Insolvency, Litigation and Dispute Resolution

Arbitrate or Adjudicate – do you still get a choice?

10 March, 2015

Prior to March 2017, any right to sue that comprised an asset of a bankrupt’s estate could only be litigated by the trustee of the bankrupt. The inability of a trustee to assign a bankrupt’s cause of action resulted in many such actions not being litigated due to factors such as a lack of resources. This position changed through the insertion into the Bankruptcy Act 1966 (Cth) in Schedule 2 of the Insolvency Practice Schedule (Bankruptcy), which expressly permits a trustee to assign to a third party any right to sue that is held by of a bankrupt estate (see section 100-5).

The Federal Court of Australia (Davies J) recently considered the obverse of the above situation, that is, the power of a trustee of a bankrupt’s estate to acquire on assignment a right to sue held by a third party, in the decision of Rambaldi v Meletsis, in the matter of Karas (Bankrupt) [2018] FCA 791.

Facts

In 2009 Tom Karas (the bankrupt) loaned money to a company of which he was the sole director and shareholder. The bankrupt took a mortgage over a property owned by the company as security for the loan.

In May 2011 the brother-in-law of the bankrupt, Mr Meletis, replaced the bankrupt as sole director and shareholder of the company.

In November 2011 the loan made by the bankrupt was discharged and the company sold the property to another company known as ‘Establishment 5’. The money received from the property sale was allegedly distributed to another company of which Mr Meletis was a director.

In 2013 Establishment 5 went into liquidation and Mr Karas was made bankrupt on 16 October 2015. Mr Rambaldi and Mr Yeo were appointed as trustees for Mr Karas’ estate (the trustees).

After conducting relevant investigations, the trustees formed the view that there was still a substantial sum owed by Establishment 5 to the bankrupt estate in respect of the discharged loan which the mortgage over the property had secured. The trustees also determined that the liquidator of Establishment 5 may have causes of action or claims in relation to the property sale and the payment or transfer of company monies to third parties from the sale proceeds, including for breach of directors’ duties by Mr Meletis (causes of action).

The liquidator advised that he could not investigate the circumstances of the property sale further as he was without funding and that he therefore intended to finalise the liquidation.

In September 2017, the liquidator assigned the causes of actions to the trustees for the sum of $25,000 with the approval of the company’s creditors.

Issues

After the trustees commenced proceedings against the bankrupt, Mr Meletis and others, some of the defendants challenged the validity of the assignment by applying for summary dismissal of the claims. The trustees also sought judicial advice that they had the power to acquire the assigned claims and that they were justified in doing so, as a proper exercise of their discretion in administering the bankrupt estate.

The defendants argued (amongst other things) that the assigned claims are not “property of the bankrupt” and that the assigned claims are not “property” within the meaning of that term as defined in s 5 of the Bankruptcy Act .

Outcome

The Court found that the causes of action comprised after-acquired property of the bankrupt, the trustees had the power to acquire the causes of action and that it was reasonable and appropriate to give the judicial advice that was sought.

Did the trustees have the power to acquire the causes of action from the liquidator?

The Court noted that but for the defendants’ contention that the assigned claims do not form part of the “property of the bankrupt”, it would have little hesitation in holding that the trustees were acting within the scope of their powers under section 134 of the Act in taking an assignment of the causes of action. Although section 134, which sets out a lengthy list of things that the trustee of a bankrupt’s estate may do, does not prescribe a specific power to acquire property, the powers contained in the section “are wide and expressed in general terms” and “are of sufficiently broad compass to include the power to acquire property where the trustee has formed the view that the acquisition is in the best interests of creditors and likely to maximise the return to creditors” (at [18]).

Can causes of actions acquired after the date of bankruptcy become ‘property of the bankrupt’?

Section 5 of the Bankruptcy Act defines the expression ‘property of the bankrupt’, which includes ‘the property divisible among the bankrupt’s creditors’. In turn the latter expression, pursuant to section 116(1), includes (underline added):

all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge.

See also section 58(6) of the Act which defines ‘after-acquired property, in relation to a bankrupt’.

The defendants argued that the assigned claims were not after-acquired property of the bankrupt because the causes of actions were acquired by the trustees, not the bankrupt. The Court gave this argument short thrift, holding that because the assigned claims were acquired by the trustees in their capacity as trustees of the bankrupt’s estate the right to sue on those claims is a chose in action of the bankrupt’s estate.

Are the assigned causes of action ‘property’ as defined in section 5 of the Act?

Section 5 of the Bankruptcy Act widely defines property as “real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property” (underline added)

It is well established that ‘property’ as defined in section 5 of the Act includes rights of action and any recoveries from the litigation.

The defendants argued however that the causes of action were not ‘property’ within the meaning of section 5 because causes of action assigned to the trustees did not ‘arise out of’ and were not an ‘incident’ of any property of the bankrupt.

The Court observed that this argument relied upon a narrow interpretation of the phrase “arising out of” which the legislation did not warrant. Rather, all that the expression requires is a causal connection, which was satisfied in the present case by the trustees using $25,000 of funds from the bankrupt’s estate to pay for the assigned claims.

Conclusion

The above decision confirms the breadth of the powers held by the trustee of a bankrupt’s estate and, specifically, confirms “the power to acquire property where the trustee has formed the view that the acquisition is in the best interests of creditors and likely to maximise the return to creditors”.

It was clear that the trustees’ claim against the bankrupt and the claims acquired by the trustees, derived from alleged wrongdoing to a third party company, all arose “out of the same factual substratum”. It was therefore quite straightforward for the Court to hold that the trustees had properly exercised their discretion to acquire the assigned claims.

published by

Andrew Lacey

Managing Principal

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Litigation and Dispute Resolution

Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract. Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed. Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)." Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter. Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship. Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest. What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan

29 August, 2023

Government

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty. The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes

18 August, 2023