Company Liquidation – Are you staring down that financial gun barrel?

Are you a company struggling to pay your debts? Are you considering turning it all in? If so, a creditor’s voluntary liquidation (CVL) is a process that will allow a company’s shareholders to voluntarily wind up the company.

So, what is CVL?

A CVL is the winding up a company by a special resolution of the company’s shareholders to appoint a liquidator, usually when the company is (or may be) insolvent.

What does the liquidator do?

Upon the winding up of a company, a liquidator has several duties, including but not limited to:

  • assessing and realising the company’s assets for distribution amongst the company’s creditors;
  • conducting investigations of the following matters:
  • when the company became insolvent and whether any debts were incurred after that date;
  • whether the director committed any offences;
  • whether there are any payments to particular creditors that are preferential and other transactions that may be recoverable; and
  • providing reports to creditors and obtaining relevant approvals from creditors; such as approval for their recommendations and costs to be paid from recoveries made in the liquidation;
  • providing reports to the Australian Securities and Investments Commission (ASIC) regarding any misconduct of a director prior to liquidation.

Once the liquidator has completed their investigations and realised that all assets can reasonably be obtained and sold, it will then lodge the necessary documents with ASIC to deregister the company.

What are the effects of a liquidation?

The consequences of liquidation include:

  • the management and control of the company vesting in the liquidator;
  • creditors of the company losing the ability to commence a claim for monies owed;
  • in most cases, the dissolution of the company.

What are the Director’s Duties and Obligations of an Insolvent Company?

Upon the appointment of a liquidator, a director (and any officers of a company) must:

  1. deliver to the liquidator all books and records that relate to the company (other than those to which an officer is entitled to retain);
  2. give the liquidator information about the company’s business, property, affairs and financial circumstances;
  3. provide the liquidator with any further information or documents it requests; and
  4. attend meetings of the company’s creditors or members as the liquidator reasonably requires.

The duties and obligations of a director of an insolvent company are contained in the Corporations Act 2001 (Cth) (Act). Notably, the powers of a director cease on the appointment of a liquidator, and the liquidator takes control of the company’s operations.

So, what happens when a director is operating a company while insolvent?

If a director allows a company to incur debts while insolvent prior to entering into CVL, the director may become personally liable for those debts.

Also, if a claim is made against a director alleging that the company was trading whilst insolvent, and as a consequence the creditor(s) suffered a loss, the director may be held personally liable when the company goes into liquidation.

Subsequently, if the liquidator determines a breach of the Act by a director, they will lodge a report with ASIC. ASIC will review the matter and if deemed appropriate, take action to prosecute the director, including potentially disqualifying a director from managing a corporation.

What happens if a director has provided a Personal Guarantee?

A personal guarantee is a document signed by a director that guarantees the debt incurred by the company. A director who has provided a personal guarantee will be liable for the company’s debt or commitment if the company does not meet its obligations.

If the company becomes insolvent, and the company’s assets are unable to meet the debts, then the focus will turn towards any personal guarantees the director/s has provided.

What now?

If you are a company struggling to pay your debts and thinking of turning it all in, call Rostron Carlyle Rojas Lawyers to discuss. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts. 

This article is written by way of general comment and any reader wishing to act on information contained in this article should first contact Rostron Carlyle Rojas Lawyers for properly considered legal advice which takes into account your specific situation.

Cabinet Speech – Sunday 22 March 2020

cabinet stimulus package

The Cabinet met again on Sunday 22 March 2020 to announce a further stimulus package along with changes to regulation of corporations under the Corporations Act.

Proposed changes to the Corporations Act will seek to loosen regulation of the insolvency laws. Key changes being:
● The response time for Statutory Demands is to be extended from 21 days to 6 months
● The minimum for corporate insolvency to be raised from $2,000 to $20,000
● The response time for answering a bankruptcy notice will be extended 6 months
● The minimum threshold for personal bankruptcy to be raised from $5,000 to $20,000
● Temporary relief from directors’ personal liability for trading while insolvent
● Treasurer to have an instrument-making power, meaning the Treasurer can make ad hoc decisions on a case by case basis to provide relief to distress corporations

For more details, see the linked Fact Sheet published by the Treasury.

A large economic stimulus package has been announced which allows for those most effected by the effects of COVID-19 to access monies they otherwise may not have been able to. This includes:
● Early access to up to $10,000 of Superannuation entitlement. This is likely to be made available to those who have lost their jobs, SMEs and sole traders.
● Additional monies for Jobseekers through government benefits
● Interest free loans for businesses

For more detail, see the linked Fact Sheet published by the Treasury.

PM Scott Morrison pleaded with Australians to cut off all non-essential travel. He defined essential travel as ‘travel that is essential to your daily life’. This includes travel for work purposes, health purposes and normal daily activities such as shopping for food. There are no strict enforceable measures restricting travel within Australia on a Federal level yet. The Cabinet are simply asking Australians to be pragmatic and understanding that it is not just themselves that they must consider, but also those who they may come into contact with that we also must be mindful of.

