Case Update: Unfair preferences – DOCA defence by ATO unsuccessful

In the March 2021 case, In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (In Liq) [2021] NSWSC 232, the NSW Supreme Court has confirmed when payments made to the ATO from a company (later becoming unfair preferences) while under a deed of company arrangement (DOCA) were not ‘authorised’ by the deed administrator.

In Western Port Holdings, Justice Rees of the NSWSC has upheld and applied the reasoning of a recent decision by the Full Federal Court in Ready Kit Cabinets.

In summary, some $2 million was paid to the ATO over an 18 month period while the company was subject to a DOCA, which was found to be an unfair preference and the ATO was ordered to repay $2 million in voidable transactions to the liquidator, with costs.

Under section 588FE(2B)(d)(i) of the Corporations Act 2001 (Cth), a transaction is not considered voidable if it was entered into ‘under the authority of the administrator of the deed’, as set out below:

(2B) The transaction is voidable if:

(d) the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of:

(i) the administrator of the deed …

The earlier case – Ready Kit Cabinets

On appeal in the Full Federal Court in Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets Pty Ltd (In Liq) [2020] FCAFC 199, the ATO has argued that payments made to it, while the company was subject to a DOCA, were authorised by the deed administrators and therefore not voidable under s 588FE(2B)(d)(i).

At first instance, and on appeal, the ATO argued that a number of payments made to it by Ready Kit Cabinets while under DOCA were authorised by the deed administrator on the following grounds:

  1. The making of the payments was specifically required to give effect to, and cause compliance with, the terms of the DOCA;
  2. The DOCA of the Company expressly covenanted to make the Payments;
  3. The deed administrators accepted that they were acting as the agents of the Company when exercising the powers conferred by and carrying out their duties under the DOCA; and
  4. By the operation of s 444G of the Corporations Act both Mr Yeo and Mr Rambaldi were bound by the DOCA.

The ATO’s argument was rejected at first instance and on appeal by Justices Jagot, Davies and Markovic as they explain at [34]:

“the fact that making the payments was the “price to be paid” as part of the compromise represented by the DOCA does not mean that the making of the payments should be taken to have been by or under the authority of the deed administrators.”

The following case – Western Port Holdings

In both cases, the control of the company was returned to the directors during the DOCA period and the terms of the DOCA required the company to meet its tax lodgement and payment obligations during that period. If it did not, the deed administrators could take steps to terminate the DOCA and place the company into liquidation, which later occurred in both cases.

In Western Port Holdings, the deed administrators played an ‘active’ role in requiring the company to make payments to the ATO including that they:

    • Sought details and were informed about the company’s compliance with tax liabilities;
    • Followed up the company and the ATO in respect of unpaid amounts;
    • Sought confirmation whether tax liabilities had been paid; and
    • Issued several notices of default requiring the company to rectify its breaches of the DOCA, including to pay its outstanding tax liabilities accrued during the DOCA period.

Notwithstanding the deed administrator’s role in chasing the company to pay the ATO, the court found that (consistent with Ready Kit Cabinets) the payments were not ‘authorised’ by the deed administrators; at [157]:

“control of the company was returned to the directors pursuant to the DOCA. The payments were made by the directors exercising that control. The payments were therefore made under the authority of the directors. There is no occasion in s 588FE(2B) to look behind the authority of the directors to ask how that authority came about.”

Accordingly, the payments in excess of $2 million were clawed back from the ATO as a preference.

The Western Port Holdings judgment also dealt where preferences paid by third parties were in effect “from the company”, which we cover in a separate article here.

In this author’s opinion, both judgments correctly distinguish the deed administrator’s role (in monitoring and enforcing deed compliance) from the company director’s role in controlling the company (including making and authorising its transactions) during the DOCA period.

 

 

Case Update: Unfair Preferences Payments made by Third Parties

Under section 588FA of the Corporations Act 2001 (Cth), a liquidator is entitled to claw back payments made by a company in the lead up to its liquidation that unfairly prefer or prejudice the company’s creditors. But what about when the payment is not made directly by the company, but by a third party to satisfy a debt, or at the direction, of the Company?

