The now superceded Trade Practices Act 1974 (Cth) (TPA) and its relation to Australia’s bankruptcy laws was recently explored in Pattinson v Bellwether Agriculture Pty Ltd (In Liq) [2018] NSWSC 38 (Pattinson).
The case demonstrates the intersection in law between the TPA, the Fair Trading Act 1987 (NSW) (FTA) and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
Background
Pattinson involved misleading and deceptive conduct against the bankrupt for losses arising from a contract with a third party. The second defendant and the third defendant were executive directors of the first defendant company Bellwether Agriculture Pty Ltd (In Liq) (Bellwether).
Bellwether extracted biogas and other resources from manure and other animal waste using Digester technology from the United States. It sought to raise capital for the business and was afforded $1,000,000 and $250,000 investments by the first and third plaintiffs, respectively.
Importantly, the $1,000,000 investment was ultimately provided by a trust with the first plaintiff as beneficiary after the initial loan of the same amount was repaid.
The venture failed and Bellwether went into liquidation in 2013.
The plaintiffs brought the proceedings to recover the losses they suffered from their investments in Bellwether.
The Issue
On the first day of the hearing the second defendant lodged a debtor’s petition to make himself bankrupt.
Because of this, the main issue was whether unliquidated damages awarded by a court were claimable by creditors against a bankrupt estate.
Section 82(2) of the Bankruptcy Act states that they are not, unless the damages arise due to a contract. The Court was to decide how this operates when considering contracts with the trust, which is a third party.
The Decision
Ball J considered the facts of the case to be indistinguishable from those considered by the High Court of Australia in Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234; [2005] HCA 67 (Coventry).
Coventry outlines the requirements of establishing misleading and deceptive conduct in bankruptcy.
The plaintiffs pleaded that the directors of Bellwether made the following representations:
(a) In relation to the sales of the Digesters:
(b) Government funding for the first project was certain and Bellwether was very hopeful of obtaining government funding for the second project;
(c) The directors of Bellwether would not receive any payments from it until the first three projects were completed and the second and third defendants would not take any money out of Bellwether until after three projects were up and running;
(d) Large institutional investors were keen to buy shares in Bellwether;
(e) The second and third defendants opted not to sell shares to those large institutional investors; and
(f) Bellwether had off-take agreements to sell the products produced from the projects mentioned.
Considering this, Ball J made reference to Section 41 of the FTA, which states:
“For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.” (section 41(1)); and
“The onus of establishing that a person had reasonable grounds for making a representation referred to in subsection (1) is on the person.” (section 41(2)).
Accordingly, the bankrupt second defendant failed to discharge the onus placed on him by s 41(2) and Ball J found the representations made by him to be misleading and deceptive.
Comment
The main lesson is that misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) and related legislation is provable in bankruptcy. A director cannot avoid damages simply by declaring themselves bankrupt.
Third party litigation funding in Australia affords claimants a potential avenue of recourse in instances where:
The Assessment Process
Litigation funders are usually provided with all relevant information so that they may make an informed decision as to whether they will fund the case.
Legal opinions are also often obtained to assist in determining the matter’s prospects of success.
It is important to acknowledge that litigation inherently involves some amount of risk, so these opinions are by no means definitive.
How Funders Take on Risk: The Model
Most litigation funding agreements contain provisions requiring the compulsory acquisition of After the Event insurance cover (ATE) that indemnifies the funder against adverse costs orders if the litigation is unsuccessful. This protects the funder against the risk of paying the other side’s legal costs.
In the event of an unsuccessful outcome in Court, the funder essentially pays for the insurance out of their own pocket. The funder will forfeit their investment and treat it as a loss.
In the event of a successful outcome, the claimant will bear the cost of the premiums. The funder will be reimbursed for any costs incurred throughout the litigation and receive an additional return on investment (Success Fee).
This Success Fee is usually calculated as either:
As a multiple of the funder’s initial investment.
Success Fees can often constitute between 20 percent and 50 percent of a claimant’s award.
Is the Funding Model Fair?
While this model reduces the amount of funds that are to be returned to the claimant in the instance of a successful outcome, third party litigation funding is predominantly sought in cases where it is the only way a claim may be brought.
Making a smaller recovery is more beneficial to claimants than failing to bring an action at all. In cases where claimants have the means to bring their own action but do not wish to take on any risk, a litigation funder may agree to fund the case.
Overall, litigation funders facilitate access to justice by affording a greater breadth of options to potential claimants.
