A Cautionary Message to Liquidators Concerning Their Liability in Derivative Suits: In the matter of Barokes Pty Ltd (in liq) [2022] VSC 642

By Alicia Hill, Principal and Cherry Mitry, Law Clerk

Introduction

On 26 October 2022, in the Supreme Court of Victoria, Justice Attiwill granted Daiwa Can Company (Daiwa) – a creditor of Barokes Pty Ltd (Barokes) – leave to bring proceedings in the name of Barokes Pty Ltd against its own liquidators. This decision is significant as it is the first time in Australia that a creditor has been granted leave to bring proceedings in the name of a company against its own liquidators.

Background

Barokes Pty Ltd is an Australian company which was involved in the global production of ‘wine-in-a-can’ products. Daiwa is a Japanese company who was the majority shareholder in Barokes, holding 60.05% of their shares since 13 September 2012.

Between September 2012 and May 2014, Daiwa entered into agreements to loan money to Barokes, which had accrued a debt in the measure of approximately $10.8 million as at 2019. Separately, Barokes had brought patent infringement proceedings in China and Japan against Daiwa and others involved in the distribution of the product. The claims in these foreign courts were not successful.

In August 2015, Daiwa commenced proceedings against Barokes, seeking that the company be wound up on the just and equitable ground set out in s 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act). An order that Barokes be wound up was made by the Court in September 2018, appointing Mr Koutsoukos and Mr Coyne as liquidators.  The appointments of these liquidators took effect on 19 December 2018.

The appointed liquidators envisaged that Barokes continue carrying on business in order to engage in a campaign to sell its business and assets to an interested party. To this end, the liquidators received offers from various parties, four of which had been submitted by Daiwa. All four of Daiwa’s offers had been rejected. Instead, an alternative joint venture offer proposed by a person related to the director of Barokes had been accepted.

Issues

At issue were three claims made by Daiwa that were to be decided by the Court. These claims were predicated upon the premise that:

• The liquidators breached their duty in failing to properly consider and accept Daiwa’s first offer, which, viewed objectively, was materially superior to the alternative joint venture offer that had been accepted.
• The liquidators failed to properly compare Daiwa’s offer to make an additional payment for the rights associated with Barokes’ foreign patent proceedings, against the joint venture offer that had been accepted.
• The liquidators breached their duty in failing to properly consider and accept Daiwa’s fourth offer, which, viewed objectively, was materially superior to the alternative joint venture offer that had been accepted.

Decision

Attiwill J ultimately granted leave to Daiwa to bring proceedings in the name of Barokes against the appointed liquidators. In reaching this decision, the Court observes that a member of a company, has the requisite standing to bring a derivative action in the name of a company that is in liquidation, after having regard to three key considerations:

• That the action has “some solid foundation”[1] in the sense that the proceeding is not vexatious or oppressive, and has a reasonable prospect of success
• The attitude of the liquidator in relation to whether the action should be pursued
• Other practical considerations which concern whether the liquidator and the estate of the company are financially protected by way of indemnity or security

Attiwill J also noted that the court has inherent jurisdiction to allow a derivative action to be brought in the name of a company in liquidation. Nonetheless, exercising this discretion to grant leave requires meeting a high threshold, and the Court will consider the three limbs established above in making its final determination.

The Court first considered the claim relating to Daiwa’s first offer. Attiwill J did not consider the first claim relating to Daiwa’s first offer to have reasonable prospects of success as the offer was too “cryptic” and “uncertain” to be accepted.[2] Further, and alternatively, this first offer was overridden by the subsequent offers made by Daiwa.

Turning to the second claim relating to the additional payment offer in exchange for the rights associated with Barokes’ foreign patent proceedings, Attiwill J found that such proceedings present a reasonable prospect of success. Indeed, the liquidators had known of Daiwa’s special interest in acquiring these rights and did not make any efforts to obtain independent advice as to the value of these rights, so as to warrant excluding them from the sale of Barokes’ business and assets. As such, the evidence laid a solid foundation for a potential claim that the liquidators breached their duty of care and skill, causing Barokes – and by extension its creditors – to suffer loss.

The Court also found that the third claim relating to Daiwa’s fourth offer had a solid foundation and reasonable prospect of success as the liquidators had breached their duty of care and skill in failing to make any enquiries about the offer. The liquidators had instead accepted a materially inferior offer without making any comparison between the two offers. This caused a loss to Barokes, thereby reducing the return that creditors would have otherwise received.

In establishing that two of the claims satisfied the first limb of the three relevant considerations, Attiwill J considered the second limb. Their Honour found that the attitude of the liquidators was not a relevant consideration in this instance, where the derivative action is brought against a liquidator, as these proceedings were not of an ordinary kind.

Finally, the Court had regard to the practical considerations relating to the final protection of the liquidator and the assets of Barokes. Of significance in this consideration was Daiwa’s willingness to indemnify Barokes from liability for costs arising from the action should leave be granted. However, their Honour also observed that this indemnity must be supported by security, and that any dividend that Daiwa was entitled to upon the winding up of Barokes was not sufficient for the purposes of security, as the monetary value of these dividends was too uncertain.

Attiwill J also observed that granting leave remains discretionary in nature, with the effect that considerations beyond the three factors noted above may be taken into account. In this instance, their Honour concluded that granting leave would produce a benefit to creditors, especially so if the claims were to succeed, thereby entitling Barokes to substantial damages.

Takeaways

This case serves as a cautionary reminder of the stringent duties that liquidators must discharge in assessing prospective offers when selling the assets of insolvent companies. In particular, a thorough and rigorous assessment must be undertaken by liquidators when comparing multiple offers from competing interested parties, with a view to yielding the greatest possible return to creditors.

For creditors which seek to bring proceedings in the name of a company against its liquidators, a high threshold must be satisfied before the Court exercises its discretion to grant leave for such a proceeding. Sufficient evidence of specific and certain offers must be adduced to found a reasonable prospect of success for the claim, and creditors must be prepared to provide a security-backed indemnity for leave to be granted.

Should you have specific queries please contact Alicia Hill on (03) 8540 0200 or Alicia.hill@mst.com.au

[1] Re Barokes Pty Ltd (in liq) [2022] VSC 642, 47 [116] (‘Barokes’), citing Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577.

[2] Re Barokes (n 1) 84 [149].