In the recent matter of Western Port Holdings Pty Ltd (receivers and managers appointed (in liquidation) [2021] NSWSC 232, Rees J attempts to reconcile the various case law regarding preference payments made by third parties and provides further clarification regarding the types of third-party transactions that are caught under section 588FA.

In summary, some $2 million was paid to the ATO over an 18 month period while the company was subject to a deed of company arrangement, which was found to be an unfair preference and the ATO was ordered to repay $2 million in voidable transactions to the liquidator, with costs.

Takeaways from Western Port Holdings

In her judgment, Rees J used a practical approach to assessing this issue. Rather helpfully, Rees J noted that a third-party payment to a company’s creditor will be “from the company” with reference to the following factors:

(a) Did it confer to the third party a benefit to which the company is otherwise entitled? (for example, by reduction or set off to a loan account or other debt or obligation owed by the third-party to the company);

(b) Was the payment made by a related entity at the effective direction of the company? (where effected by a common director/shareholder on behalf of the company);

(c) Was the payment made by a loan to the company? (where recorded as a loan in books of the company, or otherwise constructively was a loan by the third party to the company).

Unfair Preferences

Section 588FA of the Corporations Act relevantly provides:

(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company…

Cant v Mad Brothers

Just prior to the Western Port Holdings decision, the Victorian Court of Appeal delivered a judgment relating to third-party preference payments in Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198. In that case, the Court of Appeal appeared to take a more narrow approach on the issue and set out at [120] the following circumstances relevant to whether a third-party payment amounts to an unfair preference:

  1. The preference must be received from the company’s own money, meaning money or assets to which the company is entitled; and
  2. The receipt of the preference by the creditor must have the effect of diminishing the assets of the company available to its creditors; noting
  3. If the preference does not have the effect of diminishing the assets of the company, then it is not a payment received ‘from the company’ and is therefore not an unfair preference.

Cant dealt with a payment that was made to the creditor (Mad Brothers Earthmoving Pty Ltd) by a company (Rock Development) that shared a director with the company in liquidation (Eliana). Although the payment was authorised and ratified by Eliana and made towards a debt owed by Eliana, the Court held that there was no unfair preference where Eliana’s books indicated that Eliana was indebted to Rock Development at the time of the relevant payments (there was no debt owed to Eliana by Rock Development and no evidence that Rock Development was more than a volunteer in making the relevant payments which were not recorded as a further loan by Rock Developments to Eliana).

As there was no diminution of Eliana’s assets recorded in the books because of the payment, the Court held there was no unfair preference from the company.

Western Port Holdings

In Western Port Holdings, Rees J comments on the reasoning of Cant saying at [38]:

“I am left with some disquiet by the reasoning in Cant v Mad Brothers. The language of section 588FA(1)(b) does not readily permit a construction that it is necessary to demonstrate a diminution in the assets of the company for there to be an unfair preference”.

Rees J noted that there may be other transactions where there is no diminution of the company’s assets and yet should be considered an unfair preference, such as where the company directs one creditor to pay moneys owed by the company to another creditor [36].

Notwithstanding Rees J’s concern with the reasoning of Cant v Mad Brothers (and noting that she was bound to follow it where it was not clearly wrong), Rees J at [40] points to the following factors relevant to establishing a third-party payment as an unfair preference:

  1. “Was the benefit, which was conferred by the third party on the creditor, a benefit to which the company was otherwise entitled, for example, by reason of a contract between the contract and the third party (Re Emanuel) or because the third party owed money to the company (Evolvebuilt; Cant v Mad Brothers)?
  2. Was the third party a related entity to the company, by reason of common directors or shareholders, or interdependence of financial arrangements, such that payment by the third party may be regarded as effectively payment by or at the direction of the company (Burness; Kassem; Cant v Mad Brothers)?
  3. Was the third party payment a loan to the company: Kassem? If it was recorded as a loan in the books of the company, this will obviously support such a finding: Cant v Mad Brothers.”

At [41] to [42], Rees J noted the difficulties that a liquidator may face in discharging their onus of proof, whether the company records may not have been kept up to date, and how the law is applied in such circumstances.

