New Financial Year – Company Structuring

New Financial Year – Company Structuring

To say that the second half of financial year 2020 was a roller coaster for business is quite the understatement. The lingering drought, catastrophic bushfires and COVID-19 pandemic combined to strike fear into even the most solid of Australian businesses. As an individual you may have lost your employed position and are starting to focus more on that hobby as an income-producing endeavour, or you may have been trading as a sole trader but are feeling a little exposed to the winds of economic change. The start of a new financial year brings with it the opportunity to address these concerns and provide you with the comfort of increased protection in company structuring.

Admittedly operating as a sole trader provides you with ultimate flexibility – there are no partners, directors or shareholders to answer to, and you free to run the business in whichever manner you choose with comparatively little regulatory compliance. However, being a sole trader exposes you to risk as you must enter into contracts as an individual and will therefore be personally liable in the event of default. Your personal assets will therefore be exposed to attack.

A simple and relatively inexpensive solution to this problem is the establishment of a company. A company is a legal entity that is separate from you as an individual; therefore, contracts that the company enters into expose the company, rather than the individual director/s and shareholder/s, to risk in the event of default or other litigation. There are exceptions to this rule, most notably where an individual director is required to be a personal guarantor to a contract. However, generally speaking, the company structure allows the functions of the business to be conducted and clearly delineated from the operation of the business. Companies are also subject to a flat rate of tax which can assist in streamlining the accounts of the business. What’s more, with the start of this financial year the company tax rate has been reduced to 26% for ‘base rate entities’ (companies with at least 20% active income that turn over less than $50 million a year), and will reduce further to 25% on 1 July 2021. Who doesn’t like a tax break to start the new year!

Companies also allow for the relatively straightforward addition and removal of partners to the business, as well as the provision of equity to valued employees. A possible investor may wish to enter into the business by providing funding; the simplest way of achieving this is by the investor being issued shares in the company that runs a business in return for their investment. Likewise, if a shareholder ever wishes to exit the business, their shareholding would need to be valued and then sold to one of the remaining shareholders.

So if you are a sole trader looking to start the new financial year with more peace of mind (and potentially more generous tax treatment), don’t hesitate to contact Rostron Carlyle Rojas Lawyers. We will be happy to guide you through the process of setting up your trading company.

Building and Construction Reform Package set to Raise Standards for Residential Developments in NSW

Building and Construction Reform Package set to Raise Standards-Residential Developments in NSW

The NSW Government passed two new pieces of legislation in June 2020, designed to ensure greater standards of construction for residential developments. The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (“RAB Act”) and the Design and Building Practitioners Act 2020 (NSW) (“DBP Act”) both attained royal assent on the 10th of June and will commence in stages throughout the next 12 months.

The legislation places a greater onus on the developers and design practitioners by apportioning responsibility to them where a building defect is discovered. The Government hopes the implementation of these Acts will regain public confidence in residential developments after substantial defects in new developments around Sydney made headlines in 2018. The RAB Act is focussed on procedures and bestows powers to the regulator through the development process. While the DPB Act sets out to register and regulate design practitioners; assigning a duty of care and accountability around building defects. We detail the key takeaways of each act below.

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) Key Takeaways:

– The RAB Act is the first of its kind in Australia; establishing a requirement for developers to notify the Secretary of the Department of Customer Service (“the DCS”) at least six months, but no more than 12 months, of the intended completion of building work. This is intended to afford the Secretary time to make regular inspections prior to completion. Where a defect is discovered the DCS can withhold a buildings occupational certificate until rectifications are made by the developer.

– The RAB Act allows for a grace period of 60 days if expected completion is advanced or delayed. If the expected completion is moved beyond the grace period, the developer must submit a notice of change to the secretary within one week of his knowledge of the change.

– A failure to correctly file an expected completion notice with the Secretary may result in a maximum penalty of $210,000 for a body corporate or $42,000 in any other case.

– The definition of a “developer” for the purposes of the RAB Act includes “the person who contracted or arranged for, or facilitated or otherwise caused, the building work to be carried out”. If the building work is the erection or construction of a building or part of a building, the owner of the land is also taken to be a developer.

– The RAB Act was assented on 10 June and will commence on 1 September 2020. However, it should be noted that it will retroactively apply to buildings completed within the last six years. The date of the occupational certificate is the relevant consideration.

– If work is, or likely to be in contravention to the Act, the Secretary may issue a stop work order. The RAB Act also sets out the process required to appeal against a stop work order. Proceedings for offences will be taken before the Local Court or before Land and Environment Court. (This applies for the DPB Act as well).

The Design and Building Practitioners Act 2020 (NSW) Key Takeaways:

– The DBP Act introduces a statutory duty of care for the benefit of land owners and places accountability for new and existing defective construction work. Any person who carries out construction work has a duty of care to avoid economic loss caused by defects relating to building or construction work.

– Construction work includes the construction of a building, making alterations or additions to a building, renovations, applying protective treatment, preparations of design, and building products used for the development of residential buildings.

– The DBP Act states that any design practitioner who makes a compliance declaration must be registered and qualified to do so. Major variations to designs must be declared as compliant before being provided to the builder. Registered building practitioners must build in accordance with these declared designs and issue a compliance declaration stating that the final building complies with the Building Code of Australia.

– Design practitioners will have responsibility for their designs that are ultimately relied upon for building work. A registered design practitioner must provide a compliance declaration if they prepare a regulated design for a person and that design is in connection with building work.

– Penalties of up to $420,000, two years imprisonment, or both may apply for breaches of the DBP Act.

– The DBP has been written to comply and cooperate with other established legislations such as the Home Building Act, Civil Liability Act, Strata Schemes Management Act, Building Products Management Act etc. Relatively, the DBP Act and RAB Act does not limit the rights and obligations set out in these acts.

– The DBP Act was assented on the 10 June, commencing partly on the same date and partly on 1 July 2021.

Who Does this affect?

The purpose of this reform package was to limit the risk of building defects from going unnoticed in through the design and certification processes. It does this by placing a heavier burden of responsibility onto the design professionals for building defects. It is important if your business is involved in the development of residential dwellings that you are complying with the new regulations. This includes:
– understanding if you meet the registration and qualification requirements;
– consider how this may affect current and ongoing projects;
– be prepared for inspections and possible investigations; and
– form an action plan around the process of stop work orders.
These changes also affect land owners within residential buildings that have experienced calamity as a result of a building defect. If you have experienced economic loss as a result of a building defect within the last 6 years you may be entitled to reasonable compensation.

Rostron Carlyle Rojas is here to help
Understanding how new legislation may affect you can be difficult. We are committed to keeping you updated with relevant updates on legislation that may effect you and your business. Should you require further advice on this current matter or others, we would be delighted to assist.

Cntact us today at:
Email [email protected]
Telephone 9307 8900
Address: Rostron Carlyle Rojas Lawyers
13.05, 88 Phillip Street
Sydney NSW 2000

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.