Key Things To Know About Business Sales Contracts and Sellers Warranties
Business sales contracts usually contain warranties by a Seller on a wide range of matters concerning the business sold, including as clear title to all of the assets sold and to the truth and accuracy of financial records. It is frequently the case that buyers and sellers will negotiate on the terms of such warranties. A buyer will want all encompassing broad warranties, while a seller will want to confine and narrow the warranty terms to matters that they absolutely know to be true and correct.
Careful drafting of business contracts reduces risk
Careful consideration must be given to the drafting of a sale of business agreement. For vendors in particular, there are a number of contractual terms and conditions by which potential liability can be reduced, (but not fully eliminated) including:
• Avoiding representations about the future performance of the business;
• Limiting warranties to matters that the vendor knows to be true and correct and can control;
• Capping any amount that can be claimed as damages;
• Providing a minimum threshold of damages before a warranty claim can proceed;
• Impose responsibility on the buyer to do their own feasibility on future performance;
• If there is a due diligence period, the buyer should confirm full satisfaction with their enquiries on giving notice to proceed.
For a buyer, any clauses which try to restrict or reduce the Seller’s liability are undesirable. Care should be taken to ensure that there will be appropriate recourse against the vendor for undisclosed issues arising post-completion.
A buyer has a number of remedies available to them if they subsequently find that the warranties are breached, including an action for breach of warranty and action under the Australian Consumer Law (ACL).
Usually, an action for damages will rely on both causes of action, and the making of misleading and deceptive representations which is prohibited by s18 of the Australian Consumer Law (ACL), cannot be excluded by contract. Vendors should be aware that s4(2) of the ACL deems a representation about any future matter to be misleading, where there were no reasonable grounds for making the representation.
Sellers should also be aware that failing to disclose any significant facts or information may well be in itself misleading and deceptive conduct, even in a due diligence process where the buyer will conduct its own investigations. Silence on any material issue can give rise to a liability in damages, or allow a rescission of the contract.
A recent example of these issues was in the decision of Evolution Traffic Control v Skerratt
 NSWSC 49 (ETC).
The key facts of that case were:
• The buyer entered into a share purchase agreement for business for $10 million.
• The price was based on a multiple of 5 times the EBIT of the business.
• The seller provided future financial forecasts upon which the buyer relied in
determining the price paid.
• In calculating the EBIT, reliance was placed by the purchaser on financial forecasts
provided by the vendors.
• The financial forecasts relied upon a specific government funding program, which was
provided based upon the achievement of conditions which were in fact, unachievable
in the future.
• The sellers did not disclose that specific condition during negotiations.
On discovery of the conditions of funding, after completion, the purchaser issued proceedings
to recover the difference between the purchase price and the actual value of the business at
the time of the sale, and pleaded a case based on:
1. misleading and deceptive conduct under the ACL, and
2. for breach of the warranties.
The share purchase agreement contained two specific broad warranties:
(i) the accuracy and completeness of all information disclosed in due diligence
materials during the course of negotiations leading up to the sale; and
(ii) that all information that would be material for disclosure to a prudent purchaser had
The vendors failed to show that they had a reasonable basis for making representations about the business’ future financial performance. The Court ordered damages of around $4 million representing the loss suffered on a re-sale of the business for $6 million.
The key facts of the ETC case are not unusual in the sale and purchase of businesses, and illustrates the risk of a seller making representations about the business sold based on inaccurate and incomplete information.
Selling a business can be a rewarding and profitable experience, and the reward for many years of hard work, capital and effort. Don’t risk losing that with a poorly drafted or inappropriate contract.
Consult an experienced and knowledgeable lawyer on the terms and conditions of a contract before signing. It can make a huge difference to the outcome.
For further information and assistance on any matters relating to the sale and purchase of a business, call us. Our knowledge and experience will help you make good decisions.
A break-down of the new temporary parent visa- Australia
The Department of Home Affairs Australia has just announced that the highly anticipated temporary parent visa will start accepting children’s sponsorship applications from 17 April 2019.
Here is what you need to know about parent visa:
Who qualifies for the parent visa?
