Sushi Sushi Franchising Pty Ltd & Ors v Liu & Anor [2021] VCC 1377 (23 September 2021)

IN THE COUNTY COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

Sushi Sushi Franchising Pty Ltd (ACN 131 477 051) & Ors according to the attached Schedule	Plaintiffs
v
Yan Liu	First Defendant
and
Hao Zhang	Second Defendant

JUDGE:	HER HONOUR JUDGE A RYAN
WHERE HELD:	Melbourne
DATE OF HEARING:	24 August 2021, further written submissions dated 1 September 2021
DATE OF JUDGMENT:	23 September 2021
CASE MAY BE CITED AS:	Sushi Sushi Franchising Pty Ltd & Ors v Liu & Anor
MEDIUM NEUTRAL CITATION:	[2021] VCC 1377

Catchwords: Debts owed to the plaintiffs by the defendants’ company arising from the conduct of a sushi franchise business – whether defendants liable for the debts pursuant to written guarantees and indemnity given to the plaintiffs

APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Ms A M Folie	Hall & Wilcox
For the Defendants	No appearance	Macpherson Kelley
For the Defendants’ solicitors	Mr G Pauline	Macpherson Kelley
For the Controlling Trustee	Mr N Mellos

Sushi Sushi Franchising Pty Ltd (ACN 131 477 051)	First Plaintiff

and

Sushi Sushi Australia Pty Ltd (ACN 630 509 027)	Second Plaintiff

and

SS Victoria Pty Ltd (ACN 630 509 027)	Third Plaintiff

and

Sushi Sushi Realty Pty Ltd (ABN 108 549 417)	Fourth Plaintiff

v

Yan Liu	First Defendant

and

Hao Zhang	Second Defendant

1 By this proceeding, the plaintiffs seek the amount of $516,533.12, plus interest and costs from the defendants, Yan Liu and Hao Zhang, pursuant to various guarantees and indemnities which they provided to the plaintiffs.

2 The amount claimed represents debts due and payable by LYZH Pty Ltd as trustee for the CLS Family Trust (“LYZH”) to the plaintiffs under three agreements relating to LYZH’s conduct of a “Sushi Sushi” franchised business from March 2016 to late March 2020. The defendants are the directors and shareholders of LYZH. They provided written guarantees and indemnities in respect of amounts owing and payable by LYZH to the plaintiffs.

(a) $449,666.60 for products and ingredients ordered by LYZH from Sushi Sushi Australia Pty Ltd, the second plaintiff (“SS Australia”), in accordance with a Franchise Agreement dated 15 March 2016 (“the Franchise Agreement”);

(b) $1,555.88 for royalty fees payable by LYZH to Sushi Sushi Franchising Pty Ltd, the first plaintiff (“SS Franchising”) under the Franchise Agreement;

(d) $814.00 for technology fees payable by LYZH to SS Franchising under the Franchise Agreement;

(e) $17,679.42 for legal fees payable by LYZH to SS Franchising under the Franchise Agreement;

(f) $14,299.98 for bailment fees payable by LYZH to Sushi Sushi Victoria Pty Ltd, the third plaintiff (“SS Victoria”) under a Bailment Agreement dated 15 March 2016 (“the Bailment Agreement”); and

(g) $33,141.74 for occupancy fees payable by LYZH to Sushi Sushi Realty Pty Ltd, the fourth plaintiff (“SS Realty”), under an Occupancy Licence dated 15 March 2016 (“the Occupancy Licence”).

5 The day before the hearing, Mr Nick Mellos of Grant Thornton sent a letter to the Court dated 23 August 2021. Mr Mellos advised that he had been appointed Controlling Trustee to take control of the examinable affairs of the defendants under a proposed personal insolvency agreement pursuant to s188 of the Bankruptcy Act 1966 (Cth). He requested an adjournment of the hearing until 18 October 2021 pending creditors’ resolution with respect to the defendants’ (debtors) proposal. The parties were informed that the Court would not adjourn the trial unless all the parties consented.

6 Mr Mellos made the foreshadowed application for an adjournment at the commencement of the hearing on 24 August 2021. He also provided a written certificate of appointment of trustee confirming his appointment on 23 August 2021. Effectively, Mr Mellos submitted that the plaintiffs did not need to go to the trouble of pursuing a trial because they could lodge a proof of debt with him and participate as the only creditors in the personal insolvency agreement. The plaintiffs opposed the adjournment application. Their position was that they were ready to proceed. The application had come at the eleventh hour and they did not want to incur any further delays in seeking to obtain judgment for a sum certain. This was in circumstances where the proposed creditors meeting may not produce a satisfactory outcome, in which case the plaintiffs would be back before the Court again in a few months’ time. It was not suggested by Mr Mellos that the matter could not proceed on the basis that his appointment as controlling trustee operated as a stay of the proceedings under the Bankruptcy Act. I refused the application for an adjournment and gave a ruling to that effect. Mr Mellos was then excused from further attendance.

7 The defendants did not appear at the hearing. Counsel who had previously acted for the defendants appeared on behalf of the defendants’ solicitors as a matter of courtesy. He did not make any application on behalf of the solicitors to cease acting and informed the Court the solicitors remained on the record. Once the adjournment application was refused, Counsel for the defendants’ solicitors was excused from the hearing. The trial then proceeded undefended.

