Knights Quest Pty Ltd v Barokes Pty Ltd
[2015] VSC 601
•30 October 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2015 01529
| KNIGHTS QUEST PTY LTD | Plaintiff |
| v | |
| BAROKES PTY LTD | First Defendant |
| - and - | |
| DAIWA CAN COMPANY | Second Defendant |
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JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 June 2015 |
DATE OF JUDGMENT: | 30 October 2015 |
CASE MAY BE CITED AS: | Knights Quest Pty Ltd v Barokes Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 601 |
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CORPORATIONS —Derivative action—Application for grant of leave by shareholder to bring proceeding in name of company under Corporations Act 2001 (Cth) s 237 — Whether applicant acting in good faith in bringing proceedings — Whether in the best interests of company that applicant be granted leave — Whether proposed proceeding involved serious question to be tried.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Wodak | Foster Nicholson Jones Lawyers |
| For the Second Defendant | Dr O Bigos | Baker & McKenzie |
HIS HONOUR:
The plaintiff, Knights Quest Pty Ltd (‘Knights Quest’), seeks an order that it be granted leave to bring proceedings in the name of the first defendant, Barokes Pty Ltd (‘Barokes’), against the second defendant, Daiwa Can Company (‘Daiwa Can’).
The application is brought pursuant to s 237 of the Corporations Act 2001 (Cth) which provides:
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e)either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.
Daiwa Can opposes this application on the grounds that it is not in the best interests of Barokes for leave to be granted pursuant to s 237 and there is no serious question to be tried.
Background
Barokes was incorporated in 1997 as the entity to develop and commercialise the idea of packaging premium quality wine in a can. Barokes was effectively a partnership between Gregory John Charles Stokes and Anthony Barics.
From 17 July 2002 to 12 September 2002, the directors of Barokes were Mr Stokes, Mr Barics, Morry Fraid and Donald Hilton.
The shareholders during the same period were:
· Knights Quest Pty Ltd holding 26.7% of the shareholding;
· SMS Management Pty Ltd holding 13.3% of the shareholding;
· Chapel Plaza Pty Ltd (‘Chapel Plaza’) holding 20% of the shareholding; and
· DBT Nominees Pty Ltd (‘DBT Nominees’) holding 40% of the shareholding.
Mr Fraid was the director of Chapel Plaza and Mr Hilton was a director of DBT Nominees. The shareholding in those two companies was held by Spotlight Group Holdings Pty Ltd (‘Spotlight’), which therefore effectively held 60% of the shares in Barokes.
On 13 September 2012, Daiwa Can purchased 60% of the shares in Barokes from Chapel Plaza and DBT Nominees for $24.4 million. The directors on the board of Barokes, from that date, are Mr Stokes, Mr Barics, Yoshi Ikeda and Tetsuo Yamashita.
Knights Quest produced before the court at the hearing of this application a statement of claim that it intends to rely upon. That statement of claim refers to several representations made before and after Daiwa Can was made a shareholder, and also agreements made regarding the provision of funds by Daiwa Can to Barokes. By reason of these representations and agreements, Knights Quest seeks to bring a proceeding in the name of Barokes, which will claim damages, including common law damages and damages under section 236 of the Australian Competition Law. Specific performance is also sought relating to agreements that were allegedly made between Barokes and Daiwa Can in 2012 and 2014.
Bests Interests
To determine whether it is in the best interests of Barokes that leave be granted to Knights Quest to bring a proceeding, the Court should have regard to the interests of Barokes as a whole. In Maher v Honeysett and Maher Electrical Contractors,[1] Brereton J said:
The force of this response is, however, much weakened by the form of s 237(3), which creates a rebuttable presumption that granting leave is not in the best interests of the company in certain events. The matters there referred to do not suggest that personal qualities of the applicant are relevant. The phrase “best interests” directs attention to the company’s separate and independent welfare. Charlton v Baber (2003) 47 ACSR 31, [52]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442, [46]. This imports the familiar concept of the interests of the company as a whole. As to which, see, for example, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457; Russell Kinsella Pty Ltd (in liq) v Kinsella [1983] 2 NSWLR 452 (Powell J); Richard Brady Franks Ltd v Price (1937) 58 CLR 112; Charlton v Baber (2004) 47 ACSR 31 , 44 [50]. Whether the “best interests” of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company. Walker v Wimborne (1976) 137 CLR 1 ; 3 ACLR 529; Spies v R (2000) 201 CLR 603 ; 173 ALR 529 ; 35 ACSR 500; Charlton v Baber (2004) 47 ACSR 31, (53].
