Trouble brewing: Special purpose liquidators appointed to investigate beer packaging company

The recent Federal Court decision of In the matter of Boka Beverages Pty Ltd (In Liquidation) [2019] FCA 1184 has taken a closer look at the use of special purpose liquidators.

Background

oka Beverages Pty Ltd (Company) operated a beer bottling plant at a premises in Prestons, NSW (Premises).  The Company leased the Premises from a related company Boka Investments Pty Ltd (Boka Investments).

Icon Brewing Company Pty Ltd (subject to deed of company arrangement) (Icon) operated a beer brewing business at the Premises, and the Company packaged the beer brewed by Icon.  Icon brewed the beer using equipment (Equipment) leased to them by a third company, Melhelm Pty Ltd (Melhelm).

A dispute arose between Icon and the Company as to the basis on which Icon used the Premises and the terms on which the Company packaged the beer brewed by Icon.  An unsigned agreement was put into evidence which dealt with the labour, equipment and services to be provided by each party, the Company’s rates for packaging of Icon’s beer and a right of entry to the Premises for Icon.  The Company agreed that this document reflected the actual relationship between it and Icon but noted that no sub lease had ever been granted and that the charges invoiced by the Company for packaging Icon’s beer were different to the unsigned agreement. 

In April 2017, the Company issued Icon with a statutory demand in respect of $939,248.87 in unpaid invoices.  Icon then filed an originating process seeking to set aside the statutory demand on the basis that Icon was in fact owed $1,735,708 by the Company for overcharging.

In May 2017, Icon ceased brewing beer at the Premises and vacated the Premises, leaving the Equipment behind.  The Company subsequently ceased all operations at the Premises.  Melhelm wrote to the Company on 17 May 2017 asserting ownership of the Equipment, but despite a number of attempts was not able to recover the Equipment.

On 11 August 2017, the Supreme court of NSW made orders on the application of Icon and Melhelm (the Plaintiffs) restraining the Company and Boka Investments from selling the Equipment.  The Plaintiffs also sought final orders that the Company deliver up the Equipment, or alternatively pay damages for detention and conversion of the Equipment.  However, despite the injunction and the matters raised by the Plaintiffs, it appeared that in the period between August 2017 and March 2018 a number of pieces of the Equipment went missing.  The Company variously claimed that some of the Equipment had been sold by the Company with the agreement of Melhelm, and some of the Equipment had been removed by ANZ bank pursuant to security held over the Equipment.  These matters were disputed by the Plaintiffs.

On 5 July 2018, notwithstanding these matters and the ongoing proceedings regarding the Equipment and the statutory demand, the Company was placed into liquidation as a members voluntary winding up.

The Plaintiffs submitted proofs of debt in the liquidation and proposed that the liquidation be converted to a creditors’ voluntary winding up.  The winding up was converted in September 2018 but the liquidators of the Company only acknowledged the Plaintiffs as contingent creditors and stated that their proofs could not be admitted for the amounts stated due to a lack of supporting documentation.  In October 2018, the liquidators rejected the Plaintiffs’ proofs of debt in their entirety.  In February 2019, the liquidators issued a report to creditors identifying the potential dividend to unsecured creditors as 0 cents/$.

The application

After Melhelm was granted eligible applicant status by ASIC, the Plaintiffs applied to the Federal Court pursuant to section 90-15 of the Insolvency Practice Schedule (IPS) for the appointment of special purpose liquidators to the Company for the purpose of carrying out further investigations as to (amongst other things) when the Company became insolvent, whether any voidable transactions or breaches of duty had occurred, and what had happened to the Equipment.  The Plaintiffs noted a number of matters of concern, including that there were discrepancies in previous statements made by the Company and Boka Investments, and that the solicitors who acted for the Company and Boka Investments in the NSW Supreme Court proceedings were subsequently engaged as the solicitors for the liquidators of the Company.

The application was opposed by the existing liquidators on the basis that all of the matters raised by the Plaintiffs had been investigated, the appointment would result in duplication of work and there was no value to the appointment given the absence of any prospect of recovery.  The liquidators’ view was that the affairs of the Company should come to an end without further cost.

Decision

Gleeson J was satisfied that the court had power to appoint a special purpose liquidator under section 90-15 of the IPS and noted the matters that the court can take into account under section 90-15(4).  Gleeson J also noted a number of examples of “special purposes” for which a special purpose liquidator may be appointed, which included:

  • whether any of the directors or officers of a company breached their statutory and or fiduciary duties to the company; 
  • whether transactions between the company and a specified third party were voidable transactions within the meaning of s 588FE of the Act; 
  • any dealing with an asset owned legally or beneficially by the company to a specified third party; and
  • any claim that the company may have or may have had against a specified third party.1

Ultimately, Gleeson J applied the test used in Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Limited (in liq) ACN 116 031 022 v Italian Prestige Jewellery Pty Limited [2018] FCA 983, where it was held that it is appropriate to appoint a special purpose liquidator if:

  • there are matters that require investigation by a liquidator with a view to possible recovery for creditors;
  • the current liquidators have insufficient funds and insufficient prospects of obtaining funding to pursue an investigation;
  • a creditor is prepared to fund investigations and recovery actions but only on the condition that another liquidator be appointed; and
  • such an appointment would be beneficial to the winding up and the creditors as a whole.2

Gleeson J found that the above factors had been met and noted the following in favour of the application by the Plaintiffs for the appointment of special purpose liquidators:

The Plaintiffs had identified sufficient evidence to conclude that there were matters which warranted further investigation.

The existing liquidators did not have either “the means nor the intention to obtain the means to pursue any further investigation of the affairs of the Company”.3

Melhelm was prepared to fund the further investigations and recovery actions, and was prepared to do so by funding the special purpose liquidators.4

The appointment would be beneficial to creditors as a whole because there was reason to believe that Melhelm was a substantial 3rd party creditor and that in the circumstances its proof of debt should be re-adjudicated. As such, the Company’s solvency prior to the commencement of the winding up required further investigations, as well as the possibility of voidable transactions.5

Lavan comment

This case highlights the fact that the courts will support a thorough investigation of the affairs of a company through the appointment of special purpose liquidators where there are matters warranting further investigation that could potentially result in additional recoveries, and where creditors are willing to fund those recoveries. It provides useful guidance for creditors considering applying for the appointment of a special purpose liquidator and also for insolvency practitioners.

06 November 2019
Insolvency Updates
AUTHOR
Lawrence Lee
Partner
AUTHOR
Joseph Abberton
Partner
AUTHOR
Dean Hely
Managing Partner
SERVICES
Recovery, Reconstruction and Insolvency


FOOTNOTES

[1] [2019] FCA 1184 at [58].

[2] [2019] FCA 1184 at [57] citing Markovic J in Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Limited (in liq) ACN 116 031 022 v Italian Prestige Jewellery Pty Limited [2018] FCA 983 at [34].

[3] [2019] FCA 1184 at [98].

[4] [2019] FCA 1184 at [99].

[5] [2019] FCA 1184 at [102].