The now superceded Trade Practices Act 1974 (Cth) (TPA) and its relation to Australia’s bankruptcy laws was recently explored in Pattinson v Bellwether Agriculture Pty Ltd (In Liq) [2018] NSWSC 38 (Pattinson).

The case demonstrates the intersection in law between the TPA, the Fair Trading Act 1987 (NSW) (FTA) and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

Background

Pattinson involved misleading and deceptive conduct against the bankrupt for losses arising from a contract with a third party. The second defendant and the third defendant were executive directors of the first defendant company Bellwether Agriculture Pty Ltd (In Liq) (Bellwether).

Bellwether extracted biogas and other resources from manure and other animal waste using Digester technology from the United States. It sought to raise capital for the business and was afforded $1,000,000 and $250,000 investments by the first and third plaintiffs, respectively.

Importantly, the $1,000,000 investment was ultimately provided by a trust with the first plaintiff as beneficiary after the initial loan of the same amount was repaid.

The venture failed and Bellwether went into liquidation in 2013.

The plaintiffs brought the proceedings to recover the losses they suffered from their investments in Bellwether.

The Issue

On the first day of the hearing the second defendant lodged a debtor’s petition to make himself bankrupt.

Because of this, the main issue was whether unliquidated damages awarded by a court were claimable by creditors against a bankrupt estate.

Section 82(2) of the Bankruptcy Act states that they are not, unless the damages arise due to a contract. The Court was to decide how this operates when considering contracts with the trust, which is a third party.

The Decision

Ball J considered the facts of the case to be indistinguishable from those considered by the High Court of Australia in Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234; [2005] HCA 67 (Coventry).

Coventry outlines the requirements of establishing misleading and deceptive conduct in bankruptcy.

The plaintiffs pleaded that the directors of Bellwether made the following representations:

(a) In relation to the sales of the Digesters:

  • The projects were definitely going ahead;
  • Almost all the work necessary to bring the projects on line had been completed;
  • The purchasers were pushing Bellwether to complete the projects; and
  • Construction would be completed in three months.

(b) Government funding for the first project was certain and Bellwether was very hopeful of obtaining government funding for the second project;

(c) The directors of Bellwether would not receive any payments from it until the first three projects were completed and the second and third defendants would not take any money out of Bellwether until after three projects were up and running;

(d) Large institutional investors were keen to buy shares in Bellwether;

(e) The second and third defendants opted not to sell shares to those large institutional investors; and

(f) Bellwether had off-take agreements to sell the products produced from the projects mentioned.

Considering this, Ball J made reference to Section 41 of the FTA, which states:

“For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.” (section 41(1)); and

“The onus of establishing that a person had reasonable grounds for making a representation referred to in subsection (1) is on the person.” (section 41(2)).
Accordingly, the bankrupt second defendant failed to discharge the onus placed on him by s 41(2) and Ball J found the representations made by him to be misleading and deceptive.

Comment
The main lesson is that misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) and related legislation is provable in bankruptcy. A director cannot avoid damages simply by declaring themselves bankrupt.