Business Due Diligence

Business Due Diligence

This article will explain the reason why a due diligence should be undertaken in the sale and
purchase of a business.


Why do a due diligence?

There are a few reasons why a due diligence is important

  1. Risk assessment-conducting a successful and profitable business involves many
    aspects. Checking that each of the key aspects means that you satisfy yourself of the
    integrity and strengths/weaknesses of those aspects. In some businesses, this may
    simply means obtaining copies of relevant documents and reviewing it to properly
    evaluate the Vendor’s business. In some situations, those documents may lead to
    more questions and indicate that a more thorough investigation is required. In some
    cases-the information disclosed or obtained, may result in a decision to .
  2. Determining Value-Due diligence is a critical element in determining value of a
    business. Any factors which affect the future earnings of the company or the value of
    any underlying assets may have a positive or negative impact upon the price for the
    business. For instance, any impending litigation against the company could seriously
    impact upon sales and reputation and diminish the financial viability of the business.
    Alternatively-a projected increase in sales because of a new significant customer
    could mean a better profit and increased value.
  3. Identifying the assets of the business- in some cases, certain aspects of a business
    may be owned by third parties-such as intellectual property rights or real property,
    and the terms upon which the business has a right to use those assets can impact
    upon control of stock sales and profit margin.
  4. any risk minimisation strategy for both the vendors and purchasers, although each
    party will have different objectives. It typically includes a legal, financial and physical
    (eg building and environmental) investigation. It may require the assistance of
    accountants, lawyers and other experts to produce the necessary information.

 

Who should do one?

Purchaser. Obviously, any intending purchaser should undertake a due diligence
before moving to purchase a business. Usually this will be a term of a purchase
contract.

Seller. In most instances-a seller should also undertake a due diligence before listing
a business for sale. Making sure that all of the key aspects of a business are sound,
and clear to enquiry can mean that a seller gets maximum value for their business
and that any contractual due diligence can be quickly and easily satisfied. In some
cases-a thorough business due diligence by a seller and rectifying any issues
discovered can result in a significant increase in value.

 

What is a business due diligence?

This depends upon the nature and size of the business. However-common investigations
involve:

  • Who owns the assets and who should be parties to the transaction? It is common for
    family businesses to own some of the business assets in a mix of companies, trusts
    and the names of individuals. It is also common for third parties to own intellectual
    property rights if the business is conducted under a franchise or licence. It is
    important to firstly identify the key assets which make up the business and then to
    identify the relevant owners of the business assets and the contractual
    documentation should accurately reflect this.
  • Deciding whether a more tax and risk effective transaction will be to buy all the
    company shares, rather than the assets themselves.
  • Identifying any statutory or government licences, permits or consents and other
    requirements and the conditions attached to those requirements. In some cases-
    these aspects may determine purchaser entity-and may impact upon value and risk.
  • Identifying any third- party consents required such as from landlords or mortgagees
    for leased premises.
  • Identifying any key staff and the integrity of their employment contracts. Retaining or
    removing key staff can have a significant impact upon future profitability, and
    business/corporate culture.
  • Identifying current or future risk factors and eliminating or minimising them.
  • Identifying and negotiating any terms and preconditions of the contract of sale of the
    business. For example, what licences, permits and statutory consents are required to
    operate the business. There may also be other requirements that a purchaser must
    satisfy under competition and consumer laws, stock exchange rules, foreign
    acquisitions and take over laws, depending on the nature of the business and the
    parties involved.
  • Identifying any restrictions on the ability to sell and transfer all of the assets of the
    business- matters such as securities held on the business assets which a seller
    should discharge (eg mortgages on business land or securities on personal property
    registered on the PPSR).

While it is ultimately a vendor’s decision to sell and the purchaser’s decision to buy, a
thorough and comprehensive due diligence will assist both parties to make informed
decisions about whether to transact at all.

For a vendor, this may involve taking the results of a pre-sale due diligence, and
implementation of remedial steps to ensure that any buyer risks are eliminated to maximise
the value.

Seeking advice on such issues at the outset might impact the sale price you are willing to
settle on.

For a purchaser, obtaining the necessary financial information and business advice to be
comfortable with the risks and financial viability of the business will not only be comforting,
but can be critical, particularly if you are seeking to acquire bank finance and using that
business as well as your own personal assets as security.

 

Due Diligence in Contract Terms

It is common for a due diligence clause to be included in a business sale contract. Important
common procedural aspects might include:

  1. Time for due diligence
  2. Method of notification of satisfaction of due diligence
  3. Obligation on seller to deliver all required information and documents
  4. Extensions of Due diligence if any delays in providing documents
  5. Termination or price renegotiation rights
  6. Warranties as to the truth and completeness of information provided
  7. Confidentiality and return of information provided if sale does not proceed

 

What’s the cost? 

Cost will vary depending upon the nature size and type of business. There is no “fixed price”
that can be applied to all due diligence, and there may be additional unexpected costs to
investigate any issues revealed.

Due diligence may be an additional cost, as it does involve engaging financial, legal and
technical expertise.

