Australia: Painaway – a complex shareholder dispute with a happy ending

Last Updated: 13 March 2014
Article by James Hamilton

Our client was appointed by the Supreme Court of NSW as receiver to a company Painaway, which marketed and sold "Painaway" branded products. The products included temporary pain relief creams and sprays which were very successful, particularly due to their promotion in the boxing industry, including by Danny Green.

Our client, the Receiver, was appointed as a result of a shareholder dispute, which eventually resulted in one director locking the others out of the company's warehouse. One shareholder applied to the Supreme Court for the company to be placed into liquidation based upon the "just and equitable ground" provided for in the Corporations Act. The other shareholders then applied for a court appointed receiver and a buyout order. The receivership was ordered by consent as an interim measure. The related winding up and buyout proceedings were then adjourned from time to time, whilst the events below unfolded.

The Receiver's initial concern was that Painaway's rights to make, market and sell the Painaway product were unclear.

Our investigations revealed that a shareholders agreement and an exclusive licence for Painaway to manufacture, market and distribute the Painaway products (IP Licence) had been prepared by a lawyer acting for all parties. The licence agreement had a provision allowing for its termination upon on a court ordered liquidation. Neither agreement was ever signed by all the parties, since at the time of the finalisation of the agreements, the Painaway company and some of the shareholder companies had not been incorporated. The agreements were signed by the promoters and IP holder and then were put to one side whilst the incorporations occurred. The parties then forgot about signing the agreements after the incorporations. The enforceability of the agreements was therefore an issue. The agreements' terms also had various uncertainties.

Key intellectual property, including Painaway trade mark registrations were owned by a shareholder's company. That shareholder objected to the Receiver selling Painaway products. Substantial stock on hand was also unable to be sold by the Receiver, as that same shareholder's related entity, who conducted the Theraputic Goods Act compliance role for the products, froze their sales. They alleged there were faulty Painaway products on hand and on the retailer's shelves. This meant the Receiver had to obtain an expert's report on that issue.

The existence of these legal issues meant that their quick determination by the Court was required, or the company might lose all its value.

Due to the inability to continue to make sales of Painaway products, the company was likely to be insolvent. Our client, the Receiver, therefore approached the Court to have the receivership terminated and him appointed as the provisional liquidator of Painaway. We obtained that order and then immediately sought and obtained the Court's leave for our client to be appointed a voluntary administrator, along with one of his partners, to seek to rehabilitate the company. This provided greater flexibility in dealing with the company's assets than a traditional liquidation and allowed for the IP Licence to remain current.

We also obtained Court ordered extensions of the "convening period" for calling the required second creditors meeting, to allow the Court to determine the dispute before the company's fate was decided at that meeting.

We then commenced litigation to determine Painaway's rights to market, manufacture and sell Painaway products. Thankfully the litigation moved very quickly. Part way through the hearing, by agreement, Painaway sales recommenced and gave the company a regular cashflow again.

The litigation was decided in favour of the company: In the matter of Painaway Australia Pty Ltd (in prov liq)(admin apptd) [2011] NSWSC 205.

This decision allowed a Deed of Company Arrangement (DOCA) to be formulated by one shareholder, which was then agreed to by Painaway's creditors. A 100 cents in the dollar return resulted for Painaway's creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Hamilton
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