Litigation in Liquidation: What Do Courts Look at When Granting Leave to Proceed Against a Company in Liquidation

Litigation in liquidation

Litigation may be commenced for various cause of actions. However, it is important to firstly establish that the defendant has legal standing to be pursued.

Section 471B of the Corporations Act 2001 (Cth) (the Act) specifies that while a company is being wound up by the Court, or by a provisional liquidator, a person cannot commence proceedings against the company except with the leave of the Court.

The purpose of this section is to reduce complications associated with the liquidation process and to ensure that funds are not being siphoned from potential dividends to creditors to fund legal battles. Notwithstanding, section 471C of the Act stipulates that if the creditor is secured, by way of real property or otherwise, then section 471B will not affect a creditor’s right to realise or otherwise deal with that security interest.

The Court in Ogilvie-Grant & Anor v East (1983) 7 ACLR 669 noted the process available to creditors was lodging a ‘Proof of Debt’ to identify and attempt to recover its debt via any liquidation dividend. Creditors may appeal to the Court if the ‘Proof of Debt’ is rejected, which provides a cheaper alternative to pursuing an insolvent company.

Litigation in liquidation -what circumstances can leave be sought/granted?

Justice Gilmour in Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749 at [29] established a number of factors which the court may take into consideration to determine whether to grant leave to proceed against a company in liquidation. These include the following:

(a) the amount and seriousness of the claim;
(b) the degree and complexity of the legal and factual issues involved;
(c) the stage to which the proceedings, if commenced, may have progressed;
(d) whether a cross-claim arises out of the same factual matrix as the claims made in the primary proceedings;
(e) the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt;
(f) whether the claim has arguable merit;
(g) whether proceedings are already in motion at the time of liquidation;
(h) whether the proceedings will result in prejudice to the creditors;
(i) whether the claim is in the nature of a test case for the interest of a large class of potential claimants;
(j) whether the grant of leave will unleash an “avalanche of litigation”;
(k) whether the cost of the hearing will be disproportionate to the company’s resources;
(l) delay; and
(m) whether pretrial procedures, such as discovery and interrogatories, are likely to be required or beneficial

While the above factors may be considered, generally leave to commence proceedings against a company in liquidation is rarely granted. In any event, in succeeding in obtaining leave, the applicant would need to demonstrate to the court that there is a ‘good reason’ as to why the ‘Proof of Debt’ avenue should be bypassed and that their claim “has a solid foundation and gives rise to a serious dispute.”

An example of where leave may be granted, is where the relief sought does not directly result in monetary relief, such as seeking that a ‘declaration’ be made. This may be necessary to commence legal action against another party but does not hinder the liquidation process or siphon funds from creditors for the party in liquidation.

How can we help?

If you are looking at commencing proceedings against a company in liquidation, or would like further advice in relation to liquidation and/or security interests, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected]

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 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.

Accessorial Liability under the Fair Work Act

fair work act

Being kept in the dark about the true facts can be an advantage.

In the recent decision of Fair Work Ombudsman v Hu [2019] FCAFC 133 – the Full Court of the Federal Court dealt with whether parties were “knowingly involved” in contraventions of the Fair Work Act, and thereby personally liable for the contravention.

The contraventions involved an underpayment of casual workers engaged to pick mushrooms on a mushroom farm by a company who supplied workers to the farm under contract.

The payments actually made to the workers were not at the level required under the applicable award for casual workers.

Fair Work Act: Ombudsman seeks to prosecute farm owner

The Fair Work Ombudsman sought to prosecute a claim that the company farm owner and its director was knowingly involved in the contravention by the labour hire company.

Section 550 of the Fair Work Act provides in relevant part as follows:

“Involvement in contravention treated in same way as actual contravention

(1)        A person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision.

(2)       A person is involved in a contravention of a civil remedy provision if, and only if, the person:

(a)       has aided, abetted, counselled or procured the contravention; or

(b)     has induced the contravention, whether by threats or promises or otherwise; or

(c)     has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or

(d)     has conspired with others to effect the contravention.”

The FCA cited with approval the summary by White J in Fair Work Ombudsman v Devine Marine Group Pty Ltd [2014] FCA 1365 when he said:

“In order to aid, abet, counsel or procure the relevant contravention, the person must intentionally participate in the contravention with the requisite intention: Yorke v Lucas (1984) 158 CLR 661.