This is a visa for parents of Australian citizens, permanent residents or eligible New Zealand citizens, to live in Australia temporarily. Parents who are waiting for the grant of a permanent parent visa can also apply for this temporary visa, so that they can live in Australia during the lengthy permanent parent visa processing queues.
Unlike previous parent visas, the parent does not need to meet the ‘balance of family test’, which means they can be eligible even if only one of their children lives in Australia.
How long will the visa last?
Parents can apply for either a three-year visa or a five-year visa. Parents will usually not be allowed to work in Australia, and they cannot receive any social security benefits while in Australia.
Parents can apply for a further stay at the end of their visa, but must go outside Australia for 90 days to reapply. A parent can only be granted a maximum of 10 years on this visa. This visa is not a pathway to permanent residency.
Am I eligible to be a Sponsor?
To be able to sponsor a parent, you must be an Australian citizen, permanent resident or eligible New Zealand citizen who is at least 18 years old. You must have been residing in Australia for the last 4 years, and meet a minimum household income threshold.
Children can only sponsor up to two parents in total.
As a sponsor, you are expected to provide financial support to your parent, including accommodation when they arrive in Australia. You also need to have good character and be able to pay any outstanding public health debts that your parent might incur in Australia.
The sponsorship will cost $420, and must be processed and approved before your parent can lodge their visa application.
What are the requirements for the parent visa applicant?
To be able to lodge a visa application, you must meet the following criteria:
• You must be sponsored by your child (biological child, step-child or adoptive child), who is an
Australian citizen, permanent resident or eligible New Zealand citizen
• Your child’s sponsorship must have already been approved
• You must be able to provide evidence of financial capacity
• You must purchase private health insurance for your time in Australia
• You must meet health, character and national security visa requirements
The Visa Application Charges will be:
• $5,000 for the three-year visa; or
• $10,000 for the five-year visa
If you are interested in applying for this visa, or if you are interested in sponsoring your parents, Rostron Carlyle Rojas Lawyers will be happy to assist you.
Anna Gunning-Stevenson, Rostron Carlyle Rojas Lawyers
Contact us for a consultation today
Peter Kuek-Kong Lee, Special Counsel and Registered Migration Agent MARN 0427478 firstname.lastname@example.org
Anna Gunning-Stevenson, Associate and Registered Migration Agent MARN 1797244 email@example.com
(07) 3009 8444
The Supreme Court of Queensland answered this question in the authority of Coles v Dormer & Ors  QSC 224. There, the defendants were held to have substantially copied plans used to construct a house that they were unsuccessful in purchasing. The plaintiff, being the owner of the house, acquired the copyright in the plans, and was successful in obtaining an order that the defendants’ house be modified and that they pay him $70,000 in damages.
Should you wish to speak to one of our experienced lawyers about an issue you are facing pertaining to copyright, please contact our office on (07) 3009 8444.
Is reproducing building plans an infringement of copyright?
The Supreme Court of Queensland answered this question in the authority of Coles v Dormer & Ors  QSC 224. There, the first and second defendants were builders who had been retained by a couple to construct a house from plans which had been specifically drafted by a building designer (the Plans). The couple later sold their architecturally unique home to the plaintiff. The third defendants were a couple who had sought to purchase the home but had been unsuccessful in their bid. Undeterred, they paid the same builders to construct a near identical house for them in the same estate in Port Douglas. Having heard rumours of the third defendants’ plans, the plaintiff acquired the copyright in the Plans from the building designer by way of an assignment.
Following on from acquiring the copyright, the plaintiff put the builders on notice that they held copyright in the Plans and that the construction of the identical house should be stopped.
It is important to note at this juncture that pursuant to section 202 of the Copyright Act 1968 (Cth) (the Act), a person who threatens another with an action in respect of an infringement of copyright may have an action brought against them by the other party to recover any damages sustained as a result of the threat, unless they can satisfy the court that they have an action in copyright. Accordingly, if you think you may have an action in copyright, contact our team of commercial litigators to determine how best to place the other party on notice of your rights.
Despite being placed on notice, the builders continued with the construction of the house, and the plaintiff commenced proceedings. In defending the proceedings, the defendants pleaded that the construction of the house did not reproduce or substantially reproduce the Plans.