However-a good and thorough due diligence will be well worth the cost when measured
against the failure or loss involved in a failed business because of a factor which should or
could have been identified and dealt with before settlement .

Identifying and dealing with critical issues either at the outset before a binding contract is
entered into or before a due diligence is satisfied is often far cheaper with better prospects of an outcome, compared to litigation to enforce rights.


If you are thinking of selling or buying a business, we can assist you.


Michael Sing
Partner, Property and Commercial

 

How long can you be chased for a debt?

Have you ever wondered how long you can be chased for a debt or how long you have to recover your unpaid debts?

In most states in Australia, the limitation period for debts is for six (6) years, except in Northern Territory where it is for three (3) years.  This means that the creditor can pursue the debt from six (6) years from the date of when:

  1. The debt became due and payable; or
  2. The last date a payment was made towards the debt; or
  3. The date the debtor acknowledged in writing that they owed the debt.

It is imperative that you get the calculations correct, as failure to establish the limitation period, may mean that you will be unable to successfully recover your debt and the debt will become statute-barred.  

A statue-barred debt is when the debt becomes older than the limitation period in your State or Territory (being six (6) years in all states in Australia, except in Northern Territory where it is three (3) years).  Therefore, a creditor will no longer have legal right of recovery for a statue-barred debt. However, if the debtor acknowledges the debt in writing, or makes any payments towards the debt, then this resets the clock on the six (6) year limitation period.

Therefore, if you have any unpaid debt, we strongly suggest that you act fast, as the longer the time passes, the less chances you have of recovering the debt.

References:

Should you require any assistance in regards to unpaid debt, contact our debt recovery lawyers now to discuss your options in a no-obligation consultation with the experts. We will guide you, step by step and ensure the best possible outcome for your circumstances.  Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

Three Ways to Ensure your Business is Viable Post COVID-19

In 2020, three quarters of Australian businesses accessed COVID-19 related support measures, with 55% accessing wage subsidies and 38% accessing other government support measures. Given these support measures are expected to be permanently repealed in 2021, It’s important to be informed about the full extent of COVID-19’s impact on your business. Here are three ways to ensure your business is still viable:

  1. Keep Your Books & Tax Lodgements Up to Date

Keeping an accurate record of all your business’ books and expenses and ensuring that these are correctly lodged with the tax office is the best way to know your business is viable. A business that keeps its books up to date will know straight away if their profits have dropped and they are still profitable. Additionally, the tax office is often the first creditor to pursue unpaid taxes from failing businesses.

  1. Seek Professional Financial Advice

Accountants and other financial advisors are able to provide sound advice about the business’ cash flow and whether the business is profitable. Financial advisors can also assist in restructuring the business and its debts to avoid a potential insolvency.

The Federal government’s small business insolvency reforms have set up a restructuring process for small businesses that allows companies to continue trading as the restructuring practitioner develops and proposes a plan to the creditors.

  1. Pay Invoices on Time

Overdue invoices, payment plans and the failure to respond to demands are all indicators of insolvency that the Court will look at when considering a business’ solvency. To avoid being presumed insolvent by the Court and incurring unnecessary legal costs, businesses should ensure their invoices are paid on time.

What Now?

If you would like to discuss how we can assist your business post COVID-19, please contact Levi Smouha at Rostron Carlyle Rojas Lawyers on (07) 3009 8444.

Contact our insolvency lawyers now to discuss your options in a no-obligation consultation with the experts. We will guide you, step by step and ensure the best possible outcome for your circumstances.  Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

What Happens When Your Company Becomes Insolvent?

insolvency

When your company becomes insolvent, you can expect a number of things outside your control to happen that you might want to know about and understand your rights.

  1. You Receive Invoices or Demands for Payment that you Cannot Pay

If you have overdue invoices or have received a letter of demand threatening legal action, you may wish to consider seeking financial or legal advice to dispute the debt.

Under the Federal governments new small business debt restructuring process, your company is able to appoint a restructuring practitioner to assess whether your company is still viable and propose a restructuring plan to your creditors.

  1. You Are Served with a Statutory Demand.

If your company is served with a statutory demand, you have 21 days to pay back (or arrange payment) of the debt that is demanded, or your company will be ‘presumed insolvent’ by the Court, which are grounds for the company to be wound up.

  1. The Court Winds Up Your Company

If the Court orders that your company be wound up on the grounds of insolvency, it will appoint a liquidator as an external administrator of the company, who will claw back any voidable transactions under the Corporations Act, distribute the company’s assets to its creditors and then deregister the Company. 

What Now?

If you would like to discuss how we can assist your business post COVID-19, please contact our insolvency partner – Levi Smouha on (07) 3009 8444. We will guide you, step by step and ensure the best possible outcome for your circumstances.  Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

The top 5 things to know about your contract!

Entering into a contract is often an exciting time for you or your business. However, it is important to know exactly what you are getting into. Reviewing your contract prior to signing can help you understand what is expected of both parties to avoid misunderstandings down the track. Here are our top five things you need to know and understand about your contract.