8 Mr Stephen Anders, the chief financial officer of the plaintiff’s parent company and company secretary and chief financial officer of each of the plaintiffs, gave evidence at the trial. Mr Anders is also an accountant and familiar with the finance and record keeping systems used by the plaintiffs, which are managed together as a corporate group. The plaintiffs tendered a number of documents in support of their claims.^[1]

9 The key issues were identified in the summary of issues filed on 23 August 2021. These issues amount to whether the amounts claimed are owing and payable by LYZH to the plaintiffs, and whether the plaintiffs can recover those amounts from the defendants under the guarantees and indemnities. By their pleadings, the defendants largely put the plaintiffs to proof of their claims.

10 After the hearing, the plaintiffs filed comprehensive submissions which the Court has adopted to a large extent. In doing so, I have satisfied myself that the matters relied upon in the written submissions are factually accurate and accord with both the documents tendered in evidence and the oral evidence given by Mr Anders.

11 At all relevant times, the first and second defendants have been the shareholders of LYZH and the first defendant has been a director of LYZH. The second defendant has been a director of LYZH since November 2017.^[2]

12 Each of the plaintiffs is a wholly owned subsidiary of Sushi Sushi Ultimate Holdings Pty Ltd.^[3] The roles of each of the plaintiffs was as follows:

(a) SS Franchising was the entity which entered into agreements with the “franchise partners”, being the persons and entities who conducted “Sushi Sushi” franchised businesses;

(b) SS Australia was the warehousing entity, which sourced and supplied ingredients and raw materials to franchised stores. Relevantly in this proceeding, LYZH placed orders with SS Australia for products and ingredients which form the basis for the warehouse debts;

(d) SS Realty was the entity which entered into leasing arrangements with head landlords and franchisees in relation to Sushi Sushi franchised restaurants.^[4]

13 In March 2016, LYZH became a franchisee of a Sushi Sushi branded restaurant at Shop F105, Casey Central Shopping Centre (“Casey Central”). On 15 March 2016, LYZH, the first defendant (as director of LYZH, as principal under the agreement, and as guarantor in her own capacity) and the second defendant (as guarantor) entered into the following three agreements:

(c) the Bailment Agreement with Sushi Sushi (Melbourne) Pty Ltd in its capacity as the trustee of the Sushi Sushi (Melbourne) Discretionary Trust (“SS Melbourne”), which was subsequently assigned to SS Victoria.

14 Prior to entering into the Franchise Agreement, the defendants were provided with disclosure documents, and signed their acknowledgement of receipt of those documents.

15 The Franchise Agreement was the key agreement, pursuant to which SS Franchising (referred to as the Franchisor) granted LYZH (referred to as the Franchisee) the right to operate a single franchise business from the premises located at Casey Central (clause 2.1 of the Franchise Agreement).

16 The most substantial portion of the amount claimed by the plaintiffs in this proceeding concerns outstanding payments for orders made by LYZH of products and ingredients for use in preparing menu items for sale at the Sushi Sushi restaurant, defined in the statement of claim as the “Warehouse Debts”.

17 LYZH as Franchisee was obliged to offer the complete range of “Menu Items” developed by the Franchisor (clauses 9.1 and 10.1), which were defined as including Japanese style hand rolls, sushi, sashimi, and other Japanese dishes (clause 1.1.60). The Franchisee could, in its discretion, determine the retail price of all Menu Items (clause 9.2). The Franchisor had approved a range of “Ingredients”, “Approved Products” and “Services” (all defined in cl 1.1), and the Franchisor was required to only use the approved Ingredients, Approved Products and Services in the Franchised Business which were sourced from, relevantly, the Franchisor or a Related Body Corporate of the Franchisor (clause 10.1.1).

10.3.1 The Franchise must purchase the Ingredients, Approved Products and Services from the Franchisor or a Related Body Corporate of the Franchisor (if available from the Franchisor or a Related Body Corporate of the Franchisor) and must not purchase the same or similar products from other suppliers otherwise than in accordance with clause 10.4

10.6.1 For any Ingredients or Approved Products or Services that the Franchisor or a Related Body Corporate of the Franchisor supply to the Franchisee, the Franchisee will pay the Franchisor or its Related Body Corporate, in accordance with the Franchisor’s or Related Body Corporate’s terms of trade (as amended from time to time). The Franchisee will pay all other suppliers, including Approved Suppliers and creditors of the Franchised Business in a timely manner and otherwise in accordance with such suppliers’ and creditors’ terms of trade.

10.6.2 The payments purchase to clause 10.6.1 may include payments via electronic transfer, pre-payment, bank cheque or cash on delivery.”

19 Clause 14 of the Franchise Agreement also concerned payments. Clause 14.7 provided that the Franchisee must pay to the Franchisor all payments due to it in such manner and terms as the Franchisor directs, in writing, and sign such forms and consents permitting the direct debit or set off and deductions of monies payable under this Agreement and any Related Agreement.

20 “Related Agreement” was defined in clause 1.1.77 as any agreement between the Franchisee and Franchisor, or any agreement between the Franchisee and an Associate or Related Body Corporate of the Franchisor in connection with the Franchise and Franchised Business, including but not limited to the Occupancy Licence Agreement.

21 Clause 14.2 of the Franchise Agreement required the Franchisee to pay a “Royalty Fee” as prescribed by item 20 of the Schedule. Item 20 of the Schedule to the Franchise Agreement provided that the Royalty Fee was 10% of “Gross Revenue” plus GST, which was payable every Wednesday in respect of the previous week’s Gross Revenue, by direct debit or such other method specified by the Franchisor from time to time.