[1][2005] NSWSC 859 at [44].
In Tru Value Solar Holdings Pty Ltd v Fernandez,[2] Osborne JA accepted the respondent’s submission that the expression ‘the best interests of the company’ imported the familiar concepts of the interests of the company as a whole. Osborne JA stated that the question of whether a proposed proceeding is in the best interests of a company is to be determined in the particular circumstances of the case and that there was no fixed test.[3]
[2][2013] VSCA 27.
[3]Ibid [13].
Some of the factors to consider in making a determination whether it is in the best interests of a company that leave be given to bring an action have been referred to by Palmer J in Swansson v R A Pratt Properties Pty Ltd.[4] His Honour said:
The requirement of s 237(2)(c) that the applicant satisfy the court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the inquiry will normally require the applicant to adduce evidence at least as to the following matters.
First, there should be evidence as to the character of the company: different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side's position rather than the other's in a way which will not achieve a useful result: see eg Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324; BC200105274.
Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.
Third, there should be evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party.
Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the court may ascertain whether the action would be of any practical benefit to the company.
[4][2002] NSWSC 583 at [56–60].
Daiwa Can submits that it is not in the best interests of Barokes that Knights Quest be granted leave to bring the proceeding because:
· It is a proceeding against its major shareholder, key creditor and its alleged principal future funder;
· There is an adverse impact on the business going ahead;
· There is a significant liability of $11 million owed by Barokes to Daiwa Can and Barokes is unable to repay it; and
· The case that Knights Quest seeks leave to make on behalf of Barokes against Daiwa Can is, at best, very weak.
In relation to the first submission, Daiwa Can submits that it is not in the best interests of Barokes to embark on the proposed litigation, because to the extent that the interests of Barokes coincide with the interests of the shareholders and the creditors, the proposed action is adverse to those interests. It also submits that in the circumstances where the shareholders are all deadlocked, it is not in the interests of the company for leave to be given to commence a proceeding by one side against the other, as this could be seen as a way of vindicating one side’s position over the other. This will not achieve a useful result. Daiwa Can also submits that Knights Quest wishes to agitate what in reality is a shareholder dispute and it need not and should not bring the proceeding on behalf of Barokes.
The draft statement of claim refers to representations and agreements made by Daiwa Can with Barokes. Knights Quest submits that it cannot bring proceedings to achieve the same redress as Barokes. It says Barokes has standing to pursue claims in relation to breach of representations and breach of contract.
The shareholders are clearly in dispute, but what is sought is a claim by Barokes relating to funding. If that claim is successful, then clearly Barokes will be better off, because it has funding. On the other hand, Barokes will also be prejudiced to some extent because its major shareholder, key creditor, alleged principal and future funder will be adversely affected. In that regard, the interests of Barokes and the interests of the shareholders and creditors would diverge. On balance, it would not appear to be in the best interests of Barokes for this situation to occur.
In support of the second submission raised by Daiwa Can, Mr Ikeda deposes that there has been a postponement of two directors meetings as a consequence of this application. There has been no Board meeting since 30 June 2015. That meeting was terminated prematurely by Mr Stokes. Mr Ikeda also deposes that Mr Stokes has made minimal effort to make himself available at future board meetings.
In my view, if there is a situation where one shareholder is suing the other major shareholder, then it stands to reason that there can be a negative effect on the business of the company, particularly when the board is deadlocked and board meetings have been cancelled. I agree with Daiwa Can that it is likely that the rift between the parties would only grow as a result of litigation. There would be an adverse impact on the business going ahead. That is not in the best interests of Barokes.
