New South Wales Supreme Court CITATION : Branalex Debstina Pty Ltd v Rossmore Mushrooms Pty Ltd & Ors [2010] NSWSC 146 HEARING DATE(S) : 26 February 2010 JUDGMENT DATE : 26 February 2010 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Palmer J EX TEMPORE JUDGMENT DATE : 26 February 2010 DECISION : Application dismissed. CATCHWORDS : CORPORATIONS – EQUITY – INTERLOCUTORY INJUNCTIONS – Whether there is a serious question to be tried – whether balance of convenience favours preserving the status quo until final determination if granting the injunction may permit the carrying on of an insolvent business. LEGISLATION CITED : Corporations Act 2001 (Cth) – s 233(1) CATEGORY : Procedural and other rulings Branalex Debstina Pty Ltd (Plaintiff) Rossmore Mushrooms Pty Ltd (First Defendant) PARTIES : Phil's Champignons Pty Ltd (Second Defendant) Eang Pao a.t.f. the Pao Khou Family Trust (Third Defendant) Leap Khou a.t.f. the Pao Khou Family Trust (Fourth Defendant) FILE NUMBER(S) : SC 2009/00290642 B. DeBuse (Plaintiff) COUNSEL : M.J. Dawson, A.W. Smith (Second Defendant) L.J. Reid (Third and Fourth Defendants) Marsdens (Campbelltown) (Plaintiff) SOLICITORS : Tress Cox (Second Defendant) Kazi Portolesi Lawyers (Third and Fourth Defendants) 2009/290642 Branalex Debstina Pty Ltd v Rossmore Mushrooms Pty Ltd & Ors JUDGMENT – Ex tempore 26 February, 2010 1 By Originating Process filed on 21 September 2009 the Plaintiff, Branalex Debstina Pty Ltd ("Branalex") commenced proceedings against Rossmore Mushrooms Pty Ltd ("Rossmore Mushrooms"), Phil's Champions Pty Ltd, and Eang Pao and Leap Khou as trustees for the Pao Khou Family Trust. 2 The Plaintiff sought an order winding up Rossmore Mushrooms. Consequential relief included a declaration that a partnership between Branalex and each of the Defendants, styled "Rossmore Mushroom Farms", had been dissolved or, alternatively, an order for the dissolution of that partnership. Also sought was a declaration that a Joint Venture Agreement between the parties had been repudiated by Phil's Champignons. 3 It appears that at the time of the filing of the Originating Process the parties were aligned in accordance with the record, i.e that Branalex was opposed to the other parties in the venture, namely Rossmore Mushrooms, Phil's Champignons and Messrs Pao and Khou, who were all Defendants. Since the commencement of the proceedings it appears that the allegiances have changed so that Messrs Pao and Khou are now aligned in interest with Branalex. 4 It is necessary to say something about the background of the dispute. It is extremely complicated, particularly the interrelationship of entities and their respective obligations in the Venture. A Joint Venture Agreement was entered into on 16 May 2008 between Rossmore Mushrooms, Phil's Champignons, Messrs Eang Pao and Leap Khou as trustees of the Pao Khou Family trust, and Branalex. The Venture was for the purpose of growing and marketing mushrooms in commercial quantities in Australia and Australasia. 5 The Joint Venture Agreement is badly drafted in many respects. One issue of contention is as to who exactly are the joint venturers. Pursuant to clause 1(a), it appears that Rossmore Mushrooms and Phil's Champignons alone are the joint venturers. However, it is quite clear from other terms of the Joint Venture Agreement that the other parties have particular obligations to perform and have particular roles to fulfil in the operation. It is convenient now to set out the principal clauses which are the subject of the dispute. Clause 1(b) provides "FORMATION OF JOINT VENTURE: … (b) Rossmore Mushrooms shall underwrite and provide ALL FINANCIAL backing and support for the JOINT VENTURE; Clause 3 provides: "WORKING CAPITAL The parties hereto, from time to time, shall determine the amount of working capital required to perform the JOINT VENTURE and each shall contribute its Proportionate Share, of the amount so determined, to the JOINT VENTURE within ten (10) days after a request thereof is made. If any party shall fail to contribute its Proportionate Share of the amount so determined, the other party or parties shall contribute the Proportionate Share of the defaulting party. In such event, and regardless of any later offer by the defaulting party to remedy its default or the later remedy by the defaulting party of its default, the Proportionate Share of each party in the profits of the JOINT VENTURE and in the ownership of all funds and property of the JOINT VENTURE shall change automatically to the respective proportions that the total amount contributed to working capital by each party to the total working capital contributed by all parties, but the Proportionate Share of each party with respect to liabilities and losses shall remain unchanged. In addition to the foregoing, the non-defaulting party or parties shall have the right to assert against the defaulting party any and all causes of action arising out of such default and any and all remedies therefore provided by law. The parties further agree that 5% of the net profit shall be retained within Rossmore Mushrooms to meet working capital requirements and unforeseen events. This may increase if required by agreement between the parties depending on demand of the working capital required to perform the JOINT VENTURE." Item 5 of Schedule B to the Joint Venture Agreement provides: "Control of and