22 Clause 14.5 of the Franchise Agreement required the Franchisee to pay the “Technology Fee” specified in Item 22 of the Schedule to the Franchise Agreement. In the Schedule, the Technology Fee was $75 per week plus GST payable in respect of the previous week.

23 Clause 14.9(d) and (e) of the Franchise Agreement provided that the Franchisee must reimburse the Franchisor for all administrative costs and expenses and Legal Costs the Franchisor incurs arising from the breach of the Franchise Agreement by the Principal or the Franchisee and arising from the termination of the Franchise Agreement. Legal Costs are defined in clause 1.1.55 as “all fees, costs and disbursements paid or payable by the Franchisor to its lawyers (whether or not under a retainer or costs agreement between the Franchisor and its lawyers)”.

24 The Franchise Agreement included special conditions in clause 38.17, pursuant to which SS Franchising provided “Administration Services” to the Franchisee, for which the Franchisee was to pay an “Administration Services Fee” of 2% of the prior week’s Gross Revenue plus GST for those services. The Administration Services provided by the Franchisor included downloading revenue information, calculating gross weekly revenue, calculating the “Royalty” and “Administration Services Fees” payable; arranging payment of all amounts owing to creditors (including the Franchisor) from moneys held in the “Franchisee’s Bank Account” (referred to further below); providing payroll services and maintenance of cash receipts and cash disbursement records, bank account records and monthly reconciliations of the Franchisee’s Bank Account.

25 The Franchisee’s Bank Account was the bank account opened by the Franchisee for the business into which all Gross Revenue of the business was receipted (being all revenue earned by the Franchisee in relation to the Franchised Business whether cash or credit). Under clause 38.17.2, the Franchisee agreed that it would sign all documents and do all things necessary to give the Franchisor access to the Franchisee’s Bank Account and to authorise the Franchisee to any cheque book attached to the Franchisee’s Bank Account.

26 Pursuant to this arrangement, the First Defendant signed a Direct Debit Authority in March 2016 for SS Franchising and SS Australia (then known as SS Warehouse Pty Ltd), and an account with National Australia Bank was opened in the name of LYZH. The defendants were signatories to the account, as were representatives of SS Australia. In 2019, the bank account was changed to an account held with the Commonwealth Bank of Australia (“CBA”), with the same access and signatory arrangements pursuant to an application dated 14 October 2019.

27 Mr Anders gave evidence that in providing the administration services and arranging payments from LYZH’s bank accounts, SS Franchising would prioritise payments to the ATO, employees, and external creditors such as utility providers.

28 Other relevant provisions of the Franchise Agreement include provisions for the Franchisor to issue a breach notice to the Franchisee (clauses 32.1, 32.2) and for termination of the agreement (clause 32.8).

29 Appendix 1 to the Franchise Agreement is a Deed of Guarantee and Indemnity, dated 15 March 2016 and signed by the defendants.

“The Guarantors hereby jointly and severally agree that all times during the term of the Agreements, any extension or renewal thereof, and during any period of overholding, they will:

2.1.2 the timely and complete observance or performance of all obligations of the Franchisee and the Guarantors under the Agreements whether demand for such observance or performance has been made on the Franchisee or the Guarantors.

2.2 indemnify and save harmless the Franchisor from and against any loss, costs or damages (whether direct or indirect) in any way arising out of the Franchisee’s failure to pay the Guaranteed Money or any sum whatsoever or to perform or observe any of the terms, covenants and conditions contained in the Agreements to be performed by the Franchisee or any moneys that are not recoverable from the Guarantors.”

31 The definition of “Guaranteed Money” is, in relevant part (clause 1.1.7):

“‘Guaranteed Money’ means all amounts which now or in the future for any reason whatsoever:

(a) are payable, are owing but not currently payable, are contingently owing, or remain unpaid by the Franchisee to the Franchisor or any Related Body Corporate or Associate of the Franchisor;

(b) may reasonably be foreseen to become owing by the Franchisee to the Franchisor or are payable by the Franchisee as a result of anything done or omitted by the Franchisee with the express or implied consent or at the express or implied request of the Franchisor or in connection with the Agreements”

32 Related Body Corporate was defined in the Franchise Agreement as having the meaning determined pursuant to s4A of the Competition and Consumer Act 2010 (Cth) (“CCA”). Relevantly, s 4A(5) of the CCA provides that where a body corporate is the subsidiary of the holding company of another body corporate, that first mentioned body corporate and that other body corporate shall be deemed to be related to each other.

33 In the present case, as noted above, SS Franchising, SS Australia, SS Victoria and SS Realty are all wholly owned subsidiaries of Sushi Sushi Ultimate Holdings Pty Ltd. Accordingly, under the Franchise Agreement, those entities are Related Bodies Corporate.

34 Clauses 3, 4, 5 and 9 of the Guarantee and Indemnity also relevantly provided:

3.1 This guarantee and indemnity is absolute and unconditional, and the obligations of the Guarantors shall not be released, discharged, modified, impaired or affected in any manner whatsoever, by any event whatsoever including, without limiting the generality of the foregoing, any one or more of the following events:

3.1.10 the acceptance of repudiation or other termination in connection with the Guaranteed Money.

The Guarantors agree that the Franchisor may exercise its rights against the Guarantors or any one of them at any stage after the Franchisee should make a default under any of the Agreements without the Franchisor first being obliged or required to take or pursue any security which it may have taken to secure the Franchisee’s obligations or in the first instance to pursue any rights or remedies against the Franchisee with respect of the Agreements.