Section 32 of the Act provides that copyright subsists in original artistic works by an author who is either an Australian citizen or resident. Building plans and houses fall within the definition of artistic works contained in the Act, making the act of reproducing plans without the consent of the copyright holder an infringement of the Act.
At trial, expert witnesses for each side came to agreement that the plans used by the defendants were in fact a substantial copy of the Plans.
Having regard to the defendants knowingly continuing with the construction of the house, Justice Henry ordered that the defendants remove the dormer roofs, arched and circular windows and the stone edge trim corners of the house. On the return date, Justice Henry awarded $70,000 in damages for the plaintiff’s loss of enjoyment of a locally unique house and a potential loss of the house’s value.
Should you wish to speak to one of our experienced lawyers about an issue you are facing pertaining to copyright, please contact our office on (07) 3009 8444.
The recent authority of Trenfield & Ors v HAG Import Corporation (Australia) Pty Ltd  QDC 107 called numerous points in relation to unfair preference claims into contention including whether:
- payments made in relation to an unperfected security interest can still be considered to be payments in relation to a secured debt;
- payments received can be applied to unsecured portions of debt first, making them recoverable as an unfair preference; and
- the value of the security can be determined in reference to the retail price of goods, or whether it will be determined in reference to the price actually paid to the creditor.
The plaintiff liquidators sought to recover payments made by Lineville Pty Ltd (the Company) to HAG Import Corporation (Australia) Pty Ltd (the Creditor) for the supply of goods pursuant to a credit agreement. The goods were supplied on terms which included a retention of title clause, and a security interest over the goods. Of note, the total debt exceeded the value of the security.
Was the security interest perfected?
In determining whether the Creditor was in fact a secured creditor, the Court considered whether the security interest had indeed been perfected. Ultimately, it was held that perfection of the security interest had not occurred, as the Creditor had incorrectly categorised the agreement as a transitional security agreement. In the absence of any further argument by the Creditor that the registration was valid for some other reason, the Court concluded that as the security interest had not been perfected, the interest vested in the Company upon the appointment of the administrators. Of note, the Court held that though unregistered, the security interest was not void. This serves to be of particular interest to creditors, as it may be possible to argue that payments made to creditors are in relation to a secured debt and are not recoverable by liquidators as an unfair preference, regardless of whether the security interest has been perfected.
When will security of the debt be assessed?
Section 267 of the Personal Property Securities Act 2009 (Cth) states that where unperfected, security interests will vest in the grantor immediately prior to the appointment of administrators. On this point, the Creditor submitted that as the payments had been made prior to the administrators being appointed, the payments were made prior to the security interest vesting in the Company. Further, the Creditor argued that at the time of the payments, the debt had been secured.
The liquidators presented the argument that whether the debt was secured was to be assessed at the time of the winding up of the Company. The natural consequence of this argument was that no security would exist, as by the time the Company was wound up, the security had vested in the Company.
The liquidators’ argument was three-fold, being:
- The structure of section 588FA of the Corporations Act 2001 (Cth) is that a preference is identified by the difference in outcome between what occurred and what would have occurred in a winding up; and
- The purpose of the word “unsecured” in section 588FA is to identify a class of creditors that exist at the time of the winding up, and is aimed at securing an equality of distribution among this class of creditors; and
- An interpretation should be preferred which would give effect to the intention of parliament, being that preference should not be given to a creditor with a defective security interest.
Adopting the Creditor’s submissions, the Court held that the relevant time for determining whether the debt was secured was the time of each payment. This conclusion may prove problematic, as it means that had the payments not been made, the Creditor would have been considered an unsecured creditor, and would not receive the priority otherwise afforded over the class of other unsecured creditors.
Can payments received be applied to unsecured portions of debt first?
The liquidators submitted to the Court that the payments made by the Company were recoverable, as the amount of the debt which was secured at the time of the payments was greater than the value of the security. What flowed from this argument was that the payments made would be taken to first discharge the portion of the debt that was unsecured. On this point, the Court adopted the liquidators submissions.
How is the value of the security determined?
Finally, the Creditor argued that:
- the value of the goods supplied should be determined in relation to their retail value, as opposed to the value they were sold to the Company; and
- the security interest applied to both the goods supplied and to the proceeds of sale.