participation in the contract. Identify by name, race, sex, and "firm" those individuals (and their titles) who are responsible for day-to-day management and policy decision making, including but not limited to, those with prime responsibility for: (a) Financial decisions – Pao Khou and Branalex (b) Management decisions, such as: (1) Estimating – Phil's Champignon's (2) Marketing and sales – Phil's Champignon's (3) Hiring and firing of management personnel – Phil's Champignon's (4) Purchasing of major items or supplies – Pao Khou, Branalex and Phil's Champignon's." 6 Operation of the business commenced in about September 2009. A finance facility had been obtained from the ANZ Bank for the purposes of the venture. The business was conducted on a property at Rossmore ("the Property") which had been acquired by Branalex and Messrs Pao and Khou for the purposes of the Venture. The Property is charged to the ANZ Bank by way of security for the finance facility. Phil's Champignons went into occupation of the land to conduct the day to day management of the Venture. 7 The parties soon afterwards fell into dispute. There was disagreement as to the amount of capital which each should contribute to the operation of the partnership. There were various attempts to resolve that dispute, all of which were unsuccessful. 8 On 23 February 2010, Phil's Champignons applied for orders, ex parte, restoring to it the possession of the land and the running of the mushroom Joint Venture business. Branalex, with the support of Messrs Pao and Khou, had entered the Property, changed the locks and excluded Phil's Champignons from running the business. 9 Mr Dawson of Counsel, who appeared for Phil's Champignons, informed the Court that the relief sought and the grounds relied upon were not set out in any pleading because events had moved so quickly it had not been possible to prepare documents. I declined to grant ex parte relief but gave short service. The matter came back before the Court yesterday. Again, there was no pleading which articulated the grounds upon which Phil's Champignons sought relief or the relief which was sought. A quantity of evidence was traversed but due to the absence of a clearly formulated claim for interlocutory relief from Phil's Champignons, and also the expiry of time, the matter was adjourned till this afternoon. 10 Mr Dawson has now proffered an Amended Interlocutory Process which sets out the basis upon which Phil's Champignons seeks interlocutory relief. The Interlocutory Process is not signed and is, I understand, in draft form but I am prepared to accept it as articulating the claim of Phil's Champignons at this stage and for the purposes of today's proceedings. 11 The relief claimed in the Interlocutory Process is: – a declaration that the Joint Venture Agreement is valid and binding; – an order that the other parties – that is, the parties to the document other than Phil's Champignons – specifically perform and carry to execution the Joint Venture Agreement; – alternatively, damages against the other parties for agreement breaches the Joint Venture Agreement; – a declaration that various documents purportedly varying the Joint Venture Agreement are valid and binding; – declarations as to the entitlement of Phil's Champignons under the Joint Venture Agreement to the transfer of certain interests in the Property and in the shareholding of Rossmore Mushrooms; – an order under s 233(1) of the Corporations Act 2001 (Cth) that the other parties sell their shares in Rossmore Mushrooms to Phil's Champignons – alternatively, an order for the winding-up of Rossmore Mushrooms. 12 There is no identification in the Interlocutory Process of the orders which Phil's Champignons seeks as interlocutory orders. All of the relief to which I have referred is obviously final relief. However, Mr Dawson has proffered draft Short Minutes of Order setting out the interlocutory relief which he seeks today. It is, in substance, as follows: "That until further order Branalex, by itself, its servants or agents and Messrs Pao and Khou be restrained from interfering with Phil's Champignons' performance of its obligations under the Joint Venture Agreement dated 16 May 2008." 13 The generality of the terms of that proposed interlocutory order demonstrates the considerable difficulties in the way of this application. However, I proceed on the basis that what is sought, in essence, is that Phil's Champignons be put back in control of the mushroom business and in occupation of the Property, pending final determination of the proceedings. 14 As in all interlocutory applications, the Court must be satisfied that there is at least a serious question to be tried that Phil's Champignons is entitled, on a final hearing, to the relief it seeks. Secondly, it must be demonstrated that the balance of convenience favours the granting of the interlocutory relief sought rather than leaving matters as they presently stand. 15 As to the second consideration, Mr Dawson rightly says that it weighs heavily in the Court's discretion if a party to a dispute which is then in the course of litigation pre-empts the litigation by helping himself to the remedy he seeks, to the detriment of the other party. However, if a party to litigation has exercised a remedy of self-help, that alone and without more, does not move the Court to interfere. The applicant for interlocutory relief must still demonstrate that he or she has a prima facie, or seriously arguable, case for the final relief sought. If no arguable entitlement can be demonstrated, then it may have been perfectly justifiable for the party exercising the remedy of self-help to do so and the Court will not interfere. 