The Guarantors agree that the guarantee and indemnities contained in this Deed shall be a continuing security and shall remain in full force and effect respectively for as long as the Agreements or any one of them remain in force including any period of overholding under the Agreements and until the whole of the moneys and obligations the subject of this guarantee and indemnity have been satisfied.

The Guarantors hereby acknowledge that, without limiting the generality of any of the foregoing, they shall be bound unto the Franchisor by this guarantee and indemnity in the same manner as though they were the franchisee named in each and every of the Agreements.”

35 “Agreements” was relevantly defined in clause 1.1.1 as including the Franchise Agreement and the “Related Agreements” (which had the same meaning as in the Franchise Agreement). In the Franchise Agreement, “Related Agreements” was defined in clause 1.1.77.

36 The Franchise Agreement contained a special condition about the lease of equipment for use in the franchised business. Under clause 38.17.3 of the Franchise Agreement, the parties agreed that the Franchisor would procure the fit out of the “Business Premises”, and procure its Associate, SS Melbourne, to lease to the Franchisee certain identified equipment on the terms of a Bailment Agreement attached as an appendix to the Franchise Agreement.

37 In accordance with that provision, LYZH, the defendants (as guarantors) and SS Melbourne entered into the Bailment Agreement on 15 March 2016. Under the Bailment Agreement, SS Melbourne agreed to supply equipment to LYZH (as bailee), and LYZH was to pay SS Melbourne the “Rental” for the equipment by monthly instalments in advance of $4,333.33 plus GST (clauses 2.1, 2.2, item 5 of the Schedule). The Bailment Agreement commenced on 17 March 2016 and expired on either the day before the expiry of the Franchise Agreement or upon the termination of the Franchise Agreement (clause 3).

38 Clause 9 of the Bailment Agreement provided that SS Melbourne may assign its interest under the Bailment Agreement. There was no requirement for SS Melbourne to obtain the consent of the counterparties to the Bailment Agreement for an assignment.

39 Under clause 18 of the Bailment Agreement, the defendants jointly and severally guaranteed to SS Melbourne the due and punctual payment of all rental and other moneys payable under the agreement. The guarantee provision relevantly stated that it would continue to be binding notwithstanding that the agreement may be assigned or transferred to another person, and that the guarantors waived their rights as guarantors which may at any time be inconsistent with the provisions of the guarantee.

40 In April 2019, as part of an overall restructure of the Sushi Sushi corporate group, SS Melbourne entered into a sale of business agreement with SS Victoria (“the Business Sale Agreement”). Pursuant to that agreement, SS Melbourne sold all its assets and business to SS Victoria. The completion date under the Business Sale Agreement was 30 April 2019. Pursuant to that agreement, the Bailment Agreement was assigned to SS Victoria.

41 On 15 March 2016, LYZH (as Licensee), the first defendant and the second defendant (as guarantors) also entered into the Occupancy Licence with SS Realty (as Licensor). Clause 2 of the Occupancy Licence was to the effect that, in consideration of LYZH entering into the Franchise Agreement, SS Realty granted a licence to LYZH to use the premises at Casey Central for the exclusive purpose of conducting the Franchised Business in accordance with the Franchise Agreement and the deed (clause 2.1).

42 The grant of the licence was subject to LYZH paying the “Licence Fee” in the manner required by SS Realty (clause 2.2). Pursuant to clause 3, the Licence Fee was payable to SS Realty at least 7 days before the date the corresponding amount was due under the lease between SS Realty and the landlord of the Premises (“the Lease”) (specified in item 3 of the Schedule to the Occupancy Licence). The Licence Fee was defined as the amount equal to the aggregate of listed amounts payable under the Lease, which included the rent, outgoings or operating expenses and any other amounts payable under the Lease (clause 1.1). Under clause 12.2, LYZH was required to comply with its obligations under the Lease, including making all payments.

43 Under the Lease, SS Realty was the lessee and Scentre Management Limited and RE Nominee Company Pty Ltd the lessor. The lessee was obliged to pay rent each month (clause 11.2), a proportion of rates and taxes, and outgoings (clauses 12.1 and 12.3(b)), all power, water and other utility services (clause 12.5(a)), a proportion of the landlord’s operating expenses and contribute to a promotion fund (clause 20.2).

44 Clause 14 of the Occupancy Licence contained a guarantee provision, which relevantly provided:

“14.1 The Guarantor acknowledges that it controls and has a direct or indirect financial interest in the Franchisee and that the Licensor would not be prepared to enter into this Deed with the Franchisor unless the Guarantor gave such acknowledgement.

14.2 In consideration of the Franchisee being granted the licence, the Guarantor, or where more than one, the Guarantors, jointly and severally:

14.2.1 guarantee to the Licensor that the Franchisee will perform all of its obligations under this Deed and the Lease;

14.2.2 agree that if the Franchisee breaches any of its obligations under this Deed it will:

(a) indemnify the Licensor for all losses the Licensor sustains as a result of any such breach of breaches of this Deed by the Franchisee; and

(b) pay to the Licensor any money that the Franchisee is obliged to pay the Licensor under this Deed which the Franchisee has not paid;

14.2.3 agree that its obligations under this clause will continue until the Franchisee fulfills all of its obligations under this Deed whether before or after the expiration or termination of this Deed”

Operation of the Sushi Sushi franchised restaurant – March 2016 to March 2020

45 LYZH operated the Sushi Sushi restaurant at Casey Central until late March 2020. Throughout that time, LYZH accrued a large outstanding balance for the Warehouse Debts. Mr Anders gave evidence about the circumstances in which those debts arose, and the unsuccessful attempts by the Sushi Sushi group to amicably resolve the payment of those amounts.