The Court ultimately determined that the goods were to be valued at the price paid by the Company, and that, in light of the liquidators’ evidence that the proceeds of sale were not readily identifiable, that no security existed over the proceeds of sale.
As a result, the liquidators were successful in recovering the payments made by the Company to the Creditor as an unfair preference.
The recent introduction of the safe harbour amendments to the Corporations Act and the newly implemented ipso facto exclusions (effective as of 1 July 2018) have been touted as a means of assisting companies to trade out of their bad times, instead being wound up in insolvency as a first resort. With these amendments, the Government is aiming to assist companies in their profitability whilst maintaining normal business conditions during a period of administration and receivership, to assist in facilitating a successful restructure.
Ipso facto Clauses – what are they?
An ipso facto clause is a standard inclusion in most contracts which allows a creditor to exercise certain rights or terminate or amend a contract upon an insolvency event occurring, such as a company being placed into voluntary administration or a receiver being appointed.
Prior to 1 July 2018, an ipso facto clause could be invoked to terminate a contract even if the company continued to meet its other contractual obligations.
Terminating a contract upon an insolvency event, regardless of the company’s ability to continue its payment obligations, often impacted the company’s ability to maintain its cash flow, improve their financial position and/or restructure its business.
Contracts entered into on or after 1 July 2018, with some exceptions, will be subject to the ipso facto amendments whereby creditors will be stayed from terminating, amending or exercising a right under the contract solely for the reason that the other party enters into voluntary administration, receivership or a scheme of arrangement. The stay is not permanent and only lasts until the administration period ends or when the company is wound up, when the managing controller or receiver’s control ends or 3 months after a scheme of arrangement is announced or if the arrangement application is unsuccessful.
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (the Amending Act) sets out the ipso facto stay in relation to receivers being appointed at sections 434J to 434M and in relation to a company being put into voluntary administration at sections 451E to 451H.
The Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 (the ‘Regulations’) specifies types of contracts which will be excluded from the ipso facto stay provision. These include contracts for defined building work where payments are at least $1 billion, for the supply of goods and/or services for the public health service and contracts which involve a special purpose vehicle for project finance or public/private partnership, among others.
Creditors should note that whilst they are stayed from terminating any contract pursuant to an ipso facto clause, there is no corresponding stay on a creditor terminating the contract due to the company failure to meet its other contractual obligations (ie. failure to meet loan repayments).
How to minimise the impact of Ipso Facto provisions
The new provisions will not be applied retrospectively and will only apply to contracts entered on or after 1 July 2018. Creditors seeking to minimise the impact of the new provisions should consider amending or extending their current contracts as these would not be subject to the provisions due to the original commencement date being prior to 1 July 2018.
As a further safeguard, creditors are advised to strengthen their current default provisions to ensure that they are broad enough to encompass all specific termination rights available, noting that clauses which attempt or purport to circumvent the new amendments may be considered void.
Safe Harbour Amendments – What are they?
Previous legislation promoted a tendency for directors to prematurely protect themselves through insolvency processes rather than fight to keep their company viable. This led to a high number of insolvency events and a significantly risk averse business culture.
In late 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (the Amending Act) amended the Corporations Act 2001 (Cth) (the Corps Act) with the aim of offering potential protection to directors from charges of insolvent trading if they were engaged in legitimate efforts to restructure the company.
Section 588GA of the Amending Act allows directors to avoid liability under section 588G(2) of the Corps Act, when they:
- Recognise that a company may be or becoming insolvent and takes a course of action that is reasonably likely to provide a better outcome for the company;
- Incur a debt that is indirectly or directly in connection to this action; and
- Continue to meet obligations in paying employees and tax.
Section 588GA(2) of the Amending Act determines what is considered as reasonably likely to lead to a better outcome for the company. It considers whether the person is:
- Properly aware of the company’s financial position; or
- Taking appropriate steps to prevent misconduct that would negatively affect the company’s ability to pay its debts; or
- Taking appropriate steps to ensure the company is keeping financial records relevant to its size and nature; or
- Is obtaining advice from qualified entities with sufficient information; or
- Is developing or implementing a plan to improve the company’s financial position.