Third-Party Preference Payments

The following types of transactions were considered by Rees J in Western Port Holdings to have been “from the company” within the meaning of section 588FA(1)(b) and therefore unfair preferences from the Company to the ATO:

  1. A payment made from a bank account of a Company director to the ATO, which reduced the amount owed by the director to the Company (under his loan account) and by the company to the ATO, at [170]-[171].
  2. A loan from another family member that was paid into the bank account of a Company director and then on-paid to the ATO (to reduce the Company’s tax debt) and recorded in the Company’s records as a loan to the Company, at [172]-[174].
  3. A number of payments made from related companies directly to the ATO (to reduce the Company’s tax debt), which were recorded in the Company’s books as loans to the Company, at [175]-[177].
  4. A number of other payments made from related companies to the ATO (to reduce the Company’s tax debt), which were not recorded in the Company’s books as loans to the Company, but were constructively found to be loans by the related entities to the Company where that was consistent with the parties’ prior conduct and where the books of the related entities recorded the payments as loans to the Company, at [175]-[177].
  5. The use of loan funds from a third-party financier secured over the Company’s invoices/receivables to pay tax debts owed by the Company to the ATO, at [178]- [179]. This secured loan facility had the effect of reducing the Company’s unsecured assets, where drawn down to pay unsecured tax debts by securing the Company’s receivables (and all its present and after acquired property) in favour of the financier.

The judgment also dealt with preferences made whilst the company was subject to a DOCA, which we cover in a separate article here.

In this author’s opinion, Rees J has correctly found a practical way to apply the relevant case law to identify where third-party payments should be treated as “from the company” in liquidation.

 

What to do if someone isn’t paying your bills?

If you have a customer/client that is not paying their invoices on time or is refusing to pay for works and/or services provided, then you may have to start your debt recovery process.

In order to deal with your “debtors”, you should ensure you have an effective process in place, as if you do not act quickly, it may be more difficult to recover the debt, especially if the customer is not solvent and becomes bankrupt/goes into liquidation.

Therefore, your debt recovery process should look something like this:

1. Ensure your terms of payment are clearly stated on your tax invoices/statements and/or your terms and conditions have been provided to the customer/client;

2. Attempt to contact your client/customer and send reminder letters (prior to engaging a debt collection agency/law firm). This should generally be as follows:

  • Two (2) weeks overdue notice – this should be a polite reminder, in the event that the invoice has been missed and they may be having short term cash flow problems and you do not want to ruin the business relationship;
  • Two (2) to four (4) weeks overdue notice – you can make personal contact by phone or a further email/letter requesting a fixed time and date in which the tax invoice will need to be paid;
  • Four (4) to six (6) weeks overdue – you can provide a final notice, strictly adhering to the time and date previously agreed to, and stating that it will now be referred to your lawyers/debt collection agency.

3. If payment is still not made, you can request a letter of demand from your lawyers/debt collection agency, which outlines the amount owing and what for, and requests that payment is made within seven (7) days, otherwise legal proceedings will be issued and further costs incurred;

4. If payment is still not received, then it is time to commence legal proceedings in the relevant state, in order to recover payment from the outstanding invoice;

  • You can use debt recovery solicitors to maximise your chances of successfully obtaining your desired outcome;
  • You are able to claim the costs incurred and interest applicable (either pursuant to the terms of conditions or the Reserve Bank of Australia rate).

5. Enforce your money order or judgment.

  • Once you have a judgment or an enforceable money order, there are a number of different enforcement options.

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

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

 

Casual Employment Defined

The Full Federal Court in Workpac Pty Ltd v Rosatto [2020] FCAFC 84 on 20 May 2020, prompted calls for urgent legislative review because it threw into uncertainty the status of casual employees and the right to seek compensation for underpayments.

In a timely response designed to avoid uncertainty and minimise such claims, the Fair Work Amendment (Supporting Australia’s Jobs and Economic Recovery) Bill 2021 contains a new statutory definition of what constitutes “casual” employment and relief from underpayment claims from employees incorrectly classified as casual to stop “double-dipping”.

  1. Casual employment” is now defined.

A person is a casual employee if;

  • an offer of employment made by the employer is made on the basis that the employer makes no firm advance commitment to continuing and indefinite work according to an agreed pattern of work;
  • the employee accepts the offer on that basis; and
  • the employee commences employment as a result of that acceptance.