46 On 23 December 2019, SS Franchising sent a letter to LYZH seeking payment of the Warehouse Debts, in the amount then owed, and for payment of another amount not claimed in this proceeding.

47 On 23 December 2019, SS Franchising also sent a breach notice to LYZH under the Franchise Agreement. The breach notice did not concern the matters the subject of this proceeding, but a different issue about LYZH’s under-reporting of sales made in the Sushi Sushi restaurant.

48 On 27 May 2020, Hall & Wilcox, on behalf of SS Franchising, sent a letter of demand to LYZH for payment of amounts owing under the Franchise Agreement.

49 On 23 July 2020, Hall & Wilcox, on behalf of SS Franchising, issued to LYZH a notice of termination of the Franchise Agreement.

50 Between March 2016 and July 2018, LYZH also operated a separate franchise business, branded as Izakaya Bar, at shop 157 in Casey Central. LYZH and the defendants entered into a separate franchise agreement with SS Franchising in respect of this business on or about 15 March 2016 (“Izakaya Franchising Agreement”). No claims are made under the Izakaya Franchising Agreement in this proceeding.

51 On 24 July 2018, LYZH, the defendants, SS Franchising and SS Realty entered into a Deed of Surrender and Release in respect of the Izakaya Franchising Agreement. No claim is made under the Deed of Surrender and Release in this proceeding.

52 The Izakaya Franchising Agreement is only relevant to this proceeding insofar as the defendants pleaded in their Amended Defence that some of the amounts claimed by the plaintiffs as “Warehouse Debts” were for products and ingredients ordered by LYZH for use in the Izakaya restaurant, and not pursuant to the Franchise Agreement for the Sushi Sushi restaurant.^[4]

53 In relation to all amounts claimed by the plaintiffs, the defendants pleaded that SS Australia and SS Franchising were authorised to operate LYZH’s business account to make payments due and payable under the Franchise Agreement, and that payments debited by SS Franchising and SS Australia were unable to be reconciled with invoices issued by SS Australia.^[5] The defendants raised additional matters in respect of certain of the amounts sought to be recovered, summarised below.

54 The defendants put the plaintiffs to proof of their claim that the amounts sought to be recovered as “Warehouse Debts” are owing. By the Amended Defence, the defendants denied that LYZH placed the alleged orders, denied that the amounts were owing as SS Australia’s invoices were not delivered together with the ingredients and were not able to be checked and reconciled with the ingredients delivered, and pleaded that some ingredients were ordered by LYZH for use in the Izakaya store and not pursuant to the Franchise Agreement.^[6]

55 The key underlying facts which support the claim for the Warehouse Debts were the subject of a Notice to Admit Facts and Documents dated 6 August 2021, served by the plaintiffs pursuant to rr 35.03 and 35.05 of the County Court Civil Procedure Rules 2018. The defendants did not serve a Notice of Dispute, so those facts and the authenticity of those documents accompanying the Notice to Admit are taken to be admitted for the purpose of the proceeding. The Notice to Admit Facts was directed to the matters raised by way of defence in paragraphs 17 and 18 of the Amended Defence.

56 The Notice to Admit relevantly stated (using terms defined in the Statement of Claim and Amended Reply):^[7]

(a) As a franchisee operating a ‘Sushi Sushi’ branded restaurant pursuant to the Franchise Agreement with SS Franchising, LYZH had access to an online ordering portal accessible at http://sushisushiapp.com.au/login (“Ordering Portal”).

(b) As a franchisee operating an “Izakaya Bar” branded restaurant pursuant to the Izakaya Franchise Agreement with SS Franchising, LYZH had access to the Ordering Portal.

(c) The Ordering Portal could be accessed by LYZH via in-store tablets located at each of the LYZH Sushi Sushi Restaurant and at the LYZH Izakaya Restaurant.

(d) LYZH was registered with SS Australia on the Ordering Portal with a unique customer code for the LYZH Sushi Sushi Restaurant, and a different unique customer code for the LYZH Izakaya Restaurant.

(e) The unique customer code on the Ordering Portal for the LYZH Sushi Sushi Restaurant was FSFCT01.

(f) The unique customer code on the Ordering Portal for the LYZH Izakaya Restaurant was FIFCT01.

(g) Between 15 March 2016 and 24 March 2020, LYZH used the Ordering Portal to place orders for ingredients, approved products and services with SS Australia.

(h) The Ordering Portal was linked to Sushi Sushi’s Enterprise Resource Planning System (“ERP System”), which was used by SS Australia for warehouse, logistics and accounting processes.

(i) The ERP System operated by SS Australia was known as the “SunSystems” program.

(j) Raw data extracted from the Ordering Portal evidences the orders placed by franchisees for ingredients, approved products and services with SS Australia (“Sales Orders”).

(k) The Sales Orders entered into the Ordering Portal by franchisees (including LYZH) were sent from the in-store tablet through to the SunSystems program for allocation and delivery by SS Australia.

(l) Upon receipt of the Sales Orders via the SunSystems program, the SS Australia warehouse team produced a picking slip which contained the details of each Sales Order placed (“Picking Slip”).