With regard to the financial position of Barokes, Mr Stokes in his third affidavit in support of the application has exhibited a balance sheet of Barokes up to February 2015. The balance sheet shows that it has a loan outstanding to Daiwa Can of $10,828,854.22. The total assets at that date were $6,333,441.72. The total liabilities including the loan were $11,842,328.04. Therefore, there was a negative equity of $5,508,886.32. The balance sheet as at March 2015 did not refer to the shareholders loan and therefore the total equity was $4,836,179.53.
In his second affidavit in support of the application, Mr Stokes deposes that:
I understand Daiwa has contended that Barokes has a deficiency of net assets. If the working capital loans from Daiwa are included in the Barokes balance sheet, then there is a net asset deficiency. However, the working capital loans from Daiwa are only repayable out of the profit of Barokes as set out in the working capital loan agreements. Taking the working capital loans into account when considering Barokes’ present financial position presents a misleading picture, given the limited circumstances in which the funds are repayable.
Mr Stokes, explaining the March balance sheet, deposes in his third affidavit that:
Barokes is acting in accordance with advice I have received from Banks Accountants, Barokes’ external accountant, as to how its accounts ought to be prepared. Mr Franc Marino, partner of Banks Accountants, has informed me that the manner in which Barokes formally prepared its accounts was incorrect. I have therefore instructed him to prepare accounts which reflect the true position. I have explained this on numerous occasions to the Daiwa representatives on the Barokes board. In any event, in due course, it will be for the Board of Barokes to finalise the annual accounts. Any issue Daiwa has with the manner in which accounts are prepared ought be taken up at the Board meeting held when the final accounts are presented. I have never suggested that the change to the accounts will be represented in the final accounts without regard to the input of Daiwa representatives on the Barokes board.
I find the explanation of Mr Barokes strange and it does not, in my view, give a proper reason why these loans have been removed from the accounts. The loans are either owed or not owed. If they are owed, then they should be in the accounts. It would appear that on reading these accounts that Barokes would not be able to meet the loans if Daiwa Can called for repayment. I note that Mr Ikeda has deposed that he will consider giving Barokes a notice to repay the debts if leave is given to bring the proposed proceeding. If an action is commenced against Daiwa Can, I expect that the loans will be called up.
There are four loans. The first and third loans contain the following clause:
The Lender is entitled to request the repayment of the principal of the Loan at any time after the 2nd anniversary of the date of this Loan Agreement after consultation with the Borrower that it is in a position to do so without negatively impacting or effecting any of the Company’s capabilities or capacity by delivering the notice in a form Appendix A (the ‘Repayment Notice’) to the Borrower, provided that the Lender must have a discussion with the Borrower at least 12 months before the Lender’s issuing the Repayment Notice as to the future cash flow and financing of the Borrower.
Knights Quest submits that the term relates to ‘requests’ for repayment by Daiwa Can can only be made following ‘consultations’ and ‘discussions’. It submits that it is far from clear that this clause entitles Daiwa Can to serve a notice to repay on Barokes, regardless of the results of the consultations and discussions referred to in the relevant clause.
Daiwa Can submits that all that is required is that there be a consultation between the parties about whether Barokes is in a position to repay. It further submits that a consultation requirement does not stand in the way of enforcement of the loan as the requirement is meaningless and therefore legally unenforceable. It is not an obligation which could be specifically enforced by a court. Consultation would be futile giving the impasse between the parties, and to the extent that any consultation is required, it can occur quickly, following which enforcement of the loans can proceed.
Knights Quest advises that, if Daiwa Can serves a notice in circumstances where Barokes is likely to be unwilling or unable to pay according to the notice, it will challenge the efficacy of the notice. In my view, any such challenge would not be in the best interests of Barokes because it would lead to a further rift between the shareholders.
I note that under the above clause, any obligation to repay the loans would not occur until one year after the notice is given, and in relation to the fourth loan, it would possibly take another year. Knights Quest argues that there could be no set off or counterclaim until the loan is due and payable and the monies may never become due and payable, as they may be repaid by Barokes before payment falls due.
