By and -

Key decisions

  • Taylor (liquidator), in the matter of Heading Contractors Pty Ltd (in liq) v Heading [2021] FCA 770
  • Australian Competition and Consumer Commission v Employsure Pty Ltd
    [2021] FCAFC 142

BANKRUPTCY

Company director insured under contract providing for director’s liability cover – director became bankrupt and subsequently discharged from bankruptcy – provable debt – effect of discharge

Taylor (liquidator), in the matter of Heading Contractors Pty Ltd (in liq) v Heading [2021] FCA 770 (8 July 2021, Charlesworth J)

Background: Mr Peter Heading was the sole director of the second plaintiff, Heading Contractors Pty Ltd (‘the Company’). The Company went into voluntary liquidation and Mr Heading was declared bankrupt on his own petition.

The liquidator of the Company alleged that Mr Heading contravened s 588G(2) of the Corporations Act 2001 (Cth) (‘CA) by failing to prevent the Company from incurring debts whilst it was insolvent. The liquidator brought the proceedings pursuant to s 588M of the CA against Mr Heading’s estate in bankruptcy (‘the Estate’) seeking to recover an amount equal to the loss or damage incurred from the alleged insolvent trading as a debt due to the Company of approximately $4 million.

By the date the proceedings commenced, Mr Heading had been discharged from bankruptcy by the operation of s 149 Bankruptcy Act 1966 (‘BA’). Prior to his discharge, no liability of Mr Heading to the plaintiffs under s 588M of the CA had been established by a court order, arbitral award or settlement.

As at the date of the alleged contravention, there existed a policy of insurance in which Mr Heading was insured against conduct performed in his capacity as a director or officer of the Company. ‘Extension 2(g)’ of the policy was as follows:

‘Spousal / Legal Representatives Cover

This Policy shall apply in the event the lawful spouse of any Director or Officer is the subject of enforcement proceedings in respect of a judgment against such Director or Officer for a Wrongful Act of that Director or Officer for which he would have received cover under this Policy and at his request.

This Policy shall apply in the event of the death or incompetency or bankruptcy of a Director or Officer to their estate, heirs, legal representatives or assigns, for Loss incurred due to any Wrongful Act of such Director or Officer for which he would have received cover under this Policy.’ [emphasis in original, showing defined terms] (‘Policy’)

The issue determined by the Court by way of separate question was whether, if the contravention alleged against Mr Heading were to be established, a liability pursuant to s 588M(2) of the CA incurred by Mr Heading prior to his discharge from bankruptcy would be a liability to which the Policy would respond in respect of the Estate, notwithstanding his personal discharge from bankruptcy. Determination turned upon consideration of relevant provisions of the BA and construction of the Policy.

Principles of bankruptcy law: There was considerable common ground as to the proper construction of the BA and as to background facts. In particular, it was common ground that any liability of Mr Heading pursuant to s 588M(2) of the CA to the Company was, and remains, a debt provable in the Estate by virtue of s 82 of the BA notwithstanding his discharge from bankruptcy (see Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93).

Accordingly, a liability of a bankrupt incurred prior to the date of bankruptcy is converted into a claim for proof. To the extent that a bankrupt estate is unable to meet all creditors’ claims, the bankrupt is released from the debt upon his or her discharge. The discharge operates to release the former bankrupt but not to release the estate.

Construction of the Insurance Policy: The Court found that, properly construed, Extension 2(g) operates to confer a right of indemnity on the estate, heirs, legal representatives or assigns of a director or officer, where the death, incompetency, or bankruptcy of the director or officer precludes operation of the insuring clause and operates in respect of any damages or costs for which the director or officer would have received cover under the Policy but for his or her death, incompetency or bankruptcy.

The policy applied to the Estate ‘for Loss incurred due to any wrongful act’ of Mr Heading ‘for which he would have received cover’. The words ‘would have received’, in their ordinary meaning, direct attention to the coverage that Mr Heading would have received had the relevant event that triggered the operation of the clause not occurred.

Were it not for Mr Heading’s bankruptcy, neither s 58 nor s 153 of the BA would apply. Accordingly, he would not have been discharged from liability to pay damages for any contravention of s 588G of the CA under s 153 of the BA. Proceedings would have been brought against Mr Heading in his own name and right, and (if a contravention were proven) an award of damages would have been directed against him personally. The insurer would have been liable to pay that award on his behalf. For the purposes of the closing words of Extension 2(g), that is the cover Mr Heading ‘would have received’ under the Policy.

The discharge of Mr Heading from bankruptcy (and his release from liability under s 153) does not change the circumstance that the debt arising from the plaintiffs’ claims remains a provable debt in the administration of the Estate, at least as between the plaintiffs and the insurer in respect of which an award of damages lies against the trustee in bankruptcy.

