The big play of the Safe Harbour Provision

safe harbour provisions

What is the Safe Harbour Provision?

The defence to insolvent trading under section 588GA of the Corporations Act 2001 (Cth) (“the Act”) may be triggered once a director of a company becomes aware of his business’s possible insolvency.  The safe harbour protection encourages companies and their respective directors to take decisive action to protect their business and keep it trading (“the Safe Harbour Provisions”).

Following the introduction of the Safe Harbour Provisions in September 2017, we are now awaiting the Federal Government to conduct its independent review of the (Safe Harbour Provisions) provisions, which was due to be done in September 2019.  While this article will critique the vague nature of the definition under the Act, it shall discuss the success of the Act since its commencement. The definition in the Act defines Safe Harbour as “taking course of action reasonably likely to lead to a better outcome for the company”.

Safe Harbour Provisions- The Issues

Since the implementation the of Safe Harbour Provisions, a common issue facing practitioners is the lack of definitions contemplated by the Act. For example, the Act does not specify what constitutes a ‘better outcome’ or how this outcome would be measured, nor does the Act indicate how ‘reasonably likely’ from the definition, will be measured or assessed. The vague nature of the definition leaves it arguable whether a “better outcome for the company” is inclusive and considerate of the positions of directors, shareholders or creditors. From the above mentioned, the legislation gives no indication in what a better outcome would mean for the abovementioned stakeholders. Our view is that the position of creditors should be at the forefront of this consideration and directors must act bona fide in the interests of a company as a whole. [1]

The legislation does not require the director to prove that a course of action adopted will lead to a better outcome, but the legislation does require the director to adopt and implement a possible course of action that could lead the company to be solvent. This is problematic as the legislation offers no measure to judge the course of action implemented and it will be unable to critique whether it will (or may) yield a better outcome for the business.

Another issue is the legislation’s lack of qualification for ‘appropriate qualified entities’, which may cause directors confusion on who to approach for advice. In assisting directors to make careful selections of appropriate entities, directors should ensure that appropriate entities hold professional indemnity insurance and have skills and expertise in:

  • Turnaround plans;
  • Assessing the insolvency of the company; and
  • Expertise in advising on entrepreneurial and innovative measures to assist the insolvent company.

Benefits of the Safe Harbour

The aim of the Safe Harbour Provisions is to allow directors to effectively implement ‘business rescue plans’. They also benefit directors by providing an alternative to immediately placing a company into voluntary administration proceedings (or being forced into it by other trade creditors), and therefore affords the company’s directors more time to reach agreement on how to handle their insolvency.

Measuring Success of Safe Harbour Provisions

Many commentators remain hopeful that Safe Harbour Provisions will encourage a shift in current business culture and facilitate a more efficient restructuring process to achieve improved outcomes for the Australian economy. The success of this legislation, will depend on directors confidently coming forward about their business’s insolvency and trusting that their selected course of action (restructuring plan or strategy) will result in a better outcome. Although we do not have sufficient substantive to data measure and judge the legislation’s success, commentators believe the Act will likely lead directors engaging in innovative and entrepreneurial measures to save their company. This will in turn force directors to apply themselves in order to devise new strategies that may result in restoring the financial solvent position company.

Possible Reasons for delay in announcement of the independent review

Since there is no decided case law on this legislation in Australia, we hope the federal government will use the Independent Review to clarify some of the uncertainties that are found in the provisions. Nevertheless, many commentators concede that a possible reason for the delay of the review announcement is due to the fact that there has not been sufficient time to form opinion and recommendations about safe harbour, since its introduction in late 2017.

How can we help?

If you want to know how the implications of the Safe Harbour Provisions will affect your business, whatever the size or scale, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 to discuss any queries or concerns you may have.

Please note that this article has been prepared by Takudzwa Makusha, Law Clerk and settled by Levi Smouha, Partner 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.

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

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

So, what is CVL?

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

What does the liquidator do?

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

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

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

What are the effects of a liquidation?

The consequences of liquidation include:

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

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

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

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

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

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

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

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

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

What happens if a director has provided a Personal Guarantee?

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

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

What now?

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

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

New Legislation Brings Major Changes To The Building And Construction Industry

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

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

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

Background to the new Building Industry Fairness Legislation

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

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

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

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

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

Key changes

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

Project Bank Accounts

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

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

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

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

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

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

Security of Payment

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

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

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

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

Liability for Executive Officers

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

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

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

When will the changes be rolled out?

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

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

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

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

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

What this means for you?