  1. Obligations under the contract

To avoid confusion, it is important for a contract to include a detailed description of the agreed work or service to be provided.  It should clearly outline what work is to be done and when, as well as the money you will be paying (or receiving). Understanding both your obligations and the obligations of the other party is a crucial step before agreeing to a contract.

  1. Termination of the contract

Most contracts include an express clause that allows for one party to end the contract even if the contract has not yet been completed. Some agreements may also be expressed to terminate automatically in certain circumstances, such as with the passage of time or a breach of duty.  Termination rights should ideally be exercised by written notice to the other party, so it is important for you to identify any specified notice periods, as well as any obligations that survive termination.

  1. Warranties

Warranties are used to describe terms of a contract, but are less significant or fundamental than the conditions of a contract. A warranty is a guarantee that a factual statement is correct.  A breach of a warranty will not entitle a party to terminate, however it can allow a party to seek damages. It is useful to note that some warranties may appear reasonable when in fact they are not.

  1. Indemnities

An indemnity is a promise by one party to compensate the other party for loss or damage suffered during the contract period.  Indemnity clauses involve allocating risk between the parties, typically from the hirer to the contractor. It is essential to carefully consider whether the risk you’re agreeing to is within your control. If not, we recommend you seek professional advice before signing.

  1. Limitations and exclusions of liability

It is common for a party to use liability and exclusion clauses to limit their legal responsibility in contracts, or to limit the other party’s rights or remedies. For example, a contractor can use a limitation clause to reduce the amount of money it would have to pay in compensation.  Prior to signing your contract, you should identify (and aim to protect yourself from) the aspects of your business or service that present risk. It is worthy to note that you cannot limit your liability entirely as the court has the power to overlook clauses that it holds unfair. 

Contact our litigation lawyers now to discuss your options in a no-obligation consultation with the experts. We will guide you, step by step and ensure the best possible outcome for your circumstances.  Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

What does litigate in litigation mean?

The term ‘litigate’ is used when a person or company resorts to legal action to settle a matter. Litigation is a method of resolving disputes, which are usually either civil or criminal.

The main purpose of your litigation lawyer in both civil and criminal matters is to assist you through all stages of your dispute, by mitigating the risks, advocating your interests and resolving your dispute cost efficiently and promptly. 

Civil Litigation

We understand that if you are in business, then you are likely to run into a dispute at some stage.  Disputes can arise in any number of circumstances, including with suppliers, customers, franchisors, other businesses, banks or third parties dealing with the business.

Accordingly, in civil matters, your lawyer represents your interests and fights for the most favourable outcome for you. This includes whether you are:

  1. The plaintiff – meaning that you have brought the claim; or

  2. The defendant – meaning that you are defending the claim.

Your lawyer will assist you in drafting and filing documents in Court (i.e. statements of claim, affidavits, defences, discovery), explaining rules of law, guiding you through the complex legal jargon, protecting your interests, representing you in Court and conducting settlement negotiations on your behalf.

We understand that litigation can be a difficult, uncertain and stressful time in a person’s life. However, by having the correct and appropriate lawyer, it will significantly assist you in making the litigation process as smooth and stress-free as possible, as well as achieving the most favourable outcome for you.

Litigation can be a costly process, however we will always tell you if the costs of litigation outweighs the potential benefits, and suggest alternative dispute resolution methods, for instance, mediation. We understand that having the correct strategy is vital in responding to the challenges which may arise in litigation proceedings.  

Contact our litigation lawyers now to discuss your options in a no-obligation consultation with the experts. We will guide you, step by step and ensure the best possible outcome for your circumstances.  Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

CONSTRUCTION LAW 101

What is construction law?

Construction law can be broadly defined as a branch of law that involves the regulation of all types of construction and building works. The body of law that deals with construction is diverse and there are a number of laws and regulations that are State or Territory specific that regulate the construction industry.

What do construction lawyers do?

Construction lawyers specialise in construction law. They are often called upon to draft, negotiate and review construction contracts, assist with the tender process, advise parties to a construction contract on various aspects either before, during, or after a project and assist with construction disputes and debt recovery.

What are the relevant statutes that regulate the construction industry?

There are a number of laws and regulations that apply to the construction industry and these can either be federal, state, and local laws.

The National Construction Code (NCC) was formally known as the Building Code of Australia. The NCC sets out the minimum requirements for safety, health, amenity, and accessibility in the design and construction of all new buildings, building work, plumbing and drainage systems, and all new building work must comply with the dictates of the NCC. All States and Territories have adopted the NCC.

Each State has its own respective legislation and regulations that regulate the construction industry. Typically, State legislation and regulations deal with issues such as contracting, licensing, registration, insurance of building works, and warranties.

The table below sets out some of the legislation in force in each State and Territory.