To determine whether, at the time the offer is made, the employer makes no firm advance commitment to continuing and indefinite work according to an agreed pattern of work, only the following considerations will apply:

  • whether the employer can elect to offer work and whether the employee can elect to accept or reject work;
  • whether the employee will work only as required;
  • whether the employment is described as casual employment; and
  • whether the employee will be entitled to a casual loading or specific rate of pay for casual employees under the terms of the offer or any applicable Award or Enterprise Agreement.

What was offered and accepted??

Importantly, the question of whether an employee is a casual is to be assessed on the basis of the offer of employment and the acceptance of that offer, not on the basis of any subsequent conduct by the parties. This will have the effect of reversing the full Federal Court decisions where the offer of employment was made on the basis of casual employment but the subsequent conduct of the parties was deemed to be the employment of a permanent nature at law.

A casual who commences employment as a result of the acceptance of an offer of employment remains a casual employee until a casual is converted to permanent employment under new rights of conversion to permanent employment or the employee otherwise accepts an alternative offer of permanent employment.

However- there is a new statutory right for a casual to make a reasonable request to convert to permanent employment.

  1. No More ‘Double-dipping”

Casuals are usually paid above an award rate as a “trade-off” against entitlements otherwise afforded to permanent workers.

Underpayment claims by casuals

What should see an end if not a great reduction to claims for underpayments by casual employees, a Court must now make a mandatory set-off of any casual loading amount paid by the employer to a “regular” casual employee who later claims underpayments as a result of being incorrectly classified as a casual and claims entitlement to:

  • paid annual leave;
  • paid personal/carers leave;
  • paid compassionate leave;
  • payment for absence on a public holiday;
  • payment in lieu of notice of termination;
  • redundancy pay.

Any underpayment claim may be reduced by a proportionate amount paid by the employer attributable to each of those entitlements claimed where the casual rate of pay loading is stated to be compensation for the particular entitlements.

Recommendation for Employers using Casual employees

  1. Immediately conduct an audit of all current casual contracts of employment.
  2. Make sure that they do meet the new statutory definition of casual employment.
  3. Ensure that any appropriate loading amount is clearly and separately identified as compensation for specified entitlements.

How can we help?

We can help you in the following:

  1. Review your workforce employment contracts and work practices, and assess your exposure and risks.
  2. Preparation of carefully drafted employment contracts that:
    • remove as much doubt or scope for mischaracterising the relationship
    • permit a set-off of any paid loading
  3. Assist with any restructuring of your workforce.

If you have concerns in relation to casual employees in your business, please contact Michael Sing to discuss how we can help on 07 3009 8444.

 

 

The Newly Introduced Small Business Restructuring (SBR) Provisions

The small business restructuring (SBR) provisions within the Corporations Act (“the Act”),[1] introduced 1 January 2021, have provided a gateway to ease pressure on small businesses facing creditor issues amid the COVID-19 pandemic. The provisions allow a company to engage a small business restructuring practitioner (SBRP) to assist with the creation of a restructuring plan to propose to creditors. The purpose of the plan is to allow the company to trade forward while avoiding the costs associated with a formal company administration or liquidation, but while maximising payouts to creditors.

Eligibility Criteria

An SBR Practitioner can be appointed upon application by the business in satisfaction of the following qualifying criteria:

  1. Any other requisite test for eligibility in relation to liabilities is satisfied (i.e. total liabilities upon entering the SBR process equal less than $1m)[2];
  2. No person appointed as director of the company within the preceding 12 months have been subject to other restructuring or simple liquidation processes (or some other prescribed period); and
  3. The company has not been under a restructuring or simplified liquidation process for the preceding 7 years,[3] or for a time as prescribed by the regulations. 

The Small Business Restructuring Practitioner

The role of the SBR Practitioner is to provide advice on the restructuring and related matters of the company; is to assist in preparing a restructuring plan; compile and make a declaration to the company’s creditors on the plan; and any other adjoining functions.[4]

There is a positive duty on directors of a company subject to an SBR plan to assist the SBR Practitioner.[5] The director must provide the SBR Practitioner with all information and books and records as required to assist the SBR Practitioner in their role, regardless of who is in possession of such records (i.e. company accountants, solicitors, etc).[6]

What Can My Business Do Under SBR?