On the accounts that I have seen, it would be unlikely that the loans can be paid out unless Barokes is successful in the proposed proceeding. According to Daiwa Can, the repayment of the loan would exceed any liability of Daiwa Can to Barokes so that the proceeding would be futile in any event.
It appears that the plaintiff’s claim is for the provision of $8.85 million working capital to Barokes in the first year after Daiwa Can became a shareholder, and a further $5 million of working capital to Barokes within the second year after which it became a shareholder of the plaintiff. Neither of those payments have been made, and therefore the claim would exceed the amount due under the loan.
Barokes, if completely successful, would obtain the funds to pay out the loan, but that would not leave much working capital, taking into account the costs and expenses in running such a trial. I accept that the claim would therefore most likely be futile.
From the above, it appears that it is not in the best interests of Barokes that this action be brought. I have not dealt with the submission that the case proposed by Knights Quest is weak. It is not for me to look at the merits, but I will consider whether there is a serious question to be tried.
A serious question to be tried
Knights Quest submits that it is plain on the evidence before the Court that there is a serious question to be tried. The test as to whether there is a serious question to be tried is the same as that in an application for an interlocutory injunction.[5]
[5]See Swansson v RA PrattProperties Pty Ltd (2002) 42 ACSR 313 at [25].
In Swansson v RA Pratt Properties Pty Ltd,[6] Palmer J said:
In order to ascertain whether there is a serious question to be tried for the purposes of s 237(2)(d), the court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622 ; [1968] ALR 469 at 472. Thus, cross-examination on the merits of the proposed derivative action will usually be permitted only with leave of the court and to a limited extent.
[6]Ibid.
In order to demonstrate a serious question to be tried, Knights Quest relies on the affidavits sworn by Mr Stokes, his wife Irena Stokes and Mr Barics.
Mr Stokes, in his first affidavit, refers to negotiations that took place in 2011 when Daiwa Can negotiated to become a shareholder in Barokes and indicated that it would provide working capital to Barokes. He then refers to meetings on 12 March 2012 and 13 March 2012 where, according to Mr Stokes, representations were made by Daiwa Can through its representatives, including Mr Ikeda, that Daiwa Can would provide funding if it became a shareholder.
An alleged agreement is said to have been made on or about 13 April 2012 when representatives of Barokes met with representatives of Daiwa Can at the Daiwa Can head office in Japan. Mr Stokes deposes that Mr Ikeda presented to Barokes’ representatives a document headed ‘Barokes 4/13/12’ and said that this was the formal proposal for investment in Barokes which the Daiwa Can board had approved. The proposal provided as follows:
The total investment by Daiwa Can would be $33.25 million, including the purchase of the Spotlight shares; and
If Barokes was able to negotiate a reduction in the price at which Daiwa Can could purchase shares from Spotlight, any reduction in the purchase price would go to increasing the working capital available to Barokes in the first year so as to keep Daiwa Can’s overall investment at $33.25 million, inclusive of the first year working capital contribution.
Mr Stokes further deposes that on or about 13 September 2012, Daiwa Can contracted to purchase 60% of the shares in Barokes from Chapel Plaza and DBT Nominees for $24.4 million, and entered into a shareholders deed with Barokes and the remaining shareholders, Knight Quest and SMS Management Pty Ltd, pursuant to which Mr Ikeda and Mr Yamashita were to be appointed as directors of Barokes. At the time of entering into the shareholders deed, Barokes prepared a substantial business plan which incorporated financial projections that had been prepared by Daiwa Can. Mr Stokes states that the document was largely agreed but Daiwa Can requested that a draft financial summary be inserted in the shareholders deed as the business plan, and that the more substantial business plan would be agreed shortly thereafter.
On 11 to 13 September 2012, there was a board meeting at Barokes in Melbourne, where the parties discussed the business plan and sales forecast to progress the finalisation of the business plan. By the conclusion of that meeting, the outstanding issues regarding the business plan were almost finalised. Barokes finalised the business plan following the 11 to 13 September 2012 meeting. The draft was sent to Mr Ikeda and Mr Yamashita. Mr Stokes states that this document was the final business plan for the purposes of the shareholders deed, as all outstanding issues had been dealt with and agreed between the parties.