This protection only extends to any debts incurred in relation to the course of action (ie. with the aim of bringing about a better outcome for the company) and ceases when:
- The director ceases the course of action; or
- It is no longer reasonably likely to lead to a better outcome; or
- The company is placed into external administration.
Prior to invoking s588GA of the Amending Act as defence to a claim of insolvent trading, the Court must be satisfied that:
- The company (and its directors) continued to pay all employee entitlements;
- It was meeting its tax reporting obligations; and
- Can retrospectively consider whether the director made the company’s books and records available to any liquidator or administrator within a reasonable time period or when requested.
The protection of safe harbour does not extend to debts incurred where the directors are aware of the company’s inability to meet the new repayment.
The legislation was introduced to reduce the number of premature entries into insolvency processes and to facilitate a positive improvement in Australian business culture to encourage potential entrepreneurs and investors to enter into the Australian business market.
Prior to taking any steps to minimise the impact of the recent legislative amendments, you should always obtain specific legal advice to your circumstances. If you have any queries in relation to your rights as a creditor or your rights as a company in relation to the above amendments, please do not hesitate to contact the Insolvency & Restructuring team at Rostron Carlyle Rojas Lawyers on 07 3009 8444.
In Queensland, the Limitation of Actions Act 1974 (Qld) (the LAA) governs the time frames bestowed upon creditors in which they can commence actions to recover monies owed pursuant to a contract. A creditor must commence proceedings to recover debts within the limitation period. All Australian jurisdictions have similar legislation to the LAA but confer different time frames and effects once the limitation period has lapsed.
The relevant time frames can be summarised, as follows:
- Commencing proceedings on contracts:
- Queensland, New South Wales, Victoria, Tasmania, South Australia, Western Australia and the Australian Capital Territory: 6 years
- Northern Territory: 3 years
- Continuing proceedings after a court judgment is obtained:
- Queensland, New South Wales, Tasmania, Western Australia, the Australian Capital Territory and the Northern Territory: 12 years; and
- Victoria and South Australia: 15 years.
In all states and territories, apart from New South Wales, once the limitation period has lapsed, creditors can no longer actively pursue outstanding debts, though they can still be listed on a person’s credit file (provided that the listing is made prior to the limitation date). However, in New South Wales, once the limitation period has lapsed, the debt is completely extinguished and cannot be pursued or listed on a credit file.
When does the limitation period start and can it be re-set?
In all states and territories apart from the Northern Territory, the 6 years is calculated once the debt becomes overdue, noting that the limitation period is reset each time the debtor makes a payment towards the account or acknowledges the debt in writing.
In Queensland, South Australia, Western Australia and Tasmania, the limitation period can be re-set with each action taken on the account. For example, if the account has become statute-barred and a debtor in Queensland makes a voluntary payment towards the debt, the limitation period is refreshed. Conversely, in New South Wales, the Australian Capital Territory and the Northern Territory, the limitation period (once reached) does not refresh regardless of any payments made or acknowledgements received.
The collection of statute barred debt
This is a process which is closely monitored and highly regulated by the Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC). If attempting to collect upon a statute barred debt, a creditor or collection agent must not suggest that they can still take legal or collection steps to recover the monies.
In the Victorian matter of Collection House v Taylor  VSC 29, a debtor was contacted by a collection agency in 2001 and advised that legal action was to be taken to recover the debt owed pursuant to a finance contract entered into in 1992. The Supreme Court of Victoria held that the agency had engaged in unconscionable conduct when it had advised the debtor that legal action was imminent unless an immediate payment was made, despite the debt being statute barred.
The principles and considerations espoused in Collection House v Taylor indicates that any attempts to recover statute barred debt means there is an increased risk of standard collection activities being considered unlawful, merely due to the age of the account.
Collecting statute barred debt
Collection of statute barred debt should be considered a last alternative. Steps should be put in place by creditors to avoid the statute barred period from lapsing and rendering the debt uncollectable.
If a debt has become statute barred, a creditor can still accept monies towards the outstanding balance, so long as it is voluntarily offered. It cannot take steps to force the repayment of the debt nor issue correspondence or elicit phone calls where payment is demanded or the potential for legal action is mentioned.