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

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

How can we help?

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

 

References:

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

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

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

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

[5] Ibid s 100B.

[6] Ibid s 58A.

[7] Ibid.

[8] Ibid s 20A.

[9] Ibid s 21A.

Insolvency 101 – What every business owner should know

Insolvency 101

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

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

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

Your obligations as director/owner and the potential consequences

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

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

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

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

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

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

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

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

When you are insolvent

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

  • Voluntary Administration
  • Liquidation
  • Receivership

Voluntary administration

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

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

Liquidation

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

Liquidation meaning
Liquidation process

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

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

Receivership

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

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

What now?

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

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

Recommended for you:  Insolvency- The Ultimate Guide

Financial reporting requirements eased as the threshold for being a Small Proprietary Company is doubled

New thresholds for definition of ‘large proprietary company’ mean your business may no longer be required to lodge audited financial reports with ASIC each year.

 

As of 1 July 2019, the Corporations Amendment (Proprietary Company Thresholds) Regulations 2019 (Cth) came into effect. This amendment to the Corporations Act 2001 (Cth) doubles the existing thresholds for determining whether a company is a large or small proprietary company for a financial year.

This change has reduced the financial reporting obligations and costs for many companies that now fall into the smaller proprietary company threshold, as instead of having to file financial, director’s and auditor’s reports to ASIC as large proprietary companies do, they will only be required to keep written financial records for each financial year.

New thresholds

Under the new amendments, a company will be a large proprietary company for a financial year if it satisfies two of the following criteria listed in the table below:

Financial reporting requirements eased as the threshold for being a Small Proprietary Company is doubled

Similarly, the requirements to be considered a small proprietary company are simply if the company does not reach two of the three of the above thresholds.

What this means for you

As mentioned above, the reporting requirements for each financial year are significantly different between large and small proprietary companies. Companies deemed to be large proprietary companies must lodge financial, director’s and auditor’s reports at the end of each financial year, as well as maintaining a whistleblower policy. Preparing these reports takes time and money, and failing to lodge them results in penalties on the company and sometimes even its officers, so removing the necessity to prepare them is great in regards to saving time, money and effort.

Furthermore, these reports become publicly available after being lodged with ASIC. The effect being that other businesses and prospective customers can freely access your financial information, which can potentially lead to market disadvantages or loss of business. Being able to avoid the reporting requirements is a great advantage to small proprietary business.

Conclusion and recommendations

The Treasury released estimates that after these changes approximately one-third of proprietary companies that submitted audited financial reports to ASIC for the 2017-18 financial year will not be required to lodge financial reports for the 2019-20 financial year under the increased thresholds.

If you are a business owner that has been over the threshold for the large proprietary company criteria for previous financial years, we certainly recommend that you take full advantage of these changes and see if your company can now be reclassified as a small proprietary company. The financial, time and effort advantages gained by these changes can be huge, especially with respect to keeping your company’s private financial information out of the public domain.

Inquiry report into the operation and effectiveness of the Franchising Code of Conduct released

franchsing code of conduct

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its 369-page report detailing its findings into the franchising sector, with regards to the franchising code of conduct .

The Committee has stated that comprehensive and broad reform is required to resolve issues within the sector which are systemic. They have also noted that the current regulatory framework is not addressing the power disparity between franchisors and franchisees. To address the issues identified and rebalance the power disparity the Committee has made 71 recommendations most of which are to be referred for further investigation by a Franchising Taskforce (Taskforce). The major recommendations are provided below:

Franchising code of conduct major recommendations

The Committee has recommended that the Taskforce be formed to further investigate potential regulatory amendments including:

1. the implementation of a public franchise register to be updated annually, with updated disclosure documents and template franchise agreements, by franchisors;

2. a requirement that the franchisor (and master franchisor) make disclosure to franchisees regarding the purchase of products below cost pricing, the margin on products and the rebates the franchisor receives for the purchase of such products;

3. investigating the conflict of interests associated with supplier rebates and third line forcing and whether the ACCC should be investigating these issues;

4. whether the Australian Consumer Law should be amended to expressly extend the unfair contract terms regime to franchises by deeming franchise agreements to be standard form documents and making breaches of this regime subject to civil penalties;

5. whether the Franchising Code of Conduct (Code) should be amended to prevent unilateral variations in documents such as manuals and policies unless the majority of franchisees (or their representatives) agree to the variation;

6. an amendment to the Code requiring rental amounts paid to the franchisor under a head lease to be held on trust solely for the purpose of paying rent to the landlord;

7. whether amendments are required to deal with franchisees’ rights in relation to goodwill when the franchise agreement ends or is transferred as part of a sale contract; and

8. whether the extent to which franchise systems involve sufficient co-investment and risk sharing such that they should be regulated similarly to financial products.