New Legislation Brings Major Changes To The Building And Construction Industry

On 5 February 2020, the Queensland Government introduced the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) (“Bill”) that will bring major changes to the building and construction industry.

The Bill proposes extensive changes to the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (“BIF Act”) that will ensure effective, efficient and fair payment procedures for those who work in the building and construction industry.

These changes will be rolled out in 4 phases; the commencement dates of each phase are outlined below.

Background to the new Building Industry Fairness Legislation

On 14 May 2018, the Minister for Housing and Public Works, Minister for Digital Technology and Minister for Sport established the Building Industry Fairness Reforms Implementation and Evaluation Panel (“the Panel”). The goal of the panel was to review the implementation and effectiveness of the building industry fairness reforms introduced by the BIF Act and provide recommendations accordingly.

The panel’s recommendations were provided in the Building Industry Fairness Reforms Implementation and Evaluation Panel Report (“the Report”).

The Bill was issued as a direct response to the Report, which proposed 20 recommendations to the BIF Act. These recommendations have been grouped into three major themes:

  • Managing the financial transition – to enable minimum financial stress following implementation;
  • Simplifying the framework – to reduce administrative costs while providing for transparency; and
  • Improving protections – by obligating all contractors and private principals in the contractual chain to hold retentions on trust and providing new mechanisms for securing funds in dispute to all claimants.

The Queensland Government has accepted, or accepted in-principle, all 20 recommendations.

Key changes

Major changes have been proposed by the Bill, including reform of project bank accounts (“PBAs”), improvements to the security of payment regime and imposing liability for executive officers.

Project Bank Accounts

The PBA framework will be simplified by removing the requirement for each contract retention to have a separate trust account. This will mean less administration for head contractors and ensure payments that subcontractors are entitled to are protected until they are due to be paid.

Previously, PBAs were only required by government building contracts between $1 million and $10 million. Head contractors were required to have a set of 3 trust accounts (known as PBAs) for each qualifying project that operated to secure funds, under a building contract, until they are paid to a subcontractor:

  1. progress payments;
  2. disputed funds; and
  3. retention money.

The new framework will remove the disputed funds account and rename PBAs “Project and Retention Trusts” accordingly. The new approach to dealing with disputed funds is outlined below under ‘Security of Payment’.

Following implementation of the Bill, head contractors will be required to establish a Project Trust for each project and a Retention Trust for all cash retentions held. This framework will eventually be expanded to all building and construction contractors (including subcontractors) and the private sector through the aforementioned phased approach.

The Queensland Government has acknowledged that the “removal of project and retention funds from operating capital is an intended consequence of the reforms and some businesses may need to change their financial management practices and find other sources of working capital from savings, by increasing debt, or liquidating assets”[1]. In an attempt to overcome this, it has been put forward that the roll out approach will leave “plenty of time for the industry to prepare and have new administrative procedures in place, minimising financial stress”[2].

Security of Payment

The Bill introduces many changes that will improve the security of payment regime by increasing protection for contractors (including head contractors) and subcontractors from a failure to pay by principals. The following examples are some of the major changes presented by the Bill.

Based on New South Wales’ model, head contractor’s payment claims will be required to be accompanied by a supporting statement. Payment claims are requests for payment given to an individual or company from a contractor progressively for construction work (or related goods and services) completed under a construction contract to a certain point in time. The supporting statement must declare that all subcontractors have been paid as at the date of the payment claim or identify any subcontractors which have not been paid and the outstanding amounts.

Further, it will be an offence to pay less that what is stated in a payment schedule. A payment schedule, as required by the BIF Act, is a document that identifies a specific payment claim, states the amount that will be paid and provides reasons if the amount that will be paid is less than the payment claim.

The Bill also introduces additional measures to secure payment. Claimants will be able to make payment withholding requests against the principal over amounts in dispute in adjudication. Payment withholdings requests will enable a claimant to require a higher party [3] to retain the adjudicated amount [4]. Additionally, head contractors can register a security interest over a property for an unpaid adjudicated amount if the respondent is the registered owner of the property [5].

Liability for Executive Officers

Executive officers will be personally liable for certain trust offences by the company if all reasonable steps in ensuring the corporation did not engage in the offending conduct are not taken [6].

An executive officer (of a corporation) is a “person who is concerned with, or takes part in, the corporation’s management, whether or not the person is a director or the person’s position is given the name of executive officer” [7].

Offences that will attract executive liability include withdrawing money from a Project Trust account for an inappropriate purpose, which has a maximum penalty of 300 penalty units ($40,035 at the time of writing) or 2 year’s imprisonment [8], and dissolving a Project Trust without authorisation, which has a maximum penalty of 500 penalty units ($66,725 at the time of writing) or 1 year’s imprisonment [9].

When will the changes be rolled out?

The enhanced PBA program will be rolled out in 4 phases. The phased approach aims to ensure that those most capable to cope with the changes will be affected first.