Conclusion: In answering the separate question to be determined in the affirmative, the Court concluded that, assuming there can be an award of damages against or affecting the Estate under s 588M of the CA arising from the alleged wrongful act, the insurer had an obligation under the Policy to pay the award to the plaintiffs on the Estate’s behalf.

CONSUMER LAW

Misleading or deceptive conduct and making false or misleading representations – ss 18(1), 29(1)(b) and 29(1)(h) Australian Consumer Law

Australian Competition and Consumer Commission v Employsure Pty Ltd [2021] FCAFC 142 (Rares, Murphy and Abraham JJ)

Background: Employsure ran a consultancy business providing advice to business owners about the requirements of workplace relations and work health and safety legislation. Employsure published paid online advertisements through Google, promoting its free employment-related advice service. In addition to any ‘organic’ search results, Employsure advertisements appeared as a ‘paid search result’ in response to specific keyword search terms. To this end, Employsure selected keywords such as such as ‘fair work ombudsman’, ‘fair work Australia’, ‘Australia government fair work’ or ‘Australia fair pay’. Some of those terms appeared in the headline of Employsure’s advertisement, e.g. ‘Fair Work Ombudsman Help – Free 24/7 Employer Advice’ or ‘Fair Work Australia- Free Fair Work Advice- fairworkhelp.com.au’. None of the advertisements mentioned Employsure, notwithstanding that when users followed the links or called the telephone numbers, they were directed to Employsure’s website or representatives. At the time, Employsure was aware that the search terms were used by consumers to locate on-line visits to the websites of the Fair Work Ombudsman and the Fair Work Commission.

The Australian Competition and Consumer Commission (‘ACCC’) claimed, at first instance, that Employsure had represented that it was affiliated or endorsed by a government agency, contrary to s 18 the Australian Consumer Law (‘ACL’). The ACCC also claimed Employsure had made representations that its services were a particular standard or quality and that it had government sponsorship or approval in contravention of s 29(1)(b) and (h) of the ACL.

The primary judge dismissed the ACCC’s claim, finding that none of the advertisements conveyed the representations to their target audience, being business owners and employers searching for employment-related advice on the internet. The primary judge came to this conclusion in circumstances where: the advertisements were identified as such; there were visual and linguistic differences between organic search results for government agencies and paid search results for Employsure; ‘fair work’ has a broad meaning not limited to government agencies; and evidence of small business owners actually being misled was limited. The primary judge did not place significant weight on omission of the word ‘Employsure’ from the advertisements. The ACCC appealed.

The issue on appeal: The central issue on appeal was whether, by publishing the advertisements, Employsure conveyed the representations to the ordinary or reasonable member of the relevant class. The finding, at first instance, that the relevant class was ‘business owners who are employers and who search for employment-related advice on the internet’ was not challenged (at [74]).

The decision: The appeal was allowed.

Per curiam, the Court affirmed the general principles relating to misleading and deceptive conduct which were not in issue between the parties (at [84-98]). The Court also confirmed the alleged representations must be viewed through the prism of an ordinary or reasonable member of the class of business owners (at [130]). However, the Court determined the primary judge erred in attributing to an ordinary member of this class a ‘high a level of shrewdness’, digital literacy, and commercial sophistication as well as the level of attention or scrutiny such a person was likely to give to the advertisements (at [131]). In coming to this conclusion, the Court acknowledged that the class of business owners was necessarily diverse and included owners of small businesses with five or fewer employees operating trades, corner stores, hair salons and cafes. Accordingly, a range of responses to the advertisements may be ‘reasonable’ (at [141]). Adopting the reasoning of the High Court in Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640, at [47], the Court accepted that the attention given to the advertisements by an ordinary and reasonable member of the target audience may be ‘perfunctory’ without being equated with a failure to take reasonable care of their own interests (at [147]). The Court further stated (at [151]): ‘To again use the words of the plurality in TPG HCA (at [52]), the impression conveyed to ordinary or reasonable business owners that the free advice was to be provided by the named government agency, or by some other entity affiliated with that agency, was not “a consequence of selective attention or an unexpected want of sceptical vigilance on their part; rather, it was an unremarkable consequence of [Employsure’s] advertising strategy”.’

In the result, the Court set aside the orders of the primary judge, with costs, and with orders requiring the parties to agree the form of declaratory and injunctive relief and the proceeding be remitted to the primary judge for hearing as to penalty and costs at first instance.


Anthony LoSurdo SC is a barrister, arbitrator and mediator in 12 Wentworth Selborne Chambers, Sydney, Lonsdale Chambers, Melbourne and Outer Temple Chambers, London and Dubai.
Joanne Shepard is a barrister in 12 Wentworth Selborne Chambers, Sydney.