STATE/TERRITORY

LEGISLATION

New South Wales

  • Building and Construction Industry Security of Payments Act 1999
  • Home Building Act 1989/Home Building Regulation 2014
  • Environmental Planning and Assessment Act 1979

Victoria

  • Building and Construction Industry Security of Payment Act 2002

Queensland

  • Building and Construction Industry Security of Payments Act 1991 (QBCC Act)
  • Building Industry Fairness (Security of Payment) Act 2017 (BIF Act)

Australian Capital Territory

  • Building and Construction Industry (Security of Payment) Act 2004

Western Australia

  • Constructions Contracts Act 2004

South Australia

  • Building and Construction Industry Security of Payment Act 2009

Northern Territory

  • Constructions Contracts (Security of Payments) Act 2004

Tasmania

  • Building and Construction Industry Security of Payment Act 2009

The statues listed above are not an exhaustive list of the laws that may be applicable to construction matters. Other laws may very well be applicable depending on the circumstances such as employment laws and regulations, local government planning and environment laws, and even common law principles.

Do I need to be licensed to carry out building work?

Each State has its own definition of what building work is and when a license (to carry out building work) is required. The table below sets out when a license (to carry out building work) is required for the States of New South Wales, Queensland and Victoria.

STATE/TERRITORY

LICENSE REQUIREMENTS

New South Wales

You must hold an NSW building license to conduct residential building work in NSW valued at more than $5,00.00 in labour and materials.

A general builder may do any work that is residential work. Work that you need to have a license for includes:

  • Constructing or erecting a garage, carport or shed
  • Bathroom, kitchen or laundry renovations
  • Swimming pool building and structural landscaping
  • Screened, glass or pool enclosures
  • Atriums and conservations
  • House lifting
  • Removing and resitting dwellings; and
  • Saunas and steam rooms
Queensland

You must hold a QBCC license to carry out building work, where:

  • The value of the building work is over $3,300.00
  • The works involve hydraulic service design works valued at over $1,100.00
  • Works of any value where the work involves:
      • Drainage
      • Plumbing and drainage
      • Gas fitting
      • Terminate management – chemical
      • Fire protection
      • Completed residential building inspections
      • Building design – low rise, medium rise and open
      • Site classifications; and
      • Mechanical services

How can I apply for a license?

Each State has its own licensing procedures and requirements. The table below sets out the governing body for the States of New South Wales, Queensland, and Victoria. You will need to contact the relevant governing body of your State to find out the specific licensing requirements.

STATE/TERRITORY

GOVERNING BODY

New South WalesFair Trading NSW via Service NSW
VictoriaVictorian Building Association
QueenslandQueensland Building and Construction Commission (QBCC)

Are there different categories of licenses?

Yes, in Queensland licensing for building work is divided into licence types and, subsequently, licence classes. The critical element understanding is to be aware of the work you are performing, as this will dictate whether a licence is required.

The types are summarised as follows:

Type

Supervise building workBe a nominee for a building companyEnter into building contracts for building work

Contractor

Yes

Yes

Yes

Nominee Supervisor

Yes

Yes

Site Supervisor

Yes

Fire OccupationalYes

In relation to the licence classes, they are varied depending on the scope of work performed for a particular project. For example, irrigation or steel fixing. There are also varying levels of general building licences according to the type of building. These are divided into low rise, medium rise and open.

In New South Wales, there are three categories of licence:

• Contractor licence – allows you to contract and advertise to do work.

• Qualified Supervisor Certificate – allows you to supervise and do the work described on your certificate.

• Endorsed contractor licence – is issued to individuals who apply for a contractor licence and who also have the qualifications and experience needed to be a qualified supervisor.

What happens if I carry out building works without a license?

In Queensland, the QBBC Act makes it an offence to undertake to carry out building work without a license of the appropriate class. The maximum penalty:

  • for a first offence is 250 penalty units;
  • for a second offence is 300 penalty units; and
  • for a third or later offence is 350 penalty points or 1 year’s imprisonment (this offence constitutes a crime pursuant to the QBCC Act).
  • In addition, you will only be entitled to reasonable remuneration for carrying out the construction work which generally means you can only claim for the cost of supplying material and labour only and not any profit.

In New South Wales, a person who performs building works without a licence may receive a penalty:

  • for a first offence – maximum 1,000 penalty units; and
  • for a second or subsequent offence – maximum 500 penalty units or imprisonment for a term not exceeding 12 months, or both.

Do I need to have a written construction contract?

In Queensland, all:

  • domestic building work costing more than $3,300.00 must be covered by a written contract. Whilst you need not have a construction contract for works that are valued at less than $3,300.00 it is a good idea to have a contract in place or at the very least a detailed written quotation; and
  • commercial building work costing more than $10,000.00 must be covered by a written contract.

In New South Wales, all:

  • residential building work over the price for labour and materials of $5,000 (GST incl.) must be documented by written contract. There are two classes of residential building contracts for NSW: Small Jobs Contract which are between a value of $5,000 and $20,000 and Contracts (other than Small Jobs) above $20,000; and
  • commercial building works over $20,000 must be covered by a written contract.

Are there any laws that regulate how much deposit is to be paid pursuant to a construction contract?

In Queensland, the maximum deposits permitted are:

  • 5% of the total contract price for domestic building work costing $20,000.00 or more; or
  • 10% for work costing more than $3,300 but less than $20,000.00.