(m) Each Picking Slip showed the number of items (measured in various units of measurement depending on the particular item) which were to be picked by the warehouse team to satisfy the particular Sales Order (“Picking Process”).

(n) Once the Picking Process was completed, items ordered were delivered by SS Australia to the applicable franchise store with a sales dispatch note which contained details of the items delivered.

(o) On delivery of items ordered by LYZH to the LYZH Sushi Sushi Restaurant pursuant to the above process, the sales dispatch notes produced by SS Australia were reviewed and signed by a representative of LYZH.

(p) LYZH placed Sales Orders with SS Australia on the Ordering Portal using the customer code FIFCT01 (linked to the LYZH Izakaya Restaurant) on 15 March 2016, 17 March 2016, 18 March 2016, 21 March 2016, 5 April 2016, 21 August 2016, 31 January 2018 and 15 June 2018 (“FIFCT01 Sales Orders”).

(q) Save for the orders referenced at sub-paragraph (p) above, between 30 November 2017 and 24 March 2020 LYZH placed Sales Orders with SS Australia on the Ordering Portal using only the customer code FSFCT01 (“FSFCT01 Sales Orders”).

(r) Between 30 November 2017 and 24 March 2020, SS Australia issued tax invoices to LYZH in respect of each of the FSFCT01Sales Orders placed by LYZH which were fulfilled by SS Australia (“Tax Invoices”).

(s) All of the Tax Invoices identified in Annexure A of the Statement of Claim were issued to LYZH in respect of Sales Orders placed by LYZH using the customer code FSFCT01.

(t) None of the Tax Invoices identified in Annexure A of the Statement of Claim were issued to LYZH in respect of Sales Orders placed by LYZH using the customer code FIFCT01.

(u) LYZH did not place any Sales Orders for use in the LYZH Izakaya Store or under the Izakaya Franchising Agreement at any time after 24 July 2018.

57 The following documents extracted from the plaintiffs’ business records evidence the above steps:

(a) The raw sales orders placed by LYZH using customer code FSFCT01 (for the Sushi Sushi Restaurant), extracted from the Ordering Portal;

(b) The raw sales orders placed by LYZH using customer code FIFCT01 (for the Izakaya Bar Restaurant), extracted from the Ordering Portal;

(c) The sales dispatch notices produced by SS Australia for each FSFCT01 Sales Order placed by LYZH for the period July 2017 to March 2020;

(d) The tax invoices issued by SS Australia to LYZH in respect of each of the above orders made by LYZH using the FSFCT01 customer code;

(e) A system extract showing all sales orders made by LYZH which were received by SS Australia, divided into those for the LYZH Sushi Sushi Restaurant (code FSFCT01) and those for the Izakaya Restaurant (code FIFCT01), showing the separate customer codes used for orders across that period.

58 The following documents extracted from the plaintiffs’ business records were tendered as evidence showing that orders to the value of $449,666.60 placed by LYZH using the customer code FSFCT01 remain unpaid:

(a) List of all invoices raised for orders made by LYZH under the code FSFCT01, showing those paid (identified by the column “Alloc. Ref” being populated with an “A”, and by column “Alloc. Marker” being populated with a number) and those unpaid (identified by the columns “Alloc. Ref” and “Alloc. Marker” being unpopulated);

(b) List of invoices raised for orders made by LYZH under the code FSFCT01 which remain unpaid, with total amount outstanding listed as $449,666.60;

(c) Account Statement for LYZH under the code FSFCT01, showing outstanding balance for LYZH as of 9 February 2021 with total amount outstanding listed as $449,666.60. Mr Anders gave evidence that account statements were sent each month.

59 Mr Anders explained how particular orders placed by LYZH can be tracked through each step of the ordering process by reference to documents in the tendered bundle. Mr Anders also gave evidence that, based on his review of the books and records of the plaintiff entities, the sum of $449,666.60 remains unpaid.

60 The plaintiffs submit it has proved the sum of $449,666.60 remains owing and payable by LYZH for ingredients and products ordered by LYZH pursuant to the Franchise Agreement. The defendants have adduced no evidence to the contrary or that any of those amounts have been paid.

61 Following termination of the Franchise Agreement, SS Franchising exercised its option to purchase the stock remaining on the premises which was in a useable or saleable position. SS Franchising calculated the value of the stock as $935.69, which it set off against the amounts owed by LYZH for the Warehouse Debts.^[8]

Other amounts claimed – Royalty Fee, Technology Fee, ASF, Bailment Fee and the Occupancy Fee

62 The other amounts sought to be recovered in this proceeding are for fees and other amounts payable by LYZH under the Franchise Agreement, Occupancy Licence and Bailment Agreement, which fell due between February 2020 and July 2020. This period covered the last few months in which these agreements were on foot.

63 All Sushi Sushi branded restaurants were closed from 25 March 2020, by reason of government imposed COVID-19 restrictions. The Sushi Sushi entities went through a process of arranging for their franchised partner restaurants to reopen from May 2020, however, LYZH did not reopen the restaurant at Casey Central. As set out above, the Franchise Agreement was terminated on 23 July 2020, effective immediately.

64 SS Franchising issued invoices to LYZH for the Royalty Fee for the periods 16 to 22 March 2020 and 22 March to 25 March 2020. As the Royalty Fee was calculated as a percentage of gross revenue, after 25 March 2020, no further amounts were payable by LYZH for the Royalty Fee.