It is anticipated that Phase 1 will commence on 1 July 2020, extending to government building projects, including Health and Hospital Services, above $1 million.

Phase 2 will commence on 1 July 2021 and will apply to all building projects above $10 million.

Phase 3 will commence on 1 January 2022 and will apply to all building projects above $3 million.

Phase 4 will commence on 1 July 2022 and will apply to all building projects above $1 million.

What this means for you?

Implementation of the Bill will affect every stakeholder in the Queensland building and construction industry.

Participants should familiarise themselves with the Bill to ensure compliance with these forthcoming amendments. In particular, those who will be affected by the replacement of the previous PBA framework with Project and Retention Trusts should consider any financial impacts well in advance of commencement.

How can we help?

If you would like to know more on how the Bill will affect you, please contact our Building & Construction Lawyers on (07) 3009 8444 or email us at [email protected]

 

References:

[1] https://www.hpw.qld.gov.au/__data/assets/pdf_file/0028/9199/panelgovernmentresponse.pdf.

[2] http://statements.qld.gov.au/Statement/2019/11/28/palaszczuk-government-delivers-confidence-for-queensland-tradies-and-business.

[3] If the claimant for the amount is a subcontractor—the person from whom an amount is or becomes payable to the respondent under an arrangement with the respondent for related work or services; if the claimant for the amount is a head contractor—the person who is the financier for the related work or services.

[4] Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) s 97B(2).

[5] Ibid s 100B.

[6] Ibid s 58A.

[7] Ibid.

[8] Ibid s 20A.

[9] Ibid s 21A.

Insolvency 101 – What every business owner should know

Insolvency 101

Your introductory guide to insolvency and what to do if you believe you are trading insolvent

Insolvency is the inability to pay bills as they become due. While the term ‘insolvent’ can apply to both companies and individuals, personal insolvency is more commonly referred to as ‘bankruptcy’ and is a vastly different process than company insolvency.

As a company director or owner, you have a legal obligation to run the business a certain way, including ensuring that creditors are paid in full and on time.

Your obligations as director/owner and the potential consequences

Knowingly trading insolvent is an offence and could cause you to become personally liable for the company’s debt. When in doubt, seek help early from financial and legal professionals. The worst thing you can do is to do nothing at all.

If you are the director/owner of an insolvent company, the potential consequences include:

  • Loss of employment for yourself and the employees due to the company’s closure
  • Struggling to secure employment in the future due to your record as the director of an insolvent company
  • Loss of personal assets (including your house) 
  • Monetary fines or, in cases where director duty has been severely breached, criminal charges or jail time
  • Personal insolvency/bankruptcy

Generally speaking, if a company is set up and has been operated correctly, you will not be personally liable for company debts. Exemptions to this are where you have knowingly traded insolvent, you have breached your duty as a director, you gave a personal guarantee in order to secure capital or you have engaged in illegal activity.

The warning signs – how do I know when my company is insolvent?

With the potential consequences at stake, it’s vitally important that as a company director/owner, you know the warning signs of insolvency and understand when it’s time to ask for help.

Insolvency, or at least the path towards insolvency, can include cash flow problems, being unable to pay creditor bills within the outlined payment terms, needing to refinance in order to pay bills or letters from solicitors or debt collectors demanding payment for outstanding invoices.

how do I know when my company is insolvent
How do I know when my company is insolvent?

When you are insolvent

If your company is found to be insolvent, there are several potential outcomes:

  • Voluntary Administration
  • Liquidation
  • Receivership

Voluntary administration

In the instance of voluntary administration, the directors of a company enlist the assistance of insolvency lawyers, rather than being forced into liquidation by an unhappy creditor.

Following an in-depth investigation into the company set-up, financials and operations, a voluntary administrator will recommend either going into liquidation (more on this to come) or coming to an agreement with creditors in which the payment term is extended so as to allow the company to trade out of its insolvency.

Liquidation

Liquidation can be either recommended by a voluntary administrator or forced upon a company by a liquidator, usually acting on behalf of the group of creditors as a whole. 

Liquidation meaning
Liquidation process

A liquidator will collate your assets and liquidate them (that is, to sell the physical asset and turn the asset into cash). These funds will then be dispersed amongst known creditors, paying off as much of the total debt as possible.

At the conclusion of this process, the company will be deregistered and will cease to exist.

Receivership

Receivership is a situation where money is owed to a secured creditor (generally a bank), that creditor can elect a receiver to operate on their behalf. The receiver will either liquidate the company assets or take control of the company operations so as to trade the business in the hope of repaying debts owed.

A key difference between liquidation and receivership is that a liquidator acts on behalf of all creditors, whereas a receiver acts only on behalf of the secured creditor. A receiver will first ensure that money owed to the secured creditor is paid before paying out other creditors.

What now?

Whether you are a company director trying to avoid insolvency or have found your company to be insolvent, the worst thing you can do is to do nothing at all. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts. 