16 If the Court is satisfied that the applicant has demonstrated a serious question to be tried, it is only then that the fact that the other party has exercised a remedy of self help will count heavily in the exercise of discretion when the Court considers the balance of convenience. 17 In my view, except in one respect, Phil's Champignons has not demonstrated that there is a serious question to be tried that it is entitled to the final relief which it seeks in the draft Amended Interlocutory Process. 18 The essence of the allegation underlying the claim for specific performance of the Joint Venture Agreement is an allegation that the other parties to the Joint Venture have committed breaches of the Joint Venture Agreement. The breaches are identified in paragraph 40 of the Amended Interlocutory Process. It is said in the particulars: "(a) The Respondents have failed or refused to comply with their obligations under the JVA including the provision of financial backing and support; (b) The Respondents have entered into possession of the Property and the business of the Joint Venture to the exclusion of the First Applicant. (c) The Second Respondent [i.e. Branalex] has refused to renew the ANZ Facility." 19 The breach of the Respondents' obligations particularised in subparagraph (a) is a breach of a so-called obligation to provide "financial backing and support". That obligation must be found in the Joint Venture Agreement. Mr Dawson points to clause 1(b) of the Joint Venture Agreement which I have set out above. The first thing to observe is that clause 1(b) refers to obligations only of Rossmore Mushrooms, not to obligations of the other parties. Secondly, it seems to me quite clear that clause 3 of the Joint Venture Agreement governs how financial backing and support is actually to be provided in the working out of the Joint Venture. I cannot reasonably construe clause 1(b) as independent of, or overriding, clause 3. Clause 1(b) is in very summary and general terms. Clause 3, and also clause 5 of the schedule (to the Joint Venture Agreement), show that there is no obligation either on Rossmore Mushrooms or on other parties to provide financial backing and support for the Joint Venture in an indeterminate sum for an indeterminate time. 20 Clause 3 provides that the requirements for the working capital of the venture are to be determined by the parties from time to time by agreement. It is only after agreement is reached as to what working capital is required that obligations of parties to contribute in particular proportions arise and a breach of the agreement will occur if a party fails to contribute its proportion of capital so determined. 21 Mr Dawson frankly concedes that there is no evidence that the parties have agreed on the requirement of working capital pursuant to clause 3. I cannot therefore be satisfied that there is a serious question to be tried that any of the other parties have breached clause 3 of the Joint Venture Agreement. 22 Particular 40(c) of the Amended Interlocutory Process alleges a breach of the Joint Venture Agreement in that Branalex has refused to renew the ANZ facility. However, as I have earlier indicated, Branalex itself has no separate obligation under the Joint Venture Agreement either to renew the ANZ facility or to make any particular specified contribution to the working capital of the venture. Clause 1(b) relates only to Rossmore Mushrooms and clause 3 of the Joint Venture relates to agreement between all parties to determine working capital from time to time. Accordingly, I cannot find anything at all to support an allegation that the Joint Venture Agreement has been breached by Branalex in failing to renew the ANZ facility. 23 The second paragraph of the particulars of paragraph 40(b) merely says that the Respondents have entered the Property but it does not with say with particularity why that action is a breach of the Joint Venture Agreement. It may be inferred, however, that what is said is that Phil's Champignons was vested with management and control of the business under the Joint Venture Agreement and that that control has been wrongfully taken from it. 24 The other parties have filed affidavits to the effect that Phil's Champignons has been in breach of its management duties under the Joint Venture Agreement for a considerable time, that it has refused to provide the information it was obliged to provide to the parties, and that it has not been managing the business properly or successfully. It is on those grounds that Branalex sought the winding-up of Rossmore Mushrooms and the consequential relief set out in the Originating Process. 25 It is difficult at this stage to say whether there is a serious question to be tried as to whether Phil's Champignons did commit a breach justifying termination of the Joint Venture Agreement and re-entry into possession by the other parties or whether Phil's Champignons is entitled to specific performance of the Joint Venture Agreement. On this aspect alone, and giving Phil's Champignons the benefit of the doubt, I would be prepared to find that there is a serious question to be tried. That, of course, is by no means the end of the matter. 