New Age Assets – New tricks for Liquidators

You have just been appointed as liquidator of Reptile Games Pty Ltd (“Reptile”). What should you do? A review of Section 477¹⁾ the Corporations Act reveals that you have ample powers to carry out your task of realising the assets of the company in accordance with the Corporations Act 2001 (Cth) (“the Act”).

However, what assets does the company have and how do you find them? The director tells you that the company sold a software game called “green frog splat” which was selling well with sales of $30,000 per week but that sales were insufficient to meet its ongoing “cash burn” rate and accumulated expenses. Apart from that the director appears to be of little assistance.

In such circumstances a liquidator, as soon as possible after his or her appointment, in addition to all the things which he or she ordinarily does upon appointment, should seek to obtain all copies of source code for the software which can be found. Normally a software company such as Reptile will keep copies both on site and offsite. Copies may be found on laptops, desktops, and server computers, tapes and sometimes with an Escrow Agent²⁾. Backup tapes are essential, as they, apart from containing the source code asset, will provide a historical record of the development of the software in the event of dispute. Further, backup tapes will most likely be found off site as it is a prudent data storage practice to store such tapes at the director’s home or in safe deposit boxes in the event of fire or other disaster.

If the software was not located at the premises and the director was not of further assistance in locating the source code then possible options available to the liquidator include seeking relief pursuant to:

• Corporations Act 2001 (Cth)(“the Act”);
• Copyright Act 1968 (Cth) (“the Copyright Act”);
• A preliminary discovery application;
• Norwich Pharmacal type orders.
• Trade Practices Act 1974 (Cth); and
• Breach of the director’s fiduciary duties to the company

Relief pursuant to the Act includes the use of:

• Section 477(3)³⁾ (Power to review books);
• Section 483⁴⁾ (Delivery of property to liquidator);
• Section 486B⁵⁾ (Warrant to arrest person who is absconding, or who has dealt with property or books, in order to avoid obligations in connection with winding up);
• Section 487⁶⁾ (Power to arrest absconding contributory);
• Section 500(3)⁷⁾ (Issuing a warrant for the seizure of the relevant tapes/director);
• Section 530A⁸⁾ (Officers to help liquidator);
• Section 530B⁹⁾ (Liquidator’s rights to company’s books);
• Section 530C¹⁰⁾ Warrant to search for, and seize, company’s property or books;
• Section 596A¹¹⁾ (Examination); and
• Section 590¹²⁾ (various offences)

Section 438B¹³⁾ (Directors to help administrator) and 438C¹⁴⁾ Administrator’s rights to company’s books may also assist an administrator.

Further provisions of relevance include sections 180 to 185 of the Act which require officers of the company to act with a degree of due care and diligence (s180), good faith (s181), not to abuse their position (s182), not to gain advantage for themselves by the use of information (s183) and criminal reckless or dishonest failure to use good faith and act for a proper purpose.

Relief pursuant to these provisions is based on the definition of Section 9 of the Act which provides that “books” includes: (a) a register; and (b) any other record of information; and (c) financial reports or financial records, however compiled, recorded or stored; and (d) a document and the Evidence Act 1995 (Cth) which provides that ”document” means any record of information, and includes (a) anything on which there is writing; or (b) anything on which there are marks, figures, symbols or perforations having a meaning for persons qualified to interpret them; or (c) anything from which sounds, images or writings can be reproduced with or without the aid of anything else; or (d) a map, plan, drawing or photograph.

In our view this includes source code, however, if this is wrong then some of the provisions referred to above also include property which is defined in the Act to mean any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action. The rights granted pursuant to the Copyright Act are choses in action.

Let’s say that as a result of those enquiries a former employee advises the liquidator that a new company, owned by the director’s wife has been established called SnakeSoft Pty Ltd which is selling a game called “green frog smash”

Amongst the relief set out above the liquidator may now wish to consider relief pursuant to the Copyright Act for copyright infringement. Such a claim belongs to the copyright owner as determined by Section 35¹⁵⁾ and Section 196(3)¹⁶⁾ of the Copyright Act.

To be successful in such a claim the company needs to establish that the software was either written by Reptile’s employees within the scope of their employment or was assigned to Reptile by virtue of Section 196(3)¹⁷⁾ of the Copyright Act. A recent decision in relation to whether or not an employee wrote software within the scope of his or her employment is Redrock Holdings Pty Ltd v Hinkley & ors¹⁸⁾. In that case employment records which showed a fixed salary from which group tax was deducted, an Australian Taxation Office Employee Declaration, sick leave and long service leave were all considered by His Honour Justice Harper relevant in determining that question.

The next step in an infringement action is set out in Section 36¹⁹⁾ in that there must be substantial reproduction of the source code. Until the source code is obtained such a suit may be premature and therefore a preliminary discovery action such as that in A2B Telecommunications Pty Ltd v Hinkley & Ors²⁰⁾ may be necessary to obtain copies of the source code to ensure that substantial reproduction has occurred. If the software has been rewritten then no infringement may have occurred (See for instance Data Access Corporation v Powerflex Services Pty Ltd²¹⁾ in which case the High Court found that a computer program written which provided similar functionality to another program was not a substantial reproduction). Alternatively, proceedings could be commenced and Anton pillar and Mareva²²⁾ relief simultaneously sought to order delivery up and a search of the defendant’s premises as well as orders preventing disposal of assets prior to trial. Further, Norwich Pharmacal orders could sought used to obtain the identify the source of the source code leak from the company by way of specific Court order for the defendant to identify same as part of the discovery process.

