Johnny Oceans Restaurant Pty Ltd v Page [2003] NSWSC 952

New South Wales Supreme Court

CITATION : Johnny Oceans Restaurant Pty Ltd v Page [2003] NSWSC 952 revised - 24/10/2003 HEARING DATE(S) : 16 October, 2003 JUDGMENT DATE : 16 October 2003 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Winding up order made.

CATCHWORDS : CORPORATIONS - WINDING UP - JUST AND EQUITABLE GROUND - Whether deadlock between shareholders established - whether discretion to refuse or delay winding up order. LEGISLATION CITED : Corporations Act, 2001 (Cth) - s.232, s.233, s.459G, s.461K, s.467 Retail Leases Act 1994 (NSW) PARTIES : Johnny Oceans Restaurant Pty Limited - Plaintiff Michael Gerard Page - Defendant FILE NUMBER(S) : SC 2339/03 COUNSEL : G. Leather (Sol) - Plaintiff R.D. Wilson - Defendant SOLICITORS : Conway Leather Shaw - Plaintiff Stacks the Law Firm - Defendant

Ex tempore

1 There are before the Court two applications. The first is an application by the Plaintiff ("JOR") under s.459G of the Corporations Act, 2001 (Cth) to set aside a statutory demand issued by the Defendant, Mr Page, on the ground that the debt is genuinely in dispute. The second is a cross-application by Mr Page, who is a shareholder of JOR, to wind up the company on the just and equitable ground pursuant to s.461(k) of the Corporations Act . 2 The parties wish to defer the hearing of the application to set aside the statutory demand and they have proceeded today to argue the cross-application for winding up of the company on the just and equitable ground. 3 Mr Page is one of four shareholders of JOR which was incorporated on 9 April 2002 to conduct a restaurant business at Boomerang Beach on the north coast of New South Wales. The four shareholders are Mr John Tervenski, his wife Tracey Tervenski, Mr Kevin Lindsay and Mr Page. Each shareholder has 2,500 shares in the company. Mr Lindsay supports Mr Page's application to wind up the company and Mr and Mrs Tervenski oppose it. 4 The circumstances in which the parties came to be associated may briefly be recounted. Mr and Mrs Tervenski have had a great deal of experience in the restaurant business. They wished to set up a restaurant in a resort known as Moby's at Boomerang Beach in old premises already located in the resort and then in a new restaurant to be constructed within the resort and for which they hoped to obtain a long term lease. They had very little, if any, capital to put into this enterprise and in late March/early April 2002 they were introduced to Mr Page and Mr Lindsay as people who might be willing to finance the restaurant venture. 5 Mr and Mrs Tervenski attended a meeting on 4 April 2002 with Messrs Page and Lindsay in which Mr Tervenski explained the proposal. Mr Tervenski said that he had secured an agreement from the resort owner, Sandlock Pty Ltd, for a long term lease over the new premises with sole rights to food and liquor for the entire resort. The lease was to be of an initial term of five years with two options for renewal for a further term of five years each. It was acknowledged in the course of discussions that there would be a gap in trading of the restaurant business during the period between the closing of the old premises for demolition and the completion of construction of the new restaurant premises. 6 Mr Page and Mr Lindsay agreed to finance the restaurant business. There is disagreement about how much Mr Page and Mr Lindsay initially agreed to put up, but it was certainly not less than $60,000. There is a dispute about whether an overdraft facility was also agreed to be made available in that discussion but, in the end, resolution of that dispute does not matter because the agreed terms between the parties were incorporated into a Shareholder Agreement dated 30 May 2002, signed by the four shareholders. 7 Clause 1 of the Shareholder Agreement provided that Mr and Mrs Tervenski were to be the sole directors of JOR and would run the business on a day to day basis. Paragraph 6 provided that funding for JOR would be by an initial investment of $80,000 by Messrs Page and Lindsay, each of whom was thereby to acquire 25% of the share capital of the company. Additional funds were to be provided by a $20,000 overdraft facility "during tight times" . Although not specifically stated, it was clear enough from the context of the Shareholder Agreement that the overdraft facility was to be made available and funded by Messrs Page and Lindsay. 8 Mr Page's evidence is that an increase of commitment of capital from $60,000 to $80,000 and the provision of a $20,000 overdraft facility was agreed between the shareholders on the assurance that that was to be the total investment required for the establishment of the restaurant business. 9 The whole of the sum of $80,000 was provided by Messrs Page and Lindsay by the end of May 2002 and the overdraft facility for the company was then established. 10 In late June 2002 Mr Page was asked for further funds to keep the restaurant business trading. On 3 July Messrs Lindsay and Page paid a total of $5,000 to JOR. In late July Mr Page was asked for another $5,000, which he reluctantly paid, Mr Lindsay having declined to make any contribution. 