Penalties that survive bankruptcy and customers out of pocket millions
Gidget Retro Teardrop Camper was initially an Aussie success story of a chippy’s hobby of building custom teardrop campers turning into a manufacturing business in Brisbane, Queensland employing over 20 staff.
Its products gained popularity quickly after its Instagram-worthy products went viral on social media, due to the appeal of the 1970s retro theme and compact features.
The problem they faced was that they had become so popular so fast, delivery turnaround times were beginning to push out to over a year. At its peak the company was manufacturing approximately two to three campers per week and since its inception had built around 115 in total.
At the time of our appointment 79 customers had ordered campers and paid deposits totalling $1.8million averaging around $30,000 per customer. Many of these customers had been waiting for their campers for over a year. In total there were liabilities of $5.7million and not enough funds in the bank account to pay the wages that were due.
Our investigations revealed the company’s cash flow was meagre for a significant period of trade forcing it to obtain cash in any way possible. The company enabled ‘queue jumping’ by requesting extra payments from customers “to get their camper earlier” while selling some campers for cash to new customers instead of the existing customers—who had already paid and were still waiting. The company then sourced a US investor who provided unsecured funds of nearly $2million. Our review showed that each time the US investor provided funds, within weeks, they were spent on operating costs.
Before the directors appointed Worrells as voluntary administrators, the Queensland Office of Fair Trading (OFT) had received multiple customer complaints regarding the company’s failure to supply of the campers within an acceptable time. This saw the OFT commence actions against the company and the director for several breaches of the Australian Consumer Law.
Through the administration process we assisted the OFT with their enquiries, and we were later called to the court as an expert witness to provide evidence in respect of the company’s affairs. Both the company and the director were found guilty of breaching Australian Consumer Law by receiving payment for campers but failing to supply them within a reasonable time.
During sentencing the Magistrate said, “the director did not show a good sense of judgement and had given unrealistic hopes to his customers.”
At this time, the company was now in liquidation, and was ordered to pay compensation totalling $1.1 million to 56 customers and also pay a penalty of $100,000 for the contraventions. What makes this interesting is that the order has no practical effect due to the company being in liquidation, as section 553B of the Corporations Act 2001 states that penalties and fines are generally not provable in insolvent company administrations. This means that the court imposed fine does not rank as debt and be eligible for a dividend in the liquidation.
After the company was fined the director declared himself bankrupt, and the court fined him personally $11,000 for contraventions of Australian Consumer Law and ordered him to pay a further $20,000 compensation to one customer. Despite the bankruptcy, the director is still liable to pay those monies pursuant to section 82 of the Bankruptcy Act 1966, which is similar to section 553B of the Corporations Act mentioned above (the only difference being a bankrupt continues to live past bankruptcy, whereas a company effectively dies in liquidation).
This means the bankrupt director must pay those court-imposed debts. The policy behind these laws is that creditors should not have to suffer a reduced dividend (if any) due to a company’s or individual’s illegal actions. And as outlined in the Australian Law Reform Commission Journal:
A bankrupt ‘survives’ bankruptcy to live on, and thus a further reason for the policy in bankruptcy is that a penalty is seen as a matter of personal responsibility that the bankrupt should retain for the sake of society’s need for retribution, compensation and deterrence, as with any criminal conduct.1
During sentencing the Magistrate noted the company had ignored customers’ complaints until the OFT became involved and said the outcome of the investigations must serve as a warning to other businesses: follow through and deliver goods and services as promised.
- CoseNZa, Isabella --- "The Impact of Insolvency on the Recovery of Penalties"  ALRCRefJl 26; (2002) 81 Australian Law Reform Commission Reform Journal 63