The Rostron Carlyle Rojas team of Insolvency Lawyers are the experts on your side. Speak to them today and start the journey out of insolvency. 

Recommended for you:  Insolvency- The Ultimate Guide

What is the role of a litigation lawyer?

What Is The Role Of A Litigation Lawyer

Civil Litigation is a process of resolving disputes between parties. Generally, parties use the court process to enforce, exercise or defend a legal right. A litigation lawyer or litigator can represent either the applicant (plaintiff) or the respondent (defendant) in the matter.

As a lawyer, our first duty is to the court. Our role is to advocate in the best interests of the client, though without misleading the court. It is a common misconception that litigation lawyers spend most of their day (and the case) fighting for their client’s rights in a court room. In truth, the majority of litigation matters are dealt with and settled without the need to appear before a judge.

What qualifications do you need to be a litigation lawyer?

A litigation lawyer is a lawyer who practises in the area of litigation. As such, the qualifications required to be a litigation lawyer is the same as that to be a lawyer. To be eligible to practise as a lawyer in Australia, one must:

a. have completed a law degree from a recognised university;
b. have completed an accredited practical legal training course;
c. be formally admitted to practise in their respective state; and
d. hold a current practising certificate.

It is an offence to hold yourself out as a lawyer without completing the above steps.

Set out below is a general overview of the litigation process.

Initial case assessment and investigation

Generally, prior to proceeding with any matter, a lawyer would initiate a preliminary investigation of the case. The purpose of this initial case assessment is to understand and collect information to establish the issues in dispute and the outcomes sought by the client. After an investigation of all available information, the lawyer should provide their client with an advice as to their prospects of success and options moving forward (if any). In this advice, the litigation lawyer may request their client’s further instructions or documents to verify their initial position.

Commencing proceedings

Generally (and depending on the jurisdiction), court action can be initiated by way of Application or Statement of Claim (originating document).

Should a litigation lawyer be instructed to commence a court action, they will draft the pleadings, file a final version of that document with the relevant court and have a sealed (a copy stamped by the court) version served on the other side.

If the client is served with an originating document, then the next step (depending on the jurisdiction) is to prepare, file and serve their client’s defence to that originating document. The relevant state rules provide a timeframe which parties are to adhere to in such proceedings.

The discovery process

The litigation process places an ongoing obligation on both parties (and their representatives) to disclose (or exchange) documents held in their possession which relates to the issues in dispute to the other party, this is also known as discovery. The purpose of discovery is to make the parties aware of the evidence to be relied upon, and prevent surprise at the trial. This formal exchange of documents is usually commenced by serving of a list of documents that a party has in its possession or control that are directly relevant to the case.

However, it is noted that not all documents held in a party’s possession can be exchanged in discovery, especially if they are subject to privilege.

During the discovery process, the lawyer may also assess and analyse the significance of the discoverable documents. This process is very important as it may assist with identifying issues, and planning strategic ways of strengthening their client’s position.

Pre-trial processes

Once the discovery is complete, the parties will (if they have not previously) commence trial preparation.
At this time, the parties may attempt to resolve the dispute through an alternative dispute resolution (ADR) method such as mediation. Prior to requesting a date for trial, the parties are expected to make genuine attempts to resolve or reduce the disputes in issue. Genuine attempts by the parties to resolve the dispute prior to requesting a trial date is beneficial to both sides as it can assist in resolving the dispute in a mutually agreeable way (as opposed to being arbitrarily decided upon by a judge) and minimises further costs and delays.

Settlement Conference

In the Magistrates court of Queensland, engaging in a settlement conference is a required preliminary step before requesting a date for trial.

The purpose of a settlement conference is to convene the parties before a court registrar to discuss and attempt to narrow or resolve the issues in dispute. If a party fails to attend the conference, the registrar can grant judgment against the absent party.
In this process, a registrar acts as a neutral facilitator. The conference is normally conducted in person (however, parties can appear by telephone upon request). The conference provides for a without prejudice discussion of the contentious issues by the parties. A settlement conference may result in several outcomes, including but not limited to:
– no agreement being reached; or
– agreement in writing between parties; or
– admissions being made to narrow the issues in dispute, and subsequently the potential length of any trial.
All discussions (save for the terms of an agreement, if reached) are confidential.

Mediation

Mediation is an alternative ADR process that also assists parties in settling or narrowing the issues in dispute prior to trial (though without the presence of a court registrar). Similar to a settlement conference, mediations are without prejudice and points discussed or agreed upon cannot be relied upon by either party at a later date.

During mediation, a mediator (generally a barrister) would conduct and guide the parties through a structured process. A mediator is impartial and does not give advice or make decisions. A mediator also creates an environment where all parties have the opportunity to speak and be heard so that they can eventually agree on a mutually agreeable outcome.
Actively taking part in ADR can save time, stress, further legal fees and court costs.

