by Sarina Mari

Company Phoenixing- Clipping the wings of the Phoenix

Company phoenixing or ‘phoenixing’ occurs where, the primary controllers of a failed company conducts the same type of business while using some or all of the former company’s assets.

When is Company Phoenixing illegal?

Despite the adverse stigma that is most commonly associated with ‘Phoenixing’, there are circumstances in which it can be legal. There are many examples and success stories where a person has revived the business previously conducted after the financially distressed company enters liquidation and its remaining assets are distributed to creditors.

However, such activity is illegal when this attempted resurrection comes before creditors are paid and where the use of the former company’s assets was uncommercial.

For example, John realizes that ‘John’s Farms Pty Ltd’ cannot pay its debts as and when they fall due. John therefore decides to transfer the company’s assets to the newly-incorporated ‘Johnno’s Farming Pty Ltd’ for little to no value before putting John’s Farms Pty Ltd into liquidation. In this way, John has avoided paying the creditors of John’s Farms Pty Ltd, and has not legally “phoenixed” from the old entity to the new entity.

The Impact of Company Phoenixing

Company phoenixing affects many trades and industries, and sadly, appears to be on the rise.

In 2012, phoenix activity was estimated by Price Waterhouse Coopers and the Fair Work Ombudsman to have costed the Australian Economy between $1.8 to $3.2 billion annually. A second report in July 2018 indicated that this figure could now be as high as $5.13 billion per year.

Unpaid trade creditors seem to suffer the most, making up approximately 61.8% of this figure, whereas unpaid employee entitlements are approximately 5.8% and unpaid taxes and compliance costs are approximately 32.3%.

What is being done about company phoenixing it?

Early in 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced (but had not been passed into law prior to the Federal Election in May 2019). In summary, the Bill purports to:

amend the Corporations Act 2001 (Cth) by introducing new criminal offences and civil penalty provisions for officers who fail to prevent a company from making ‘creditor-defeating dispositions’;

Empower Liquidators in allowing them to apply for court orders in relation to voidable, creditor-defeating dispositions;

Enable ASIC to make orders for the recovery of company property disposed of under such a disposition; and

Improve the accountability of resigning directors so as to prevent companies being left rudderless.

Further, individuals who engage in “illegal phoenixing” can expect to receive a fine of up to $945,000.00 or imprisonment of 10 years for contravening these provisions whereas body corporates can expect to receive penalties of either $9.45 million or 10% of the entity’s annual turnover.

What you can do about phoenixing

Even if these measures are implemented, it is important for you to proactively assess a company’s circumstance.

As an employee, it is important to look for warning signs such as late payment or non-payment of wages, unpaid superannuation and entitlements.

As a creditor, one should be aware of late payment or non-payment of invoices which may indicate financial distress, as well as changes to company details.

Noting that officers of the company have certain duties under the Corporations Act 2001 (Cth), it is important to monitor the financial health of the corporation and ensure that decisions are made in accordance with key duties.

Often, the best way to ensure that your rights and obligations are being met is to seek advice.

How can we help?

Rostron Carlyle Rojas Lawyers are well appraised in the field of corporate law and are able to assist companies, company officers, creditors and employees in ensuring the discharge of their duties and protection of their rights. If you or someone you know requires further assistance, please do not hesitate to contact our Corporate Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note that this article has been prepared by Kishen Bhoola, Lawyer and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

by Sarina Mari

Safe Harbour Reforms: Are you safe or swimming with the sharks?

With effect from 19 September 2017, the safe harbour reform came into effect, reflected in Section 588GA of the Corporations Act 2001 (Cth) (the Act). The practical effect of the reform was to encourage the turnaround culture of companies through innovation and strategic management instead of companies prematurely appointing a voluntary administrator.

What is a Safe Harbour?

