at the hearing. In the language of s 55 of the Evidence Act 1995 (NSW), it prevents certain matters from being "facts in issue in the proceeding" by narrowing the issues. Nevertheless, the broad definition of relevant evidence, expounded in s 55, remains applicable. Although s 459S prevented Multipye from raising matters it could have raised at the hearing of the application to set aside the statutory demand, it was permitted consistently with s 459S to raise the matters identified in grounds 1, 5, and 9-15 of its Notice of Grounds of Opposition to Winding Up. It was entitled to adduce evidence relevant to those grounds (Evidence Act, s 56).
117 I have reviewed the evidence to which counsel raised the general objection under s 459S, by considering whether that evidence, though it cannot be used in support of grounds that were or could have been raised at the s 459G hearing, is relevant to the grounds of opposition that remain. I have decided that all of the evidence meets the test of relevance in s 55: that is, if accepted, it could rationally affect the assessment of the probability on the existence of the facts remaining in issue in the winding up proceeding. Therefore the general objection to admissibility has been unsuccessful.
Conclusions
118 I have decided that Multipye is insolvent and that the court should make an order under s 459A that it be wound up in insolvency, and accordingly that liquidators should be appointed. I shall appoint Mr Hall and Mr Brown, official liquidators, who have consented to the appointment. I shall order Multipye to pay the Pie Company's costs, as agreed or assessed. Those costs will have the priority over other unsecured debts afforded by s 556(1)(b).
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