In New South Wales, the maximum deposit is 10% of the contract price.

What should I do if I get involved in a construction dispute?

Your building contract is an important document. It sets out the rights and responsibilities of each party to the building contract. It therefore follows that you must first check the building contract to determine your legal position.

The relevant laws and regulation of your State or Territory also set out your rights and the course of action you can take if you find yourself in a situation where you are faced with a building dispute. In addition, the course of action you take to resolve the building dispute will depend on whether you have a domestic construction contract or a commercial construction contract. It is a good idea to seek legal advice at the outset of the first signs of a dispute.

How do I protect my payment rights if I’ve entered into a commercial construction contract?

The Security of Payment legislation has the primary purpose of facilitating cash flow for commercial construction projects in each respective State and Territory. It achieves this objective by regulating commercial construction contracts and establishing a regime of strict payment terms that exist in each transaction.
Accordingly, protecting payment rights occurs by adopting the provisions of the legislation and implementing procedures that coincide with the process.

This includes the issuance of payment claims on and from reference dates, in addition to responding with payment schedules. When disputes arise, these documents will be critical to adjudication and other mechanisms under the relevant statute. Each State and Territory has its own legislation that deals with security of payment.

For further details on the security of payment legislation in Queensland and New South Wales please click here. [insert hyperlink to packages]

What do I do if I discover defective building work to my home?

In Queensland, you may lodge a complaint at the QBCC. If the QBCC determines that they have the power to take further steps with respect to your complaint, a QBCC inspector will carry out a site inspection.

The QBCC inspector will then issue a decision either directing that the works complained of are not defective or directing that the Builder is to rectify the defects. If the Builder fails to rectify the defects, the QBCC may commence disciplinary action against the Builder and the defective work may also be rectified pursuant to a claim under the QBCC home warranty insurance scheme.

In New South Wales, you will need to raise a complaint either through Fair Trading or bring proceedings through a court of competent jurisdiction. Defective residential building work may be covered by the iCare Home Building Insurance, but is only paid after the liability has been established. This is because unlike Queensland with the QBCC, the NSW system is an insurance of last resort.

Is it necessary to get a standard form construction contract reviewed?
Yes, we would recommend that you have a standard form construction contract reviewed. Contrary to popular belief, standard form construction contracts can be amended. We would recommend that you have your standard form construction contract reviewed to:

  • Ensure that the clauses are compliant with existing legislation. This is a common issue, considering frequent changes in legislation.
  • Ensure that your rights and interests are adequately protected.
  • Simplify, where appropriate, contractual mechanisms to coincide with the nature of the project and development.
  • Modify the payment terms.
  • Have standardised processes and documentation that complement the contract that may not be immediately apparent, such as variation and extension of time forms.
  • Create awareness regarding rights and obligations, particularly with respect to payment obligations, resolving disputes, termination clauses and default of payment.

At Rostron Carlyle Rojas lawyers we have low fixed fees for the review of home building contracts starting from as little as $450.00. You can find further details click here.

Instalment Contracts and Forfeiture of Deposits

Business Due Diligence

A recent matter reminds us all that in a hot real estate market and rising prices, any delays in settlement can be a fundamental breach. However-not all may be lost if there is an instalment contract.

We recently acted for a buyer of an off the plan property on the Gold Coast who initially signed a contract for $2,000,000 in 2017.

A deposit was paid of 10% of the purchase price at the time of signing.

4 years later when the developer called for settlement, the buyer’s financier was not ready to settle and sought a short extension to settle.

The developer refused to grant the extension, and purported to terminate and forfeit the deposit of $200,000 on the basis that the contract expressly provided time was of the essence and the failure to settle on the due date was a fundamental breach of the terms of the contract. The developer then offered to re-sell the property to the buyer at what it considered to be the current market value of $2,500,000-an increase of $500,000 ! Clearly, the developer had simply sought to take advantage of the market conditions and the increased value.

Naturally the Buyer was less than impressed and sought our advice.

Upon further investigation, it transpired that some months before the settlement was due, the developer’s had offered to build an additional storage area for the buyer attached to its basement carpark for $3,500. This additional storage area was offered on the basis that it would be “on title” and that the buyer would have exclusive use, and the CMS would reflect the additional space.

This offer was accepted and the additional storage area fee was paid.

Instalment Contracts definition

Was the additional storage space fee payment a payment “other than a deposit”?

In our view, this additional storage fee triggered the instalment provisions of the Property Law Act.

Under the Property Law Act 1974 (Qld) (PLA), section 71 defines:

a “deposit” as follows:

deposit” means a sum—

(a) not exceeding the prescribed percentage of the purchase price payable under an instalment contract; and

(b) paid or payable in 1 or more amounts; and

(c) liable to be forfeited and retained by the vendor in the event of a breach of contract by the purchaser.”

an “instalment contract” as follows:

“instalment contract” means an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments.

a “prescribed percentage” as:

“prescribed percentage” means—

(a) for a contract for the sale of a proposed lot—20%; or

(b) otherwise—10%. 