In order to have the requisite intention, the person must have knowledge of “the essential matters” which go to make up the events, whether or not the person knows that those matters amount to a crime: Yorke v Lucas.

Although it is necessary for the person to be an intentional participant and to have knowledge of the matters or things constituting the contravention, it is not necessary for the person to know those matters or things do constitute a contravention: Rural Press Ltd v Australian Competition and Consumer Commission [2002] FCAFC 213;

That is to say, it is not necessary that the accessory should appreciate that the conduct in question is unlawful…

Actual, rather than imputed, knowledge is required. Giorgianni v The Queen (1985) 156 CLR 473

The notion of being “knowingly concerned” in a contravention has a different emphasis from that of aiding, abetting, counselling or procuring” a contravention. To be knowingly concerned in a contravention, the person must have engaged in some act or conduct which “implicates or involves him or her” in the contravention so that there be a “practical connection between” the person and the contravention: Construction, Forestry, Mining and Energy Union v Clarke [2007] FCAFC 87;  Qantas Airways Ltd v Transport Workers’ Union of Australia [2011] FCA 470; (2011)”


Ombudsman fails to prove case against farmer owner

In reviewing the evidence of meetings between the labour hire parties and the mushroom farm owners and its director, the FCA accepted that the Fair Work Ombudsman had failed to prove to the requisite onus that the farm owners and its director was aware of the casual employment status of the workers and therefore of the rates of pay made in contravention of the award, and refused to draw an inference of such knowledge from the meetings held.

If you have any queries in respect of personal liability under the Fair Work Act, or the matters raised in this article, please contact us.


Social Media: An Employee’s Freedom of Speech has Limits

social media and freedom of speech

What are the limits of free speech and the right to publish personal political views and opinions about your employer as an employee?

Is there an unrestricted right to freedom of speech and expression of political views?

In Comcare v Banerji, (2019) HCA 7 August 2019, the High Court ruled that a dismissal of a public servant who used a Twitter account to post some 9000 tweets, many of which were variously critical of the Department, other employees of the Department, departmental policies and administration, Government and Opposition immigration policies, and Government and Opposition members of Parliament, was justified.

The decision has been widely criticised in some circles as contrary to and an erosion of a right of freedom of speech and political opinion.

Facts: Social Media and Freedom of Speech Case Study

The employee who was employed by the Department of Immigration and Citizenship began broadcasting tweets under the name, “Lalegale”.

A complaint was received that the employee was inappropriately using social media in contravention of the APS Code of Conduct.

The departmental guidelines explained that “[p]ublic comment, in its broadest sense, includes comment made on political or social issues at public speaking engagements, during radio or television interviews, [and] on the internet”, and cautioned that it was not appropriate for a Department employee to make unofficial public comment that is, or is perceived as, compromising the employee’s ability to fulfil his or her duties professionally in an unbiased manner (particularly where comment is made about Department policy and programmes); so harsh or extreme in its criticism of the Government, a member of Parliament or other political party and their respective policies that it calls into question the employee’s ability to work professionally, efficiently or impartially; so strongly critical of departmental administration that it could disrupt the workplace; or unreasonably or harshly critical of departmental stakeholders, their clients or staff. Similar, more extensive guidance was provided in Australian Public Service Commission Circular 2012/1 (“the APS Guidelines”), which recorded that, “[a]s a rule of thumb, irrespective of the forum, anyone who posts material online should make an assumption that at some point their identity and the nature of their employment will be revealed”.

In turn, the tenor of the APS Guidelines was further reiterated for employees of the Department in a document entitled “’What is Public Comment?’ Workplace Relations and Conduct Section Fact Sheet”.

Following an investigation, which found the account, “LaLegale” to be that of the employee, the employee was terminated for breaching the Australian Public Service (APS) Code of Conduct.

The employee challenged her termination including on grounds of an implied freedom of political communication guaranteed in the Constitution.

The Public Service as an Employer

Much of the Court’s judgement revolved around the specific provisions of the Public Service Act, and the essential elements for the functioning of the APS. The majority commented:

“Regardless of the political complexion of the government of the day, or its policies, it is highly desirable if not essential to the proper functioning of the system of representative and responsible government that the government have confidence in the ability of the APS to provide high quality, impartial, professional advice, and that the APS will faithfully and professionally implement accepted government policy, irrespective of APS employees’ individual personal political beliefs and predilections. To the same end, it is most desirable if not essential that management and staffing decisions within the APS be capable of being made on a basis that is independent of the party-political system, free from political bias, and uninfluenced by individual employees’ political beliefs. The requirement imposed on employees of the APS by ss 10(1) and 13(11) of the Public Service Act at all times to behave in a way that upholds the APS Values and the integrity and good reputation of the APS represents a rational means of realising those objectives and thus of maintaining and protecting an apolitical and professional public service. The impugned provisions are suitable in the necessary sense.”