26 I now turn to deal with the balance of convenience. Of the greatest concern is the fact that if Phil's Champignons is put back into control of this business, the Court may be permitting thereby the carrying on of an insolvent business. It is clear from the evidence that the ANZ Bank, which has provided the facility which enables the business to continue operating, regards the performance of the borrowers as entirely unsatisfactory and it has issued notices that the facility is in default. The defaults comprise not only failure to pay the monthly amounts due under the facility but also failure to provide accounting and other information in accordance with the terms of the facility. Recent communications from the Bank make it quite clear that unless the facility is refinanced within a few days, the Bank will commence recovery proceedings. 27 It is clear that the parties are in such a state of dispute that they cannot and will not collectively take steps to refinance the ANZ Bank facility. Certain of the parties, Messrs Pao and Khou, indicate that if Phil's Champignons is removed from the Joint Venture by one means or the other, they themselves may be willing to cooperate with Branalex in procuring refinance. However, as matters presently stand, there does not appear to be any realistic prospect that all the parties to the Joint Venture can procure a renewal of the facility. 28 There is also evidence that there are at least two or three substantial creditors of the business whose debts have been outstanding for sixty days or more. It is also clear from the evidence that the business has not been profitable to date; indeed, it appears to be declining in profitability. Mr Dawson says that that might well be expected where the business has only just commenced. That may, indeed, be true but it does not detract from the fact that the business appears to be on the brink of insolvency, if it is not already insolvent. 29 The position, therefore, is that if Phil's Champignons is let back into possession, it has indicated that it wishes to continue running the business virtually as it has been doing. How that is to happen in the state of the company's financial position, particularly in relation to the action proposed by the ANZ Bank, has not been made at all clear. 30 Those now in possession of the business are those who have provided the substantial security for the bank's facility and are in a position to provide substantial security if there is to be any continuation of the business. They have provided guarantees for the business debts. In the present parlous state of the finances of the business, on the balance of convenience I do not think it is proper to reinstate Phil's Champignons as manager of the business to enable the business to continue as it has been doing. The result may be that the parties have reached a complete impasse. It may be that nothing further can be done to salvage the business other than to appoint a receiver to wind it up and distribute such assets of the Joint Venture as are left after paying creditors. 31 At the same time, it would not be right to leave the other parties to these proceedings in possession of the business in a situation in which they can continue to trade in a way which increases the liability of Phil's Champignons under the guarantees it has given. Mr DeBuse of Counsel, who appears for Branalex, says that his client is willing to offer an undertaking to the Court not to continue to incur trading liabilities on credit on behalf of the business, if his client is left in control of the business. I have taken that undertaking into account in determining that the balance of convenience does not favour placing Phil's Champignons back in control of the business. 32 It would have been sufficient for me to have refused interlocutory relief simply on the basis that the terms of the relief sought were so vague that the Court would never make such orders. However, I have thought it best, for such benefit as it may be to the parties, to explore the deeper issues in the way that I have done. 33 The consequence is that the Amended Interlocutory Process will have to be formally filed in Court, assuming that Phil's Champignons wishes to seek the final relief claimed, but this application for interlocutory relief will be refused. Costs 34 I have regard to the fact that this application was brought on with great urgency, that it was difficult for Phil's Champignons to accommodate a change in allegiances and a change in circumstances and to bring proceedings properly formulated in a very short space of time. For that reason, bearing in mind the difficulties that Phil's Champignons has had, I think it is better to defer the question of costs of this application until after the mediation has occurred, bearing in mind that that is going to occur in a matter of days. 35 By what I have said, I intend to indicate that I think that the fate of this application has something to do with the other parties' exercise of a self help remedy, which is not to be encouraged. It is for that reason that I think the parties should have an opportunity of negotiating the costs issue amongst the other issues in the mediation process. – oOo – DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.