65 The invoices for the Royalty Fees totalled $1,555.88, the details of which are:

(a) invoice dated 22 March 2020, Inv LYCT/RF/402, for period 16 March to 22 March 2020 for $1,235.04; and

(b) invoice dated 20 April 2020, Inv LYCT/RF/403, for period 22 March to 25 March of $320.84.

66 Documents listing the transactions on each bank account used by LYZH to operate the Sushi Sushi restaurant were tendered including:

67 Mr Anders’ evidence was that these were the accounts into which the revenue from the Sushi Sushi store was paid. He also gave evidence that, based on his review of the records of the plaintiffs and their related entities, no payments were made by LYZH or the defendants by any other method or arrangement.

68 The bank account statements for LYZH’s NAB and CBA accounts show that no amounts for the Royalty Fee Debt have been deducted from those accounts on or from 22 March 2020. The amounts have not been paid and remain outstanding.

69 SS Franchising issued invoices to LYZH for the Administration Fee for the periods 16 to 22 March and 22 to 25 March 2020. As with the Royalty Fee, as the Administration Fee was calculated as a percentage of gross revenue, no further amounts were payable for the Administration Fee after LYZH ceased operating the store from 25 March 2020.

70 The invoices for the Administration Fees totalled $311.18, the details of which were:

71 The bank account statements for LYZH’s NAB and CBA accounts show that no amounts for the Administration Fee Debt have been deducted from those accounts on or from 22 March 2020. The amounts have not been paid and remain outstanding. Mr Anders confirmed that, from his review of the books and records of the plaintiff entities, the Administration Fee Debt remains outstanding.

72 Between February and June 2020, SS Franchising issued invoices to LYZH for the Technology Fee payable each month. The Franchise Agreement was terminated on 23 July 2020, after which time no further technology fees were incurred.

73 The invoices for Technology Fees totalled $814.00, the details of which were:

74 The bank account statements for LYZH’s NAB and CBA accounts show that no amounts for the Technology Fee Debt have been deducted from those accounts on or from 29 February 2020. The amounts have not been paid and remain outstanding. Mr Anders confirmed that, from his review of the books and records of the plaintiff entities, the Technology Fee Debt remains outstanding.

75 Under the Bailment Agreement, SS Victoria issued invoices to LYZH for payment of the bailment fees.

76 The invoices for the Bailment Fee totalled $14,299.98, the details of which were:

77 The bank account statements for LYZH’s NAB and CBA accounts show that no amounts for the 31 May and 30 June invoices have been deducted. The NAB account listing shows that on 19 May 2020 an amount of $4,766.66 was deducted, described as “Automatic Drawing SSCT13 Bailment Sushi Sushi WHRS CLS Family Trust” (emphasis added), together with another amount of $4,766.66 described as “Automatic Drawing SSCT12 Bailment Sushi Sushi WHRS CLS Family Trust” (emphasis added) (invoice SSCT12 is not the subject of this proceeding). Following these withdrawals, the balance on the account was stated to be overdrawn by $7,319.83. The next day, there is a further entry in the statement by way the amount of $4,766.66 was credited to the account, described as “Reversal Credit Reversal of Debit Sushi Sushi Warehouse SSCT13 Bailment”, following which the account was stated to be overdrawn by $2,553.17. Accordingly, that amounts the subject of Inv SSCT13 for the Bailment Fees remain outstanding.

78 Mr Anders confirmed that, from his review of the books and records of the plaintiff entities, the Bailment Fee Debt remains outstanding.

(a) invoice issued by SS Franchising to LYZH for $3,3000.00 on 25 February 2020;

(b) invoice issued by Hall & Wilcox to Sushi Sushi Ultimate Holdings Pty Ltd, Carrol Resources Pty Ltd & Food Odyssey Operations Pty Ltd for $6,137.93 dated 29 May 2020;

(c) invoice issued by Hall & Wilcox to Sushi Sushi Ultimate Holdings Pty Ltd, Carrol Resources Pty Ltd & Food Odyssey Operations Pty Ltd for $1,684.65 dated 29 June 2020;

(d) invoice issued by Hall & Wilcox to Sushi Sushi Ultimate Holdings Pty Ltd, Carrol Resources Pty Ltd & Food Odyssey Operations Pty Ltd for $2,757.70 dated 29 July 2020; and

(e) invoice issued by Hall & Wilcox to Sushi Sushi Ultimate Holdings Pty Ltd, Carrol Resources Pty Ltd & Food Odyssey Operations Pty Ltd for $3,799.14 dated 31 July 2020.

80 The defendants do not admit the allegations about the legal costs and put the plaintiffs to their proof.^[9]

81 Mr Anders’ evidence was that SS Franchising engaged Hall & Wilcox for advice about LYZH’s breaches of the Franchise Agreement and ultimately terminating the Franchise Agreement.^[10] As set out above at paragraphs 46 to 48, between December 2019 and July 2020, breach notices and demands were sent to LYZH in relation to the Franchise Agreement, and in July 2020, the Franchise Agreement was terminated.

82 Mr Anders also gave evidence that all of the above invoices had been paid by SS Australia (as the entity through which the group runs a lot of its accounts payable processes), and that SS Franchising was in turn liable to pay SS Australia for those amounts.

83 The bank account statements for LYZH’s NAB and CBA accounts show that no amounts for the Legal Costs Debt have been paid for or on behalf of LYZH.