Also relevant to the current administration is whether or not the company registered any trade marks. A search of the trade mark register in the company and the director’s name will reveal the relevant details. This search can be conducted free of charge at www.ipaustralia.gov.au. If a trade mark is discovered by the liquidator in the company name he or she may wish to bring an action against infringers so as to preserve the assert for the creditors of the company. Let say the liquidator found a trade mark called “Green Frog” in relation to class 9 software. It would appear that the liquidator has

1. found another asset of the company to sell and
2. could institute proceedings pursuant to the trade mark against SnakeSoft for its use or the similar or deceptively similar mark “Green Frog smash.”

Ownership in this case is proved by production of the certification of registration to the Court. Of relevance to such a suit are the comments of His Honour Justice Finkelstein in the case of Malibu Boats West Inc v Catanese²³⁾ in which His Honour found that notwithstanding that a company in liquidation had ceased to carry on business, sold all its tools and realised all the possible assets of the company, the company had not abandoned its rights to use a trade mark. Of critical importance was that the Liquidator was not aware of the trade mark and therefore could not surrender the mark.

Also relevant to this line of investigation is for the liquidator to locate all domain name used by the company. These domain names can be located by searching the company documentation and websites and the site www.ina.com.au for .com.au marks and www.netsol.com for .com, .org and .net marks. If a mark can be located then in most cases appropriate administrative steps can be taken to secure control of these domain names.

The liquidator may also wish to seek relief pursuant to section 52²⁴⁾ of the Trade Practices Act (1974) Cth which provides that a company shall not engage in conduct which is misleading and deceptive or likely to mislead and deceive so as to preserve the asset for the potential purchaser of the company’s assets.

A search of patent register at www.ipaustralia.gov.au could also be profitable and may reveal further assets of the company. For instance in this case a new patent could be found which is described as method of spliced polygon’s interactive display of squashed frogs. The patent records the company as owner. Accordingly, the liquidator has again (a) found another asset of the company to sell and (b) could institute infringement proceedings pursuant to the Patent Act 1990 (Cth) against SnakeSoft for its exploitation of the patent (if any). Patent litigation may well be beyond the budget of the liquidator, however, the addition of the patent to the saleable asset will add significantly to the funds available to creditors as normally, a patent will substantially increase the value of software such as “Green Frog Splat”.

There are two remaining questions which need to be considered in relation to the liquidator’s sale of the assets that presumably he or she has been able to locate (namely the source code for the computer game “Green Frog Splat”, the trade mark “Green Frog”, the domain names www.greenfrog.com.au and www.greenfrog.com and the patent). (“the Assets”) Those questions are:

1. Is the liquidator free from third party suit in relation to the use and sale of the Assets
2. What warranties are sold with the sale of the assets?

The answer to first question is no. The case of Devefi Pty Ltd v. Mateffy Perl Nagy Pty Ltd²⁵⁾ is a good example of a successful third party claim. In that case the Full Federal Court refused to set aside the decision of His Honour Justice Beaumont who found that Mateffy, a firm of consulting engineers, was the owner of the copyright, pursuant to the Copyright Act in 27 artistic works ( “the Drawings” ) being plans and drawings prepared for use in the construction of a building erected upon a commercial development site at 346 Pacific Highway, Lindfield, a suburb of Sydney ( “the Site” ) and that the builder which had purchased the Site had infringed that copyright in the Drawings by building the buildings at the Site. Of particular relevance in the Court’s decision was that the Agreement between Mateffy and the former owner of the site (which was now in liquidation) contained the following provisions:

Mateffy was unpaid and in such circumstances did not consent to the transfer to the new owner of the licence. Accordingly the new owner had no right to use the plans nor did it obtain good title from the company in liquidation. According, liquidators need to express extreme care in such circumstances and not offer any warranty with respect to such assets.

Further section 36 of the Copyright Act provides that a party who authorises such an infringement also infringes and this would attract to liquidators’ in their personal capacity. Similar provisions apply for trade marks, patents and trade practices actions.

These claims also frequently arise with respect to computer programs and graphic works which the directors seek retain once the company has gone into liquidation.

Another source of concern for liquidators are the non-excludable warranties provided pursuant to, amongst others, Section 68²⁶⁾, 68A²⁷⁾, 69²⁸⁾, 71²⁹⁾, and 74³⁰⁾ of the Trade Practices Act 1974 (Cth). It is clear that these warranties apply to all transactions worth less than $40,000.00³¹⁾. Accordingly, liquidators need to ensure that the company’s other assets are not put at risk by purporting to sell assets which do not comply with the non-excludable warranties. Further a failure to acknowledge these remedies may amount to a representation attracting the provisions of Section 52³²⁾ or Section 75B³³⁾ of the Trade Practices Act 1974 (Cth) against the liquidator in a personal capacity.

The increasing commercial importance of new age assets in commercial life ensures that these issues will need to considered by every liquidator at some stage in the near future.

STEVE WHITE
WHITE SW COMPUTER LAW
OCTOBER 2002

www.computerlaw.com.au © White SW Computer Law 2002 This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.