Additional recommendations to the franchising code of conduct

In addition to those matters to be referred to the Taskforce, the Committee has recommended that:

1. unilateral variations of franchise agreements be prohibited unless the majority of franchisees (or their representatives) agree to the variation;

2. mandatory quarterly reporting on marketing funds be required and civil penalties be introduced for failing to adhere to the reporting requirements. An additional recommendation is that legislation is amended to clarify how marketing funds are to be distributed in the event a franchisor is wound up;

3. extensive additional disclosure be required including:

a. provision of disclosures in both hard copy and digital copy formats;

b. for existing sites – the disclosure of financial information in the context of sales, including the previous 2 years’ Business Activity Statements;

c. for greenfield sites – the disclosure of financial information in the context of sales including the previous 2 years’ Business Activity Statements for a comparable franchise site;

d. provision of a copy of mandatory guidance on employment matters and overseas workforce issues as prepared by the Fair Work Ombudsman;

e. the disclosure of all rebates, commissions or other payments in relation to the supply of goods and services to franchisees as a percentage of the full purchase price on each transaction;

f. the disclosure of the reasonable personal workload to be undertaken in running and operating the franchise business; and

g. provision of a copy of the ACCC’s Franchisee Manual as part of disclosure.

4. existing whistle-blower protections be extended to cover franchisees reporting franchisors who are breaching the Code;

5. numerous changes to the cooling off provisions be made, including:

a. that the cooling off period commence on the later date of:

i. the franchise agreement being executed;

ii. an upfront payment being made to the franchisor;

iii. the disclosure documents being received by the franchisee;

iv. a copy of the lease being received by the franchisee.

b. clarification that the 14-day disclosure period must commence 14 days before the franchise agreement is executed; and

c. making the cooling off period applicable to transfers, renewals and extensions of the franchise agreement;

6. franchisees be able to terminate franchise agreements in circumstances where:

a. they are suffering hardship;

b. they are being exploited by the franchisor; or

c. the business has failed;

7. franchisor rights of immediate termination be limited to special circumstances such as fraud and public health and safety and require 7 days’ notice to be given to franchisees during which period the franchisee can lodge a dispute which causes suspension of the termination process until the dispute is resolved;

8. a class exemption be created to make it lawful for franchisees to collectively bargain with their franchisor;

9. arbitration be provided as an option if mediation is unsuccessful and multiple franchisees be able to take part in mediation or arbitration with Franchisors;

10. the ACCC be given power to identify and act on instances of systemic churning and burning (i.e., the repeated sale of a franchise site that is known to perform poorly or fail in order to make money from franchisees paying franchise fees).
Whilst the Committee’s recommendations are numerous and substantive, the report is part of a greater legislative process which will involve:
• the Government considering which recommendations to implement; and
• the formation of the Taskforce to provide further recommendations,
before Parliament will consider any legislative changes proposed by the Government.

Additionally given the recent joint media release by the Hon Stuart Robert, MP and the Hon Michaelia Cash which confirmed the Government is looking at strengthening the unfair contract terms regime, it is expected that the amendments proposed by the Committee will be considered as part of the Government’s review of the unfair contract terms regime.

If you would like us to prepare new franchise documents for you, review your existing franchising documents or would like to obtain further advice in respect of the Franchising Code of Conduct, please don’t hesitate to contact us.

Changes to the corporate tax rate – are your franking credits affected?

franking credits australia rcr

Changes to the tax laws commencing the 2018 financial year were introduced to provide tax relief to smaller companies. Instead of the blanket 30% corporate tax rate across all companies, the following rates apply:

franking creditsA base rate entity is a company for which:

  • no more than 80% of its assessable income for the financial year is passive income; and
  • aggregated turnover does not exceed:
  • $25 million for the 2018 financial year;
  • $50 million for any of the 2019 financial years onwards.

Included in the definition of passive income are corporate distributions (excluding non-portfolio dividends) and franking credits on those distributions, and any amount received from a trust to the extent that it is referable to passive income.

While the reduction in corporate tax rate provides welcome relief to small businesses operating out of corporate structures, there may be serious implications to franking accounts where a trading company was previously taxed at 30% but is subsequently regarded as a base rate entity.