Settlements in litigation cases

The parties are entitled (and encouraged) to settle their dispute at any time. Where appropriate, a lawyer may encourage the parties to settle the dispute. However, a lawyer cannot settle the dispute without their client’s instructions.
Once the terms are finalised, the lawyers for each party will organise the terms to be formalised in an appropriate deed, copies of which will be provided to and executed by each party.

The appeal process

After delivery of initial judgment of a civil court in Australia, if it is disputed, parties can appeal that decision to a superior court. Lawyers can assist their client in identifying the grounds of appeal, such as a significant and relevant error of fact or law decided in the first instance. The appealing party proceeds by submitting the necessary evidence and the requisite legal documents in order to start the appeal process.

Overall, the court process can be a confusing and overwhelming experience. It is important for individuals to understand their rights and obligations when dealing with the courts. Litigation lawyers at Rostron Carlyle Rojas Lawyers have experience in, and can assist with, all types of legal proceedings.

The above information is intended only as general information and should not be interpreted or relied upon as legal advice. If you require assistance to understand your rights and obligations when dealing with the courts, please do not hesitate to contact our office.

What’s the difference between Receivership, Administration, Liquidation and how does it affect creditors?

An insolvency practitioner’s appointment to a debtor is generally a worrisome thing to creditors as it is deemed to mark the company’s death with no return on any outstanding debts. While this is true that such an appointment is an indication of serious financial trouble. It is important to understand the differences between receivership, administration and liquidation and how they affect creditors dealing with a financially unstable company.

 

What is Receivership?

Simplified scenario: It mainly concerns the bank or secured creditors
Receivership is when a secured creditor such as a bank appoints a trustee to act as a custodian of company’s assets or business operations. This is done to make sure the bank or secured creditor gets paid.

Hence, a receiver operates only for the advantage of the secured creditor for whom it was designated and not all creditors (although they are subject to specific duties).

In most cases a receiver will be appointed under the provisions of a security instrument (such as a fixed and floating charge, or ‘all present and after- acquired property’), which specifies the powers of the receiver. A court order is not usually needed for a receiver’s appointment.

Depending on the type of the security instrument, a receiver may be appointed to simply realise and sell the secured assets, or to also take control of the company’s assets or business operations from the directors thus acting as (a receiver and manager).

Granted, receivership is not a good sign for unsecured creditors. But, it does not necessarily mean the company is folding or winding up. However, it is not uncommon at a practical level for an administrator or liquidator to be appointed immediately to represent the interests of unsecured creditors while the business is in receivership.

 

What is Voluntary Administration?

Simply put: The company can be saved
Voluntary administration is a process in which an insolvent company or company near insolvency is placed in the hands of an independent person who can evaluate all available options and produce the best result for a business owner and creditors.

You can read more on Voluntary Administration here:

 

Liquidation

Simply put: The business is winding up or has come to an end
Once a company has been placed in voluntary liquidation or compulsory liquidation the most likely outcome is the winding up of the business.

Read more about Liquidation here:

 

Personal Guarantees – A Creditor’s Safety Net?

personal guarantee

It is common practice for suppliers to require a Director to guarantee the obligations of an applicant company prior to advancing any goods or services on credit to them (“the Guarantor”). This is what is commonly known as a personal guarantee.

More frequently, a common issue facing suppliers or creditors (“a Creditor”) who issue, process and approve high volumes of credit applications is ‘improperly executed guarantees’.

When properly executed, and on the basis that the terms of the guarantees are drafted correctly and are able to be enforced, a personal guarantee can offer additional security and potential recovery avenues to a Creditor if the applicant company is wound up or otherwise becomes insolvent.

Generally, for a guarantee to be enforceable, it will require three conditions to be satisfied (“the Guarantee”):
1. It must be in writing;
2. It must be signed by the Guarantor; and
3. It must be witnessed.

When a Guarantee has not been properly executed (and not reviewed prior to the provision of credit), the Creditor may later find themselves in a predicament if the applicant company is unable to meet its obligations and becomes insolvent or is wound up.
This article will look at the ability of Creditors to enforce Guarantees in circumstances where the guarantee was improperly executed or not executed at all.

Unexecuted personal guarantees

Directors of companies may still be liable under an unsigned guarantee, if the guarantee can be construed as forming part of the initial credit application. The theory behind this position is that, commonly, credit applications and guarantees are included in the one document and accordingly, the execution of one section should be construed to be an execution or an agreement as a whole (including the guarantee).

In Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168 [58] , the Western Australian Supreme Court considered certain practices and whether they could be construed as a director showcasing their ‘objective intention’ to be bound by a guarantee. Particularly:

1. Whether the guarantor is specifically identified within the particulars of the agreement or if it can be argued that the guarantee provisions applied to the guarantor directly in plain terms;

2. Whether the guarantor’s signature has been witnessed. It was argued that there would have been no purpose for the potential guarantor’s signature to be witnessed if they had not intended to be personally bound;

3. Whether there were handwritten amendments or initials signifying that the guarantor had exhibited an intention to be bound by the amended or initialled sections; and

4. Whether there is any correspondence from the guarantor relating to the agreement on or about the date of signing the agreement.
Despite the position put forward by the above case, such a proposition would only occur in rare circumstances and generally, the Queensland Courts would be unlikely to take such a view.