30 days notice to terminate required

The effect of this was that the Developer had failed to terminate in accordance with S 72 which provides:

S71 (1) An instalment contract shall not be determinable or determined because of default on the part of the purchaser in payment of any instalment or sum of money (other than a deposit or any part of a deposit) due and payable under the contract until the expiration of a period of 30 days after service upon the purchaser of a notice in the approved form.

Following our robust representations to the developer’s legal representatives and threats of court action, the developer relented it position and offered to re-sell the unit at the original contracted price and credit the forfeited deposit to the new contract.

Our client buyer refused this kind offer and sought an immediate refund of the deposit, storage fee and interest. This was agreed upon and paid.

But for the fact that the additional storage fee made the contract an instalment contract, the developer was entitled to terminate and forfeit the deposit.

The matter was a timely and stark reminder that in a rising market with property values rapidly escalating, buyers must have their finance in order to settle on time or face the possible termination and loss of their deposits. However-in certain circumstances, and with the benefit of good legal advice, it may be possible to avoid the drastic consequences of a purported termination. It also emphasises the need for developers to  be aware of the consequences of accepting additional payments “other than” deposit monies before deciding to terminate.

If you have any queries on these matters-please contact us;

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

 

Small Business Restructuring Reforms Now in Effect

On 1 January 2021, a number of amendments to Chapter 5 of the Corporations Act (2001) (Cth) came into effect, establishing a new framework of Australian insolvency law to better serve small businesses as they try to cope with the economic impact of COVID-19. 

Takeaways

  • Businesses with liabilities of less than $1 million will be entitled to a new debt restructuring and liquidation process, aimed at providing faster and lower cost pathways for businesses in financial distress. 
  • The reforms introduce a debt restructuring process that allows business owners to retain control of their company while a restructuring practitioner develops a debt restructuring proposal. 
  • The small business insolvency reforms are aimed at increasing the rate of successful restructures as well as reducing the number of financially distressed businesses entering voluntary administration and liquidation. 

Overview

Small businesses experiencing financial distress should note three key reforms to the Australian insolvency law that might be available to them:

  1. A new debt restructuring process to provide small businesses with a faster and less complex mechanism for financially distressed, but viable, companies to restructure their existing debts;
  2. A new simplified liquidation process for small businesses to allow faster and lower-cost liquidation, increasing returns for creditors and employees; 
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business. 

Small Business Debt Restructuring Process

The most significant insolvency law reform is the introduction of a new debt restructuring process for small businesses (Restructuring Process). Under the new debt restructuring model, eligible companies are able to approach a registered small business restructuring practitioner (Restructuring Practitioner) to assist in reviewing the business’ financial affairs and developing a restructuring plan to be put forward to the creditors within 20 days of their appointment. 

Once the plan is put forward, creditors are given 15 days to vote on the plan, after which the plan is either implemented and distributions are made according to the plan’s terms, or the company may resolve to go into some other form of external administrations (voluntary administration or the small business liquidation process, as discussed below). 

Eligibility

A company will be eligible for the Restructuring Process where:

  • Its liabilities are than less than $1 million (any liability that is not contingent)
  • It has not been the subject of a separate Restructuring Process in the past 7 years
  • It is not currently the subject of other forms of external administration. 

Additionally, before a Restructuring Practitioner may propose a restructuring plan to the company’s creditors, they must ensure the company:

  • Has paid its employee entitlements due (including its employees’ superannuation); and 
  • Has its tax lodgements up to date (this includes returns, statements applications and any other documents required under the taxation law, but this does not require all tax debts to be paid where the lodgements are up to date). 

Who May Act as a Restructuring Practitioner?

As the law currently stands only registered liquidators are permitted to consent to an appointment as a Restructuring Practitioner. However, it is the intention of the legislation to create a new class of registered small business Restructuring Practitioner, under the Insolvency Practice Rules, that solely focuses on small business restructuring.

Additionally, certain classes of persons are excluded from acting as a Restructuring Practitioner, including creditors of the company over the value of $5,000, related entities or auditors of the company. 

Powers of the Restructuring Practitioner and the Company

The small business restructuring process allows the company to continue trading in the ordinary course of business under the control of its owners, which is overseen by the Restructuring Practitioner while a debt restructuring plan is developed and proposed to the Company’s creditors. Any trading outside the company’s ordinary course of business requires the prior approval of the Restructuring Practitioner. 

The role and function of the Restructuring Practitioner include: 

  • Examining the company’s financial records and determining if the business is viable;
  • Assisting the company in developing a debt restructuring plan to restructure its debts; 
  • Proposing the plan to the company’s creditors; and 
  • Managing the disbursements if the plan is approved. 

It is the Restructuring Practitioner’s responsibility to remain as an independent third party and to ensure that the creditor’s rights are represented and protected, this includes preserving the rights of secured creditors and treating similarly ranking creditors consistently. 

Only creditors who are not related entities may vote on the restructuring plan, and in order for it to be approved, the plan requires the majority of value of the creditors to vote in favour. If the proposal is successful it binds all creditors. 

