The machinations of a historic dispute between Pirate Life Brewing and collapsed distributor Palais Imports have been laid bare in a recent court ruling.
Palais Imports’ sole director Phillip Chehade in June 2021 started legal proceedings aiming to establish the liability of his former business partner, Craig Jessup – who declared bankruptcy in December 2018 – for one half of the company’s debts.
In May 2021, Jessup’s bankruptcy trustee rejected Palais’ proof of the $358,328.08 debt.
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The trustee found a 2017 agreement between Jessup and Chehade – called the ‘Line in the Sand Agreement’ – did not amount to an enforceable contract between Jessup and Palais.
Palais challenged the decision in the Federal Circuit and Family Court of Australia, which heard the matter over three days in June and August 2022.
Pirate Life ‘extremely lucrative’ for Palais
Childhood friends Jessup and Chehade founded Palais Imports in 2004, building a roster of international craft beer brands such as Brooklyn Brewery, Hitachino Nest and Dieu du Ciel!.
Court documents state that the company borrowed money from Chehade’s family after striking financial difficulty in 2013.
“Palais utilised a factoring facility, which resulted in the company incurring excess interest and fees, which it struggled to pay, as well as meeting its regular trade payments,” Judge Stewart Brown surmised.
Against this backdrop, the company’s fortunes markedly improved when it secured a national distribution agreement with booming South Australian start-up, Pirate Life, in March 2015.
The court heard this contract became “extremely lucrative” for Palais, generating monthly sales of approximately $500,000.
But Judge Brown said this improved outlook came to an “abrupt halt” in 2016 when Pirate Life took back distribution rights, “leaving Palais high and dry”.
“In these circumstances Palais and Pirate Life fell into dispute with one another in respect of issues relating to the breach of the distribution contract between them,” he said.
‘Sitting on a gold mine’
Court documents state that the dispute was resolved in July 2016. Palais received a cash settlement of $800,000, comprising forgiveness of a $500,000 debt it owed to Pirate Life.
Pirate Life was to pay the remaining $300,000 to Palais in 15 monthly cash instalments of $20,000.
Palais was also allocated 40 shares in Pirate Life, which Jessup and Chehade divided and transferred into their respective family trusts.
The court heard that while Chehade believed these shares had a nominal value of $30,000, he and Jessup believed they would one day be worth significantly more.
“At the time, Mr Chehade deposes that he believed the shares would likely sell for somewhere between $700,000.00 and $1,000,000.00,” Judge Brown said.
“Clearly, this is a far cry from his earlier estimates of their worth, only a comparatively short period of time beforehand.
“I am unsure as the why he believed this was a realistic valuation other than his experience, in the past, had been that large corporate brewers were prepared to acquire small boutique-type breweries at a premium.
“The effect of his evidence is that he, at least, considered that the two men were sitting on a gold mine.“
Palais Imports’ financial situation continued to deteriorate despite the monthly instalments it was receiving from Pirate Life.
By April 2017, the distributor owed its creditors approximately $1.2 million.
Palais duo fought AB InBev buyout
In November 2017, brewing giant AB InBev acquired all shares in Pirate Life other than the small stakes held by Chehade and Jessup.
AB InBev subsequently began proceedings in the Supreme Court of South Australia to compulsorily acquire the remaining shares, which Jessup and Chehade answered with notices of objection to the acquisition.
“These proceedings were resolved in September of 2018, but not on the advantageous terms hoped for by Mr Jessup and Mr Chehade,” Judge Brown said.
“Each of them received the sum of $450,000.00.”
In November 2018, Chehade sent a formal letter to Jessup demanding payment of $358,328.08, which he alleged was a half share of Palais Imports’ remaining debts.
But Jessup declared bankruptcy in December 2018 with debts exceeding the value of his Pirate Life settlement by about $170,000.
‘Gentlemen’s agreement’ not enforceable
Judge Brown last month upheld the trustee’s decision that Palais and Jessup “did not directly agree on anything” regarding Palais’ debts, which included $615,000 in loans advanced to the distributor by Chehade’s parents.
“Palais was not a direct signatory to any aspect of the ‘Line in the Sand Agreement’, which was between Mr Jessup and Mr Chehade alone,” said Judge Brown.
“This confirms my view that the April 2017 acknowledgement of debt was informal in nature and, at best, constituted a gentlemen’s agreement.”
Jessup told Drinks Adventures in a statement: “I’m disappointed that more money was wasted on these proceedings. This whole mess was completely avoidable.”
“I’m just glad that this chapter of my life is almost over,” he said.
Chehade’s legal representative did not respond to a request for comment.
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