In the matter of Bar Machiavelli Pty Ltd (Administrator Appointed)

1. [1]

   By originating process filed on 13 August 2018 the plaintiffs Bicher & Son Pty Ltd (“Bicher”), Bicher Truco Pty Ltd (“Bicher Truco”) and Pelltruco Pty Ltd (“Pelltruco”) claim an order that the first defendant WFM Motors Pty Ltd (“WFM”) consent to the assignment by the third defendant company Bar Machiavelli Pty Limited (“the company”) to Bicher of a lease dated 18 December 2015 and registered AM454517YH by WFM to Bar Machiavelli of premises at Rushcutters Bay (“the Lease”).

Background

1. [2]

   Bar Machiavelli was incorporated on 12 November 2015. It has two equal shareholders, Mr Nicolae Bicher and the fourth defendant Ms Paola Toppi, who was the sole director. Its sole function was to act as trustee of the Bar Machiavelli Unit Trust, in which the unit holders are Bicher Truco (a company in which Mr Bicher is the sole director and shareholder) as to 30, Pelltruco ( a company in which Mr Paul Pellarini is the sole director and shareholder) as to 30; and G & P Toppi Pty Ltd (a company of which Ms Toppi and her mother Ms Giovanni Toppi are the directors) as to 60.

2. [3]

   Mr Bicher is the sole director of Bicher, in which there are two shareholders, Mr Bicher and Mr Pellarini. Bicher owns and operates a restaurant business, known as Machiavelli Ristorante Italiano, in Clarence Street, Sydney. That business was established in 1988 by Ms Giovanna Toppi, and purchased by Bicher in 2015.

3. [4]

   By the Lease, which was executed on 18 December 2015, the company leased the premises at Rushcutters Bay from WFM for a term of six years from 1 December 2015, with two options to renew for further terms of 5 years each. Ms Toppi has guaranteed performance of the company’s obligations under the Lease.

4. [5]

   Between December 2015 and March 2016, Bicher Truco and Pelltruco made advances by way of loan to the company to fund fit-out and working capital. From about April 2016, the company operated a bar and restaurant business under the name Bar Machiavelli from the premises. Ms Toppi had day-to-day conduct and control of the restaurant operations.

5. [6]

   On 22 December 2017, Bicher Truco and Pelltruco demanded repayment, by 31 March 2018, of their advances amounting to some $837,726. On 21 March 2018 they commenced proceedings against the company, G&P and Ms Toppi, which were amended on 17 April 2018 to include claims for recovery of the loans.

6. [7]

   On 12 June 2018, Ms Toppi as sole director of the company appointed the second defendant David Hurst voluntary administrator of the company, pursuant to (CTH) Corporations Act 2001, s 436A, that is to say on the ground that the company was, or was likely to become, insolvent. The Administrator immediately suspended the company’s operations, but entered into a licence agreement with Sciue Sciue Pty Ltd (“Sciue Sciue”) (a company of which Ms Toppi and Ms Giovanna Toppi are the directors) to operate the restaurant.

7. [8]

   There are two proposals for deeds of company arrangement: one by Bicher, and the other by Ms Toppi. Each involves the assignment of the Lease to the proponent. The Creditors Meeting to consider the future of the company is now to be held on 12 September 2018. Having considered the two DOCA proposals, and although he considers that the Bicher proposal would be more advantageous for creditors, the Administrator has recommended that creditors resolve that the company enter into the Toppi DOCA, because WFM as Lessor has refused to consent to an assignment of the Lease to Bicher, while it has indicated that it would be prepared to consent to an assignment to Ms Toppi. However, the Administrator has also indicated that should Bicher succeed in these proceedings, in which it contends that WFM is not entitled to withhold consent to an assignment to it, he will change his recommendation.

Request for consent to assignment

1. [9]

   Although there were a number of prior communications between Bicher (and its solicitors Hall & Wilcox) and WFM (and its solicitors HWL Ebsworth), the relevant formal request for consent to an assignment to Bicher was - as was submitted for WFM by its counsel Mr Fernon - contained in an email from the Administrator’s solicitors Johnson Winter & Slattery (JW&S) to HWL Ebsworth of 8 August 2018, as follows:

2. [10]

   The email was accompanied by a letter from Hall & Wilcox to Johnson Winter & Slattery and its enclosures, which comprised:

   1. (1)

      Vision for Bar Machiavelli restaurant;

   2. (2)

      Bar Machiavelli Marketing Plan;

   3. (3)

      Bar Machiavelli Staff Manual;

   4. (4)

      Transitional Plan;

   5. (5)

      Financial report for 30 June 2016;

   6. (6)

      Financial report for 30 June 2017;

   7. (7)

      Bank statement for 30 June 2017 showing balance of operating accounts;

   8. (8)

      Profit and loss and balance sheet for 30 June 2018;

   9. (9)

      Bank statement for 30 June 2018 showing balance of operating accounts;

   10. (10)

       Cash flow forecast for twelve months ending June 2019;

   11. (11)

       Evidence of capacity to pay security deposit for lease.