84 In their Amended Defence, the defendants admitted that invoices were sent to them seeking payment of the Licence Fees under the Occupancy Licence but pleaded that no COVID-19 related rent relief was offered to them pursuant to the provisions of certain legislation and regulations.^[11]

85 Mr Anders’ evidence about the amounts sought to be recovered under the Occupancy Licence may be summarised as follows. The amounts payable by LYZH under the Occupancy Licence were paid from LYZH’s NAB and CBA bank accounts to the landlord, and electricity provider. However, as the lessee under the head lease, SS Realty remained liable for the amounts payable under the head lease. Upon the introduction of government imposed COVID-19 restrictions in March 2020, the Sushi Sushi group was engaged in negotiating rent abatements with their head landlords for their franchised stores. The landlord of the Casey Central Store granted rent relief, and the full amount of that rent abatement was applied in deduction of the rent sought to be recovered from the defendants under the Occupancy Licence.

(a) Rent, water, promotion levies, rates, operational expenses, council taxes as detailed in the statement of account from the landlord to SS Realty of $45,859.04;

87 Mr Anders gave evidence that these amounts have been paid by the plaintiffs to the head landlord and electricity provider, and that they have not been paid by LYZH.

88 Additionally, the plaintiffs understand that the rent abatement figures provided by the head landlord^[12] do not include GST payable on the abatements, but the amounts actually received by SS Realty in respect of those abatements was a higher amount that included GST payable on each abatement. For the purpose of the plaintiffs’ claim, the plaintiffs have calculated the rent abatement as being the amount of the total abatement approved by the head landlord of $13,775.74 plus GST, reflecting what was actually received. This is advantageous to the defendants: to the extent that there is insufficient evidence before the Court that the rent abatements were GST exclusive, they would necessarily be taken to be GST inclusive, which would in turn reduce the amount of the rebate and increase the amount of the plaintiffs’ claim. However, insofar as the evidence before the Court might be taken to suggest that the rent abatement excluded GST, the plaintiffs have waived any claim to be entitled to such higher amount.

89 As set out above, by clause 2 of the Deed of Guarantee, the defendants jointly and severally guaranteed to SS Franchising the timely payment of the “Guaranteed Money”. The Guaranteed Money was defined to include “all amounts which now or in the future for any reason whatsoever” are “payable, are owing but not currently payable...or remain unpaid” by LYZH to SS Franchising or any Related Body Corporate. As set out above, each of SS Australia, SS Realty and SS Victoria are Related Body Corporates of SS Franchising.

90 This guarantee covers each of the amounts sought by the plaintiffs: the evidence has established that the amounts are all payable, owing and remain unpaid by LYZH. To come within the definition of Guaranteed Money, the amounts may be payable for “any reason whatsoever”. In this case, the amounts arose under and in connection with the Franchise Agreement (Warehouse Debt, Royalty Fee Debt, Administration Fee Debt, Technology Fee Debt and Legal Costs), the Bailment Agreement (Bailment Fee Debt) and the Occupancy Licence (Occupancy Fee Debt).

91 The plaintiffs submit that SS Franchising, as the party to the Deed of Guarantee, may recover all of the amounts claimed in this proceeding.

92 The plaintiffs further submit that SS Realty is also entitled to recover the Occupancy Fees under the separate guarantee provided by the plaintiffs under the Occupancy Licence, and that, similarly, SS Victoria is entitled to recover the Bailment Fees under the separate guarantee provided by the plaintiffs under the Bailment Agreement.

93 The plaintiffs seek an order for judgment in favour of SS Franchising, the first plaintiff, for the full amount claimed in the proceeding. The plaintiffs also seek orders for interest from the date of commencement of the proceeding and costs.

94 By reason of the foregoing, I am satisfied the plaintiffs have proved their claims both in respect of the sums presently owing by LYZH to the plaintiffs and of the defendants’ liability to pay those sums under the written guarantees they provided to the plaintiffs.

95 I will enter judgment as is sought in favour of SS Franchising, the first plaintiff, in the sum of $516,533.12 against the defendants, together with interest under statute in accordance with the calculations provided by the plaintiffs’ solicitors following the hearing.

96 Unless the defendants seek to be heard on the question of costs, I will order that they pay the plaintiffs’ costs of and incidental to the proceeding, to be taxed on the standard basis in default of agreement.

97 Should the defendants wish to make any submissions on the final orders, including costs, they must do so by 4pm on 29 September 2021. I will then make the final orders on the papers unless I decide an oral hearing is required.

I certify that these 28 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 23 September 2021.

^[2] Amended Defence [5] and [6]; Company Search of LYZH [Court Book (“CB”) 2912-2921].

^[3] ASIC company searches for SS Franchising: CB 2923-2926; SS Australia: CB 2935-2939; SS Victoria: CB 2951-2953; SS Realty: CB 2975-2978.

^[8] Statement of Claim at 43, and letter from Hall & Wilcox on behalf of SS Franchising to Logan Raj & Associates on behalf of the defendants dated 24 July 2020 (CB 2873 - 2874).

^[10] The transcript at T76.17-76.18 states "HER HONOUR: Was that all one cost? Is that all on one cost? Are they retained? --- Yes, Your Honour yes they were." However, the exchange in fact referred to "Hall and Wilcox" rather than "all on one cost".

^[12] Detailed in a letter addressed to “Sushi Sushi Pty Ltd” dated 11 August 2020.

County Court of Victoria

Sushi Sushi Franchising Pty Ltd & Ors v Liu & Anor [2021] VCC 1377 (23 September 2021)