The Act now provides an avenue for company directors to take steps against being held personally liable for a company’s inability to comply with their financial commitments. Section 588GA of the Act (the Safe Harbour Reform) provides that a director is not subject to an insolvent trading claim provided that upon suspecting that the company may become or is insolvent, they develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company.

What are the requirements for the Safe Harbour Reform?

To determine what an appropriate course of action is, the Act provides a number of examples a Court is to consider in determining whether a director has in fact, complied with the Safe Harbour Reforms, such as, whether the director:

1. is properly informing himself or herself of the company’s financial position; or
2. is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
3. is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
4. is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
5. is developing or implementing a plan for restructuring the company to improve its financial position.

When do the Safe Harbour Reform provisions apply?

The Safe Harbour Reform provisions only apply to debts incurred (whether directly or indirectly) in connection with the course of action until such time that:

1. a ‘reasonable time period’ has passed; or
2. the course of action has ceased; or
3. the course of action is no longer reasonably likely to lead to a better outcome; or
4. the appointment of an administrator, or liquidator, of the company.

The phrase a ‘better outcome’ is defined in the Act as to mean “an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company.”

Debts incurred after the above circumstances may be subject to insolvent trading claims against directors.

What does this mean for directors?

Whilst the Safe Harbour Reform is intended for companies to strategically become more solvent, there is still a risk in relying on the Safe Harbour Reform as a defence to insolvent trading claims as the onus of proof is on the director should the matter escalate. So, while a director may think they are pursuing a course of action that is reasonably likely to lead to a better outcome, they need to be able to prove this. Due to this, many directors may decide to avoid the risk of not being able to successfully prove that their actions were in accordance with the Safe Harbour Reform and simply appoint voluntary administrators.

How can we help?

Our insolvency and commercial litigation team has extensive experience acting on behalf of companies and directors to reach positive outcomes. If you or someone you know requires further assistance with regard to directors’ duties or the Safe Harbour Reform, please do not hesitate to contact Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note that this article has been prepared by Krishna Ramji, Law Clerk and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

by Sarina Mari

Costs Order against a Non-Party

I’m a director of a company being sued – I won’t be liable for cost ordered against the company, right?

It is not often that the Court orders a non-party, such as a director, personally liable to pay costs of a legal proceeding. However, in the recent decision in Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90 (Murphy), the Court held that a director who was not a party to the litigation could be made liable to pay costs, as the Court considered that the interests of justice required it.

On appeal, the Court found that Murphy as the director of the insolvent company (despite not being party to the litigation) and in defending the company, had played an active part in the conduct of the litigation.

The facts in Murphy satisfied the three criteria set out by the High Court in Knight v FP Special Assets (1992) 174 CLU 178, where the award of non-party cost order was considered just and appropriate, as follows:

• the party to a litigation is an insolvent person/entity or ‘a man of straw’;
• the non-party has played an active part in the conduct of the litigation; or
• the non-party has an interest in the litigation.

Evidentially, the non-party cost order in Murphy was justified because Murphy was effectively the real party to the litigation and the company was unable to pay the costs. Consequently, Murphy’s appeal to have the order requiring him to pay costs, was dismissed.

Additionally, Murphy’s case demonstrates the responsibility on directors, for transparency if the company is in financial hardship. On appeal, the Court agreed with the findings of the primary judge in the original proceedings that Murphy allowed the trial to run without disclosure of the company’s financial hardship to the opposing party. Murphy’s omission of this fact, had allowed the defendant to expend further legal costs on a claim which would be unenforceable. As a result, failure to disclose information about financial difficulty resulted in an adverse non-party costs order against Murphy.

The Supreme Court’s power to award a costs order

In Queensland, the Supreme Court’s power to award costs against non-parties is contained in rule 681 of the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) which provides that:

‘costs of a proceeding are in the discretion of the court but follow the event, unless the court orders otherwise’

The decision in Murphy illustrates that in particular cases, the Courts may be prepared to lift the corporate veil and use their discretion conferred by rule 681 of the UCPR to order costs against directors who are non-parties to the litigation.