3. [11]

   The letter also contained submissions in response to an earlier letter of 7 August 2018 from HWL Ebsworth to JW&S, in which it had been advised that while reserving its position that it had received no compliant request for consent, the lessor did not consent to the proposed assignment to PBB on the basis that it considered the financial resources and retailing skills of PBB to be inferior to those of the current lessee, and listed a number of factors on which its decision was said to be based.

Refusal of consent

1. [12]

   WFM (and its solicitors) made no request or requirement for any further information. However, on 16 August, Hall & Wilcox sent to HWL Ebsworths a copy of the affidavit of Rosanna Riccio (who the plaintiffs proposed would operate the restaurant should the Lease be assigned to Bicher).

2. [13]

   On 27 August 2018, HWL Ebsworth sent a letter to Hall & Wilcox and JW&S, which referred to the Lease and the request of 8 August 2018 for consent to the assignment of the Lease, stated that their client (WFM) had considered the assignment request and supporting documents, and had determined that it would not consent to the assignment of the Lease to the plaintiffs. After setting out its reasons under the headings “Financial resources” and “Retailing skills”, the letter concluded:

3. [14]

   It is noteworthy that:

   1. (1)

      There was no assertion that (as a matter of objective fact) the financial resources of the proposed assignee were inferior to those of the company;

   2. (2)

      In the statement of the “rationale” for the decision, there was no reference to any “requirement” of the lessor for provision of additional information, nor to any failure to comply with any such requirement.

When can consent be withheld?

1. [15]

   Although the Lease contains a provision which limits the Lessor’s right to refuse consent to an assignment (clause 16.2), it was common ground that, as the Lease is a retail shop lease for the purposes of (NSW) Retail Leases Act 1994, this clause had no practical relevance, as the provisions of the Act left no room for its operation.

2. [16]

   (NSW) Retail Leases Act, s 39, provides as follows:

3. [17]

   Section 41 provides as follows:

4. [18]

   Section 39 states the circumstances in which a lessor is entitled to withhold consent, not as matters of which the lessor must be reasonably satisfied, but as objective facts. The lessor is entitled to withhold consent only if one or more of the circumstances referred to in s 39(1)(a) to (e) objectively exists, regardless of whether or not in the lessor’s opinion, reasonable or otherwise, one exists. The question whether such circumstances exist is ultimately one for determination by the Court, on the evidence before the Court. I do not accept the submission made, on behalf of WFM, that the Court is confined to the material that was before lessor. Such confinement might be appropriate if the test were the state of mind of the lessor. But it is not; it is whether a relevant circumstance objectively exists.

5. [19]

   A further reason for rejecting the view that the decision is confined to evidence that was before the lessor is that (1) the objective existence (or not) of one of the specified circumstances does not depend only on what is provided to the lessor; (2) there is no reason why the lessor could not later rely on grounds additional to those invoked when it made its decision; (3) while it may not be difficult to establish what was placed before the lessor by the lessee, it will be often be difficult to ascertain what other material the lessor may have taken into account.

6. [20]

   Here, where the plaintiffs seek to establish that the lessor was not entitled to withhold consent, the plaintiffs must show that none of the circumstances referred to in s 39(1) exist. As WFM relied only on the grounds referred to in the HWL Ebsworth letter of 27 August 2018, and there was no suggestion that any other circumstance referred to in s 39(1) was relevant, this means that, as a matter of practicality and reality, the plaintiffs must establish that:

   1. (1)

      Bicher (being the proposed assignee) has financial resources and retailing skills that are not inferior to those of the company (being the proposed assignor); and

   2. (2)

      The company has not failed to comply with section 41 (Procedure for obtaining consent to assignment).

7. [21]

   I accept that in considering these questions, it is appropriate to acknowledge that the lessor is entitled to act in its own interests, and also that for present purposes the circumstance that the plaintiff’s DOCA would produce a better return for creditors than Ms Toppi’s DOCA is entirely irrelevant.

Does the proposed assignee have financial resources and retailing skills that are not inferior to those of the proposed assignor?

1. [22]

   First, it is important to identify the correct comparator, and when the comparison is to be made. Secondly, that comparison is to be undertaken as at the time of the assignment. In McEvoy Food Company Pty Limited v Miziner and Finch, [1] Senior Member Bluth observed:

2. [23]

   Further support for that view is to be derived from the context of s 41, which in requiring provision of an updated lessor’s disclosure statement shows that the relevant considerations in relation to consent to assignment involve the circumstances that obtain at the time of the proposed assignment, and not at the commencement of the lease.

