Can a bankruptcy trustee acquire then sue on causes of action held by a third party?

18 September, 2018

The recent case of Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 serves as a reminder to directors and other non-parties whose conduct materially influences the conduct of a company which is involved in court proceedings, that the Court may order non-parties to reach into their pockets and personally pay costs.

Background facts

On 13 January 2017, Modena Pty Ltd (Modena) and Vanguard 2017 Pty Ltd (Vanguard) entered into two separate agreements in relation to proposed property developments, which included payment of a “commitment fee” from Vanguard to Modena under each agreement, totalling $138,000. Each agreement stated: “We underwrite the agreement for the refund of the upfront fee if this facility does not go unconditional”.

After the agreements were terminated on 14 August 2017, the sole director of Modena, Mr Carr, provided assurances that Modena “will refund the fee as soon as possible but in any instance no later than 29 March 2018”.

Vanguard did not accept this situation. On 27 September 2017, it served on Modena a statutory demand for repayment of the commitment fees. Modena was unsuccessful in its application to set aside the statutory demand and was therefore deemed insolvent. On 17 January 2018, Vanguard commenced proceedings in the Federal Court of Australia to wind up Modena in insolvency.

Modena indicated its intention to oppose the winding up on the basis that it was, contrary to the statutory presumption, in fact solvent. It served on Vanguard an affidavit sworn by a Mr Schimana. He deposed, amongst other matters, that he was a Certified Practising Accountant; that his employer performed accounting services for Mr Carr and entities associated with him; and “Modena is now, and has, at all times since its incorporation been able to pay its debts as and when they fall due”. However, the affidavit failed to annex or exhibit any financial records to evidence Modena’s solvency.

In a second affidavit, Mr Schimana deposed that he had been engaged by Modena to prepare current annual financial statements, and that “[t]hese Financials indicate Modena’s solvency”. The affidavit did not annex or exhibit a single financial record, but indicated that copies of the Financials would be “available for submission at hearing should the honourable court require”.

On 1 June 2018, Vanguard issued a subpoena to Westpac to ascertain the balance of the Modena’s only bank account. Modena unsuccessfully sought to set aside the subpoena on the basis that it was too broad and irrelevant.

At the hearing on 4 July 2018, Modena neither consented to nor opposed the orders which had been sought in the originating process.

Relevant principles 

The Federal Court’s power to award costs in all proceedings before it is contained in section 43 of the Federal Court of Australia Act 1976 (Cth). The presiding judge in this case, the Honourable Thawley J, noted although section 43, does not expressly state that the Court has power to make an order for costs against a non-party, it has been accepted that it does provide such power.

Thawley J also observed that the exercise of the discretion to make an order for a non-party to pay the successful party’s costs has been described as “rare and exceptional”. His Honour continued as follows (at [46]):

“[I]t is obviously not sufficient of itself that the director, being actively involved in the proceedings, caused the company to defend proceedings.  …  However, there may be situations where the director’s conduct is such that a non-party costs order is appropriate.  The question might arise, for example, where the director’s management of the litigation was in breach of a duty to the company or was in some material way improper, or where the director caused the litigation to be conducted in a manner intended to increase irrecoverable costs of the opposing party.”

Non-party costs orders against Mr Carr

In considering whether to make a non-party costs order against Mr Carr personally, Thawley J examined Mr Schimana’s two affidavits and identified the numerous deficiencies and/or discrepancies in them. For example, in his first affidavit, Mr Schimana stated that he was aware that Modena had approximately $300,000 in “cleared funds” available in its Westpac account. However, in fact, as was demonstrated by the bank statements obtained from Westpac under subpoena, there was only $1,203.54 in the account on the date the affidavit was sworn. His Honour also noted that if the evidence of Mr Schimana had been read in the principal proceedings, it could not rationally have been accepted as establishing solvency, absent tender of appropriate financial records.

Thawley J noted that Mr Carr was the sole director of (and shareholder in) Modena, and thus inferred that Mr Schimana’s affidavits were filed on his instructions and that he was aware of the contents of them.

Mr Carr argued that insolvency is one matter which it is always incumbent upon a moving party to establish at a final hearing, with the result that “it cannot be said that there was anything unreasonable or improper in the respondent company agitating solvency or ultimately conceding that matter shortly before hearing”. Thawley J rejected this submission, observing (inter alia) that Vanguard did not need to establish insolvency; Modena was presumed insolvent.

Ultimately, the Court concluded that this was an exceptional case in which it was appropriate to make a non-party costs order. It ordered that Mr Carr pay Modena’s costs on the party and party basis until and including 14 February 2018 and on the indemnity basis from and including 15 February 2018 (the day Mr Schimana’s first affidavit was sworn and filed).

In relation to the exercise of its discretion to make a non-party costs order, the Court was satisfied that:

  • Modena was in fact insolvent from at least the time the proceedings to have it wound up in insolvency were commenced on 17 January 2018;
  • Mr Carr as the sole director of Modena played an active role in the conduct of the litigation;
  • he procured Modena to conduct its defence of the proceedings maintaining solvency as an issue until shortly prior to the hearing, in reliance on evidence which he knew to be inadequate to prove solvency and/or knew to be misleading; and
  • the conduct of the litigation in this way had the consequence of increasing Vanguard’s (probably irrecoverable) costs in engaging with the issue of solvency.

In relation to the exercise of its discretion to order costs on the indemnity basis, the Court found that this was justified because “the proceedings were continued in wilful disregard of known facts and the proceedings were unduly prolonged by making groundless contentions”.

Take home points

  1. Although directors may not actually be a party to court proceedings, the Court does have a broad power to make non-party costs orders against those who actively and unreasonably manage litigation on behalf of the company.
  2. Although it is understandable that a company may wish to vigorously defend winding-up proceedings, there are limits to this and a clear line that cannot be crossed. Directors need to be careful to never cause the company to mislead the opposing party and/or the Court as to the company’s solvency or make groundless contentions, including in affidavits deposed to by other persons.
  3. Non-party costs orders are not necessarily limited to insolvency cases in the Federal Court of Australia, as similar powers are vested in State Courts and may in theory be made in any case to which a company is a party.

Recent Insights

View all
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 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

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
Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.

Published by Justin Pennay
10 August, 2023