In the draft statement of claim, it is alleged that by participating in the finalisation of the business plan and accepting the business plan, Daiwa Can represented that it would provide $8.85 million of working capital to Barokes in the first year in which it was a shareholder in Barokes. It is also alleged Daiwa Can would provide a further $5 million of working capital to Barokes in the second year in which it was a shareholder in Barokes.
Mr Stokes refers to further emails exchanged by him and Mr Ikeda in October 2012. On 5 October 2012, Mr Ikeda sent Mr Stokes an email stating:
After our first meeting, we have not talked about funding $5 ml after $6.85 ml. Of course, our recognition is that if Barokes’ cash flow will not run proper, it is necessary to fund $5 ml and more after funding $6.25 ml.
Mr Stokes deposes that on 10 October 2012, he met Mr Yamaguchi, Mr Yemashita, Mr Ikeda and Mr Ueda in Tokyo and discussed Barokes’ need for prompt funding. It was agreed at the meeting that Daiwa Can would commence its funding commitment of $8.85 million for the first year by funding $1.5 million by the end of October 2012 and a further $1.5 million by the end of December 2012.
Mr Stokes also states that on 12 October 2012, Mr Ikeda sent him an updated summarised chart to present to President Yamaguchi, to which Mr Stokes responded. On 15 October 2012, Mr Ikeda emailed Mr Stokes in response, saying that he had removed the reference to the $8.85 million from the summarised chart. The email stated:
If Barokes cannot turn black and become self reliant after we fund $6.85ml + $2mil = $8.85ml, Daiwa will fund Barokes for sure.
Yamaguchi Junior thinks since Barokes and Daiwa is now the same company, we should not decide big sum funding frame prior but to hold a meeting more frequently and discuss how much funding will be needed; like we did in Oct.10th meeting, and then Daiwa will fund Barokes with flexibility.
Since we are now working as the same company, we don’t have to set the funding price to $8.85ml. We can work things out with flexibility.
This is why we have removed the $8.85ml 2013/14 funding from the chart. Again, there is no particular meaning for it.
Mr Stokes deposes that on 23 October 2012, Mr Ikeda emailed him advising that Daiwa Can would financially support Barokes when it is having a hard time and Daiwa Can would get a return when Barokes turned to black.
Mr Stokes states that on 31 October 2012, a loan agreement was entered into between Barokes and Daiwa Can, which stated that the repayment of the loan would only be required after consultation and if it did not impose financial hardship on Barokes to repay.
During 2013, according to Mr Stokes, there was a delay by Daiwa Can in providing 300ml slim bottle cans to Barokes, which put Barokes six months behind estimated sales in the business plan, damaging its reputation with customers. There have since been ongoing disputes between Barokes and Daiwa Can in relation to the supply by Daiwa Can of a suitable slim bottle can to Barokes. Daiwa Can advised that it was unwilling to contribute funds to Barokes for marketing the slim bottle cans, therefore on 23 April 2013, Barokes entered into a distribution agreement with Cofco, a Chinese State-owned enterprise.
Mr Stokes deposes that on 8 April 2014, Barokes and Daiwa Can agreed that Daiwa Can would provide additional working capital to support Barokes’ expansion into the Chinese market and to also support its expansion into the USA market. He says that Barokes and Daiwa Can agreed that Daiwa Can would provide three tranches of $1.5 million, and he signed the agreement on behalf of Barokes. Shortly after, and even though an agreement had already been reached, Daiwa Can informed him that it required the April 2014 funding agreement to be altered, so that Mr Stokes contributed $100,000.00 to Barokes as part of the first $1.5 million of funding provided under the April 2014 funding agreement.
In or around April 2014, Mr Stokes provided a loan of $100,000.00 to Barokes, and Daiwa Can provided a loan of $1.4 million to Barokes.
On or about 12 December 2014, Daiwa Can informed Barokes that it would not provide any further funding to Barokes, whether under the 2014 agreement or otherwise.
