Daiwa Can Company v Barokes Pty Ltd (No 3)
[2016] VSC 737
•9 December 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
S ECI 2015 000307
| DAIWA CAN COMPANY | Plaintiff |
| v | |
| BAROKES PTY LTD (ACN 079 714 579) AND OTHERS | Defendants |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1 December 2016 |
DATE OF JUDGMENT: | 9 December 2016 |
CASE MAY BE CITED AS: | Daiwa Can Company v Barokes Pty Ltd (No 3) |
MEDIUM NEUTRAL CITATION: | [2016] VSC 737 |
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PRACTICE AND PROCEDURE – Undertaking to manage company in the ordinary course of its business – Variation of undertaking sought to permit company to protect its interests – Changed circumstances – Variation granted – P Dawson Nominees Pty Ltd v ASIC (2009) 255 ALR 466 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | P. Anastassiou QC with C. H. Smith | Baker & McKenzie |
| For the Defendants | G. P. Harris QC with R. Tyson Wodak | Foster Nicholson |
HIS HONOUR:
Introduction
Barokes Pty Ltd (‘Barokes’) is an Australian company based in Melbourne. The plaintiff (‘Daiwa’) is a shareholder in Barokes holding 60% of the shares. The remaining 40% is held as to 26.7% by Knights Quest Pty Ltd[1] and 13.3% by SMS Management Pty Ltd[2] respectively (‘the Minority Shareholders’). Daiwa, a Japanese company, acquired its majority holding in 2012 for about $18 m.
[1]Knights Quest is controlled by Mr Stokes.
[2]SMS Management is controlled by Mr Barics.
Barokes holds or is the applicant for patents referred to as ‘Vinsafe’ in 17 countries, which includes Japanese patent JP 3668240 (‘JP 240’) (‘the Vinsafe Patent’), with priority dates from 28 September 2001.[3]
[3]Second affidavit of Gregory John Charles Stokes sworn 26 April 2016, exhibit ‘GS-60’, CB 1639.
A number of disputes have arisen between the shareholders of Barokes. They are the subject of four proceedings in this Court:
(a) this proceeding commenced on 24 August 2015, in which Daiwa seeks to wind up Barokes on the just and equitable ground, to remove Mr Stokes as a managing director and to invalidate a default notice served by Knights Quest and SMS Management on Daiwa for alleged defaults under a shareholders deed (‘the Winding Up Proceeding’); and
(b) proceeding S ECI 2015 309 commenced on 26 August 2015, in which Knights Quest and SMS Management allege that they are oppressed by Daiwa and seek to buy Daiwa’s shares in Barokes, and also seek orders allowing Mr Stokes to commence and continue with litigation in the name of Barokes (‘the Oppression Proceeding’).
(c) proceeding S CI 2015 01529 commenced on 8 April 2015, in which Knights Quest sought leave to commence a derivative proceeding in the name of Barokes against Daiwa, for allegedly failing to honour representations about additional funding. The application for leave was heard by Efthim AsJ on 18 June 2015. Leave was refused. His Honour published reasons on 30 October 2015;[4]
(d) proceeding S ECI 2016 060, a further derivative proceeding in relation to the Vinsafe Patent as referred to below.
[4]Knights Quest Pty Ltd v Barokes Pty Ltd [2015] VSC 601.
In August 2015, Barokes commenced proceedings in Japan, against Daiwa, its major shareholder (and others), for infringement of the Vinsafe Patent (‘the Japanese Proceeding’). As a result of challenges to its authority to do so and other matters as set out below, Knights Quest and SMS, the Minority Shareholders, applied nunc pro tunc under s 237 of the Corporations Act 2001 (Cth) (‘the Act’) for leave to bring (or continue) the Japanese Proceeding in the name of Barokes. This is the fourth proceeding referred to in 3(d) above, and is referred to as the Derivative Proceeding.
On 11 September 2015, I made orders effectively putting the Japanese Proceeding on hold, essentially because of the existence of the other proceedings in this Court between the parties which were due to be heard on 27 January 2016 as referred to in paragraph 7 below. I published my reasons on 18 September 2015.[5] It was not necessary at that stage to deal with the Derivative Proceeding.
[5]Daiwa Can Company v Barokes Pty Ltd & Ors [2015] VSC 502.
