COVID-19, Insolvency

Case note – Comcare v Transpacific Industries Pty Ltd [2015] FCA 500

4 August, 2015

With the rampant spread of COVID-19 worldwide, there are increasing concerns as to the financial impact of the outbreak. With forced business closures a potential reality, it seems inevitable that the Australian economy is on its way to a recession.

It is therefore critical that directors of companies are fully aware of the extent of their duties and understand what they must do to comply.

If you suspect your company is or may be facing impending insolvency, McCabes is here to help you navigate the opportunities available to you to save your company and limit personal liability, particularly through the safe harbour provisions.

Testing times

Directors owe a myriad of duties and obligations to the company arising under the Corporations Act and common law. One of these duties is the statutory duty to prevent insolvent trading, pursuant to s 588G of the Corporations Act.

This duty is enlivened when a company is:

  1. insolvent at the time that a debt is incurred;
  2. the company will become insolvent by incurring the debt contemplated; or
  3. the company will become insolvent by incurring debts, including the contemplated debt.

A director will be in breach of this provision if, at the time that the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent or is likely to become insolvent.

Definition of insolvency

A company will be considered solvent if it can pay all of its debts as and when they become due and payable. If a company cannot meet this test, it will be deemed insolvent.

Common indicators of insolvency include:

  1. suffering continuing losses;
  2. the company’s liquidity ratio falling below 1;
  3. outstanding tax liabilities;
  4. the inability to access additional finance;
  5. outstanding liabilities to suppliers that have extended past the usual trading terms; and
  6. having to enter into special arrangements with creditors.

Importantly, there is also a statutory presumption that a company will be insolvent if it has failed to keep financial records in accordance with the legislative requirements (see s 286 of the Corporations Act 2001 (Cth)).

What happens if I breach my duty to prevent insolvent trading?

The duty to prevent insolvent trading is a civil penalty provision. This means that a director may be fined up to the greater of $1.05 million or three times the value of the benefit derived or detriment avoided for breaching this duty.

The court also has discretion to order that a director pay the company an amount of compensation equal to the amount of loss or damage suffered by the company as a result of the director failing to prevent the company from trading whilst insolvent.

The court may also order that a director be disqualified from managing corporations for a period of time.

Shields at the ready

There are however, a number of defences available to directors who are alleged to have breached their duty to prevent insolvent trading.

A director may have a defence to insolvent trading if:

  • they expected that the company was and would remain solvent if it incurred the debt, and that expectation was based on reasonable grounds;
  • they believed the company to be solvent based on information provided by a competent and reliable person responsible for providing that information to the company;
  • they did not participate in the management of the company at the time the debt was incurred due to illness or some other good reason; or
  • they took all reasonable steps to prevent the company incurring the debt.

Deep Seas and Safe Harbours

In September 2017, safe harbour provisions were introduced into the Corporations Act through the new section 588GA.

Pursuant to this section, a director will not be liable for insolvent trading if, after suspecting that the company may be or become insolvent, they incur debts in connection with a course of action that is reasonably likely to lead to a better outcome for the company.

Put another way, the safe harbour protections will become available to directors if they:

  1. suspect that the company is (or may become) insolvent; and
  2. start developing a course of action that is reasonably likely to lead to a better outcome for the company; and
  3. incur a debt that is either directly or indirectly connected with that course of action.

The threshold of achieving a “better outcome for the company” simply means achieving an outcome that is more beneficial than the immediate appointment of an administrator or liquidator.

Section 588GA acknowledges that it may be necessary to incur debts in the short term to assist the company’s overall financial position in the long term, and effectively allows directors to try to trade the company out of financial difficulty without facing persecution for insolvent trading.

In this way, the provision provides an additional layer of protection for directors while allowing them to remain in control of the company.

Take away

If you find yourself in a position where you must seek the protection of the safe harbour provisions, we recommend that you consider the following steps:

  1. Properly inform yourself of the company’s financial position. Regularly monitor the financial position and take active measures to inform yourself of any changes.
  2. Seek advice from an appropriately qualified professional. Though you cannot only rely upon professional advice, it will demonstrate that you have taken active steps to inform yourself and accurately assess the company’s financial position. To ensure the advice is reliable though, it is critical that the professional is provided with adequate information to make informed conclusions.
  3. Act promptly to invoke the safe harbour provisions. Action should be taken as soon as you begin suspecting that the company is, or may, become insolvent. If you fail to act within a reasonable time period, the delay may preclude you from being entitled to rely on safe harbour provisions.
  4. Keep proper records documenting financial transactions and director decisions. This includes documenting any advice you have received and relied upon, and documenting any steps taken to inform yourself of the company’s financial position. The extent and nature of the record keeping necessary will depend on the size and nature of the company.
  5. Act honestly. A director will not be able to rely on the safe harbour provisions if they have acted dishonestly in failing to prevent the company from incurring debt.
  6. Develop and implement a plan to restructure the company in order to improve its financial position.
  7. Importantly, if you begin to suspect that the actions taken pursuant to the safe harbour are not improving the solvency of the company, act quickly to appoint an administrator or liquidator to limit your risk of personal liability for debts incurred by the company.

Given the large degree of uncertainty plaguing the current economic climate, it is understandable that business owners and directors may feel uneasy.

McCabes has extensive experience in advising directors about their duties and obligations under the law and can work with you to provide tailored strategies to ensure compliance. If you have any questions or concerns regarding your duty to prevent insolvent trading, or your director duties generally, we encourage you to contact McCabes Litigation and Dispute Resolution group today.

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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 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