Controversy
The participation of litigation funders in class action claims has become increasingly controversial.
Former Attorney General George Brandis is championing for the regulation of litigation funders after they have been criticised for imposing high fees and allowing law firms to do the same.
An example of high fees can be seen from the Black Saturday bushfire victims class action, where Maurice Blackburn received close to $100m in legal costs and administration fees out of an $800m award afforded to the victims.
Comment
Litigation funders tend to take on an appreciable amount of risk and expect compensation in the event of a successful outcome. New laws may be imposed in this area that regulate this more thoroughly.
Potential claimants should be aware of this alternative method of funding for legal action where other options are limited.
Liquidators have a duty to act independently and in the best interests of the creditors of a company. However, frequently, a dispute with a liquidator may arise in relation to an apparent lack of independence, a proposed asset realization strategy or an intended action in respect of debt recovery. In view of this, new amendments to the Corporations Act 2001 (Cth) have made it easier for creditors to replace liquidators and have provided creditors with a range of other new powers.
Amended Laws for Replacing a Liquidator
Previously, creditors could only replace a liquidator appointed by the company at the first meeting of creditors or by application to the court.
However, in addition to granting other new powers, the amendments now enable creditors to request an appointed liquidator to call a meeting to consider their replacement at any time.
The Process for Replacing a Liquidator
To replace a liquidator, a resolution to that effect must be considered at a meeting of creditors and passed by a majority in both number and value of voting creditors.
Under the amendments, a liquidator must hold a meeting of creditors to consider their replacement in the following circumstances:
(a) The creditors pass a resolution directing the liquidator to call a meeting; or
(b) A creditor or creditors request the liquidator to call a meeting:
(i) Within 20 business days of the liquidator’s appointment to a Creditor’s Voluntary Liquidation; or
(ii) At any time if the creditor(s) represent at least 25 per cent of total creditors or 10 to 25% of total creditors and provide security for the cost of holding the meeting.
Apart from requesting the appointed liquidator to hold a meeting, creditors will also need a Consent to Act as well as a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) from an alternative liquidator.
Other New Powers for Creditors
In addition to providing the process for replacing a liquidator, the new laws afford creditors with extensive powers including the ability to:
(a) Request information, which the liquidator must provide within five business days so long as it is relevant to the liquidation, does not result in a breach of liquidator duties and is reasonable for the liquidator to provide; and
(b) Engage a liquidator specifically to review the appointed liquidator’s remuneration approved within the preceding 6 months and/or an expense incurred by the appointed liquidator in the preceding 12 months.
Comment
Although the Corporations Act 2001 (Cth) now gives creditors substantial leeway to replace a liquidator, resorting to this step immediately may unduly increase costs. When responding to a dispute with a liquidator, it is best to utilize the new powers in a more structured way: by requesting particular information from the liquidator, considering the appointment of a reviewing liquidator and then discussing the liquidator’s replacement with other creditors.
1. Background
1.1 Last month in Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor [2017] QCA 260 (Featherstone) the Queensland Court of Appeal demonstrated how far the phoenix prohibition in the Corporations Act 2001 (Cth) (Corporations Act) reaches.
1.2 Phoenix activity refers to an insolvent company moving its assets to a new company with the same directorship to avoid paying creditors.
1.3 In summary Featherstone concerned:
(a) A de facto director who used company money to pay a debt owing to the ultimate owner and controller of the company to enable them to purchase an apartment for their personal benefit.
(b) The company was wound up and its assets moved to a phoenix company.
(c) The effect of this was that creditors of the company, such as the Deputy Commissioner of Taxation, were defeated.
1.4 Section 588FE(5) of the Corporations Act prohibits the directors of a company from making transactions for the purpose of defeating creditors. Under section 588FE(1) of the Corporations Act, such transactions are voidable and the assets recoverable by a liquidator.
1.5 Issue: whether this was an uncommercial transaction that was made for defeating creditors or whether it was done in the ordinary course of business for the benefit of the company.
2. The Decision
2.1 The 2-1 decision of the QCA demonstrates a broader and more objective approach to interpreting s 588FE(5).
2.2 Key points in the majority judgments of Morrison JA and Sofronoff P:
(a) The loan repayments were an uncommercial transaction because:
(i) The transactions left the company with very low funds;
(ii) Any benefit the company received in discharge of the liability for rent only came about by preferential payment; and
(iii) The company had never paid tax or GST.