3. [24]

   The proposed assignee is, for present purposes, Bicher. The proposed assignor is Bar Machiavelli – a company which is in voluntary administration and therefore presumably insolvent. It is not itself currently operating the restaurant, but has licensed it to Paula Toppi’s company Scuie Scuie Pty Ltd. There is no suggestion that the company will resume operation of the restaurant, and if neither DOCA is approved by creditors it will inevitably go into liquidation. The comparison is not between the competing DOCAs, but between the status quo on the one hand, and assignment to Bicher on the other.

4. [25]

   Although WFM has not contended that, as an objective fact, Bicher’s financial resources are inferior to those of the company, the plaintiffs bear the onus of establishing that the circumstance does not exist and accordingly I shall address it, although more cursorily than might have been appropriate had it been truly in issue.

5. [26]

   Bicher continues to operate its Clarence Street restaurant. There is nothing to suggest that it does not pay its creditors as and when they fall due. It does not have an overdraft; a bank statement shows a credit balance for its operating account as at 2 July 2018 of $30,426.

6. [27]

   Bicher has proffered financial statements for the years ended 2016 and 2017, and management accounts as at 30 June 2018, according to which:

   1. (1)

      for the year ended 30 June 2016 (which was its first year of operations and represented a 7 month period only) it had net operating profit of $17,591 and as at 30 June 2016 had net assets of $28,730;

   2. (2)

      for the year ended 30 June 2017 it had net operating profit of $26,330 and as at 30 June 2017 had net assets of $55,060; and

   3. (3)

      for the year ended 30 June 2018 it had net operating profit of $289,907 and as at 30 June 2018 had net assets of $366,446.

7. [28]

   It is true that there are some internal inconsistencies in those financial statements, and that they are not audited. However, in the context of a private company of this kind, it is unsurprising that they are unaudited. In the Hall & Wilcox letter of 8 August 2018, submissions were made to the effect that the financial statements required adjustment and understated the true profit. WFM treated this as a reason for not relying on those financial statements at all; however, I would regard this as a reason for concluding that, on balance, they do not overstate Bicher’s position.

8. [29]

   As to the company, the starting point is that it is implicit in the appointment of an administrator that it is insolvent. The Administrator’s report to creditors contains a summary of its financial position, concluding that there is an estimated deficiency of $1,413,366 – before provision for costs of the administration.

9. [30]

   Notwithstanding that the accounts of Bicher may be unaudited and imperfect, in those circumstances they are ample to support a conclusion that Bicher’s financial resources are not inferior to those of the insolvent proposed assignor.

10. [31]

    As to retailing skills, the retailing skills to be considered are those in the retail sector for the purposes of which the demised premises are used. [2] In this case, that means the operation of a restaurant.

11. [32]

    Bicher says that its relevant retailing skills are those of Ms Ricci (whom it proposes would manage the restaurant if the Lease were assigned to it), and in addition a range of employees whom it could deploy to operate the restaurant - including a chef, a floor manager, and other staff at its Clarence Street restaurant.

12. [33]

    WFM contends that the comparison reduces to one between Ms Ricci for Bicher, and Ms Toppi for the company, and that Ms Toppi’s skills are by reason of her lengthy experience and proven track record superior.

13. [34]

    For present purposes I will assume, without deciding, that Ms Toppi’s skills as a restauranteur are superior to those of Ms Ricci. At least, it would have been difficult to be affirmatively satisfied that Bicher’s skills as a restauranteur in the context of the operation of Bar Machiavelli were not inferior to those of Ms Toppi. However, for the following reasons, I do not accept that that is the relevant comparison.

14. [35]

    In McEvoy Food Company Pty Limited v Miziner and Finch, [3] Senior Member Bluth pointed out that the skills which the proposed assignor once had before its directors ceased working in the business are no longer its skills:

15. [36]

    While, in my view, the question is not what skills a proposed assignor or assignee “demonstrates”, but rather what skills they “have”, that nonetheless directs attention to the skills that the assignor or assignee presently have to deploy in the business being conducted from the leased premises. The skills of a director, whose powers are suspended by administration, are not skills the company can presently deploy on its own account in the restaurant. The skills of a former employee of the lessee, who is now working for another employer, are no longer skills of the lessee.

16. [37]

    It is true that Ms Toppi remains a director of the company. However, that does not mean that in the present circumstances, her skills as a restauranteur are skills of the company. With the company in administration, her powers are suspended, and she performs no directorial function. She is no longer employed or otherwise engaged by the company to operate the restaurant; rather, she operates it on her own account for her own company Scuie Scuie. Her skills are now the skills of Scuie Scuie, and no longer those of the company.

17. [38]

    Although the position might arguably be different it there were a proposal that the company continue to operate the business using Ms Toppi as its manager, that does not arise as there is no intention or proposal that her skills would be engaged by the company to operate the restaurant.