The final comments before upholding the appeal were that:

“The respondent must be taken to have accepted that her conduct in broadcasting the “anonymous” tweets was conduct which failed to uphold the APS Values and the integrity and good reputation of the APS within the meaning of s 13(11), and that, but for the implied freedom, the sanction of dismissal was warranted.”


Comment on Social Media and Freedom of Speech

It should be noted that this was not a case based upon the Fair Work Act provisions.

While this decision was based upon the particular environment of the public service in which the employee worked, and the specific regulatory framework around that environment, there are clear messages for employees in the private sector, that tweets or similar social media activity, even if anonymous, which are critical of the employer may lead to a lawful dismissal, particularly where there are clear policies prohibiting such conduct.

The publication of individual political views, and beliefs which offend the express policies of the employer, and the basic principles of the duties of fidelity owed to the employer, and go so far as to be critical of the activities of the employer and its business activities may well result in a lawful dismissal.

Social Media Policy- Message for Employers

The message for employers from this decision is to ensure that there are robust, but clear, fair and reasonable workplace policies in place, that employees are aware of and acknowledge the existence of them, and that any investigation into a breach of such policies which may result in a termination of employment is conducted with due regard to procedural fairness.


If you have any concerns about your workplace policies and claims for dismissal, please don’t hesitate to contact us:


The right to take legal advice about an employment contract is a workplace right

Employment Contract

Frequently, an employee or prospective employee will want to take legal advice about the terms of an employment contract before signing. The termination of an offer of employment, or of employment itself as a result of an employee wishing to take such legal advice, has been found to constitute adverse action.

Employment Contract Case Study

In Tran v Kodari Securities Pty Ltd (29 FCA 968), Mr Tran’s employment was terminated when he wished to obtain legal advice in respect of a new employment contract that his employer wished him to execute.

Dismissal from employment-adverse action

The Court found that the dismissal amounted to adverse action by Kodari Securities Pty Ltd via the actions of a director Mr Kodari. It found that the dismissal took place because Mr Tran had earlier on the evening on which his employment was terminated, proposed to exercise a workplace right to seek legal advice, and thereby constituted adverse action and thereby contravention of section 340(1)(a)(iii) of the Fair Work Act. That contravention was by the employer, Kodari Securities, and by its director, Mr Kodari by reason of his conduct giving rise simultaneously to the conduct by the company and the necessary involvement by him.

It was notable in this case that the parties had in fact had a long history together, and that the particular employment contract to be signed contained a provision actually stating that the employee had already received independent legal advice about the terms and effect of the Contract.

This meant that if the Contract had been signed without having had the benefit of independent legal advice about its terms and effect, the employee would have executed the Contract containing a material falsehood.

Threats and coercion

It was further found that the threat by the company director, Mr Kodari to terminate his employment if he did not sign the new Contract was made with the intent to coerce Mr Tran in the sense of intending to negate his choice to exercise that workplace right, and to instead sign a new Contract.

Company failed to discharge the onus

The bare denial in the affidavits of the company directors did not suffice to rebut the presumption in section 361. Their bare denial was found to be unconvincing and ultimately, was rejected by the Court. In effect, they failed to discharge the onus upon them by failing to produce any evidence of the nature or quality adverted to by the High Court in Board of Bendigo Regional Institute of Technical and Further Education v Barclay 2012 HCA 32.

Adverse Action -Civil Penalties

The measure of the civil penalty to be applied required a consideration of the factors relating to the objective seriousness of the contravention and included: the extent to which the contravention was the result of deliberate, covert or reckless conduct, as opposed to negligence or carelessness; whether the contravention comprised isolated conduct, or was systematic or occurred over a period of time; if the defendant is a corporation, the seniority of the officers responsible for the contravention; the existence, within the corporation, of compliance systems and whether there was a culture of compliance at the corporation; the impact or consequences of the contravention on the market or innocent third parties; and the extent of any profit or benefit derived as a result of the contravention.