It is common to structure ownership and operation of a business via a trading company in which the shares are held by a discretionary trust. One of the beneficiaries of the trust is a bucket company that receives income from the trust so that trust income is not taxed in the hands of the trustee at the highest marginal rate but at the lower corporate tax rate. If the bucket company has been receiving income franked to 30% and has accumulated significant franking credits at this rate but it then becomes a base rate entity, it can only frank dividends to the lower tax rate which may lead to an excess of unusable franking credits.

More seriously, the bucket company may be liable to pay top-up tax in the following scenario: The trading company is a base rate entity and pays a dividend to the trust franked at the lower rate. The trust distributes the dividend to the bucket company, but because the distribution came from a trust (and therefore the bucket company does not have at least a 10% voting interest in the trading company excluding it from the definition of “non-portfolio dividend”) the income will be deemed to be passive income and the bucket company will not be regarded as a base rate entity. As a result, the bucket company must pay tax at 30%.

It remains to be seen if the Department of the Treasury will address the indirect effects of the change to corporate tax rates on company franking accounts. In the short term, anyone using a bucket company to retain profits should carefully consider the effectiveness of the strategy in light of these changes.

Company Phoenixing- Clipping the wings of the Phoenix

Company Phoenixing

Company phoenixing or ‘phoenixing’ occurs where, the primary controllers of a failed company conducts the same type of business while using some or all of the former company’s assets.

When is Company Phoenixing illegal?

Despite the adverse stigma that is most commonly associated with ‘Phoenixing’, there are circumstances in which it can be legal. There are many examples and success stories where a person has revived the business previously conducted after the financially distressed company enters liquidation and its remaining assets are distributed to creditors.

However, such activity is illegal when this attempted resurrection comes before creditors are paid and where the use of the former company’s assets was uncommercial.

For example, John realizes that ‘John’s Farms Pty Ltd’ cannot pay its debts as and when they fall due. John therefore decides to transfer the company’s assets to the newly-incorporated ‘Johnno’s Farming Pty Ltd’ for little to no value before putting John’s Farms Pty Ltd into liquidation. In this way, John has avoided paying the creditors of John’s Farms Pty Ltd, and has not legally “phoenixed” from the old entity to the new entity.

The Impact of Company Phoenixing

Company phoenixing affects many trades and industries, and sadly, appears to be on the rise.

In 2012, phoenix activity was estimated by Price Waterhouse Coopers and the Fair Work Ombudsman to have costed the Australian Economy between $1.8 to $3.2 billion annually. A second report in July 2018 indicated that this figure could now be as high as $5.13 billion per year.

Unpaid trade creditors seem to suffer the most, making up approximately 61.8% of this figure, whereas unpaid employee entitlements are approximately 5.8% and unpaid taxes and compliance costs are approximately 32.3%.

What is being done about company phoenixing it?

Early in 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced (but had not been passed into law prior to the Federal Election in May 2019). In summary, the Bill purports to:

amend the Corporations Act 2001 (Cth) by introducing new criminal offences and civil penalty provisions for officers who fail to prevent a company from making ‘creditor-defeating dispositions’;

Empower Liquidators in allowing them to apply for court orders in relation to voidable, creditor-defeating dispositions;

Enable ASIC to make orders for the recovery of company property disposed of under such a disposition; and

Improve the accountability of resigning directors so as to prevent companies being left rudderless.

Further, individuals who engage in “illegal phoenixing” can expect to receive a fine of up to $945,000.00 or imprisonment of 10 years for contravening these provisions whereas body corporates can expect to receive penalties of either $9.45 million or 10% of the entity’s annual turnover.

What you can do about phoenixing

Even if these measures are implemented, it is important for you to proactively assess a company’s circumstance.

As an employee, it is important to look for warning signs such as late payment or non-payment of wages, unpaid superannuation and entitlements.

As a creditor, one should be aware of late payment or non-payment of invoices which may indicate financial distress, as well as changes to company details.

Noting that officers of the company have certain duties under the Corporations Act 2001 (Cth), it is important to monitor the financial health of the corporation and ensure that decisions are made in accordance with key duties.

Often, the best way to ensure that your rights and obligations are being met is to seek advice.

How can we help?

Rostron Carlyle Rojas Lawyers are well appraised in the field of corporate law and are able to assist companies, company officers, creditors and employees in ensuring the discharge of their duties and protection of their rights. If you or someone you know requires further assistance, please do not hesitate to contact our Corporate Lawyers on (07) 3009 8444 or email us at [email protected]

Please note that this article has been prepared by Kishen Bhoola, Lawyer and settled by Sarina Mari Alwi, Senior 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.