The evidence of Mr Stokes is supported by Mrs Stokes. Her evidence, in effect, is to the extent that where Mr Stokes’ affidavit refers to discussions where she was described as being in attendance, she states that Mr Stokes’ account of those events are true and correct. She also refers to notes exhibited to Mr Stokes’ affidavit that Mr Stokes deposes were made and prepared by her, and states that these accurately record the discussions to which the notes relate.
Mr Barics gives evidence that whilst he was not present at the discussions with potential investors, he was regularly updated on the progress of the discussions, and the descriptions made of those discussions in Mr Stokes’ first affidavit are consistent with the descriptions given to him at the time the discussions occurred. He confirms parts of the first affidavit of Mr Stokes that are within his direct knowledge.
Knights Quest submits that if the evidence before the court remains as it is, then it is overwhelmingly likely that Barokes will succeed on the underlying proceeding.
Mr Ikeda was appointed as a director of Daiwa Can on 25 June 2014, and was previously General Manager - Sales and Marketing. Mr Ikeda has sworn an affidavit in opposition to the application. He deposes that throughout the process of the negotiations he told Mr Stokes, on several occasions, that deals could be concluded only with the approval of Daiwa Can’s board of directors in Tokyo. In particular, he said that President Yamaguchi had the final say. The affidavit of Mr Ikeda contradicts what was said by Mr Stokes and gives a different version of events.
The only documents that were executed by Daiwa Can and Barokes, before Daiwa Can became a shareholder in Barokes, according to Mr Ikeda, were the shareholders deed, the loan agreement dated 27 August 2012 and a letter of intent dated 27 April 2012.
Mr Ikeda, in his affidavit, refers to the draft statement of claim and denies that he or anyone else on behalf of Daiwa Can made the alleged representations on 12 March 2012, 13 March 2012, April 2012 or July 2012. He denies that there was a 2012 agreement.
Daiwa Can submits that on the evidence there can be no serious question to be tried. The relief sought in relation to the two alleged agreements of 2012 and 2014 is specific performance, alternatively damages for breach of contract. Specific performance is not an available remedy for the breach of those agreements. The only available remedy would be damages.
In Wight v Haberdan Pty Ltd,[7] Kearney J held that an agreement for the loan of money may be specifically enforced where in the particular circumstances a remedy in damages is not adequate to satisfy the demands of justice.
[7][1984] 2 NSWLR 280 at 290.
Knights Quest submits that here the remedy of damages would not be adequate and would not satisfy the demands of justice. It would therefore be entitled to bring an application for a specific performance.
The claim before me is that there are two agreements which have been breached and Barokes should be entitled to a remedy. It is said by Knights Quest that the appropriate remedy is not damages. Specific performance is an available remedy if damages are not appropriate. I do note, however, that damages are sought for breach of the representations. If damages are appropriate for misleading representations, I query why it would not be appropriate for breach of contract. The application for specific performance will not render the whole proceedings as a nullity.
Daiwa Can submits that there is no room for the alleged 2012 and 2014 agreements to operate in the circumstances where the parties have executed the share purchase agreement, the shareholders deed and the four loan agreements. It says that the parties are bound by the executed contracts.
The 2012 agreement is pleaded to be both oral and written. The written component comprises a memorandum made in April 2012 regarding a meeting on 13 April 2012. The oral component relates to representations made at the meeting on 13 April 2012.
Daiwa Can submits that the terms of the 2012 memorandum are not sufficiently clear so as to constitute a binding contract. The April memorandum refers to working capital of $9.25 million to be decreased to $6.85 million and also refers to investing in shares and also debts. Daiwa Can submits that there is no mention of interest rates or terms for repayment. In my view, that memorandum alone cannot constitute an agreement.
As to the oral representations, Daiwa Can states that those oral representations have been superseded by the share purchase agreement, shareholders deed and loan agreements. Under the share purchase agreement, Daiwa Can acquired its shares from the two former shareholders - DBT Nominees and Chapel Plaza. It contains an entire agreement clause which relevantly provides that the agreement is the entire agreement of the parties about the subject matter of the agreement and supersedes any representations, negotiations, arrangements, understandings or agreements and all other communications.