Once the plan is approved, the practitioner remains in his position and administers the plan according to its terms. If the plan is voted down, the process ends and the company may proceed in an alternative form of external administration – this may include the simplified liquidation process set out below. 

New Small Business Simplified Liquidation Process

The second key reform which came in effect on 1 January 2021 is the new small business simplified liquidation process, which gives eligible companies access to a faster and cheaper alternative to the standard large scale, complex liquidation process. 

Details of the Simplified Liquidation Process

Where a liquidator has been appointed pursuant to a creditor’s voluntary liquidation and they consider on reasonable grounds that the company meets the eligibility criteria, the liquidator may choose to adopt the small business liquidation process rather than the standard creditor’s voluntary liquidation process. 

The simplified liquidation process is faster and simpler than the standard process, with the aim of a greater return to the company’s creditors and employees. Under the new process:

  • the liquidator is not required to submit a section 533 report to ASIC on potential misconduct unless there are reasonable grounds that misconduct has occurred. 
  • the liquidator is not required to hold formal creditor’s meetings and can instead distribute information to creditors, and proposals for voting, electronically. 
  • The unfair preference voidable transaction provisions are restricted to prevent the liquidator pursuing claims against unrelated entities.
  • The system of dividend distribution and proof of debt submission is simplified. 

Eligibility

In order for a company to be eligible for the simplified liquidation it must satisfy a number of requirements under the legislation including:

  • The company must already be in liquidation pursuant to a creditor’s voluntary liquidation.
  • The company must have liabilities less than $1 million.
  • The company must have its tax lodgements up to date (returns, notices, statements and applications as required by taxation laws). 

Creditors may also request in writing that the liquidator not follow the simplified liquidation process within 20 days of the event triggering the simplified liquidation process, and the liquidator must cease the simplified liquidation process if the eligibility criteria are no longer met. 

Complementary Provisions to Support the Insolvency Reforms

In addition to the debt restructuring process and the simplified liquidation process, a number of other amendments have been made to the Corporations Act to assist insolvency practitioners and distressed companies to transition into these reforms. 

Temporary Relief for Companies Seeking a Restructuring Practitioner

To assist in the transition into the small business reforms and as insolvency practitioners become more familiar with the processes, from 1 January 2021 until 31 March 2021 eligible companies are able to declare their intention to utilize the small business restructuring process through ASIC’s published notices website. 

If a company declares their intention to access the Restructuring Process with ASIC, the insolvency relief that applied in 2020 (extended compliance period for statutory demands and temporary protection from insolvent trading liability) will continue to apply until they are able to engage an eligible Restructuring Practitioner before 31 March 2021.

New Small Business Restructuring Practitioner

As the law currently stands, only registered liquidators are eligible to act as Restructuring Practitioners, however, under the insolvency practice rules a new classification of insolvency practitioner will be created that will solely focus on small business restructures.

To streamline the small business restructuring process, the new classification of practitioner will have their practice limited to small business restructurings only and will be offered to registered chartered accountants, in addition to insolvency professionals. It would seem the aim of this new classification is to try to increase accessibility and supply of available practitioners to meet potentially higher demand for small business debt restructuring. 

More Reforms

Other complementary provisions include:

  • Key sections of Chapter 5 of the Corporations Act have been made “technology neutral” so to allow external administrations to be carried out without a formal meeting of creditors.
  • Fees associated with registration as a registered liquidator are waived until 30 June 2022.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

 

Update to Ending of COVID-19 Relief Measures

 

Overview

On 22 March 2020 the Government announced temporary insolvency relief for financially distressed companies, to help businesses get to the other side of the Coronavirus crisis. 

The temporary insolvency relief increased the thresholds at which creditors could issue a statutory demand (or a bankruptcy notice) and the compliance time for debtors to respond to statutory demands and bankruptcy notices. 

As a result of the temporary relief measures, creditor enforcement action (to recover debts) effectively graded to a halt. Businesses that would otherwise have failed (and entered External Administration) were kept alive through a combination of lack of creditor debt recovery action and other Government relief incentives. Such as JobKeeper – which was intended to give temporary support to viable businesses during a period of broader mandatory restrictions and shutdowns. 

Consequently, the number of businesses entering External Administration (liquidation or voluntary administration) dropped over 50%. This compared to the same period last year and, in the September quarter 2020, bankruptcy numbers were at their lowest level since AFSA records began in 1986. 

Temporary relief was also given to directors of companies from any personal liability for trading while insolvent, with respect to debts incurred by the company in the ordinary course of the company’s business. Provided that an external administrator was appointed to the company before the moratorium’s expiry, being before 31 December 2020.

The temporary insolvency relief measures expired on 31 December 2020 (while JobKeeper currently has a scheduled end date of 28 March 2021).

Insolvent trading moratorium ends

  • Many people appear to be operating under the misunderstanding that the insolvent trading moratorium (in effect during the March – December 2020 period) provides a complete shield from personal liability for insolvent trading. That is simply not the case.