The SBR provisions allow for a ‘debtor-in-control’ model, meaning the company officers maintain full control over the trading and affairs of the company during the restructuring. However, the director in control of the company’s affairs may only continue to trade in matters that are considered the ‘ordinary course of the company’s business.[7] Whilst a business is under the SBR process, they may seek adjournments or cease any current or future legal proceedings in relation to the debts of the company.

Transactions that may not be considered in the ordinary course of business must then be consented to by the SBR Practitioner, or by order of the Court, and are otherwise considered a breach of the Act by the director.

Recent Case Study: Re Dessco Pty Ltd [2021] VSC 94

In the recent Victorian matter of Re Dessco Pty Ltd, a petitioning creditor filed a wind-up application against Dessco Pty Ltd (“Dessco”) for failure to comply with a statutory demand in the amount of $81,748.29 (excl interest). Descco’s board of directors resolved to appoint a SBR Practitioner on 15 February 2021, and sought an adjournment of the wind-up proceedings for 50 days.

The appointment of the SBR Practitioner and adjournment was opposed by the petitioning creditor, based on three key arguments:

  1. The company’s liabilities exceeded the $1m threshold;
  2. As a substantial creditor of the company, the proposed plan was rejected; and
  3. The appointment was not in the interest of creditors due to the late stage of wind-up proceedings.

In consideration of the above points, the Court found company liabilities to total $750,592 (discounting the total claim by the petitioning creditor). Further, such a plan could not be rejected as the petitioning creditor was not yet provided with a restructuring proposal statement and declaration. Finally, a 5c/$ return to creditors was sufficient for the purposes of restructuring, as opposed to a costly liquidation model diminishing creditor returns. His Honour Irving JR, relevantly found these factors to be satisfactory on the basis that it was a ‘sufficient possibility as distinct from mere optimistic speculation’.

Ultimately, the court allowed the adjournment of proceedings and the appointment of the SBR Practitioner. The basis of the finding being that the process would not diminish creditor returns as posed by the petitioning creditor.

Given the success of the SBR plan as a way to avoid liquidation, it can be reasonably speculated that in future decisions, disputes will be brought forward by creditors to determine which is the option of greater value to creditors – a wind-up or SBR. Watch this space!

How Do I Enter the SBR Process?

For a company to enter the SBR process, the company’s board of directors must pass a resolution deeming that the company is, or is likely to be insolvent and that a SBR Practitioner should be appointed.[8] Once these resolutions are passed, and the eligibility criteria is satisfied, an SBR Practitioner can be engaged to commence the company restructuring.

We’re here to help.

If you think the SBR process is appropriate for your business, contact our insolvency lawyers now for tailored assistance and advice regarding the next steps. We can help by representing you through the restructuring process and by referring your restructuring request to a qualified practitioner.

[1] Corporations Act 2001 (Cth) Part 5.3B.
[2] Corporations Regulations 2001 (Cth) Reg 5.3B.03(1).
[3] Ibid Reg 5.3B.03(3).
[4] Corporations Act (n 1) s 453E.
[5] Ibid s 453F.
[6] Ibid s 453G.
[7] Ibid s 453L(2)(a).
[8] Ibid s 453B(1)(b)

 

 

 

COVID-19 Financial Assistance for Small and Medium Businesses in 2021

On 11 March 2021, the Federal Government announced the SME Recovery Loan Scheme (Recovery Loan Scheme), which will come into effect on 1 April 2021 and operate until 31 December 2021 and aims to assist eligible businesses to access financial support.

Similar to the Coronavirus SME Guarantee Scheme (Guarantee Scheme), the Recovery Loan Scheme will offer lenders a guarantee from the government on certain loans to allow distressed businesses to access cheaper credit at a lower interest rate as Job Keeper (and other COVID-19 related government assistance) ends throughout 2021.

Eligibility

The following businesses will be eligible to access the Recovery Loan Scheme:

  • Businesses that have accessed Job Keeper payments between 4 January 2021 and 28 March 2021;
  • Businesses with up to $250 million in turnover; and
  • All business structures, including self-employed individuals as well as non-profit businesses.

Moreover, businesses that have accessed a loan under the Guarantee Scheme are not excluded from accessing assistance under the Recovery Loan Scheme.