The shareholders deed was executed on 27 August 2012, the same day as the share purchase agreement. The shareholders deed is an agreement between Barokes, Daiwa Can, Knights Quest and SMS Management Pty Ltd. Clause 5.7 refers to funding and it states:
If the Company requires additional working capital, then the Company may raise additional capital in any manner determined by the Board in accordance with this Deed.
Clause 21.14 of the shareholders agreement is an entire agreement clause which states:
This Deed and any other documents referred to in this Deed or executed in connection with this Deed comprises the entire agreement of the parties about the subject matter of this Deed and supersede any prior representations, negotiations, arrangements, understandings or agreements and all other communications.
An entire agreement clause was considered by Barrett J in Beauty Health Group Ltd v Sholl,[8] where his Honour stated:
It is plain on the face of the document propounded by the plaintiff as a deed of release on both 20 August 2010 and 3 September 2010 that it contains no such condition. There is no basis at all on which a contrary construction could be placed on it. It is also plain that the document contains an “entire agreement” clause of the familiar kind that would preclude the assertion of any collateral parol agreement imposing such a condition. Any dispute the plaintiff says there is as to its liability to pay in the absence of the defendant’s participation in a handover is a dispute entirely without substance and therefore lacking genuineness.
[8][2011] NSWSC 77 [20].
Daiwa Can submits that this entire agreement clause is conclusive so as to rule out claims based on any alleged agreement or representations which preceded the shareholders deed. Given the detailed provision in the shareholders deed, it is implausible that the reason for excluding funding obligations was that it was simply unnecessary to visit this topic, as has been asserted by Mr Stokes in his third affidavit. Mr Stokes deposed that he did not propose that funding be included in the shareholders agreement, as it was a matter already agreed between representatives of Barokes and representatives of Daiwa Can before the shareholders agreement came to be prepared. The explanation given by Mr Stokes lacks reality. The defendant submits that the entire agreement clause must be read and understood in its terms and in its context. I agree with that submission. When considering the evidence and the entire agreement, it is apparent that the clause does have effect in these circumstances.
The entire agreement clause in the shareholders deed will not operate to prevent representations and claims which do not come strictly within the ambit of the subjects dealt with in the shareholders deed. It does not apply in relation to events after the shareholders agreement was executed. That leaves the question of whether the representations made after 27 August 2012 and also the 2014 agreement can be the subject of the claim, because the entire agreement clause does not operate to prevent a claim which arises after the shareholder deed was entered into.
Knights Quest submits that the evidence presently available to Barokes, if leave is given, is very strong. By way of contrast, the only evidence presently relied on by Daiwa Can is very weak. All of the relevant witnesses for Barokes have gone into evidence to support the present application, whereas only Mr Ikeda has sworn an affidavit.
Mr Stokes states that the evidence of Mr Ikeda is false. He says that in negotiations between Barokes and Daiwa Can, Mr Ikeda and other senior executives of Daiwa Can presented themselves as representatives of Daiwa Can, authorised to negotiate and reach agreement with Barokes, but on the basis that the agreement reached would subsequently be ratified by the board of directors. He also deposes that Mr Ikeda, Mr Yamashita, Mr Yamaguchi Senior, and Mr Yamaguchi Junior, told him on many occasions that they preferred to work on the basis of trust and that they did not favour formal contracts.
There are emails in October 2012 which support the submissions of Knights Quest, referred to in paragraphs 40 and 42 above.
Daiwa Can concedes that the possibility of funding was discussed. It says that Mr Ikeda told Mr Stokes on several occasions that:
- Daiwa Can would consider good faith funding requests by Barokes;
- any provision of funding by Daiwa Can to Barokes would have to be first approved by President Yamaguchi;
- any approval would not be given unless the requested funding was justified by a business plan for stimulating growth in sales;
- Mr Ikeda expected that Daiwa Can’s decision whether to fund would depend on a range of factors, including Barokes’ current and expected performance at the time a funding request was made, Barokes’ achievement of sales targets, and the proposed use of funds making good business sense; and
- Daiwa Can required further information about Barokes’ performance.
