Liquidators and the TGA – legislative and practical issues

07 December 2016

William Clement and Ian Currie

Liquidators can face significant issues when appointed over companies that operate under the licencing regime of the Therapeutic Goods Administration (TGA).

The TGA is a Commonwealth Government agency administered by the Department of Health. It’s responsible for regulating the supply, import, export, manufacturing and advertising of therapeutic goods – which can range from biological products (like stem cells and cord blood) to medical devices (such as blood pressure monitors and MRI scanners).[1] It also issues licences to companies that handle therapeutic goods.

The TGA operates in accordance with the Therapeutic Goods Act 1989 (Cth) (the Act) and the accompanying Therapeutic Goods Regulations 1990 (Cth) (the Regulations). The Act provides for controls relating to the quality, safety, efficacy and availability of therapeutic goods produced or used with Australia.[2]

Legislative issues for liquidators

The main concern for external administrators appointed over companies that deal in therapeutic goods is the potential exposure of personal liability.

Under the Regulations, the liquidator of a company holding a licence under the Act is deemed to be the holder of that licence.[3] The same is true for trustees in bankruptcy of a bankrupt licence holder.[4] The liquidator or trustee is also required to notify the TGA of their appointment within three months.[5]

Liquidators are always concerned about criminal or civil liabilities that may arise for misconduct that may have occurred before their appointment, or of which they are unaware. As with most appointments, liquidators generally have little or no knowledge of an insolvent company’s previous practices.

This is particularly true in highly specialised industries (such as therapeutic goods), where a liquidator relies on directors’ and employees’ cooperation after appointment. Unfortunately, however, the Act provides for serious criminal and civil penalties against licence holders for acts or omissions that breach conditions of the licence.[6]

Liquidators should, therefore, exercise extreme caution when deciding whether to accept an appointment, to continue trading or to discuss the matter with key directors or employees. In fact, they should always consult with their insurance broker to ensure they’re covered by an existing or new policy.

Practical issues – the case of StemTech

A liquidator’s issues don’t stop, however, just by ceasing to trade. They’re still responsible for an insolvent company – one that’s probably short of cash and unable to fund the short-term liabilities (such as rent, wages and supplier payments) that preserve the products covered by the TGA licence.

In a recent matter, BRI Ferrier Brisbane was appointed liquidator of StemTech Pty Ltd (StemTech) which harvested and stored cord blood from mothers after giving birth. The cord blood was processed and frozen by StemTech using liquid nitrogen (with any change in storage temperature potentially causing the blood to spoil).

Upon our appointment, StemTech had arrears in rent, electricity, liquid nitrogen, blood storage containers, couriers and other suppliers required for products or services to preserve and protect the integrity of the company’s biological products. It also owed payments to key employees who were told they were out of a job and may have to wait months to receive their entitlements from the Federal Government.

Cooperation from these parties was even less likely once the liquidator explained there was no cash available until assets were sold and/or debtors collected (and the debtors may have refused to pay until guaranteed the integrity of their biological products).

Situations like these are not unusual to liquidators and are the reason the Corporations Act 2001 (Cth) includes provisions such as section 545 (which ensures a liquidator is not liable for expenses unless property is available to meet those costs) and section 568 (which allows a liquidator to disclaim property).

The bad news is that it’s not clear how these provisions interact with those of the Therapeutic Goods Act. Common sense suggests that, if a liquidator with no funds is unable to reach a suitable agreement for the sale or transfer of a company’s biological and therapeutic goods, he or she would be justified in disclaiming and surrendering the assets to the appropriate authorities.

In StemTech’s case, while this approach may be justifiable, the therapeutic goods were stored by parents in the hope that the stem cells contained within the cord blood might be used to treat current or future diseases that inflict them or their children.

Public outcry would undoubtedly follow if a liquidator was identified as the person who allowed biological products to spoil by not personally funding essential preservation costs. Such controversy would bring adverse attention to the liquidator’s practice and would, in turn, potentially trigger legal action by the TGA and by parents storing their child’s cord blood.

The TGA has no fact sheets or guidance for liquidators in such situations. It’s therefore prudent for liquidators to seek directions from the court before making decisions that affect the life of the biological products.

Sale and transfer issues

Even when a liquidator can negotiate deals with relevant parties and arrange a sale of the company’s assets and/or the takeover of its business, their problems don’t always immediately cease.

It’s difficult to escape exposure to liability from pre- and post-liquidation practices. A liquidator is therefore well advised to write exhaustive ‘exclusion of liability’ clauses into sale agreements, with respect to the integrity of the biological products (even though such products may not be sold, as the company would have no title to them).

Also, if a business purchaser requires the removal and transport of storage facilities and biological products, the liquidator should seek to transfer the liability for related problems to the purchaser, and possible indemnification for losses that arise.

This transfer of cord blood products may require specialised equipment and be time-consuming. It should, therefore, be factored into sale agreements.

In addition, a liquidator should keep the TGA apprised of each step in writing.

In the matter of StemTech, we negotiated the sale of relevant assets to a competitor who was required to assume liability for holding costs. It was also required to accept responsibility, with the TGA’s approval, for the specialised transport of assets housing the cord blood products to their interstate premises.

In negotiating the sale, the cord blood of over 2,000 children was preserved, adverse publicity to the therapeutic goods industry was averted, and potential further liabilities to StemTech and the liquidator were avoided.

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[1] Therapeutic Goods Act 1989 (Cth) s 3 (definition of ‘therapeutic goods’).

[2] Ibid s 4(1).

[3] Therapeutic Goods Regulations 1990 (Cth) s 22(3)(a).

[4] Ibid s 22(2)(a).

[5] Ibid ss 22(2)(b), 22(3)(b).

[6] See, eg, Therapeutic Goods Act 1989 (Cth) ss 35B, 35C.