If collection action is taken on a potentially statute barred debt which is later disputed by the debtor, the onus is upon the creditor or collection agent to show that the transaction was fair, just and reasonable in the circumstances.
If you are considering taking action on accounts which may be close to becoming stat-barred, it is important that you obtain legal advice prior to doing so.
The RCR Recovery Team are able to provide advice in relation to the methods in all Australian jurisdictions which can be utilised to recover monies owing, including older accounts.
If you have any queries in relation to the above, please contact Ellen Naughton on 07 3009 8444.
Is a Landlord’s claim against a Company under administration extinguished by a Deed of Company Arrangement (DOCA)?
Traditionally, a DOCA extinguishes all claims that existed at the time when a company was placed into administration. This is governed by the Corporations Act 2001 (Cth) (the Act).
Section 444D(1) of the Act provides:
A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).
Under Section 444A(i) of the Act, a DOCA must indicate what date on or before which claims must have arisen. In the 1996 case of Brash Holdings Ltd v Katile Pty Ltd the term “creditors” in Part 4.3A was held to be similar to the parts of the Act that relate to winding up. Therefore, the term “creditors” in Section 444D(1) of the Act, should be constructed in accordance with Section 553 of the Act which provides:
Subject to this Division and Division 8, in every winding up, all debts payable, by and all claims against, the company (present, future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
From the above, it is clear that a DOCA will not only bind creditors with a debt that was due and payable at the time of that the company was placed in administration, but also those with a claim which is “future, certain of contingent, ascertained or sounding only in damages”. However, this is not always the case.
In the matter of Baseline Constructions Pty Ltd (subject to a deed of company arrangement)  NSWSC 1018, the Supreme Court of New South Wales granted a landlord leave to commence proceedings against a company subject to a DOCA.
In March 2018, Baseline Constructions (the Company) entered into a DOCA. At this same time, the Company leased premises from Place Management (the Landlord). Two months later, the Landlord terminated the lease and took possession of the premises on the basis that the Company failed to pay rent owing under the lease.
The Landlord sought leave of the Court to recover unpaid rent and future rent from the Company. As the Company was subject to the DOCA, the Landlord was required to seek leave under Section 444E of the Act.
The primary question before the Court was whether the Landlord’s right to unpaid and future rent, was extinguished by the terms of the DOCA (in this circumstance, the lease was entered into before the Company went into administration but the liability under the lease arose after the date of administration). To answer the question, the Court considered the terms of the DOCA.
Ultimately, the Landlord was granted leave to commence proceedings on the following conditions:
- the proceedings could not cause the administrator to engage in work over and above his fee cap. However, the Court noted that it was unlikely the administrator would be involved in the action given that control of the Company had passed back to the Company’s director; and
- the Landlord could not execute any judgment against the ‘Deed Fund’ established under the DOCA which comprised moneys to pay employee entitlements and the administrators costs.
Additionally, there are specific provisions in the Act that deal with Landlords rights during insolvent administration, namely:
Section 443B of the Act which provides that the Administrators’ liability under lease agreements does not commence until five (5) business days after the Administrators’ appointment. However, Section 443B applies if under an agreement made before the administration of a company began, the company continues to use or occupy, or to be in possession, of property which someone else is the owner or lessor.
In summary, a Landlord’s claim against a Company subject to a DOCA may not be extinguished, so long as the landlord can satisfy the requirements of Section 443B of the Act. For further information please contact our commercial litigation team on (07) 3009 8444.
The above information is intended only as a selective overview of the provisions of the Act and not be interpreted or relied upon for legal advice.
 Brash Holdings Ltd v Katile Pty Ltd  1 VR 24 at .
After preparing a will it is important that the testator does not have a “set-and-forget” approach to the document, or indeed their wider estate plan. Circumstances change over time: potential beneficiaries are born or die, marry or divorce, or may fall into acrimony with the testator; assets are purchased, sold or partially transferred by the testator; the testator themselves may marry or divorce, have children, change the jurisdiction of their residence, or come into financial success or fall upon financial hardship. Where any such major life event happens to a testator it is likely that their estate will be impacted significantly, and the testator should update their will accordingly. Failure to do so will likely require the involvement of the Court to apply the common law doctrines of lapse or ademption.