Improperly executed personal guarantees

A personal guarantee given by an independent third party (for example a family member of the Director) may be set aside if the Court considers that the guarantee was unjustly obtained through misrepresentation, unconscionable conduct or the exercise of undue influence over the guarantor leading up to or during the execution of the guarantee.

Generally, for relief to be granted (and the guarantee set aside), it must be shown that the stronger party (usually the creditor) exploited the guarantor’s disadvantage to procure the security for the applicant company.
In Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402 (“Amadio”), the Court took into consideration whether the creditor knew or ought to have known about the misrepresentation of a material fact which induced the guarantee. In Amadio, the Full Court decided that the bank’s behavior was unconscionable as it took deliberate steps to conceal the Defendants’ son’s true financial situation from them prior to their execution of the guarantee (which directly influenced their decision to provide the guarantee to their son).

In light of the recent expose of unsatisfactory banking practices during the Royal Commission, if a similar matter was before them, it is likely that the judiciary could possibly be swayed to take a harder approach to such unscrupulous practices.

Minimisation of risks associated with unexecuted or improperly executed Guarantees

As a means of mitigating any potential losses, as well as minimising potential disputes arising from unexecuted guarantees (especially when a creditor subsequently attempts to rely on it), parties should take care to ensure that credit applications and guarantees are fully and properly executed prior to the provision of credit.

Should you require assistance in reviewing your current guarantee (or corresponding credit application) to further safeguard your rights when providing credit to companies, please contact our office on 07 3009 8444 to discuss further.

The effectiveness of injunctions in relation to claiming security under a construction contract

Performance Bonds

Introduction: performance bonds

A substantial body of jurisprudence has developed with respect to performance bonds provided pursuant to construction contracts and the relevant rights of the parties to such contract. It is clear that this form of security is intended to be the equivalent of cash. Indeed, the High Court of Australia has exclaimed that “instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts”. This seems to be the prima facie position that an applicant must displace to succeed in acquiring injunctive relief, preventing recourse to security. Consequently, the contract centrality becomes an underlying theme.

Approach by the courts regarding performance bonds

The authorities have recognised three principal exceptions to the obligation of an issuer of a performance bond, including:

1. In the event of fraud by the party seeking recourse;
2. Unconscionability by the party seeking recourse; or
3. A beneficiary has promised to not have recourse to the performance bond.

In respect of the third instance, the intention of the parties becomes critical and involves contractual interpretation. The case of Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (Clough) provides insight into this phenomenon and is an invaluable authority in relation to the approach adopted by the courts. Clough establishes the prima facie construction of the contract:

“Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation…will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party’s part, and that any further investigation of its merits or extent is not usually intended by the contract.”

Accordingly, the third exception contradicts the presumed position. This occurs as there has been an explicit promise to alter the allocation of risk, creating a contractual impediment to the beneficiary. However, due to the potential injustice, the courts tend to require “clear words” to support an interpretation of a contract which inhibits recourse where a breach is alleged in good faith (without the other two exceptions applying).

Intention of the parties – Performance Bonds As A Risk allocation Device

It seems that if the parties intend that the performance bond is a risk allocation device, this will impact consideration of the primary issues considered at the hearing for an interlocutory injunction, being whether the beneficiary is entitled to call upon the bond and where the balance of convenience lies (a standard consideration in equitable relief). In this circumstance, the entities have agreed as to which of them should bear the financial risk pending final determination. This becomes particularly relevant when a party is relying on the security, pending the outcome of a trial. In the event that there is a risk allocation purpose, failure to resolve issues pertaining to interpretation of the contract at the interlocutory stage may defeat commerciality, depriving the parties of the bargain they have arranged.

If a term of a contract, construed utilising the accepted principles adopted by the courts, shows that the commercial purpose was to allocate the risk of who should be financially impacted notwithstanding that there may be a genuine dispute as to whether a party had failed to comply with their obligations, then the entity benefiting from the security is uninhibited in invoking it. Clear words to the contrary are required to have a condition precedent to recourse. This means that they must be unambiguous and have only one possible meaning.

Granting the injunction

Culminating the above considerations, the courts will intertwine them with their reasoning when determining the required elements for an injunction to be granted. The cases of Saipem Australia Pty Ltd v GLNG Operations Pty Ltd provide background on the principles. The significance of these decisions is that the intention of the parties in respect of the performance bonds as a risk allocation device is relevant to the determination of the balance of convenience in awarding the injunction. The other elements to analyse, being the question of whether there is a serious question to be tried and inadequacy of damages as a remedy, depend on the facts. The typical argument in the commercial discourse is reputational impact in the market and industry.