Features of the SME Recovery Loan Scheme

From 1 April 2021 until 31 December 2021, eligible businesses will be able to negotiate a loan from a Participating Lender under the following terms under the Recovery Loan Scheme:

  • The Government will guarantee 80% of the loan amount.
  • Lenders are allowed to offer borrowers a repayment holiday of up to 24 months.
  • Loans are for terms of up to 10 years, with an optional repayment holiday period.
  • Loans can be either unsecured or secured (excluding residential property).
  • The interest rate on loans will be determined by lenders but will be capped at around 7.5%.

Loans issued under the Recovery Loan Scheme may be used for a broad range of commercial purposes (including the refinance of existing loans even those from the Guarantee Scheme), but cannot be used for:

  • To purchase residential property (but can be used for purchasing non-residential real property);
  • To purchase financial products;
  • Lending to an associated entity; or
  • Leasing, renting, hiring or hire purchasing existing assets that are more than halfway into their effective life.

SME Recovery Loan Scheme v Coronavirus SME Guarantee Scheme

The Recovery Loan Scheme commences on 1 April 2021 and the Guarantee Scheme ends on 30 June 2021, so there will be a short overlap of access to both schemes. While ultimately the terms of the loan will be negotiated with the lender, it is important to be aware that the Recovery Loan Scheme offers slightly better terms for loan seekers than the Guarantee Scheme. These include:

  • Whereas the Guarantee scheme was only available to businesses with a turnover of $50 million, the Recovery Loan Scheme is available to businesses with a turnover of $250 million;
  • The interest rate under the Recovery Loan Scheme is capped at 7.5%, while the Guarantee Scheme is capped at 10%;
  • The loan limit for the Recovery Loan Scheme is up to $5 million (in addition to any loans under the Guarantee Scheme), while for the Guarantee Scheme it is up to $1 million; and
  • The Recovery Loan Scheme allows a repayment term of up to 10 years with a “repayment holiday” of up to 24 months, while the Guarantee scheme only allows a repayment term of 5 years.

It will be interesting to see the uptake in the new Recovery Loan Scheme and whether the banks will rely on it to finance businesses that they otherwise might not, or if it will mainly be used to support businesses that would already qualify for usual bank finance.

For more information about the SME Recovery Loan Scheme, or if you would like to discuss how we can assist your business post-COVID-19, please contact us here or call (07) 3009 8444.

 

Security for Costs in NSW: Balancing Justice Between the Parties

To minimise the risk of substantial collateral financial loss, the court, on evidence of a plaintiff’s impecuniosity, may make an order that the plaintiff pay money into court as security. In the event that the plaintiff is unsuccessful in its case and is ultimately ordered to pay the defendant’s costs, the defendant may recover its costs from those monies ordered as security – this court process is referred to as security for costs.

While potential litigants should not be discouraged from seeking justice through the legal system, what happens when a plaintiff is unsuccessful in their claim but cannot pay the costs of a defendant that has been put to the substantial expense of successfully defending proceedings?

Power to order security for costs

In NSW, security for costs applications are largely governed by regulation 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”). Regulation 42.21(1)(d) of the UCPR states that if in any proceedings, it appears on the application of the defendant that the plaintiff will be unable to pay the defendant’s costs if so ordered, the court may order the plaintiff to give such security it thinks fit, in such manner as it directs, for the defendant’s costs of the proceedings. The court may also order that the proceedings be stayed until such time that the security is given.

The court has additional discretionary power to order security for costs if the plaintiff is a corporation. Pursuant to section 1335(1) of the Corporations Act 2001 (Cth), where a corporation is plaintiff in any action or other legal proceeding, the court may require sufficient security be paid into court where there is reason to believe that the corporation will be unable to pay the costs of the defendant, if for example, the plaintiff’s claim is not successful.

Unlike the Local and District Courts, the Supreme Court of NSW also has inherent jurisdiction to regulate court’s procedures to prevent abuses of process – this extends to the making of orders for security for costs.

What will the court consider when making an order for security for costs? 

The court’s power to make an order for security for costs is discretionary and involves considering all relevant circumstances so as to strike a balance between protecting a defendant while avoiding the ‘stifling’ of a plaintiff’s reasonable access to prosecute a claim. 

