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.
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).
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.
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.
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.
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 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)  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  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:
- 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;
- If not recorded on the transitional register and the trust has an ABN, reference must be made to that ABN;
- 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.
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  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.
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@example.com.
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.
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
 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
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.
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  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  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)  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.
Answer: Not very hard!
A party who is claiming a debt from a company will often want to consider the quickest and most cost-effective way for recovery. A drawn out court case over many months can often lead to a very unsatisfactory result, including lost time and legal fees. For these reasons, many will consider the use of a Statutory Demand under Section 459 of the Corporations Act 2001 which basically entails making a demand in a prescribed form and which allows 21 days to resolve the matter of the debt, or face a winding up on the grounds of insolvency. Properly used, it can be a fast and effective way to recover debts.
However, this process is often misused by parties particularly where the issue is not solvency of the company, but a genuine dispute as to the existence of the debt claimed.
The recent decision of ABC Constructions No 1 Pty Ltd v. Bonelli Constructions Pty Ltd  QSC 35 (4 March 2016) is an illustration of this point.
Bonelli issued a statutory demand against ABC for monies it claimed were due and payable as a consequence of a payment claim made under a building contract. ABC applied to the Court to set the Demand aside. At issue was whether there was a genuine dispute about the existence or amount of the debt that was the subject of the demand, and whether there was a genuine off-setting claim.
ABC claimed that the debt claimed under the statutory demand was genuinely in dispute. Bonelli had failed to submit documentary evidence supporting its progress claim; the debt has been the subject of a Principal’s Notice to Show Cause with a subsequent termination of the building contract by the applicant; and there are differences between separate progress claims issued by the respondent, at a relevant point in time.
ABC also contended that under the building contract it had a right to claim delay costs subject to a specified procedure, which had not been followed by ABC. ABC expressly disputed Bonelli’s right to make any claim for delay costs prior to service of the statutory demand.
Finally, ABC claimed that the statutory demand was issued in circumstances where there was a pre-existing dispute between the parties resulting in a termination of the contract by it.
On all of its arguments, ABC asserted a genuine dispute existed and that the Statutory Demand should be set aside with costs.
The Court agreed and set aside the Statutory Demand and ordered that Bonelli pay the costs of the application.
In reviewing the well-established principles and cases, the Court had no hesitation in finding a genuine dispute existed. Importantly, the court emphasised the relatively low threshold required to show a “genuine dispute”:
“No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised.”
The Court quoted with approval the decision of TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd in which Dodds-Stretton J said:
“As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile… it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less.”
In other words, a party does not need to actually prove their case to show that a “genuine dispute” exists, but it should show the basis or grounds do actually exist. This usually requires the presentation of an affidavit that exhibits relevant correspondence and documents, and setting out of relevant facts to show a credible basis for a genuine dispute.
This recent decision is another of many examples where a party has been punished with a costs order for issuance of a statutory demand where a clear genuine dispute existed.
It illustrates the need to have good legal advice and to choose an appropriate way to resolve disputes, and particularly those which may involve the Court having to decide questions of fact and the meaning and effect of contracts and credit of witnesses. Such disputes are clearly not able to be decided under a Statutory Demand process.
If you have any reason to consider recovery of a debt or have received a statutory demand, and require urgent advice, contact us for assistance.
An Employer’s Liability as an accessory for misuse of confidential information by its own employees.
It is commonly the case that executives and senior managers seeking to jump ship from one employer to another either by themselves or through recruitment agents, actively promote themselves with promises that they can bring significant business with them thereby adding to their value and increasing their worth to a prospective employer.
The recent decision of Lifeplan Australia Friendly Society Limited v Ancient Order of Foresters in Victoria Friendly Society Limited  FCAFC 74 is a stark reminder of the risk to not just those employees who take and purport to misuse confidential information of former employers but also to the new employer.
In the Foresters decision, the court ordered that the new employer (Forester) should account for profits generated by business developed and managed by two former employees of Lifeplan.
The former employees of Lifeplan that joined Foresters in senior roles implemented business plans and drew clients away from their former employer. The court found that they did so whilst still employed by Lifeplan and had used and misused highly confidential information to do so.
On appeal, the court found that there was a causal relationship between the breach of the employee’s duties and the profits generated in their new employer. Further, the court found that Forrester’s as the second employer had knowingly acted upon the information, were implicated in the steps taken by the employees before jumping ship to join their company. As a consequence, the profits made by Forrester’s relied entirely upon the employees misusing the confidential information taken from their former employer and with the assistance and complacency of the new employer. Accordingly, the court ordered that Forrester’s pay damages in the sum of $6,200,000.00 representing profits made from the breaches of their employees against the former employer.
