Insolvency, Litigation and Dispute Resolution

Breaches of directors’ duties: the High Court’s reach exceeds the limitation period’s grasp

14 February, 2019

In the recent decision of In the matter of Parkway One Pty Limited (in liquidation) [2019] NSWSC 1495 (Parkway), Rees J dismissed an application to terminate the winding up of Parkway One Pty Ltd (in liquidation) (the Company) due to inconclusive evidence as to the solvency of the Company and, having regard to the non-compliance by its director of her statutory duties and the likelihood of the Company not being able to service the current and foreseen indebtedness, her Honour held that it would be contrary to commercial morality to terminate the winding up of the Company and allow the Company to return to the mainstream of commercial life under the control of the same director.

Key facts

Ms Page, the sole shareholder of the Company, made the application to terminate the winding up of the Company pursuant to section 482 of the Corporations Act 2001 (Cth).

A liquidator was appointed to the Company due to its failure to comply with a statutory demand for a judgment debt in respect of unpaid strata levies of $18,000.

Ms Page relied on cash flow projections provided by the Company’s accountant in support of the Company’s solvency, but there was no evidence from the accountant confirming that he prepared the projections and on what basis.

The liquidator had concerns about the Company’s solvency. Of particular concern to the liquidator was the incomplete financial statements and tax returns of the Company (despite requests), the $50,000 liability to the Australian Taxation Office, the fact that the income of the Company appeared insufficient to discharge the debts of the Company, and that the Company could not pay its creditors as and when they fell due.

The Court’s discretion to terminate winding up

As summarised by Black J in In the matter of MWM Sydney Pty Ltd (in liquidation) [2016] NSWSC 688, the following principles as set out by Master Lee QC in Re Warbler Pty Limited (1982) 6 ACLR 526 apply in exercising the Court’s discretion to terminate the winding up of a company, being:

  1. Whether there is a “positive case” for the favourable exercise of the court’s discretion;
  2. Whether all debts have been discharged (considering the nature and extent of the creditors);
  3. What the attitude of creditors, contributories and the liquidator is;
  4. The current trading position and general solvency of the company;
  5. Any non-compliance by the directors with their statutory duties;
  6. What the general background and circumstances are leading to the winding up order; and
  7. Whether the conduct of the company was in any way contrary to “commercial morality” or “the public interest”, considering the nature of the company’s business.

The current and future solvency of the company

It is well established that the most important factor the Court will consider when terminating a winding up application is the solvency of the company.

This will be particularly be the case in circumstances in which the winding up was on the grounds of insolvency, and in an application to terminate the winding up of a company, the applicant must demonstrate that the company is not (or is no longer) insolvent and that it is likely to remain solvent. This includes proof that if new debts are incurred, the directors will operate in a financially sound and responsible way and pay debts as and when they fall due.

Maintaining the company’s solvency is consistent with the directors’ duty to prevent companies from insolvent trading pursuant to section 588G of the Corporations Act 2001 (Cth).

Commercial morality

In determining whether to terminate the winding up of a company, the Court must consider whether it is conducive or detrimental to commercial morality and to the interest of the public at large; In re Telescriptor Syndicate Limited [1903] 2 Ch 174.

In this context, “commercial morality” focuses mostly on the likely impact on future creditors, however, can also extend to instances where there has been serious impropriety and where there has been a history of failure in meeting statutory duties (which would indicate future difficulties).

The Court’s decision in Parkway

Rees J observed and made the following findings:

1. Whether the Company was solvent:

  • The Court will not order a termination of a winding up unless it is satisfied as to the quality of the evidence of the financial position of the company. It is relevant in this context the view taken by the liquidator, who is expected to have expertise on matters involving solvency.
  • As Ms Page produced evidence that was not verified by external accountants or the liquidator, the Court found that this evidence was lacking, and accordingly that Ms Page had not made out a positive case that the Company is, or will continue to be, solvent.

2. Whether it was in the public interest to wind up the Company:

  • The Court considered that:
    • The Company’s long history of non-payment to trade creditors;
    • Ms Page’s indignant (rather than apologetic) attitude to the efforts of such creditors to obtain payment;
    • Ms Page’s non-compliance of statutory duties as director; and
    • The Company’s failure to keep proper books and records in accordance with section 286(1) of the Corporations Act 2001 (Cth)

suggested “that it is not in the public interest for the benefits of incorporation to continue to be available to this company.”

On the basis of the above, her Honour was not satisfied that, if the winding up was terminated, that the company would operate in a financially sound and responsible way, servicing “foreseen indebtedness.”

Key takeaways

The decision re-emphasises the principles the Court will apply when determining whether to exercise its discretion to terminate the winding up of a company, particularly the Court’s vigilance in respect of the public interest and the current and future solvency of the company.

It also raises the importance of complying with the Corporations Act, particularly the statutory duties as a director and maintaining proper books and records of a company.

McCabes has extensive experience in advising on matters arising from the Corporations Act and the winding up process for companies, directors and shareholders. If you would like advice on any of the matters raised in this article, please get in touch with us today.

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Canadian Court elevates thumbs-up emoji to signature status

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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." 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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.

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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. 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