A non-exhaustive list of relevant factors the court can consider is set out in regulation 42.21(1A) of the UCPR. The common factors are summarised in the table below:

The prospects of success or merits of the proceedings

If the plaintiff’s claim discloses a cause of action and has reasonable prospects of success, the court will generally not make an order for security of costs.

The genuineness of the proceedings

The court may consider the plaintiff’s motivation in commencing proceedings including whether the plaintiff’s claim is bona fide or vexatious.

The impecuniosity of the plaintiff

The threshold factor that ‘triggers’ the court’s discretionary power is whether there is proof of the plaintiff’s unsatisfactory financial position. Mere speculation that a plaintiff is insolvent or experiencing financial difficulties is not sufficient: Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1.   

Whether the plaintiff’s impecuniosity is attributable to the defendant

A plaintiff may very well be impecunious because of or for reasons including the defendant’s conduct. The court should decline to make an order for security for costs, where the litigation may

Whether the plaintiff is effectively in position of the defendant

The court will not ordinarily make an order for security where a plaintiff has been forced to commence litigation in order to defend themselves.

Whether the plaintiff ordinarily resides outside of the jurisdiction

There may be difficulties in enforcing an adverse costs order against a plaintiff that ordinarily resides outside of the jurisdiction.

How can I apply for security for costs?

An application for security for costs should be made by notice of motion filed by the defendant and should be supported by credible testimony of the plaintiff’s impecuniosity. While applications should be brought as early as possible in proceedings (and this is a factor the court can consider) the Supreme Court of NSW in Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 noted at [70] that delay “does not necessarily render the application fatal”.

How is the amount of security calculated?

The amount of security fixed by the court is calculated by reference to the amount the defendant is likely to recover in a cost order at the end of the proceedings. Ideally, an estimate will be provided by a costs assessor or an experienced solicitor. The assessment of the requested amount can take into consideration the defendant’s costs for any relevant steps to conclude proceedings, including obtaining witness statements, issuing subpoenas and briefing counsel for hearing.

The court made an order for security for costs – what next?

If the court has made an order for security for costs, the proceedings are generally stayed until the plaintiff complies with the order and makes payment of the security. The security does not necessarily have to be payment of money into court and can, subject to court orders, include bank bonds or be placed into a joint bank account in the name of the parties’ solicitors.

Where the plaintiff fails to comply with an order for security for costs, regulation 42.21(3) of the UCPR allows the court to dismiss the plaintiff’s claim.

We’re here to help.

If you are a defendant to a proceeding and are concerned that the plaintiff may not be able to pay your costs, or if you require any advice on responding to a security for costs application, please contact our experienced litigation lawyers now.

 

Director Resignations: New Laws Apply from 18 February 2021

From 18 February 2021 a company director will not be able to backdate their resignation more than 28 days or resign and leave a company without a director.

Backdating resignations was a common tactic used by directors who engage in illegal phoenix activity. The reforms and new changes are aimed at further combating such illegal phoenix activity.

Illegal phoenix activity can involve serious breaches of the law that include directors’ duties, fraudulent concealment or removal of assets and fraud by company officers under the Corporations Act 2001. Penalties include large fines and up to 15 years imprisonment for company directors and secretaries and others involved.

Directors will now have 28 days to lodge their notice of resignation with ASIC, otherwise the resignation will take effect from the date that the notice is lodged.

If the notice is lodged outside of the 28 days, application can be made to ASIC (within 56 days of the claimed registration date) or the Court (within 12 months of the claimed resignation date, unless the court allows a longer period) to fix the date that the resignation takes effect.

Directors will also be unable to resign or be removed by a company if that resignation or removal results in the company being without a director. This limitation does not apply if the company is in liquidation.

If you are concerned about your company, or your directors duties, or require clarification in relation to the new reforms, now is the time to get advice. Please contact our experienced restructuring and insolvency lawyers to ensure the best possible outcome for your circumstances. 

Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

 

 

Business Due Diligence

Business Due Diligence

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

Why do a due diligence?

There are a few reasons why a due diligence is important

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

Who should do one?

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

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

 

What is a business due diligence?

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

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

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

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

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

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

 

Due Diligence in Contract Terms

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

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

What’s the cost? 

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

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

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

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

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

Michael Sing
Partner, Property and Commercial

 

 

How long can you be chased for a debt?

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

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

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

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

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

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

References:

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

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