Ademption applies if specific property gifted under a will no longer forms part of the testator’s estate at the time of death. Any such gift will fail as it is not possible for that property to be gifted as part of the testator’s estate.
Lapse can apply in various situations including where the will provides for a gift over of property, chattels, money or share of the residuary of a testator’s estate to a contingent beneficiary where the contingency does not happen. In such circumstances the Court will generally look behind the wording of a will to ascertain the intention of the testator under the presumption that the testator did not wish to die intestate. In Queensland, s.6 of the Succession Act 1981 (Act) gives the Court broad powers in determining all matters relating to the administration of the estate of a deceased person and making any declarations and orders as are necessary and convenient.
The Supreme Court of Queensland was recently called upon to make such orders in respect of an estate potentially affected by lapse. The matter of Sadleir v Kahler & Ors  QSC 67 concerned the hand-written document of a testator that purported to be a will, written in 1984, in which the testator’s entire estate was left to his brother provided the brother was not separated or divorced from the brother’s wife, in which case the brother’s children were to inherit the estate in equal shares. After determining under s.18 of the Act that the document was the testator’s will notwithstanding that it did not comply with the strict formalities of execution under the Act, the Court was then called upon to decide whether the children of the testator’s brother were entitled to the residuary estate given that the brother had died in 2009 and had remained married to his wife at the time of his death. The testator died in 2016.
In making her determination Atkinson J reviewed case law surrounding the doctrine of lapse. Her honour noted that the rule in Jones v Westcomb forms the basis of the notion that in certain circumstances a beneficiary can receive a gift over even though the precise contingency does not occur where the Court determines that this was the testator’s intention. In applying a case involving similar facts in Queensland, Atkinson J determined “the real contingency that [the testator] was intending to guard against was the failure of [his brother] to take under will whether that failure was caused by [his brother] dying before [the testator] or being separated or divorced at the time of [the testator’s] death.” Her honour therefore declared that the brother’s children were entitled to the residuary estate under the will.
Notwithstanding the Court’s broad powers under s.6 of the Act to interpret wills, testators should primarily seek to avoid the involvement of the Court if possible by keeping their wills updated with respect to property, beneficiaries and life circumstances. A great deal of time and cost to executors, beneficiaries and the estate in general could have been avoided in this case had the testator amended his will in the years following his brother’s death.
If you would like to update your will don’t hesitate to contact one of our solicitors for a free initial consultation.
 Buckley LJ in Kirby-Smith v Parnell  1 Ch at 489
 (1711) Prec Ch 316
 Re Stacey, deceased  St R Qd 244
  QSC 67 at para 37
The recent case of Shah v Hagemarad  FCA 91, case concerned the sale of Subway franchise for $460,000 where the seller made certain representations to the buyer as to the average weekly and monthly sales. The contract provided that:
1. the buyer entered into the agreement as a result of their own due diligence;
2. any representation not warranted in the agreement was withdrawn;
3. each of the parties was released from all claims in respect of any representation not warranted in the agreement;
4. the buyer would not bring a claim against the seller unless based solely on and limited to the express provisions of the agreement.
Despite the buyer noting in correspondence that the practice of cash sales could allow for fake sales the buyer elected to rely on the combo reports and weekly inventory & sales report provided by the seller. It does not appear that the buyer engaged professionals to conduct due diligence into the business or its finances and merely used the reports provided by the seller and sat across from the store to observe the traffic into the store during lunchtime.
The buyer after purchasing the business subsequently discovered that the business averaged less than $12,000 weekly which was substantially below the average represented sales figures of just over $16,000 weekly. After considering the arguments of the seller the Court found that:
1. the seller sold the business during a period of cash flow problems and poor trading performance and that in order to inflate the sale price of the business he had created fake sales;
2. the buyer would never have agreed to purchase the business if he knew the sales were fake;
3. it was not unreasonable for the buyer to rely on the reports as provided by the seller as these reports were generated by the store for the purpose of reporting to the franchisor and were regarded by both franchisees and prospective purchasers as important and reliable records of a store’s sale performance;
4. the terms of the contract disclaiming liability and representations made before the contract were entered did not apply to exclude the liability of the seller in engaging in misleading and deceptive conduct by providing reports that misrepresented sales for the business in circumstances where they knew those documents were likely to be relied on by the buyer in entering into the contract,
and ordered the seller to pay the buyer $300,000 being the difference between the price paid by the buyer ($460,000) and the true value of the business ($160,000).