The civil penalties imposed were:

1. In relation to the adverse action claim against the Company and ultimately the director only:

(a) a penalty of $35,000 payable by the Company;

(b) a penalty of $7,000 payable by the director;

(c) compensation payable by the Company and the director, upon a joint and several basis, for economic loss of $75,000; and

(d) compensation payable by the Company and the director , upon a joint and several basis, for hurt, distress and humiliation, which would have been present to some limited degree, of $10,000.

2. In relation to the coercion action claim against the Company and ultimately, the director only:

(a) a penalty of $20,000 payable by the Company;

(b) a penalty of $4,000 against the director.

Contract compensation

In addition, the Court ordered payment of contract compensation of six months salary.

In awarding 6 months, the court considered Mr Tran’s indefinite employment, the highly trusted role he had occupied and the apparently still highly trusted role that he had been earmarked to fill, his age and the time that it should have taken him to find alternative equivalent employment.

Warning to Employers about employment contracts

The decision serves as a warning to employers that failing to afford prospective employees the right to obtain legal advice in respect of employment contracts is a denial of a workplace right that may give rise to significant and costly liability for penalties and compensation for adverse action against both the company as well as directors who are “involved “under the Fair Work Act.

This is especially so where the contracts contain provisions of acknowledgement that the employee has received independent advice prior to signing, and where there is express or implied coercion used to try to have the employee sign with a companying threats that an offer of employment will be withdrawn or, existing employment terminated if the new agreements are not signed.

If you have any queries in respect of employment contracts or employment related litigation, please do not hesitate to contact us.

Michael Sing | Partner
Telephone 3009 8472
Email [email protected]

5 Legal Aspects You Should Consider Before Creating A Startup


You have finally decided to turn your idea into action. After a long time of thinking, planning and organising you have decided to stop procrastinating and immerse yourself in your idea by bringing a new business to life. Whilst you have been thinking about every aspect of your new and exciting business, you may have inadvertently forgotten about (or maybe you did not even think about) the legalities of your startup. Without the proper legal protections in place, you may not only lose your advantage, but someone may actually pinch your idea and beat you to the punch. In fact, without the proper legal documents, you may find yourself in a position whereby you are spending most of your time fighting a legal battle instead of working on and perfecting your new startup venture.

So, what are some of the main things you should think about when starting a new business?


Protecting your idea

No doubt, when you are looking at creating a startup, much of your advantage depends on the novelty and uniqueness of your idea. If you think you have the next great idea in your locker, you ought to make sure that you protect this idea. This means not only being selective with whom you share your idea, but making sure that they in turn are also selective with whom they share your idea.

This is where a Confidentiality Deed or a Non-Disclosure Agreement becomes important. This agreement essentially prevents a disclosee (the party you intend to disclose information to) from sharing your idea with anyone and simply limits their disclosure to what is necessary to aid you in the service you are engaging them in.

Business Structure

Before actually embarking on establishing your new startup, you should carefully consider your business structure. Will you operate as a sole trader (and save costs) or will you choose to run your business as a company (and limit your liability)? Perhaps a partnership or a joint venture is a good middle ground.

Your business structure should be carefully determined, and this will largely depend on how or if responsibilities are to be shared and who will be in control. If you are working on the startup with someone, you will need to carefully discuss your business structure and make sure your interests are protected.”

If you are creating a startup with the assistance of partner, it becomes extremely important to document how your relationship will be managed. An agreement between all partners (whether this is shareholders agreement or other agreement to document the start of the relationship) is highly recommended. This prevents any issues down the road and dictates how the business will be run (i.e who calls the shots, procedure for buying each other out in case things go pear shaped, first rights of refusal etc).


Intellectual Property

If your startup relies on Intellectual Property, this should be protected prior to official launch. If you have not patented/copyrighted your Intellectual Property as of yet, you should be very careful as to who you discuss your idea with.

If you already own intellectual property which you intend to utilise in your new startup, you should carefully think about what is to happen to such property. Is it the case that the intellectual property will become part of the business structure that you have decided on above (i.e. will it belong to the company) or will you continue to own the intellectual property and merely licence this to the business structure? This should be clearly and unequivocally documented in your agreement with the other partners.

Employee/Contractor Agreements

You may engage different entities whilst your startup is kicking off. You may be liaising with a lot of different people who will be providing you a variety of services. In addition to making sure that your idea is protected and that such parties execute the right confidentiality agreements, you will need to clearly set out how your relationship with such parties will be governed.

For example, if you are engaging someone (or a company) to design and develop a website for you, you may need a contractor agreement which clearly sets out the work to be performed and how this party will be paid for their services.