11 In September 2002 Mr Page was asked for further funds. By this time relations between Mr and Mrs Tervenski on the one hand and Messrs Page and Lindsay on the other were becoming increasingly strained. At a meeting in September there was heated discussion between the parties about Mrs Tervenski's continued participation in the business. In a meeting in December 2002 there was further heated discussion between the parties when further funds for the business were requested. 12 By this time it was quite clear the two sides regarded each other with distinct distrust and animosity. Mr Page raised the desirability at that time of his shares in the company being bought out. 13 Shortly before Christmas 2002, Mr Page learned that the lessor of the premises in which the restaurant business was then being conducted had given notice to JOR that vacant possession was required by 28 February 2003. Mr Page was angry that he had not been informed earlier by Mr and Mrs Tervenski and he expressed that anger to Mr Tervenski. 14 In early January 2003 Mr Page instructed his bank that he wished to withdraw any guarantee in support of the JOR overdraft facility. The guarantee was withdrawn and the overdraft facility thereby was discontinued. This action on Mr Page's part further exacerbated the animosity between the parties. 15 JOR did not voluntarily give up possession of the restaurant premises on the date requested by the lessor. On 10 March 2003 the lessor re-took possession of the restaurant premises by locking the company out. The lessor contended that the company was in occupation pursuant to a weekly tenancy and that it had given proper notice terminating that tenancy. There was by that time a dispute between JOR and the owner of the resort as to whether or not there was a binding agreement for lease between them in respect of the new restaurant premises. 16 On 13 March 2003 JOR commenced proceedings in the Administrative Decisions Tribunal seeking a determination of that issue in its favour. In brief, the contention of JOR in those proceedings is that there was an oral agreement between the parties in early January 2002 for the granting of a lease of the new premises and, in reliance upon that agreement, the company entered into occupation of the old premises, whereby it entered into a lease within the provisions of the Retail Leases Act 1994 (NSW). Apparently, on or about 20 March this year, a member of the Administrative Decisions Tribunal made a preliminary finding that JOR is entitled to a lease agreement, but I do not know what significance I can attach to that finding. 17 The proceedings in the Administrative Decisions Tribunal were commenced by JOR without the consent of Messrs Page and Lindsay. It is a term of the Shareholder Agreement that any decisions involving the spending of over $2,500 must be referred to all shareholders and agreed upon by 75% of them. I think it is a fair inference that a decision to embark upon the proceedings would be a decision involving the expenditure of over $2,500 in the company's own legal costs. 18 It appears clear enough that, absent the consent of Messrs Page and Lindsay, Mr and Mrs Tervenski were in breach of paragraph 3 of the Shareholder Agreement in resolving, as directors of JOR, that the company would commence the proceedings in the Administrative Decisions Tribunal. 19 On 17 and 18 March 2003, Mr and Mrs Tervenski procured the removal of the plant and equipment which was then used in the restaurant business conducted in the old premises. Mr Tervenski arranged for the auction of that plant and equipment, which took place on 23 March 2003. That action by Mr Tervenski was, likewise, without the prior consent of Mr Page and Mr Lindsay. 20 Mr Page confronted Mr Tervenski at the auction on 23 March and a serious altercation broke out between them, such that on the following day Mr Tervenski sought an apprehended violence order against Mr Page in the Local Court at Forster. Those proceedings were compromised on 24 June 2003 by mutual undertakings given by Mr Page and Mr Tervenski that they would have no further contact with each other except through lawyers. 21 This episode is indicative of the degree of hostility which now exists between Mr and Mrs Tervenski on the one hand and Mr Lindsay and Mr Page on the other. It was shortly after this incident that Mr Page served on the company a statutory demand for the repayment to him of some $7,500, which had been lent by him to the company. 22 The proceedings in the Administrative Decisions Tribunal are set down to be heard on 26 October. JOR says that no winding up order should be made at this time because the company should be given the opportunity of securing for itself what is said to be a very valuable lease of the new restaurant premises. 23 Mr Leather, who appears for JOR, submits that Mr Page and Mr Lindsay are making the application for winding up of the company on the just and equitable ground for the purpose of frustrating the company in its endeavours to secure the new lease. However, there is no evidence, and it has not been suggested by Mr Leather, that Mr Page and Mr Lindsay are seeking to obtain the benefit of that lease for themselves or for their interests. 