Costs Order: Do you require assistance regarding

If you are a director of a company the subject of current legal proceedings, or know someone who is, and want to know more, please contact the Commercial and Corporate Lawyers at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note that this article has been prepared by Daryl Hamley, Law Clerk and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

by Sarina Mari

Unsecured Debts after Bankruptcy – Can you get your money back?

The Scenario

An individual owes you a debt (which is unsecured), such as a debt for non-payment of goods purchased.

• The individual enters into bankruptcy.
• You have not been notified of the individual’s bankruptcy but have a “provable” debt.
• 3 years later, you are now aware that the individual is a discharged bankrupt (the Discharged Bankrupt).

Can you demand payment if it was an unsecured debt?

Generally, ‘No’ – the Discharged Bankrupt will no longer be liable to pay debts that are deemed to be covered under the bankruptcy rules for certain debts. Usually after three years a bankrupt will ultimately be discharged from bankruptcy and released from their liabilities owed as at the date of bankruptcy.

On this basis, you will not be able to demand payment of the debt, and the individual is not liable to repay the debt (if the bankrupt failed to disclose a debt owed at the time of bankruptcy, they may be liable to prosecution by Australian Financial Security Authority, but that would not recover the debt).

Debts included and not included in Bankruptcy

Debts included in bankruptcy include unsecured debts (being, tangible debts), examples of which may include, but not limited to:

• Credit and store cards;
• Unsecured personal loans;
• Unsecured business loans;
• Utility bills (ie electricity, phone etc); and
• Medical, legal and accounting fees.

Conversely, debts not included in bankruptcy include, but not limited to:

• Debts incurred after the bankruptcy begins;
• Unliquidated debts (these are debts where the amount of debt is yet to be determined, not arising from contract, promise or breach of trust, which is quite rate); and
• Child support and maintenance debts.

Below is a comparison table of examples of debts that may and may not be recoverable post-bankruptcy.

*Australian Government, Australian Financial Security Authority, Debt Comparison table – https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-happens-my-debts-when-im-bankrupt/debt-comparison-table dated accessed 14 May 2019.

How do I recover an unsecured debt in this scenario?

Generally, the only way to recover an unsecured debt is if you are a named creditor with a provable debt that came about before the start of the bankruptcy. Provable debts are debts and liabilities, present and future, certain or contingent to which a bankrupt was subject at the date of the bankruptcy, or to which they may become subject before their discharge by reason of an obligation incurred before the date of the bankruptcy.1

If your debt is a “provable debt”, you would be able to participate in the bankruptcy and be entitled to repayment of your debt, in whole or part.

However, in this Scenario, you are not a named creditor that have not been notified of the bankruptcy, you may be hindered in recovering the debt. Conversely, if you are able to prove that the debt was incurred after the bankruptcy, the individual will be liable, and you would be able to pursue the individual for payment.

Accordingly, the best avenue in which to recover an unsecured debt is to stay informed with respect to the financial position of the individual who owes you the debt.

How can we help?

If you are unsure of whether you can make a claim for an unsecured debt against a discharged bankrupt, please contact the Corporate and Commercial Lawyers at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note the contents of this article are for general purposes only and does not by any means constitute legal advice, or should it be relied upon.

by Sarina Mari

Happy 7th anniversary to the Personal Property Securities Register (PPSR)

As it has almost been seven years since the start of the Personal Property Securities Register (PPSR), this article will discuss the implications of lapsing personal and business security interests. We highlight key implications about not having your security interests protected and how the team at Rostron Carlyle Rojas Lawyers can assist.

What is a PPSR security interest?

The Personal Property Securities Act 2009 (Cth) (PPSA) came into effect on 30 January 2012, incorporating a national online register of security interests for personal property known as the Personal Property Securities Register (PPSR). The PPSR allows banks, financial institutions, businesses and individuals to register a security interest against personal property. The federally administered register was the first of its kind, and became a critical mechanism in protecting personal and business assets by allowing a priority charge to be held over a specific asset.