If you are engaging staff, appropriate employment agreements will need to be put in place. You should consider clearly setting out that some people ought not to be considered to be partners in your new startup but that they are simply providing a service. This limits the potential for an ex-employee/contractor claiming that they co-founded your startup (a familiar scenario in successful startups).

Without the above documents, you may find yourself in a situation where work has not been performed (or has been performed below standard) and you may not have a clear leg to stand on in your attempts to force the other party to finish their work or to redo their work to an acceptable standard.


Depending on the nature of your startup, you should make sure that you are complying with the relevant laws and regulations. This means ensuring that your terms and conditions on your website are up to scratch, ensuring that your privacy policy is up to date and your employees are adequately paid.

Whilst the above may seem costly and time consuming (or you may not consider it worthwhile to think about it at this time), rest assured that having the appropriate legal documents in place is a lot less expensive and time consuming than dealing with issues if/when issues do inevitably arise.

Just like you wouldn’t start a business without a business plan, we strongly recommend you don’t jump into a startup without thinking about the appropriate legal protections. Having the above-mentioned documents in place prior to launching (or even discussing) your idea, may be the difference between you being the next Steve Jobs or the next John Doe.

At Rostron Carlyle Rojas Lawyers, we can assist with all legal aspects of your startup. We work with multiple startup clients in ensuring that they have the right legal foundations before kicking their idea off the ground.

Contact James Hatzopoulos or Klevis Kllogjri on 02 9307 8900 for a confidential discussion regarding your new business idea and to check that you have all the relevant legal documents in place to ensure your new startup does not fail before it kicks off and to ensure that you avoid/minimise the potential for any disputes.

This one oversight concerning security interest can result in huge losses for your business

Here’s how to prevent it.

The way you handle a security interest can determine whether you record huge loss in your books or a healthy account of your business. One company Onesteel Manufacturing Pty Limited lost $23 million because of an over-sight in their security interest! While another, Psyche Holdings Pty Limited was able to avert the situation. Anything that potentially lose your business such huge amounts of money should be taken seriously. But what is a security interest?

Definition of a security interest

A security is “Enforceable claim or lien created by a security agreement, or by the operation of law, that secures the fulfillment of a pledge. A lender or obligee has a security interest in the collateral provided by a borrower or obligor to guaranty timely payment of a debt or performance of an obligation. See also perfected security interest.” Source: Business Dictionary

Security Interest

Security Interests- Why you should care?

Under s 166 of the Personal Property Securities Act 2009 (Cth) (PPSA), even if a security interest is registered correctly at the time of lodgement, there is an ongoing requirement to amend the registration within 5 business days of you acquiring actual or constructive knowledge of a defect in the registration. A failure to amend the registration within this time frame will result in the registration becoming defective. A defective registration can result in substantial losses such as was the case in OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21, in which a registration incorrectly made reference to an ABN (where an ACN should have been used), effectively resulting in a $23 million loss.

Defects of the kind covered by s 166 of the PPSA can arise where security interests are registered in respect of:

(a) an individual who changes their name after registration of the security interest;

(b) patent, plant breeder’s right, trade mark or design applications using a reference to a serial number (e.g. a patent application number) which changes upon the registration of the patent, plant breeder’s right, trade mark, or design (e.g. a patent number);

(c) a trust where the trust does not initially have an ABN and subsequently obtains one; or

a trust which has an ABN (and the security interest is registered against that ABN) but subsequently cancels the ABN;

(d) partnerships where partners leave or have ABNs cancelled or new ABNs are issued;

(f) secured property which is transferred to another party by the Grantor subject to the security interest;

(g) body corporates which after registration obtain an ARSN or have their ARSN cancelled.

The above list is not exhaustive, and the exact details required to be recorded for a particular entity are prescribed in the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations).

Issues that can rise after a security interest has been registered

A case has recently highlighted the issues that can arise where a trust obtains an ABN after a security interest has been registered. In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254:

(a) A general security deed was entered into between Ridgeway Finance Pty Ltd (Secured Party) and Psyche Holdings Pty Ltd as trustee for the LH Equity Trust (Grantor) in June 2013 relating to a loan between the two parties.

(b) Pursuant to the general security deed, a security interest was registered; however, at the time of registration the trust did not have an ABN and accordingly the ACN of the trustee was used in accordance with the registration requirements of the PPS Regulations.