The court also discussed the provisions of section 79 of the Corporations Act 2001 (Cth) (“the Corporations Act”) which provides that a person may be involved in a contravention if and only if the person:
a) has aided, abetted, counselled or procured the contravention; or
b) has induced, whether by threats or promises or otherwise, the contravention; 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 importance of this section lies in the fact that the former employees were claimed to have breached various provisions of the Corporations Act as officers of their former employer and they had been obliged in their capacity to exercise their powers and discharge their duties with a reasonable degree of care and diligence in good faith and in the best interests of the corporation and for proper purposes without improperly using their position to gain advantage or cause the corporation detriment and as officers they had obtained information that they were obliged not to use improperly or to gain advantage or to cause the corporation detriment. Those were civil penalty provisions of the Corporations Act section 180, 181, 182 and 183 and by section 79 of the Corporations Act, accessorial liability was established.
In fact, the court found that on the facts before it, “there was no doubt that the board of Forrester’s was actually aware, had actual knowledge, of the taking and using in breach of duty of confidential information. The board was not a passive observer of this; it did not prepare it but it used it in its decision-making process and after employing FPA in the governance process of checking performance. Likewise, Mr … knew of the clearly wrongful solicitations of funeral directors as the business venture was being agreed”. The court found that given the actual knowledge of the Forrester’s board in its participation of breached of the Corporations Act by the former employees, it would “not draw back from a conclusion that Forrester’s was knowingly concerned in those breaches”.
The decision is a stark and practical reminder of the risk in taking on new employees who promise to bring business and work from their former employer. Often, the promise of such new work proves irresistible to the new prospective employer, and the risks are either overlooked or ignored. The decision dealt with above clearly shows that the risk of damages are real.
If you have any queries in respect of these matters please do not hesitate to contact us for timely advice which may save expensive and troublesome litigation.
The introduction of the Australian Consumer Law (ACL) was meant to have the desired effect of delivering balance in the market place. To a certain extent, that may be true. However, there is one provision of the ACL in which it appeared to be the case that we found little guidance from court authorities, namely the question of re-supply under section 3(2) of the ACL. Or so we thought…
Recently this office defended a summary judgment application filed by a third party in our client’s case. The case involves the provision of managed services to customers by an IT company being our client’s company. The third party is alleged to have provided defective computer software to our client, which in turn allegedly caused problems in relation to our client’s provision of services to its customers. The third party brought its application for summary judgment on the basis that our client was not a consumer as defined in the ACL, and, accordingly the provisions of the ACL did not apply.
Section 2 of the ACL includes computer software in the definition of “goods”. To qualify as a consumer under section 3(1) of the ACL the goods have to be acquired for an amount less than $40,000.00 or alternatively the goods are acquired for personal, domestic or household use or consumption (the other provision pursuant to section 3(1)(c) of the goods consisting of a vehicle or trailer is irrelevant for the purpose of this discussion). These provisions are clear enough and on their own would not cause any confusion.
However, the difficulty of statutory interpretation of section 3 of the ACL in its application to the IT services industry arises due to the provisions of section 3(2) of the ACL, in particular section 3(2)(a) regarding the exclusion of the application of section 3 if the acquisition of the goods was for the purpose of re-supply. Our client had acquired goods from a major computer software provider for the purpose of performing its role as a managed service provider to its customers. In providing the managed services to its customer, our client would install the software but not provide the license key to the customer. The customer did not have any control over the computer software and they were never given access to the license key. Due to an alleged defect within the programming of the computer software issues allegedly arose for our client’s customers regarding their computers and eventually the business relationship was terminated causing our client loss.
The principal dispute in the proceeding lay between our client and its customer in relation to the customer repudiating the contract entered into with our client. Nevertheless, the issue regarding the alleged defect in the computer software which our client acquired from the computer software provider meant that it was necessary to bring in that software provider as a third party. In adding the third party, our client relied upon the provisions of the ACL. The software provider argued that the provisions of the ACL regarding consumers and the protections provided under the guarantees relating to goods did not apply to our client.
The Supreme Court of Queensland heard the third party’s application for summary judgment. As discussed herein, there was little previous court authority which applied to the question of re-supply under section 3(2) in relation to computer software. In particular, there was very little authority which applied to the unusual factual circumstances of this case. Notwithstanding the paucity of authority to guide the parties and the court, the Supreme Court of Queensland nevertheless agreed with our client’s argument there was a triable issue which necessitated our client’s case against the third party being heard, namely the fact that the exclusion under section 3(2) may not apply as the license key for the computer software was not provided by our client to its customers. The Supreme Court considered that based on the fact that the license key had not been provided the goods (in this case the computer software) had not been re-supplied.