(b) “Purpose” does not require fraudulent intent;
(c) “Undervalue” is only a factor in determining purpose, not the “signal marker of fraud”;
(d) Intention can be inferred from the nature of the transactions and the parties to it; and
(e) The transactions would not have been completed by a reasonable person knowing the company’s financial position and non-compliance with its tax obligations.
3. Comment
3.1 Both liquidators and company directors should be aware of how s 588FE(5) can apply more broadly than previously for clawing back assets upon liquidation. A voidable transaction need not be made dishonestly due to this broad reading. Therefore, more transactions may be determined voidable, leading to a greater pool of assets for creditors.
The arrival of the ‘safe harbour’ reforms aim to protect directors from personal liability for insolvent trading as long as from the outset of suspecting insolvency of the company they have thoroughly documented their attempts at improving the company’s financial state and implemented a well-defined strategy to restructure the company and prevent it from entering into insolvency.
Under the current regime, section 588G of the Corporations Act 2001 (Cth) (Act) holds a director to be in breach of their duty to prevent insolvent trading of the company if:
(i) They were a director of the company when the company incurred the debt(s);
(ii) The company was insolvent when the debt was incurred or became insolvent as a result of incurring that debt; and
(iii) There were reasonable grounds for suspecting the company is or would become insolvent.
The reforms however seek to introduce section 588GA to the Act which intends to facilitate a restructuring of the company outside the formal insolvency process. This is only available to directors who have genuinely undertaken a course of action which is reasonably likely to lead to a better outcome for the company, its employees and its creditors.
WHAT DOES A ‘COURSE OF ACTION’ ENTAIL?
Whether a course action will be classified as reasonable will depend on the circumstances surrounding each case. Generally the directors are required to perform a thorough review of the company’s solvency by garnering relevant advice from “appropriate qualified entities” which have inter alia extensive experience in restructuring, managing stakeholders and assessing a company’s financial position.
In addition to what may be necessary, the directors here are required to take an active role in being informed of the company’s financial position by maintaining adequate books and records whilst concurrently ensuring that they are complying with their directors’ duties including the ability to produce information and books upon request, preventing misconduct of the company’s officers and employees who could adversely affect the company’s ability to pay its outstanding debts and meeting their employee entitlement and tax reporting obligations where both superannuation and tax lodgements are not overdue by more than 3 months.
Directors who are relying on safe harbour will need to provide evidence in any proceedings that may arise in the future to indicate that there were reasonable prospects for their ‘course of action’ to lead to a ‘better outcome’. For this directors are required to document any and all steps they have undertaken during the restructuring of the company including but not limited to:
(i) The formal implementation of the plan;
(ii) Minutes of any meetings which examined the progress of the company’s solvency;
(iii) Assessment of the company’s financial records;
(iv) Reports to stakeholders;
(v) Documents indicating compliance with employee and tax obligations; and
(vi) Engagement of any qualified third parties for advice.
COMMENT
Safe harbour only covers debts which were incurred from the time the first course of action was undertaken up to the date when (a) it is no longer feasible that the directors’ ‘course of action’ will reasonably lead to a ‘better outcome’; or (b) the company is placed into external administration. Once that occurs, the option to rely on safe harbour is no longer available to directors.
For directors to successfully commence safe harbour protection for their company, they must ensure that they are satisfying the following at a minimum:
(i) Informing themselves of the company’s financial position;
(ii) Engaging with ‘qualified’ advisors as necessary;
(iii) Complying with directors’ duties through maintenance of adequate books and records and not knowingly incurring any debts which would remain unpayable;
(iv) Lodging tax in a timely manner;
(v) Providing employees with their entitlements including making superannuation contributions; and
(vi) Documenting the entire plan and strategy for restructuring the company.
The Directors and staff at Chamberlains Law Firm are excited to announce that we have been voted as one of the Top 3 conveyancing law firms in Canberra by the readers of The RiotACT. As conveyancing lawyers with an expertise in real estate law, our team has extensive experience with property conveyancing transactions whether it be related to commercial or residential properties.
Ms Kellie White, our Conveyancing Manager, will closely guide you through this process and keep you informed at every transaction, including liaising with other parties, the Bank and even the government. Our award-winning service along with reasonable fees guarantee that your property’s settlement will be as hassle-free as possible.
Interested in learning more on Property Law?
Click our recent articles below to find out more:
ACT Stamp Duty Concession Update
The Release of Deposit Conundrum
Last week Chamberlains and its clients were targeted by scammers.
A client informed us that he received a suspicious email directing him to deposit moneys into trust in preparation for a property purchase. The email was sophisticated and detailed in nature, and very convincing.