(c) It is important to note that in relation to trusts, the PPS Regulations require that security interests are registered as follows:

  1. If the trustee of the trust has been included on the transitional register, reference must be made to those details as recorded on the transitional register;
  2. If not recorded on the transitional register and the trust has an ABN, reference must be made to that ABN;
  3. If not recorded on the transitional register and if the trust does not have an ABN, then:
  • If the trustee is a company, reference must be made to the company’s ACN; or
  • If the trustee is an individual, the security interest must be registered against the individual.

(d) After registration of the security interest, the trust was assigned an ABN, the registration date of which was backdated to 20 June 2013.

(e) Over 5 years later a director of the Secured Party was advised of the ABN of the Grantor and became aware that the security interest would need to be updated to reference the Grantor using the Trust’s ABN.

(f) Unfortunately, the Secured Party did not amend the security interest to refer to the Grantor using the ABN within the 5 sdays provided for in s 166 of the PPSA resulting in the security interest becoming defective.

(g) Once the Secured Party realised their error, they registered a new security interest on 6 July 2018 using the Trust’s ABN details and then applied to the Court under section 588FM of the Corporations Act 2001 (Cth) (Act) to fix a later time for the registration of its interest. The basis for their application was that the failure to register the interest earlier was accidental or due to inadvertence.

(h) The Court action was necessitated due to s 588FL of the Act which would have the effect that should the Grantor become insolvent within 6 months of the date the second security interest was registered, the secured property would vest in the company for the benefit of creditors generally and the Secured Party would lose the benefit of the security interest unless the Court extended the date for registration under 588FM of the Act.

(i) Fortunately for the Secured Party, the Court was satisfied in this case, that such inadvertence had been established and granted the extension of time to register the security interest.

This case shows that secured parties need to be particularly diligent when dealing with trusts to ensure that their security interests are registered correctly and that, if it becomes aware of changes to the trust’s ABN status, amendments are made to correct the registration within the 5 days allowed for in s 166 of the PPSA. Doing so will avoid the costs incurred in lodging a new security interest and going to Court to obtain a similar order as granted in this case.


How to avoid a loss: security interests

One solution to above problem is for a secured party to register multiple security interests against both the trustee and the trust to attempt to ensure that there is at least one security interest which is valid at any point in time. Another benefit to this approach is that, if Parliament ever legislates the recommendation contained in the Whittaker Report (published in 2015) that security interests granted by trusts should always be registered against the trustee, the Secured Party will not have to amend any of its security interests. The main risk with registering multiple security interests, however, is that such registrations are potentially unjustified and may expose the secured party to civil penalties under section 151(1) of the PPSA. It is for this reason that we recommend that a clause is included in the relevant agreement providing that the trustee is acting in its own right and as trustee in order to justify the lodgement of the security interests.

If you are looking for further legal advice in respect of registering security interests, obtaining security or searching the Personal Property and Securities Register please contact us.


Issues surrounding documents marked Return to Sender

Issues surrounding documents marked return to sender

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

The Common Law Position on return to sender

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

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

return to sender

What Section 109X says about Return to Sender

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


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

How can we help?

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

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

Business Sales Contracts and Warranties

Business Sales Contracts

Key Things To Know About Business Sales Contracts and Sellers Warranties

Business sales contracts usually contain warranties by a Seller on a wide range of matters concerning the business sold, including as clear title to all of the assets sold and to the truth and accuracy of financial records. It is frequently the case that buyers and sellers will negotiate on the terms of such warranties. A buyer will want all encompassing broad warranties, while a seller will want to confine and narrow the warranty terms to matters that they absolutely know to be true and correct.

Careful drafting of business sales contracts reduces risk

Careful consideration must be given to the drafting of a sale of business agreement. For vendors in particular, there are a number of contractual terms and conditions by which potential liability can be reduced, (but not fully eliminated) including:
• Avoiding representations about the future performance of the business;
• Limiting warranties to matters that the vendor knows to be true and correct and can control;
• Capping any amount that can be claimed as damages;
• Providing a minimum threshold of damages before a warranty claim can proceed;
• Impose responsibility on the buyer to do their own feasibility on future performance;
• If there is a due diligence period, the buyer should confirm full satisfaction with their enquiries on giving notice to proceed.

For a buyer, any clauses which try to restrict or reduce the Seller’s liability are undesirable. Care should be taken to ensure that there will be appropriate recourse against the vendor for undisclosed issues arising post-completion.