18. [39]

    In short, Ms Toppi’s acknowledged skills are no longer skills of the company. The company, in its current and prospective condition, has no retailing skills as a restauranteur. Such skills of Bicher are manifestly superior.

Has the lessee complied with section 41 (Procedure for obtaining consent to assignment)?

1. [40]

   One of the circumstances which will entitle the lessor to withhold consent is if the lessee does not comply with s 41 (Procedure for obtaining consent to assignment), and s 41(1)(b) provides that the lessee must provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. The first defendant argued that this had the effect that if the material supplied by the lessee was insufficient to (reasonably) satisfy the lessor that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee, then the lessor was entitled to withhold consent, and moreover that for that reason, the question of whether any of the relevant circumstances existed was to be judged on the evidence that was before the lessor.

2. [41]

   I do not accept this submission. Section 41 sets out procedural requirements - as distinct from the substantive requirements in s 39, one of which is compliance with the s 41 procedure. Where s 39 requires the objective existence of circumstances to justify withholding consent, it would be curious if s 41 introduced, by a backdoor, a test which turned on the lessor’s reasonable satisfaction. In my view, what s 41(1)(b) means is that if the lessor makes a requirement for information, for the purpose of being satisfied whether the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee, and the requirement is a reasonable one, then the lessee must provide the information so required, and failure to do so will be a non-compliance with the s 41 procedure, which will then engage s 39(1)(c) so as to justify withholding consent. But it does not mean, as WFM appeared to contend, that there is a non-compliance merely if the lessee fails to provide sufficient information to satisfy the lessor. There must first be a “requirement”, and it must be a “reasonable” one, and a failure to comply with it, before s 39(1)(c) is engaged.

3. [42]

   This view of s 41 is supported by the observations of Barrett JA (with whom Campbell JA and Meagher JA agreed) in Lockrey v Historic Houses Trust of New South Wales: [4]

4. [43]

   Those observations establish the following relevant propositions:

   1. (1)

      because the "information" that must be given by the lessee is information that the lessor requires; and the lessor will have no occasion to require anything unless a request for consent has been made, s 41(b) necessarily contemplates action by the lessee separate from and subsequent to the making of the lessee's written request for consent to assign. This is so, even if the lessee when making the request endeavours to streamline matters by offering unsolicited information about the financial standing and/or retailing skills of the proposed assignee;

   2. (2)

      the lessee comes under no obligation to furnish information about the proposed assignee, unless required by the lessor to do so; and

   3. (3)

      it is for the lessor to specify the information sought, and to do so with a reasonable degree of specificity

5. [44]

   Here, WFM as lessor made no relevant “requirement” after receipt of the request for consent to the proposed assignment. The significance of this is accentuated by the fact that the JW&S letter of 8 August 2018 seeking consent expressly invited the Lessor to “please let us know” … “if you or your client require any further information”, yet no such request or requirement was ever made. No such request having been made, the company as lessee came under no obligation to furnish further information, and in those circumstances, there was no failure on the part of the company to provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. Section 39(1)(c) is therefore not engaged.

Conclusion

1. [45]

   My conclusions may be summarised as follows:

2. [46]

   Bicher’s financial resources are not inferior to those of the insolvent proposed assignor. Assuming, without deciding, that Ms Toppi’s skills as a restauranteur are superior to those of Ms Ricci, Ms Toppi’s skills are no longer skills of the lessee company. The company, in its current and prospective condition, has no retailing skills as a restauranteur. Such skills of Bicher are manifestly superior to those of the company. Section 39(1)(b) is not engaged.

3. [47]

   WFM as lessor made no relevant “requirement” after receipt of the 8 August 2018 request for consent to the proposed assignment. Even though the JW&S letter of 8 August 2018 seeking consent expressly invited the Lessor to “please let us know” … “if you or your client require any further information”, no such request or requirement was ever made. No such request having been made, the company as lessee came under no obligation to furnish further information, and in those circumstances, there was no failure on the part of the company to provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. Section 39(1)(c) is therefore not engaged.

4. [48]

   There being no suggestion that there was any other basis for withholding consent, the plaintiffs have therefore established that WFM was not entitled to withhold consent to the proposed assignment of the Lease to Bicher.

Orders

1. [49]

   The court:

   1. (1)

      Declares that the first defendant WFM Motors Pty Ltd is not entitled to withhold its consent to the assignment of the Lease by Bar Machiavelli Pty Ltd to Bicher & Son Pty Ltd.

   2. (2)

      Orders that the first defendant consent to the assignment by Bar Machiavelli Pty Ltd to Bicher & Son Pty Ltd.

   3. (3)

      Reserves liberty to apply in the event of any difficulty arising in the implementation of these orders.

   4. (4)

      Orders that the first defendant pay the plaintiffs’ costs of the proceedings.