I granted an interlocutory injunction[6] and undertakings were given to Judd J[7] to ensure that then current and any foreshowed patent infringements proceedings against Daiwa and others were not prosecuted.[8]
[6]Order of the Honourable Justice Sifris dated 11 September 2015:
a) Barokes be restrained from:
i. taking any further steps (other than by way of discontinuance, withdrawal or stay) in legal proceedings filed in the Tokyo District Court 2015 (WA) No. 21684 between Barokes, Monde Shuzo Co. Ltd, Daiwa Can Company, Itochu-Shokuhin and Seven-Eleven Japan Co. Ltd (‘Japanese proceeding’);
ii. commencing any proceedings in Australia or elsewhere against Daiwa and/or in relation to any infringement of any intellectual property rights of Barokes.
b) Mr Stokes be restrained from, and restrained from causing Barokes to:
i. take any further steps (other than by way of discontinuance, withdrawal or stay) in the Japanese proceeding.
ii. commence any proceedings in Australia or elsewhere against Daiwa and/or in relation to any infringement of any intellectual property rights of Barokes.
[7]Order of the Honourable Justice Judd dated 17 September 2015: Mr Stokes undertook to the Court that he would, amongst other things, manage Barokes in the ordinary course of its business.
[8]Daiwa Can Company v Barokes Pty Ltd & Ors [2015] VSC 502 at [55]-[65].
The Winding Up Proceeding and the Oppression Proceeding were both listed for trial before the Honourable Justice Judd on 27 January 2016. This is why the Japanese Proceeding was put on hold. However, the hearing of both matters was adjourned and orders were made enabling the (effectively previously stayed) Derivative Proceeding to be heard.
On 7 June 2016 I granted leave[9] and the Japanese Proceeding is progressing. I held (relevantly) that the Minority Shareholders, in wishing to pursue Daiwa (and others) in the name of Barokes, were acting in good faith, in the best interests of Barokes and that the alleged infringement by Daiwa (and others) of the Vinsafe Patent was a serious issue to be tried. In its defence Daiwa has put the validity of the Vinsafe Patent in issue. The validity of the Vinsafe Patent (‘the Invalidity Application’) is to be determined separately and a decision is expected by mid next year.
[9]Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296. I will assume familiarity with the Judgment. Defined terms bear the same meaning.
The Japanese Proceeding alleges that Daiwa and Monde have breached Claim 1 of the Vinsafe Patent (JP 240). Page 2 of the document sets out the amount of damages that Barokes claims, being an amount of JPY ¥80,000,000. This equates to less than AUD $1 million.
The Derivative Proceeding was initially confined to the claims made in the Japanese Proceeding. There are however further claims and phase 2 of the application dealing with the other claims was set down for hearing in the week commencing 19 or 26 September 2016.
The Application
The parties agreed that phase 2 of the application would not proceed until the result and the Invalidity Application was known. This was a sensible course. However, the Minority Shareholders want to preserve their position by sending formal letters of demand to the parties listed in Annexure A to the interlocutory process and then taking no further action until the result of the Invalidity Application is known. Daiwa opposes any such course.
Because the matter was no longer an application for leave to proceed under s 237 of the Act but in effect an application to vary the undertaking given on 17 September 2015 to Judd J the application was adjourned to 1 December 2016.
By their application, by interlocutory process filed 24 November 2016, the Minority Shareholders seek a variation to the undertaking given and, if necessary, the injunction granted in this proceeding so as to protect the interests of Barokes pending the phase 2 hearing, which will or may take place after the Invalidity Application has been determined.
The submissions
It was only after the hearing of phase 1 of the Derivative Proceeding that the Minority Shareholders became aware of a three year limitation period in respect of Barokes’ most favourable measure of damages, an account of profits.[10] Time is now potentially running, at a cost of up to $1m per month until March 2017 and then at up to $1.3m per month thereafter for the balance of 2017.
[10]Affidavit of Gregory John Charles Stokes sworn 16 September 2016 (‘Stokes 3’) at [10], CB5566.
The Minority Shareholders relied on expert evidence to the effect that time was now running[11] and that the service of a proper demand would interrupt the running of time for a period of up to six months.
[11]Affidavit of Gregory John Charles Stokes sworn 31 October 2016 (‘Stokes 4’) at [11]-[12], CB 5965 -6; Affidavit of Yoichi Watanabe and Kenji Yamaguchi sworn 18 November 2016 (‘Watanabe and Yamaguchi 1’) at YW-KY3, CB 6215-6; Affidavit of Shinya Tago affirmed 14 November 2016 (‘Tago 1’) at ST-1, 4-1(f)(i)-(ii), CB6136-7.
The evidence was not challenged.