A buyer has a number of remedies available to them if they subsequently find that the warranties are breached, including an action for breach of warranty and action under the Australian Consumer Law (ACL).

Usually, an action for damages will rely on both causes of action, and the making of misleading and deceptive representations which is prohibited by s18 of the Australian Consumer Law (ACL), cannot be excluded by contract. Vendors should be aware that s4(2) of the ACL deems a representation about any future matter to be misleading, where there were no reasonable grounds for making the representation.

Sellers should also be aware that failing to disclose any significant facts or information may well be in itself misleading and deceptive conduct, even in a due diligence process where the buyer will conduct its own investigations. Silence on any material issue can give rise to a liability in damages, or allow a rescission of the contract.

A recent example of these issues was in the decision of Evolution Traffic Control v Skerratt
[2018] NSWSC 49 (ETC).
The key facts of that case were:
• The buyer entered into a share purchase agreement for business for $10 million.
• The price was based on a multiple of 5 times the EBIT of the business.
• The seller provided future financial forecasts upon which the buyer relied in
determining the price paid.
• In calculating the EBIT, reliance was placed by the purchaser on financial forecasts
provided by the vendors.
• The financial forecasts relied upon a specific government funding program, which was
provided based upon the achievement of conditions which were in fact, unachievable
in the future.
• The sellers did not disclose that specific condition during negotiations.
On discovery of the conditions of funding, after completion, the purchaser issued proceedings
to recover the difference between the purchase price and the actual value of the business at
the time of the sale, and pleaded a case based on:
1. misleading and deceptive conduct under the ACL, and
2. for breach of the warranties.
The share purchase agreement contained two specific broad warranties:
(i) the accuracy and completeness of all information disclosed in due diligence
materials during the course of negotiations leading up to the sale; and
(ii) that all information that would be material for disclosure to a prudent purchaser had
been disclosed.

The vendors failed to show that they had a reasonable basis for making representations about the business’ future financial performance. The Court ordered damages of around $4 million representing the loss suffered on a re-sale of the business for $6 million.

The key facts of the ETC case are not unusual in the sale and purchase of businesses, and illustrates the risk of a seller making representations about the business sold based on inaccurate and incomplete information.

Selling a business can be a rewarding and profitable experience, and the reward for many years of hard work, capital and effort. Don’t risk losing that with a poorly drafted or inappropriate contract.

Consult an experienced and knowledgeable lawyer on the terms and conditions of a contract before signing. It can make a huge difference to the outcome.

For further information and assistance on any matters relating to the sale and purchase of a business, call us. Our knowledge and experience will help you make good decisions.

Enforcement of Shareholder Restraints

Sydney Lawyers

We were recently successful for a client in a fierce contest in the Supreme Court in enforcing a 12 month restraint on a shareholder working for a direct competitor contrary to the provisions in a shareholders agreement (LCR Group v Bell (2016) QSC 130).

It is commonly the case that shareholders in a company enter into written agreements which set out their rights and obligations. Shareholders agreements of this nature are designed to achieve a harmonious and profitable business operational environment with cooperation between the shareholders.

A well drafted shareholders agreement should, particularly where the shareholders are of a management or executive level contain restraints of trade, drafted to strike a balance between  achieving a harmonious and profitable business operational environment with cooperation between the shareholders, protection of the company interests, and protection of individual rights.

Recent decisions on the enforcement of restraints of trade in shareholders agreements point to a more commercial and contractual approach rather than the approach generally accepted by the courts when considering restraint of trade in an employment contract.

Restraints of trade in employment contracts are said to be void being contrary to public policy.

A well drafted restraint clause in an employment agreement will typically contain non-competition provisions, geographical and temporal restrictions.

The starting point as observed by McMurdo J in AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 at 25 is that:

“A restraint of trade is void as contrary to public policy unless it is reasonable in the interests of the parties and by reference to the interest of the public: see Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd, Amaco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd. As to the interests of the public, the onus is on the party which is subject to the restraint to establish that the restraint is harmful to the public: Herbert Morris Ltd v Saxelby.”

Restraints on post-employment activity contained in shareholders agreements indicate a different approach. Issues such as mutuality of obligations, legitimate business interests of the company, acknowledgements of independent legal and accounting advice, the risk of loss of client and customer connections and relationship, confidential information and reasonableness of the restraints are all relevant considerations.