Conclusion

As can be identified, the effectiveness of injunctions in relation to claiming security under a construction contract depends predominately on the terms of the agreement and their interpretation by the court. These inform the judiciary on the primary issues considered when deciding to exercise discretion when granting the equitable remedy of injunction. This is consistent with the common law philosophies in respect of privity of contract in the context of commercial transactions. Therefore, there needs to be an explicit and unequivocal promise that there will not be a conversion of the bond.

Coinciding with international commerce, the importance of performance bonds as a currency is reflected on several levels in various jurisdictions. Accordingly, the relevant feature of the contract in question regarding injunctions on recourse to security pertains to allocation of risk between the parties. Where the type of security in the construction contract contained other characteristics, such as an interest in property, this would reflect the intention of the parties and the threshold to satisfy the third exception for injunctive relief may decrease. Indeed, the tests may change entirely.

It is evident that seeking, understanding and applying relevant legal principles in construction contract contexts becomes increasingly vital. With the proper advice and drafted terms, recourse to security is a seamless event that occurs without hindrance. The beauty of the law when a party seeks injunctive relief is that the entities involved are ultimately the masters of their destiny. Consequently, it requires a forensic approach and placing value on legal services when creating the written agreement that governs the transaction. Resonating with many doctrines and ideologies of the Australian system, contracts in a commercial space remain dominant.

Receiving an interest or right in a property? Don’t get caught out when signing on the dotted line!

interest in land

It is common practice for a creditor to require a debtor to consent to passing an interest or right in the debtor’s real property (also known as real estate) as security for the provision of credit, goods or services.

The provision of this security can be made by way of contract (guarantee or agreement) or deed. The failure to correctly execute the document can render the document void and severely impact the legal enforceability of the clauses contained therein. Each state has their own requirements when drafting and executing these documents. It is therefore imperative that you (or your legal representatives) are aware of the governing requirements in the respective state.

This article will discuss:

  1. the main differences between deeds and agreements; and
  2. execution requirements of deeds and agreements in each state, particularly in relation to passing a legal interest or right in property.
What is a deed?

Generally, a deed is a written document that outlines the commitment or promise of a party to perform a specific task. Deeds are commonly used to confirm, or affirm, the owner’s right and interest in the property.

What is the difference between a deed and a contract?

Deeds and contracts are both ways in which a ‘deal’ can be committed to writing. Similar in nature, deeds and contracts are commonly mistaken as being an interchangeable term for the same document.
The principal rules of contract law confirm that in order for a contract to be binding, a contract must have:
• Offer and acceptance;
• An intention to legally bound; and
• Consideration.
In simple terms, consideration is the benefit that each party receives, or expects to receive, when entering into a contract. Often monetary, consideration can also be a promise to perform a specific act, or refrain from doing something.

For example, John agrees to sell his house to Michael for $350,000. Michael’s payment serves as consideration for John’s promise to sell the house to him. John’s consideration is his promise to sell Michael the house.

Unlike a contract, there is no requirement for consideration to render the parties bound to the terms of a deed. The lack of consideration in a deed is overcome by the intention of the executing party of a deed upon signing of the deed.

For example, a third-party who agrees to guarantee a bank loan may sign a deed if they are not receiving any benefit of that loan.

What is the execution and witnessing requirements in each state?

“Signed, sealed and delivered” is more than the song title of a 1970’s Stevie Wonder chart-topper. These are the elements commonly recognised as constituting the requirements to execute a deed.
However, it is not necessarily the case in each state, particularly in relation to passing an interest or legal right in property.

Queensland
The Property Law Act 1974 (QLD) governs the requirements necessary to hold a valid interest over land (the Act).

Section 11 of the Act requires that an interest in land must be in writing and it must be signed by the grantor. Section 45 of the Act confirms that in order for a deed (that provides an interest in land) to be valid, it must be witnessed by a third-party.

Section 56 of the Act further specifies that a guarantee must be in writing and must be signed. There is no provision within the Act that requires a guarantee to be witnessed.

New South Wales
The Conveyancing Act 1919 (NSW) confirms that no assurances of land shall be valid to pass an interest at law unless made by deed. Deeds are required to be in writing, signed and witnessed in accordance with the provisions of the Act.

South Australia
Similar to the provisions in New South Wales, the Law of Property Act 1936 (SA) confirms that passing of an interest in land is void unless made by deed. Deeds are required to be in writing, signed and witnessed in accordance with the provisions of the Act.

Western Australia
Section 33 of the Property Law Act 1969 (WA) confirms that the transfer of interest in land in Western Australia is not valid unless made by deed. A deed under this Act is required to be in writing, signed by the grantor and witnessed by a third party.

Tasmania
Section 60 of the Conveyancing and Law of Property Act 1884 (TAS) confirms that the transfer of interest in land in Tasmania is void unless made by deed. A deed under this Act is required to be in writing, signed by the grantor, witnessed by a third party.

Northern Territory
The Law of Property Act 2000 (NT) confirms that the conveyances of land or interest in land in the Northern Territory is not valid unless made by deed or in writing signed by the grantor.