Fortunately, the client contacted us urgently to confirm our request when he noticed that the account details for Chamberlains in the email were different to those he had on record. It appears that our client has been targeted in a phishing scam. The email did not originate from our server or our network, but looked like it did.
Please be assured client files and confidential information have not been compromised. No moneys held by Chamberlains for its clients have been misdirected or otherwise lost.
This incident is not isolated. Yesterday, it was reported that two law firms in Queensland have lost several million dollars after similar email scams resulted in the misdirection of trust money and settlement funds.
You can find more details about the Queensland incidents here: Queensland Law Firms Lose Millions to Hackers
What to do:
In light of the reported incidents, when dealing with Chamberlains we ask that you assist us with the following steps for all deposits and payments:
DO NOT act on any request to deposit funds without speaking to us on (02) 6188 3600.
If you become aware of scam activity, please contact us, report it to ScamWatch and the Australian Federal Police Cybercrime Team.
Thank you for your understanding. Do not hesitate in contacting us on (02) 6188 3600 or by email if you have any questions.
A new bill has been introduced into Federal Parliament which relevantly seeks to reduce the period of automatic discharge from bankruptcy from three years to one.
Reducing the time for discharge is a deregulatory move and correlates with the anti-red tape position of the current government.
KEY CHANGES
A bankrupt will be automatically discharged one year after the filing their statement of affairs;
The legislation will apply retrospectively to bankruptcies on foot which will be discharged one year after the filing of the statement of affairs, subject to any objections made by the trustee;
Bankruptcies extended from five to eight years will remain unchanged;
Bankrupts are required to notify the trustee within 10 business days of any changes to their personal details (this used to be an ‘immediate’ requirement);
The contribution assessment period for income earners is still three years as the contribution assessment remains in force two years after discharge; and
Bankrupts are still required to retain records throughout the three-year contribution period.
PRACTICAL EFFECT
A higher number of voluntary bankruptcies will be sought by those struggling with debt;
Restrictions that prevent bankrupts that run small businesses from retrying are reduced;
Trustees will still be able to extend the period of bankruptcy for misconduct;
Current bankruptcies that are over a year old will be discharged, subject to trustee objections;
Income contributions will continue for the usual three-year period.
COMMENT
Practitioners should be aware of the new limitations on discharged bankrupts, particularly when dealing with income contribution. Individuals, particularly those that run small businesses, should be aware that applying for bankruptcy is being destigmatised and recovering from bankruptcy is made significantly less burdensome by the new proposed law.
The Federal Circuit Court in Weston v McAuley [2017] FCCA 1 (Weston) has recently reaffirmed the application of the decision in Prentice (trustee of the property of Cummins, a Bankrupt) v Cummins (No 5) [2002] FCA 1503 (affectionately known as Cummins Case), that in the absence of proceedings brought under s 79 of the Family Law Act 1979 (Cth) (Family Law Act), the distribution of matrimonial property in bankruptcies will be determined by the application of the general law of property, including equitable principles and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
The Court used equitable and property law principles in each case to interpret sections of the Bankruptcy Act to give the trustee in bankruptcy rights to property where he otherwise would have none.
2. Equitable and Property Law Principles
Where two or more people have contributed purchase money for a property in unequal shares and the property is purchased in joint names, there is a presumption that the property is held by the purchasers in trust for themselves as tenants in common, proportionate to their individual purchase money contributions (resulting trust). However, a demonstrated intention that the property was a gift and was intended to be held jointly, known as a presumption of advancement, may displace the original presumption that the purchasers are tenants in common and they may instead be held to be joint tenants. The existence of a resulting trust may be more easily rebutted by a presumption of advancement where the purchasers were related to each other, for example as spouses or parents and children.
These principles have significant implications in situations where spouses have purchased property jointly but in unequal shares and the spouse with the lesser share becomes bankrupt. In these instances, Courts must turn to the intentions of the parties at the time of purchase to ascertain whether the lesser amount paid by the bankrupt spouse was an attempt to prevent the division of assets amongst creditors. If this is found, a presumption of advancement will rebut the resulting trust, equally dividing the property value amongst spouses seen to be joint tenants and thereby rendering the bankrupt liable to disburse half the value of the property to creditors.
2. The Cummins Case
The Cummins Case concerned a barrister who failed to lodge his tax returns for 45 years, claiming that he had pre-emptively transferred his interest in the matrimonial property (Property) to his wife to protect himself from future claims made by his clients (where there were no current claims at the time of the transfer) under s 121 of the Bankruptcy Act.