Paragraph [15] of the submissions of the Minority Shareholders is in the following terms —
[15]The evidence is that it is clearly in the interests of Barokes that the leave sought be given. First, the Court can take judicial notice that commercial parties to prospective litigation will often buy certainty by a settlement to avoid a merits determination. Second, the cost of such letters is de minimis.[12] Third, the letters will be effective in buying Barokes a further 6 months extension on the limitation period, thereby, potentially preserving up to $6.6m of claims.[13] Fourth, such letters may prove successful, as they have in the past,[14] in bringing about a commercial settlements against one or more of the prospective defendants, without the cost and uncertainty to Barokes of litigation against that party.[15] Fifth, no prejudice to Barokes has ever been suffered in the past, including in Japan, as a consequence of sending such letters.[16] Sixth, Barokes inability to at least issue such demand letters damages its relationships with its distributors, licensees and potential licensees.[17] Lastly, the demand letters are to be sent in a form that Barokes’ Japanese lawyers have advised is appropriate and effective.[18]
[12]The evidence is that the cost of sending demand letter is minimal: Day 1 T25.20-26, 27.5-14, 61.4-8 and 64.2-9.
[13]Stokes 3 at [9], CB 5566 and GS67, CB 5762-5819; Stokes 4 at [11]- [12], CB 5965-6.
[14]Transcript 2 May 2016 25.20-26, 27.5-14, 61.4-8 and 64.2-9.
[15]Stokes 5 at [9]-[11], CB 6305 – 6307 and GS79, CB 6318-6324.
[16]Stokes 5 at [31]-[34], CB 6311 – 6312.
[17]Stokes 5 at [12]-[15], CB 6307-8.
[18]Stokes 5 at [35], CB6313.
Daiwa has offered to enter into a deed indemnifying Barokes against the risk of any damage suffered as a result of the theoretical loss identified above (‘the Indemnity’). A copy of the Indemnity was handed up to the Court on 22 November 2016.
Daiwa submits that as a result of offering the Indemnity there is no disadvantage to Barokes if leave to vary the undertaking is refused.
Conversely, there is, it was submitted, potential damage to Barokes if letters of demand are sent. There would be a reduced likelihood of a recipient doing business with Barokes in the future, and particularly if Barokes is unsuccessful in the Invalidation Application (and therefore not having any leverage that a successful result might give it).
For these reasons, Daiwa submits that the balance of convenience is in favour of not granting leave to vary the scope of the undertaking given by Mr Stokes.
Decision
Although the arguments are finely balanced it is clear that the position has changed since the undertaking was given.[19] Having sensibly retreated from making the phase 2 application until the validity of the Vinsafe Patent is known, the Minority Shareholders simply want to protect their position by sending out formal demands. Daiwa, sensibly in my view, did not disagree that some protection was required — for the theoretical possibility that damages may not be recovered because of the running of time — but agreed to indemnify Barokes for any such loss, contending that the Indemnity addressed the issue of prejudice and avoided any reputational type damage to Barokes. In other words there was protection without any prospect of reputational damage which was very difficult to assess, but clearly existed.
[19]P Dawson Nominees Pty Ltd v ASIC (2009) 255 ALR 466; DB Marketing Solutions Pty Ltd (formerly known as Auto Xtreme Electronics Pty Ltd) v Cause (No 2) [2014] FCA 1429.
However, although not free from difficulty, I prefer the submissions of the Minority Shareholders, substantially for the reasons they give.
Once it is accepted — as it must be on the evidence — that there is a risk of limitation issues the question is one of demand versus indemnification. I prefer reducing any risk by way of the service of demands.
First, I do not accept that there will necessarily be any reputational damage to Barokes, as a separate corporate entity. In fact the contrary may be the case. The recipients of a well drafted demand, raising serious issues can hardly complain and are likely to address the allegations made in a serious way. Why should a legitimate and well formulated claim against known defendants cause reputational damage? It may not ultimately succeed. However, claims are made all the time in trade and commerce. The mere making of a claim does not damage the maker of the claim unless the claim is scurrilous, vexatious or without any foundation. This is not (as I have found in the phase 1 claims) the case.
Secondly, the directors, or more particularly those in control of Barokes, are obliged to do all things necessary to protect the intellectual property of Barokes. Where, as in this case, they take the view that there has been an infringement they are obliged to act unless otherwise restrained. I propose to remove such restraint for the limited purpose requested. There is, in the context of Barokes, a credible argument that the sending of infringement demands is indeed in the ordinary course of business. However, the application did not proceed on this basis. It proceeded on the basis that leave was required. In my opinion the letters of demand best discharge the duty.[20] This brings me to the next point, the Indemnity.
[20]They are in proper form and there is no longer any difficulty with the identity of the recipients or alleged infringers.
The Indemnity does go some way to address the prospect — however remote — of loss in the identified situation, but it is not as good as the proposed demands which as I have found are unlikely to cause reputational damage to Barokes itself. So it is best to go that way. It is not necessary to say anything more about the difficulties associated with the Indemnity. Some were identified during argument. There may be others.
For these reasons and the reasons identified in paragraph 15 of the submissions of the Minority Shareholders I propose to vary the undertaking in the manner suggested in the interlocutory process filed 24 November 2016.
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