  • Directors trading-on a business beyond 31 December 2020 will be exposed to the insolvent trading provisions of the Corporations Act 2001 throughout any period that the company was insolvent—including the March-December 2020 period—should the company later end up in liquidation.

  • Directors should be aware that they would only be afforded protection under the temporary relief measures IF they appointed an external administrator to the company before the moratorium’s expiry, i.e., before 31 December 2020.

  • For the avoidance of doubt, directors of companies who are still trading now that were trading insolvent during the March – December 2020 period, and that later end up in liquidation, will be exposed to personal liability for insolvent trading.

Where are we now?

On 1 January 2021 (following the expiration of the temporary insolvency relief measures) the Government’s insolvency reforms to support small businesses commenced. 

The reforms introduce new insolvency processes suitable for small businesses aimed at reducing the complexity, time and costs required to quickly and efficiently restructure their affairs. Where restructure is not possible, businesses can wind up faster via the simplified liquidation process, designed to enable greater returns for creditors and employees. 

The new small business insolvency reforms (see link below) include:

  • A new Debt Restructuring Process for small businesses;

  • Temporary restructuring relief; and

  • A new Simplified Liquidation Process for small businesses.

For more information about the Small Business insolvency and restructuring reforms, please access our separate article HERE

Personal Insolvency and Bankruptcy Notices

  • Changes to Bankruptcy laws:

    • In March 2020, the Australian Government announced a series of changes to bankruptcy law, as part of the wider economic response to the COVID-19 pandemic.

    • Those temporary changes included:

      • an increase in the debt threshold, which enabled creditors to apply for a bankruptcy notice;

      • an increase to the timeframe for a debtor to respond to a bankruptcy notice; and

      • an increase to the temporary debt protection period available to debtors. 

    • As of 1 January 2021, those temporary changes have ceased, however, an amendment has been made to adjust the bankruptcy threshold amount. 

    • Relevantly:

      • the minimum amount of debt that can trigger bankruptcy is now $10,000 (down from $20,000 under temporary changes). Before the temporary changes, the minimum amount of debt that could trigger a bankruptcy was prescribed at $5,000.

      • The timeframe for a debtor to respond to a bankruptcy notice has reverted to 21 days (from 6 months under temporary changes). This means if a bankruptcy notice is issued on or after 1 January 2021, the debtor will have 21 days to comply with the bankruptcy notice.

      • The period for temporary debt protection for debtors has reduced from six months (under temporary changes) to 21 days.

      • Two or more creditors can combine their judgement debts to meet that minimum amount and together apply to court to petition to have a mutual debtor declared bankrupt

    • Back on the discussion table for government is the potential permanent bankruptcy reform to reduce the default bankruptcy period from three years to one year. That potential reform had stalled previously, but it may become a reality 2021.

Statutory Demands

Effective as at 1 January 2021, for creditor’s statutory demands against companies:

  • the minimum amount of debt for a statutory demand, that can trigger a winding up application, is now $2,000 (down from $20,000 under temporary changes), which is back to the way it was before the temporary changes.

  • The timeframe for a debtor to respond to a statutory demand has reverted to 21 days (from 6 months under temporary changes). This means if a statutory demand is issued on or after 1 January 2021, the debtor will have 21 days to comply with the statutory demand.

Update on JobKeeper

  • Ends 28 March 2021.

  • According to Federal Treasurer the Hon Josh Frydenberg MP, JobKeeper has costs $77 BILLION to date and at its peak was supporting 3.6 million Australian workers and around 1 million Australian businesses.

  • JobKeeper has now entered the second phase of its extension (from 4 January 2021). 

    • In this current phase, eligible businesses receive $500 per week for each staff member working at least 20 hours per week, down from $600. Other employees attract a payment of $325 per week, down from $375.

    • The tier 1 rate applies to eligible employees who worked for 80 hours or more in the four weeks of pay periods before either 1 March 2020 or 1 July 2020, and eligible business participants who were actively engaged in the business for 80 hours or more in February and provide a declaration to that effect.

    • The tier 2 rate applies to any other eligible employees and eligible business participants.

  • We anticipate that a significant number of businesses currently being kept alive solely by JobKeeper, will enter External Administration sometime after 28 March 2021.  

Practical tips & takeaways

  • Use the correct and updated Statutory Demand and Bankruptcy Notice forms to avoid challenges relating to material deficiencies in light of the above changes effective from 1 January 2021. 

  • Directors who think their companies were trading insolvent prior to 1 January 2021 (or since) should seek professional advice urgently to consider the options for their business and their personal position. 

  • Pressure from creditor enforcement being able to resume, and from JobKeeper coming to an end, will see an increase in companies entering External Administration and personal bankruptcies, likely from about March 2021. Business owners, directors and creditors should prepare themselves for new waves of insolvency and restructuring coming soon.

If you have felt the effects of the pandemic on your business or require assistance or clarification in relation to the ending of the temporary relief for financially distressed companies and businesses, now is the time to get advice on how to structure your company’s affairs or recovery activities.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]