We all scream for ice-cream! ACCC alleges Peters hindered or prevented competition for the supply of ice-cream

7 December, 2020

If a company in liquidation makes a payment to an unsecured creditor during or prior to entering into liquidation, the liquidator may flag that transaction and if necessary, seek a determination from the Court that the payment is an ‘unfair preference’ pursuant to section 588FA of the Corporations Act 2001 (Cth), because that creditor has received an advantage over other creditors. But what happens when, instead of the company in liquidation paying the creditor directly, it instructs or authorises a related third party to pay the debt?

In other words, could a payment from a third party constitute an unfair preference payment within the meaning of section 588FA?

 Taking a closer look at section 588FA

Section 588FA (1) of the Corporations Act 2001 (Cth) (the Act) provides that a transaction is an unfair preference given by the company to a creditor if, and only if:

  1. the company and creditor are parties to the transaction (even if someone else is also a party); and
  2. the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and  the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

If a transaction is found to be an unfair preference, the Court may make orders compelling the creditor to return the funds or property to the company in liquidation, or order the creditor to pay an amount that reflects the benefit that the creditor has received due to the unfair preference.

A creditor may resist an unfair preference claim provided they had come to the transaction in good faith and had no reasonable grounds for suspecting that the company was insolvent (nor would a reasonable person suspect the company was insolvent). This is known as the “good faith” defence.

Dealing with third-party payments

In the recent decision of Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198, the Supreme Court of Victoria, Court of Appeal, had to consider whether a payment made from a company referred to as Rock Developments (third party) to Mad Brothers (unsecured creditor) in satisfaction of an unsecured debt owed to Mad Brothers by Eliana (company in liquidation) was an unfair preference.

That is, could the payment be an unfair preference even though the payment came from a third party, Rock Developments, and not from the company in liquidation?

To further muddy the waters, the sole director of the company in liquidation was also the sole director of the third party company that made the payment, so there was an inference that as the sole director he had ratified or authorised the payment from the third party.

The three key questions the Court considered were as follows:

(1)   Was Eliana a party to the transaction? (s 588FA(1)(a))

The Court was satisfied that the company in liquidation was a party to the transaction on the grounds that there appeared to be an inference that the company in liquidation and the third party that made the payment had an ‘interdependent financial relationship’. For instance, the ledger of the company in liquidation was updated to reflect that the third party had made the payment, which was not contested.

(2)   Was it a payment “from the company”? (s 588FA(1)(b))

The Court was satisfied that the unsecured creditor had received more than it would have obtained if it had to prove its debt in the winding up. The more significant issue for the Court was whether the payment was ‘from the company’ (that is, the company in liquidation) within the language of the section.

In reviewing the authorities, the Court concluded that:

  • A company can be a party to the transaction, by giving a third party a direction to pay a creditor or by authorising such a payment – but this does not mean that the payment was from the company.
  • To be from the company, the payment must come from the company’s own money, meaning money or assets to which the company is entitled.
  • For it to be an unfair preference, the receipt of the funds ‘from the company’ must have the effect of diminishing the assets of the company available to creditors.
  • If the payment does not have the effect of diminishing the assets of the company available to creditors, it is not a payment received ‘from the company’ and is therefore not an unfair preference.

Accordingly, the Court found that the payment from the third party to the creditor could not have been a payment ‘from the company’ as it did not result in a reduction of the assets of the company that were available to creditors.

(3)   Was Rock indebted to Eliana? Could that result in a diminution of assets?

As noted above there must be a reduction or diminution of assets from the company in order for the transaction to fall within the criteria of an unfair preference. In these proceedings, it was originally held that it had not been shown that Rock Developments (the third party) was indebted to Eliana (the company in liquidation). If indebtedness had been shown, this would have meant:

‘that the payment made by Rock reduced its debt to Eliana and gave Mad Brothers the benefit of moneys to which Eliana was entitled. The payment would therefore have reduced the value of the asset”, that asset being a debt payable to Eliana which a liquidator would ordinarily be able to recover, and this would therefore amount to a payment from Eliana.

In the appeal, the Court concluded that there was still insufficient evidence to support a finding that the third party did in fact owe a debt to the company in liquidation, and accordingly, there was no diminution of the assets of the company in liquidation.

This then begs the question why would Rock Developments pay a debt for which it was not liable? This may very well raise questions as to whether its director was acting in the bests interests of Rock Developments when causing it to make the payment and it may amount to a breach of directors’ duties.

Key takeaways

This decision clarifies the position in relation to payments made by third parties and that such payments will not always necessarily amount to an unfair preference. This was held despite the fact that the company in liquidation authorised and ratified the payment by the third party to the unsecured creditor, and that both the third party and the company in liquidation were controlled by the same person.

That is, for a payment to be an unfair preference it must come ‘from the company’ and be accompanied by a corresponding diminution of the company’s assets that are available to creditors.

The unfair preference provisions are intended to ensure that the assets of a company in liquidation are not unfairly applied so as to give an advantage to some creditors – so this decision could potentially create a loophole for insolvent companies that may be considering paying one or more creditors ahead of others, so long as the payment is not “from the company”.

It will be interesting to see how other states and territories approach this Victorian decision and whether a similar approach will be adopted for the treatment of third party payments- so definitely watch this space.

McCabes has extensive experience in dealing with insolvency matters and can advise companies, creditors and third parties on unfair preference transactions and insolvency matters generally. Please do not hesitate to contact us today to discuss your situation.

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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