Safe Harbour Reforms: Are you safe or swimming with the sharks?

safe harbour

With effect from 19 September 2017, the safe harbour reform came into effect, reflected in Section 588GA of the Corporations Act 2001 (Cth) (the Act). The practical effect of the reform was to encourage the turnaround culture of companies through innovation and strategic management instead of companies prematurely appointing a voluntary administrator.

What is a Safe Harbour?

The Act now provides an avenue for company directors to take steps against being held personally liable for a company’s inability to comply with their financial commitments. Section 588GA of the Act (the Safe Harbour Reform) provides that a director is not subject to an insolvent trading claim provided that upon suspecting that the company may become or is insolvent, they develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company.

What are the requirements for the Safe Harbour Reform?

To determine what an appropriate course of action is, the Act provides a number of examples a Court is to consider in determining whether a director has in fact, complied with the Safe Harbour Reforms, such as, whether the director:

  1. is properly informing himself or herself of the company’s financial position; or
  2. is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
  3. is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
  4. is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
  5. is developing or implementing a plan for restructuring the company to improve its financial position.

When do the Safe Harbour Reform provisions apply?

The Safe Harbour Reform provisions only apply to debts incurred (whether directly or indirectly) in connection with the course of action until such time that:

  1. a ‘reasonable time period’ has passed; or
  2. the course of action has ceased; or
  3. the course of action is no longer reasonably likely to lead to a better outcome; or
  4. the appointment of an administrator, or liquidator, of the company.

The phrase a ‘better outcome’ is defined in the Act as to mean “an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company.”

Debts incurred after the above circumstances may be subject to insolvent trading claims against directors.

What does this mean for directors?

Whilst the Safe Harbour Reform is intended for companies to strategically become more solvent, there is still a risk in relying on the Safe Harbour Reform as a defence to insolvent trading claims as the onus of proof is on the director should the matter escalate. So, while a director may think they are pursuing a course of action that is reasonably likely to lead to a better outcome, they need to be able to prove this. Due to this, many directors may decide to avoid the risk of not being able to successfully prove that their actions were in accordance with the Safe Harbour Reform and simply appoint voluntary administrators.

How can we help?

Our insolvency and commercial litigation team has extensive experience acting on behalf of companies and directors to reach positive outcomes. If you or someone you know requires further assistance with regard to directors’ duties or the Safe Harbour Reform, 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 Krishna Ramji, Law Clerk and settled by Sarina Mari Alwi, Senior 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.

Australian Consumer Law: Warranty against defects and the mandatory statement to be provided to consumers

Australian Consumer Law 2019

Are you a service business and do you guarantee that if the goods or services your supply are defective you will repair or replace the goods, provide again or rectify the services, or compensate the consumer? If so, from 9 June 2019 you will be required to include, in all documents containing your warranty such as your terms and conditions, marketing material, receipts, product packaging or consumer contracts (Warranty Document), one of the following statements which best suits your business:

Existing Requirements

Even if you only supply goods to consumers you are required to provide the following statement to your consumers in a Warranty Document:

Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.

Businesses that do not comply with the requirements of the Australian Consumer Law risk fines of up to $50,000 for companies and $10,000 for individuals per breach. Given the upcoming changes it is a timely reminder that you should ensure that your warranties should be documented:

1.       transparently;

2.       to concisely note:

a.       what the consumer must do to claim the warranty

b.       what you will do to honour your warranty;

c.       who will bear the expenses of the warranty and if relevant how the consumer can claim such expenses from your business;

3.       to prominently state your business’ name, address, telephone number and email address;

4.       to clearly state the length of the warranty and the time frame in which a consumer may claim the warranty.

Exceptions

Businesses are not required to display the mandatory statements noted above in relation to:

  • the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored;
  • services supplied under a contract of insurance; or
  • supplies of gas, electricity or a telecommunications service.

In addition to the exceptions noted above, Parliament may amend the Competition and Consumer Regulations 2010 (Cth) to exclude the supply of certain goods from the operation of the Consumer guarantees in the Australian Consumer Law; however, as at the date of this article no additional exceptions have been provided.

If you would like us to prepare new terms and conditions for you or review your existing warranties, or if you would like to obtain further advice in respect of the Australian Consumer Law please don’t hesitate to contact us.