Section 121 of the Bankruptcy Act provides that a transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void if the property would probably have become part of the transferor’s estate or been available to creditors had it not been transferred. The trustee must also prove the primary purpose of transferring the property was to prevent or hinder the division of the property amongst creditors. It will be taken that this was the transferor’s purpose if it could have been reasonably inferred at the time of transfer that the transferor was about to become insolvent.
In characterising the transfer of the Property to his wife, Justice Sackville on the first occasion found that the main purpose of the transfer under s 121 of the Bankruptcy Act was to prevent his assets being divisible among his creditors, namely the Commissioner of Taxation. The Court held that the matrimonial property was to be distributed according to the intention at the time the property was purchased. Therefore, the Court looks towards evidence of a bankrupt’s prior knowledge of their impending insolvency at the time of the property transfer. This test has been applied by looking to all surrounding circumstances to reflect the flexibility of equitable principles.
Interestingly, when proceedings are brought under the Family Law Act, the result is often divergent from property law proceedings applying principles of equity as the Family Law Act expands the Court’s discretion to alter the interests in property of a bankrupt and their spouse.
3. Weston
Weston concerned the purchase of property by a wife and husband as tenants in common registered on the title in 95% and 5% respectively before the husband became bankrupt. Unlike Cummins, the primary issue was whether the resulting trust could be rebutted by the presumption of advancement, thereby entitling the trustee to 50% of the proceeds of the sale of the property.
Though primarily concerning a different issue, principles expounded in Cummins were drawn upon to inform the reading of s 52 of the Bankruptcy Act. Although Weston did not concern the operation of s 121 of the Bankruptcy Act, it is relevant to the extent that the Court considered what proportion of the matrimonial home was vested in the trustee. The Court predictably reaffirmed that property will be held according to the intention at the time of purchase.
s 52(1) of the Bankruptcy Act provides that at the hearing of a creditor’s petition, the Court requires proof of the matters stated in the petition (this may be satisfied by the affidavit verifying the petition), service of the petition, and the fact that the debt relied upon is still owing. If satisfied, the Court may make a sequestration order against the estate of the debtor.
In characterising the intention of the parties at the time of purchase the Court considered the interaction of the information listed on the title and the presumption of advancement. This analysis is further informed by principles of equity.
On these bases, the court did not find that the presumption of advancement displaced the resulting trust in Weston, and that the wife was entitled to her 95% share of the proceeds of the property sale. The primary evidence distinguishing Weston from Cummings was that the only reason the bankrupt’s name was on the title was due to bank pressure, additionally explaining the small sum he paid to purchase the property. The bankrupt’s wife gave evidence she purchased the home as security for her future, and would not have included the bankrupt’s name on the title had it not been for bank pressure.
4. Conclusion
Though other considerations of equity will be taken into account to determine a bankrupt’s liability with respect to jointly owned property, it has recently been affirmed that the starting point of the inquiry as described in Cummins is the intention of the bankrupt at the time of purchase. It is incumbent upon spouses and de facto partners to be aware of how their intentions may be demonstrated.
Interested in learning more about Insolvency & Reconstruction?
Click on our recent articles to find out more:
Statutory Demands and Insolvency
Chamberlains’ Response to Proposed Exposure Draft of Bankruptcy Regulations 2021
When it comes to protecting intellectual property, and especially protecting intellectual property by registration most people automatically think about patents (devices, substances, method or processes) and trademarks (identification marks for your business, goods, or services).
But what about designs that you intend to commercially produce?
While artistic or literary work may be protected by the Copyright Act 1968 (Cth), there is no formal registration process for works that are subject to copyright. Further, due to the definition of what is protected by copyright, a design that is intended to be produced commercially may not enjoy the protections under the Copyright Act.
That is where the Design Act 2003 (Cth) applies.
The Design Act provides for registration of designs, and gives the owner of a validly registered design the exclusive right to make, import and trade products incorporating that design.
Registration of a design is unrelated to the function of the product it is to be incorporated in (although, it may affect the function as well), and is only concerned with whether the design’s overall appearance from its shape, configuration, pattern or ornamentation is new and distinctive.
It is important to note, however, that:
As such if you are looking to protect any of your intellectual property, especially any designs you wish to commercially exploit, or which you believe may be covered by both the Copyright and Design Acts, you should seek legal advice.
Interested in learning more about Intellectual Property?
Click our articles below to find out more:
How to file a patent in Australia