I note that in an email dated 1 October 2012, Mr Ikeda raised five issues, including sales targets and profits, and concluded that email by stating:
If I make presentation to President Yamaguchi now, he will be seeing it as negative image, because we have no clue when Barokes can run with just cash, when will Barokes turn to profitability company, or when will Barokes start sharing out to Daiwa, etc.
We will try hard to prepare clarified and summarized chart by Oct.10th, so please cooperate with us for this.
There was an indication that Mr Yamaguchi needed to be informed of certain matters, but it is not conclusive that funding would only be provided if those items were met.
The defendant submitted that the only time when Daiwa Can did commit to lending money to Barokes was when the four loan agreements were executed between Daiwa Can and Barokes. Each loan agreement was a written document, executed by both parties, and a total of approximately $11 million was loaned. Daiwa Can submits that the first loan agreement was entered into at the time of the initial investment by Daiwa Can, in order to enable the former shareholders (DBT Nominees and Chapel Plaza) to cut their ties with Barokes. The other three loan agreements related to funding.
Mr Ikeda deposes that Mr Stokes wanted $3 million to be funded as equity instead of debt and said that Barokes would issue C-class stock. Mr Ikeda was generally content with this, but the way in which funding would occur was yet to be determined and had to be approved by President Yamaguchi. An email was sent by Mr Stokes on 13 October 2012 to Mr Ikeda, stating that he had noticed that Mr Ikeda had removed the reference to the $8.85 million 2013/14 funding from Daiwa in his new attached spreadsheet, in order to allow Mr Ikeda to present it to President Yamaguchi. Daiwa Can submits that this email expressly acknowledged the need to obtain approval by President Yamaguchi. I am not convinced that that is the effect of this email.
The suggestion of funding by equity was not accepted by Daiwa Can. Mr Stokes subsequently agreed that there would be loans. Approval was given by President Yamaguchi for the loans on 31 October 2012. Daiwa Can submits that the fact that loans were made - and no funding was given - is a matter which must be taken into account, making it inherently unlikely that representations were made.
In my view, the entering into loans does not mean that it is not arguable that there were representations made and relied on. The emails are such that there are matters that merit investigation. It is arguable that the representations were made. It will be more difficult to prove that they were relied on.
Mr Stokes also states that Barokes’ business plan provided for the defendants to provide working capital to Barokes of $8.85 million in the first year, and $5 million in the second year. In the statement of claim, it is pleaded that by participating in the finalisation of Barokes’ business plan and accepting the business plan, the defendant represented that it would provide working capital. Representations are implied by the defendant’s participation in the final version of Barokes’ business plan and its acceptance of the business plan. I note that that document was not accepted by Daiwa Can and not approved by Daiwa Can. In my view, there would be no cause of action in relying upon the representations from the business plan.
Mr Stokes deposes that on or about 8 April 2014, Barokes and Daiwa Can agreed that Daiwa Can would provide additional working capital to support Barokes’ expansion into the Chinese market and also support its expansion into the USA market. The agreement is said to be written and implied. It is comprised of a document headed ‘Funding Request from Barokes’ and executed by the plaintiff.
Mr Stokes deposes that a funding request dated 10 February 2014 for $1.5 million was sent by Mr Stokes to Daiwa Can and a revised funding request was formulated by Mr Ikeda and Mr Ueda which Barokes signed and submitted to Daiwa Can. That offer was not accepted and $1.4 million was arranged as a loan and Mr Stokes provided a loan of $100,000. On the evidence I cannot ascertain any commitment to that funding agreement and I accept the submissions of Daiwa Can that it would have been inconsistent with the executed loan agreements.
In my view, the only serious question to be tried relates to some of the representations made after the shareholders agreement was entered into. There is no serious question to be tried in relation to any of the alleged agreements. A much narrower proceeding than that envisaged would be able to be brought if it was in the best interests of Barokes.
Even though there is a narrow serious question to be tried, in my view it is not in the best interests of Barokes that Knights Quest be given leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring an action in the name of Barokes against Daiwa Can. The application will therefore be dismissed.
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