This case illustrates the importance of:
1. the seller of a business ensuring that the representations it provides to a buyer are correct as they may be liable for any misleading and deceptive conduct used to induce the buyer to enter the contract irrespective of any limits on liability or warranties included in the contract;
2. the seller ensuring it is able to substantiate any representations made regarding the business to the buyer;
3. the buyer undertaking thorough financial and legal due diligence prior to purchasing a business.
If you need advice or assistance in respect of the sale or purchase of a business including due diligence searches, please contact us.
Self-Managed Super Funds (SMSFs) are increasing in popularity as retirement savings structures. Investors often choose to set up SMSFs instead of using retail super funds because they prefer to have control, flexibility and transparency over their money. There are also tax incentives to using SMSFs in the form of lower rates of income tax and capital gains tax.
Control and versatility
One of the key benefits of using an SMSF is investment control and versatility of investment products. Compared to retail or industry super funds, investors can choose to invest in a broad range of assets, including listed and unlisted shares, collectibles, term deposits and residential and commercial property. Investors with less knowledge in finance and share trading may choose to invest in real property, while experienced property investors and small business owners may look to establish an SMSF to hold real property for the tax benefits it provides. One often-used structure for business owners is to purchase the commercial property from which the business is operated using their SMSF and then lease the property back to the business. This structure provides not only secure tenancy for the business but also steady income for the SMSF which is entitled to the benefit of a lower income tax rate.
Since the amendments to the legislation concerning limited recourse borrowing arrangements in 2010, SMSFs have been able to take out loans to purchase residential or commercial property provided, among other things, that the recourse of the lender is to the specific property only and that the borrowing is not being undertaken to improve the property. Generally, an SMSF may borrow up to 75% of the purchase price of a property. This means that, where the SMSF meets the servicing requirements of the financier, if the SMSF holds $300,000 in cash it may purchase an investment/commercial property up to the value of $1 million (including legal costs, transfer duty, and other costs).
Nearly all superannuation funds offer the ability to take a tax-free pension as an income stream upon retirement. An SMSF additionally allows more flexibility when it comes to timing of contributions, amounts of contributions, allocation of earnings and implementation of reserves. A tailored investment combination provides trustees with the ability to minimise the amount of overall tax that the SMSF members pay within the fund by utilising concessional tax treatment and franking credits.
For example, if an SMSF has income of $200,000 for a financial year, the tax payable is 15% x $200,000 = $30,000
If $70,000 of the $200,000 represents fully franked dividend income from shares in a public company (providing $30,000 franking credits), then the tax payable is nil because the franking credits offset the income tax payable
The tax benefits in purchasing properties via an SMSF in comparison with purchasing personally can be summarised in the table below:
Purchasing Property in Personal Capacity v SMSF
|Deposit / Transfer Duty/ Legal costs||Personal Savings||Funds in Super|
|Loan Repayment||30 years||Up to 25 years|
|LVR||Up to 90%||Up to 75%|
|Rental Income Tax Rate||19% – 45%||0 – 15%|
|Marginal Tax Rate||19% – 45% + Medicare levy 2% (potential)||0 – 15%|
|Capital Gains Tax||Assessable income taxed at marginal rate||0 – 10% (if property held for more than 12 months)|
Superannuation in general can be a structure that protects members from litigation and bankruptcy. If an individual’s assets are owned by an SMSF, such assets are protected from creditors in the event of business failure. The legislative policy behind this is that superannuation is intended to fund an individual’s retirement, so SMSF assets cannot be accessed either by the member to revive the failing business (prior to preservation age) or to creditors in the event the member becomes bankrupt.
Establishing an SMSF
The decision whether to set up an SMSF should first be discussed with financial advisors such as accountants and financial planners. It is important to understand the responsibilities involved in acting as the trustee before establishing the SMSF, and once it is established ongoing professional advice should be sought as superannuation is a highly regulated and technical area. If you would like to discuss the use of an SMSF structure for investment purposes, please don’t hesitate to contact us.