Which security interest registrations are affected?

PPS registrations against consumer property with serial numbers (such as your motor vehicles, boats or business machinery equipment) only allows such items to be registered on the Personal Property Securities Register (PPSR) for a period of seven years. As the PPSR this year celebrates its 7th birthday, it will be a short-lived celebration if those security interests registered at the commencement of the PPSR, have not been amended or re-registered.

As at 30 January 2019, over 120,000 registered security interests were set to expire.

To save these registrations from expiring, the secured party, being the party whose interest is being secured, must amend or create a new registration before the expiry of the original registration.

Consequences of a lapsing PPSR security interest?

If a PPS registration is not renewed, the security interest will expire, and the secured party will lose its status as a secured creditor.

PPS registrations are designed to protect personal and/or business interests, to allow recovery of property or valuable assets should the other side in the transaction being the grantor, become a bankrupt or enter into liquidation.

Accordingly, allowing your PPS registration to lapse or expire could have significant consequences. Regardless of when your security interests were registered on the PPSR, now is the time to ensure your rights are protected. To avoid losing your security interests and priority, we encourage you to check the status of your registration by generating a ‘registrations due to expire report’ using the PPSR website: https://www.ppsr.gov.au/registrations-due-expire-report.

How can we help?

Find this area of personal and/or business security interests confusing? If you have questions about a potential expired registration or want to know whether your personal and/or business security interests are still protected, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note that this article has been prepared by Jakob Mignone, Law Clerk and settled by Sarina Mari Alwi, Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

by Sarina Mari

Issues surrounding documents marked Return to Sender

The general rule is that serving a company at their registered office will be deemed effective service. However, what happens when you “serve” court documents at a company’s registered address, and it is returned to sender? The Courts have made it clear that if there is proof that a document has not been delivered, service will not be deemed to have taken place.

The Common Law Position on return to sender

While the Court’s position on documents marked “returned to sender” appears to take a “common sense” approach, this position may change depending on the individual circumstances of the matter. For example, in the case of CGU Workers’ Compensation (Victoria) Ltd v Carousel Bar Pty Ltd (1999) 17 ACLC 1, service of a Creditor’s Statutory Demand was deemed ineffective because the envelope was returned and marked ‘return to sender’. The Court considered this to be sufficient proof of non-delivery. Whilst this case emphasizes that unless the creditor has taken all reasonable steps to bring the demand to the attention of the Company after it has been served, there are circumstances, and case law to suggest that it really does come down to the individual circumstances of each case.

On the contrary, in the case of Dennis v Fodare Pty Ltd [2007] NSWSC 180, the plaintiff sent an originating process along with an accompanying affidavit to the Defendant’s registered office. The envelope was returned and marked ‘Return to sender’ followed by the word ‘refused’ by way of explanation. In contrast to the above case, the Court inferred that the document had in fact come to the attention of a relevant person at the Defendant’s address but they declined to accept delivery. As such, the court was prepared to hold that service was effective.

What Section 109X says about Return to Sender

Section 109X of the Corporations Act 2001 (Cth) presumes that documents which have been delivered to the registered office of a company have been served. It is up to the party seeking to maintain that the documents were not served, usually the defendant, whom will be required to rebut this presumption, which has a high threshold of proof.

Significance

The above highlights that despite there being a general presumption for the service of documents on companies, each case will be decided on its own individual facts and circumstances.

How can we help?

Having difficulty effecting service? Our commercial litigation team has extensive experience in all facets of litigation, including service. If you or someone you know requires further assistance, please do not hesitate to contact Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at mail@rcrlaw.com.au.

Please note that this article has been prepared by Ellen Nowland, Lawyer and settled by Sarina Mari Alwi, Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

by Sarina Mari

The Importance Of A Will – 5 Critical Reasons Why You Should Have A Will