In BDO Group Holdings (Qld) Limited & Anor v Sully [2015] QSC 166, Flanagan J considered and enforced a restraint imposed upon an accountant who became a party to a shareholders agreement and a party to an employment agreement when he sold his business into the applicants.

The restraint of trade in the shareholders agreement provided a non-competition restraint of trade which purported to restrain the respondent from engaging in any activity during the restraint period and within the restraint area which essentially competed with the business activity of the company, provision of similar services, inducing, soliciting staff or clients.

In dealing with the shareholders agreement, and Flanagan J observed that the respondent agreed to:-

  • Diligently and faithfully devote…attention to the business
  • To cooperate and use…best endeavours to ensure that the group successfully conducted the business
  • To give approval to make decisions that were required of it in good faith and in the best interests of the group and the conduct of the business as a commercial venture

Relevantly, the shareholders agreement contained an acknowledgment that the terms of the restraint were reasonable considering the interests of each party and went no further than was reasonably necessary to protect the interests of the other shareholders, the group and the business.

In the decision of Seven Network (Operations) Limited & Ors v Warburton (No 2) [2011] NSWSC 386, Pembroke J dealt with a restraint of trade involving a senior executive of the Seven Network in the context of restraints imposed under an employment contract and a management equity participation deed.

In a decision notable for its clarity and analysis of both factual and legal issues, Pembroke J found that the restraints imposed in the management equity participation deed should be enforced. In analysing the circumstances relating to entry into the management equity participation deed, the commercial background and experience was detailed exhaustively. In that case Mr Warburton was a person of considerable commercial experience, knowledge and acumen. His Honour also considered that the entry into the management equity participation deed by senior executives such as the respondent was an important factor in the venture capital company’s decision to invest in the company (an investment of approximately $690 million for a 50% economic interest). The transaction involved, through an equity participation plan, senior management being given a financial incentive to strive to maximise the value of the business. By this means, the interest of the investors and senior management were aligned. In an effective practical sense, they became “owners of the enterprise”.

The commercial rationale for the deed was also analysed and His Honour commented:

“It resulted in the participating executives becoming the holders of shares and options in SMG. By this means, they acquired a shared financial interest in the enterprise with KKR and Seven Network Limited. The MEP Deed was designed, amongst other things, to enhance the prospect of senior management staying together as a team. It provided each of them with an opportunity to achieve a generous return on investment that was disproportionate to the risk being undertaken. From the perspective of KKR and Seven Network Limited, the restraints on competition served to protect their investment. But they also served to ensure that the investment of each of the senior management participants was not undermined or devalued. The object of the restraints on competition was to reduce the risk of devaluation of the business by the departure of any executives to work for competitors: to reduce the risk of the misuse of confidential information by its provision to competitors: and to reduce the risk of dissipation or reduction in the customer connection of the business”.

His Honour found that on the facts of the case, there was no logical reason for denying the existence of a legitimate financial interest to support the restraints imposed.

His Honour also dealt with the provisions in the MEP Deed which contained an acknowledgement of reasonableness of the restraints imposed. His Honour said “this is possibly the most important single factor in determining whether the restraint period was reasonable at the time it was entered into. It does not of course absolve the court from reaching its own conclusion, but as Emmett J observed in Synavant Australia Pty Ltd v Harris (2001) FCA 1517 at 85:

“The matter involves the exercise of business judgment. For that reason, considerable weight should be attached to the period the parties themselves have selected.”

His Honour further pointed to the fact that in this case, Mr Warburton had obtained legal and taxation advice at the time of entry into the deed, had been to a presentation at which attention was drawn to it and the commercial rationale and purpose behind the restraint was explained to him and he obtained written legal advice which specifically addressed the clause. Those factors reinforced the appropriateness of placing weight on his agreement as to the reasonableness of the restraint.

In LCR Group v Bell (2016) QSC 130, Byrne J enforced a 12 months restraint on a manager and shareholder, after analysing the scope of duties of the shareholder and the business interests of the company, finding that the restraint was reasonable and valid where the company and the prospective employer were direct competitors, and “there was a significant risk of appreciable detriment to LCR’s commercial interests through misuse of LCR’s confidential information.”

Enforcing restraints of trade, whether in employment contracts, business sale agreements or Shareholders Agreements is never simple and usually involves complex and contested, factual and legal issues. Where there are significant risks of serious loss and damage occurring if the restraints are not enforced ,protective and urgent injunctions are well warranted.

If you have any reason to consider action on a restraint of trade, and require urgent advice, contact us for assistance.