Further and similar to Queensland provisions, the Act specifically mentions that a guarantee must be in writing and signed.

Section 47 of this Act confirms that a deed is considered to be duly executed if it signed and attested by at least one witness who is not a party to the instrument. However, the Act does not specify whether a guarantee must be witnessed.

Victoria
The Property Law Act 1958 (VIC) confirms that conveyances of land or interest in land in Victoria are void unless made by deed. The Victorian legislation requires the deed to be in writing and signed. However, there is no requirement in the provisions that requires the deed to be witnessed.

Australian Capital Territory
The Civil Law (Property) Act 2006 (ACT) confirms that interest in land cannot be created or disposed of by a person except in writing. Unlike the provisions of the other states, a deed is not specifically required to convey an interest in land in the Australian Capital Territory.

In accordance with the provisions of the ACT legislation, the instrument providing the interest in the land must be in writing and signed. In all cases, regardless of its contents, a deed is required to be signed, sealed and witnessed to be valid in accordance with the provisions of the legislation.

It is important to know what you are signing, and how to correctly execute the document before putting pen to paper. This is particularly true when executing deeds or agreements that pass interest or rights in property because a poorly or incorrectly executed document will extinguish a party’s entitlement to that right or land.

The above information is general in nature and does not constitute legal advice, should you have any queries regarding execution of or enforcement of a deed or agreement, feel free to contact our office.

New South Wales Security of Payment Changes that you need to know

Security Of Payments New South Wales

The New South Wales Government has announced that the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Amendment”) and the Building Construction Industry Security of Payment Amendment Regulation 2019 (NSW) (“the Regulation”) will commence on 21 October 2019.

These security of payment amendments will have an impact on developers, head contractors, subcontractors and building material suppliers who operate within the construction industry in New South Wales. This short article will outline the key implications of the Amendment and the Regulation, as well as the steps you will have to take to make sure you are ready for the changes.

Summary: Security of Payment Amendment (NSW)

It should be noted that the Amendment will not be retrospective and will apply to all new contracts entered into after 21 October 2019.

The first key changes are pursuant to the recent New South Wales Court of Appeal decision in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (“Seymour Whyte”) which established that an insolvent company is able to remain a “claimant” for the purposes of their entitlement to serve a payment claim even once they become insolvent.

Although the Seymour Whyte decision set a vital initial precedent, the New South Wales Parliament has indicated that they do not want insolvent claimants taking benefit of the New South Wales Security of Payment legislation. The Amendment now prohibits a claimant in liquidation from serving a payment claim, taking action to enforce a payment claim (including by making an adjudication application) or enforcing an adjudication determination. If a company makes an application for adjudication but subsequently enters into liquidation prior to a decision being made, the application for adjudication is deemed to be withdrawn on the day on which is commenced to be in liquidation.

Given the Amendment has now overturned the precedent set by the Seymour Whyte decision, claimants need to be aware that they can no longer rely on the case law principles set out in Seymour Whyte should they enter into liquidation.

Some additional key changes pursuant to the Amendment are as follows:

• Progress payment and payment claim under the Amendment have now been simplified, with the removal of a reference date requirement for a valid payment claim. There is also the right to serve a payment claim on a monthly basis by the claimant. This can be done at the end of each month in which the construction work was first carried out (or the related goods and services were first supplied), and on the last day of each month afterwards.

• If a contract has been terminated by one party, there is now a statutory entitlement for a payment claim to be validly served on and from the date of termination.

• The requirement for payment claims to be endorsed by, or specifically state that it is made pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW).

• The due date for payment of payment claims by head contractors to subcontractors has been reduced from 30 to 20 business days after the date it was initially made.

• The entitlement for a claimant to withdraw an application for adjudication can only be done should the adjudicator consider it to be in the interests of justice and if the respondent of the adjudication provides their consent.

• The Supreme Court of New South Wales has the power to set aside any part of an adjudication determination based on a jurisdictional error. As a result, this does not impact the entire enforceability of an adjudication decision based on a jurisdictional error.

Summary of the Regulation

As noted above, the Regulation will also come into force on 21 October 2019. The key changes as a result of the Regulations commencement are:

• An owner occupier entering into a construction or building works contract with a builder will be an excluded class of construction contract for the purposes of the security of payment provisions.

• In relation to trust account retention monies, individual executives can be held liable for offences committed by their governing corporation.

What does this mean for you?

All parties engaged in the construction industry are required to understand how the changes will impact them. Industry participants are required to acknowledge the stricter penalties for offences committed after the Amendment. We encourage you to re-visit previous contracts and ensure that project management or administrative processes are compliant.

How can we help?

If you are a developer, construction company or small subcontractor and operate in New South Wales, please contact the Construction Team at Rostron Carlyle Rojas Lawyers on (02) 9307 8900 or email us at [email protected]

Please note that this article has been prepared by Jakob Mignone, Law Clerk and settled by John Christian, 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.