24 Mr Wilson, who appears for the Defendant, submits that it is clear that the shareholders have reached a complete deadlock so that it is impossible for the two opposing factions to conduct the business of the company in the future – if there be a future for the company. He submits also that there has been a failure of the substratum or purpose for which the company was formed in that the company is now no longer trading and will not be able to trade at all unless and until it secures a new lease. Essentially, however, Mr Wilson relies upon what he says is a complete breakdown in the relationships between the members of the company resulting from breaches by Mr and Mrs Tervenski of the Shareholder Agreement, amongst other things. 25 Mr Leather submits that there has not really been a total break-down in the relationships between the parties. Further, he submits that the management of the company is under the control of Mr and Mrs Tervenski, as expressly provided for in the Shareholder Agreement, so that the company's business can still be conducted by them without interference by Messrs Page and Lindsay. He submits that the company should not be deprived, before the hearing of the proceedings in the Administrative Decisions Tribunal, of the opportunity of securing a valuable asset, namely, the lease of the new premises. 26 Mr Wilson, on the other hand, points to a number of factors which he says ought to weigh in the Court's discretion in favour of making a winding up order at this stage. He says that at the very least there must be grave doubts about the company's solvency. He points to evidence that the company is indebted to the Australian Tax Office in respect of GST payments overdue in the sum of some $20,000 and that there is no evidence that the company has any capacity to pay this amount. There is no evidence, in fact, that the company has any substantial cash assets and there is no evidence that any arrangement has been made with the Australian Tax Office to pay the GST indebtedness by instalments or on a deferred basis. 27 Mr Wilson also points to the fact the company is presently not trading and he emphasises that even if the company's proceedings in the Administrative Decisions Tribunal are successful so that the company is able to secure the right to a new lease, the relations between the shareholders are such that the company will not be able to do anything effectively to conduct its business with the benefit of that lease. 28 This is a difficult case, but it seems to me that I must hold that the grounds for winding up the company on the just and equitable ground have been made out. 29 I sympathise fully with the position in which Mr and Mrs Tervenski find themselves. It is clear, I think, that they began this venture with high hopes of its success and that they have worked very long and hard and have applied all of their considerable experience in the conduct of the business in order to ensure its success. However, it appears that the venture has been flawed from the start by lack of sufficient capital and that Messrs Page and Lindsay were never prepared to invest in the business more than a certain amount. As events transpired, it turned out that that amount was not sufficient. As a result of the requirement for further funds in the business, the relationship between the parties has soured and has eventually deteriorated to what may fairly be described as intransigent hostility. 30 Mr Tervenski was asked whether he regarded it as possible that he could continue to work together with Mr Page in the conduct of the business. Mr Tervenski, to his credit, frankly said that he could not answer that question one way or the other, without a great deal of soul searching, as he put it. I think it fairly clear from that evidence, and from evidence of a similar character from Mrs Tervenski, that the position has now passed where any real working relationship can be re-established between the two camps in this company. 31 I readily appreciate that as matters presently stand, Mr and Mrs Tervenski are the sole directors of the company, but there is a Shareholder Agreement in existence which provides for all important decisions in the conduct of this business to be made with the consent of all shareholders, or at least 75% of them. Even if the new lease of the premises was obtained, it is quite clear that in order to establish the restaurant business in those premises substantial further funds would be required. Whether they were put in by Messrs Page and Lindsay or some other investors, it is nevertheless clear that four of the shareholders of JOR would have to agree on what was to be done and how it was to be done. 32 It seems clear to me from the history of the relationship that there is no real prospect that the parties can work together sensibly to reach the necessary agreement to be able to conduct the company's business successfully in the future. In short, I am satisfied that there is now a complete deadlock between the two opposing camps, that there has been an irretrievable breakdown in the relationships between the members of the company, and that the company's operations in the future will, therefore, not be able to be conducted in any commercially viable and sensible way. 33 The question arises whether, in the Court's discretion, a winding up order should now be made or refused. 34 Section 467(4) of the Corporations Act provides: "Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that: