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Director identification numbers being introduced

Director identification numbers being introduced

The Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 (Cth) (Act) passed by the Federal parliament on 12 June 2020 with the effect that directors of Australian companies will soon be identified by a permanent unique number which will be known as a director identification number (DIN). The main purposes of the Act are to:

• ensure that all directors have their identity verified as part of the DIN application process (this includes alternate directors acting as directors, and other officers such as company secretaries as might be prescribed by regulations);
• ensure directors only have one DIN and preventing directors hiding behind aliases or variations of their name;
• prevent director identity fraud;
• apply a consistent regime across Australian body corporates, Aboriginal and Torres Strait Islander corporations, and registered foreign companies;
• further aid in the deterrence and penalisation of illegal phoenix activity; and
• impose criminal and civil penalties for non-compliance.

This Act is one of five other acts which have been passed by parliament which will together introduce a single business register, allow for the governments technology to be modernised and address the issue of phoenix activity.

Whilst the Act is not yet in force it will come into force on the date fixed by proclamation or within two years from the day the Act receives assent. After the Act becomes operational:
• existing directors having to apply for a DIN within a period of time to be announced;
• within the first 12 months (Transitional Period) of the new Act’s operation a person who is appointed a director will have 28 days to apply for a DIN.
• after the Transitional Period ends, a director must apply for a DIN prior to being appointed as a director or such time as specified by the registrar; and
• The resignation of a director will then only take effect from the date of notification and a director that fails to notify the ASIC of their resignation within 28 days may be held accountable.
• There will be criminal and civil penalties for applying for multiple DINs or misrepresenting a DIN with the penalties for a director applying for multiple DINs or misrepresenting a DIN being up to $21,000 (100 penalty units) and/or 12 months imprisonment as at the date of this article.
This is in stark contract with the current process as ASIC does not take steps to verify the identity of company directors and will have a significant impact on:
• the time frame and costs to incorporate companies will be lengthened where the person to be appointed as a director does not already hold a DIN;
• clearly identifying the directorships an individual holds and removing the discrepancies and errors commonly seen in Government registers; and
• making the process of locating directors in insolvency matters by creditors, administrators and liquidators more efficient and easier.

If you have any questions regarding the introduction of DINs or other matters relating to your or duties as a director, please contact Rostron Carlyle Rojas Lawyers:

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Time to review your business affairs

Time to review your business affairs

The beginning of the new financial year is a good opportunity to set aside time to review your contracts and ensure that the key aspects of your business are in order. In particular you should check:
• that you are aware of the changes to award rates which may affect the amounts payable to your employees and whether your employment agreements need to be updated to deal with changes in the law such as those changes introduced in response to the Covid-19 pandemic;

• that your key customers or suppliers have executed current written agreements;

• whether any of your contracts need to be renewed or extended;

• that all of your licenses and authorisations are up to date;

• whether your terms and conditions are up to date, noting that we frequently review terms and conditions which are in breach of the Australian Consumer Law or do not provide standard protections for the businesses such as the right to register security interests;

• that your insurance policies to ensure they are appropriate and adequate for your current business operations and whether your policies need to be updated to take into account recent changes in your business;

• that your company register, the ASIC register, trust documents or partnership agreements are up-to-date and reflect the current structure of your business; and,

• whether any personal property security interests have been registered over your business which should be removed

• whether any personal property security interests registered in your favour need to be extended to avoid the registration expiring; and

• the status of your debtors and whether you need to engage professionals to collect the debt on your behalf.

In addition to the above you may also wish to consider reviewing your current business structure and your business succession arrangements to ensure that they up to date and match up with your requirements.

Rostron Carlyle Rojas Lawyers can assist you in reviewing each of the above, provide you with practical advice and work with you to rectify any problem areas identified.

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New Financial Year – Company Structuring

New Financial Year – Company Structuring

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

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

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

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

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

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COVID-19 and Contractual Obligations – Frustration

COVID-19 and Contractual Obligations Frustration

Is COVID-19 getting in the way of you complying with your obligations under a contract?

We find ourselves in new territory as COVID-19 impacts the way we comply with our contractual obligations. Especially when the government is implementing measures and restrictions to flatten the curve of COVID-19.

Contracts are generally drafted with a force majeure clause. This clause is designed to free both parties from liability or obligation when an extraordinary event or circumstance beyond the control of either party (such as a strike, riot or epidemic) prevents one or both parties from fulfilling their obligations under the contract. Depending on the wording, some force majeure clauses take into consideration pandemics or government responses to a pandemic.

If the force majeure clause in your contract does not cover pandemics like COVID-19, the doctrine of frustration may discharge your obligations under the contract. Frustration is when performance of the obligation required is rendered radically different from those originally contemplated by the parties.

The presence of COVID-19 will not automatically frustrate your contract, you will need to consider the specific impacts it is having on the performance of your obligations in the context of your contract.

Let’s discuss frustration and its impacts when a contract may be affected.

What is the Doctrine of Frustration?

Frustration is where, without fault of either party, the contract is incapable of being performed due to an unforeseen event (or events), and it is no longer possible for the parties to perform their obligations under the contract.

The doctrine of frustration looks to discharge the party/parties from performing their obligations when a frustrating event occurs.

Therefore, you may be relieved from the performance of certain contractual obligations if you can establish that your contract has been frustrated.

What is a Frustrating Event?

To establish a frustrating event, you must be able to prove the following:

1. through no fault of either party;
2. an unforeseen event occurs; and
3. this event renders performance of the contract impossible or radically different from that originally contemplated.

Examples of a frustrating event is where:

1. an individual’s personal capacity is required for performance, and that individual is prevented from performing the contract; or

2. performance of certain obligations are essential and required to be done within a specific timeframe, but the performance of the obligation is significantly impeded, delayed or postponed; or

3. a contract specifies a method of performing the obligations (and the method specified is essential in its performance), and it is impossible to perform the obligations using that method.

On the contrary, frustration or a frustrating event will not occur where:

1. the impossibility of performance is the fault of either of the parties; or

2. performance has only become more onerous or expensive..

A frustrating event will be determined on a case by case basis. Accordingly, it is important to consider the terms of your contract to determine the express contractual rights of each party where the contract may be affected by COVID-19.

Call Rostron Carlyle Rojas Lawyers if you believe your contract has become frustrated or you wish to assess your existing contractual arrangements.

Also, we can assist with reviewing your existing contracts, and to ensure your future contracts protect your interests in uncertain times.

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.

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Changes to Witnessing of Wills and Enduring Documents due to COVID-19 Pandemic

Changes to Witnessing of Wills and Enduring Documents due to COVID-19 Pandemic

The COVID-19 Emergency Response Act 2020 (Qld) (Act) was passed on 23 April 2020 in response to the extraordinary circumstances arising out of the COVID-19 Pandemic. The Act allows for Queensland State Government Ministers to issue extraordinary regulations relating to existing legislation in order to facilitate the continuance of public administration, judicial process and other activities disrupted by the COVID-19 emergency. Regulations may have retrospective effect to a date no earlier than 19 March 2020 and may not extend time periods beyond 31 December 2020.

On 15 May 2020 the Queensland Government published the Justice Legislation (COVID-19 Emergency Response—Wills and Enduring Documents) Regulation 2020 (Regulation) pursuant to the powers under the Act. The Regulation provides that the requirement for a witness to be present when a will is signed under the Succession Act 1981 (Qld) or an enduring power of attorney is signed under the Powers of Attorney Act 1998 (Qld) is satisfied by the witness being ‘present’ by audio visual link provided that the witness or, if there are 2 witnesses, at least one of the witnesses is a special witness. In this regard special witness includes a justice of the peace, commissioner for declarations, notary public and Australian legal practitioner.

Regardless of the document being signed:

• the audio-visual link must have sufficient quality of sound and imagery to satisfy the witness that the signatory is signing the document
• the witness must observe the signatory signing the document in real time
• the signatory must sign each page of the document
• the witness must be satisfied that the signatory is freely and voluntarily signing the document
• the witness must take reasonable steps to verify the identity of the signatory and that the name of the signatory matches the name of the signatory written on the document

The Regulation capitalises on the advances made in audio-visual technology over recent years to provide a practical solution to problems created by social distancing and lockdown measures required to combat the spread of COVID-19. Until the expiry of the Regulation on 31 December 2020, prospective testators can gain peace of mind by preparing their estate plan without the risk of contracting the novel coronavirus by interacting with a documentary witness. The experienced estate planning lawyers at Rostron Carlyle Rojas are available to assist you with remote preparation and execution of wills and enduring documents throughout this period.

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Execution of documents during Covid-19?

execution of documents during coronavirus

As a result of Covid-19 the commonwealth and the state governments have introduced a number of extraordinary measures to allow for certain documents to be executed remotely during the COVID-19 (coronavirus) emergency.

In respect of companies incorporated under the Corporations Act 2001 (Cth) on 5 May 2020, Josh Frydenberg MP issued the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 which for the next 6 months will allow companies and officers to use electronic software such as DocuSign to execute documents under s 127 of the Corporations Act 2001 (Cth), do away with the need to use company seals (where previously required) and allow for signing of documents in counterparts.

In respect of other entities whilst the Commonwealth and each State has had their own legislation allowing for electronic transactions and execution for some time generally only documents which are not required to be witnessed could be signed electronically and the witness was required to be physically present during the execution of the document. For example documents as wills, powers of attorney, the majority of land title documents and statutory declarations have to the witnessed. As a result of Covid-19 a number of exceptions to the normal requirements of witnessing have been made including:
• In Queensland up until 30 September 2020 to allow for the remote witnessing of wills in certain circumstances where the requirements of Supreme Court of Queensland’s Practice Direction No. 10 of 2020 are complied with;
• In Queensland until further advised to allow for the remote witnessing of title documents in certain circumstances where the directions of the Registrar of Titles are followed;
• In New South Wales the Electronics Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020(NSW) has been introduced to allow witnessing and attestation of documents to take place by audio visual link up until 26 September 2020. The documents which can be witnessed in this manner include:
o wills;
o powers of attorney;
o enduring powers of attorney;
o deeds;
o agreements;
o affidavits (including annexures and exhibits); and
o statutory declarations.
so long as the witness:
o observes the person signing the document (“signatory”) sign in real time;
o attests or otherwise confirms this by signing the document or a copy of the document;
o is reasonably satisfied that the document the witness signs is the same document, or a copy of the document signed by the signatory; and
o endorses the document, or a copy of the document, with a statement specifying the method they used to witness the signature of the signatory and that the document was witnessed in accordance with the regulations.
• In Victoria has introduced COVID-19 Omnibus (Emergency Measures) (Electronic Signing and Witnessing) Regulations2020 (these temporary measures will expire on 24 October 2020) allowing for:
o the electronic execution of deeds and mortgages;
o the remote witnessing of documents effecting transactions; and
o the electronic execution and remote witnessing of powers of attorney, wills and statutory declarations (but not affidavits, which are covered in the emergency legislation itself).

Whilst exceptions to the normal requirements of execution have been and may continue to be made it is important to keep in mind:
• These changes are temporary and parties entering into agreements or wishing to execute documents remotely should be aware of the dates these measures will end;
• When using digital signing platforms, it is important to ensure that the platform has the means to verify the identity of each signatory;
• Each of the exceptions noted above is subject to a number of specific requirements which must be met in order for the executions to be valid;
• The identity of the person signing the documents should always be verified by taking reasonable steps to verify their identity; and
• There is always a risk in accepting electronic execution of deeds as they will not strictly satisfy the requirement to be on paper. To deal with this, where possible clauses should be inserted into the document itself on how the document can be signed and if necessary, convert a document drafted as a deed into an agreement.

How can we help?
If you are looking for advice in respect of your contracts and agreements or need assistance with executing documents, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected]

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Commercial Leases During Covid-19 (Coronavirus)-What Does Government Have to Offer?

Commercial Leases During Covid-19 (Coronavirus)-What Does Government Have to Offer

The National Cabinet has published the mandatory Code of Conduct (Code) imposing various leasing principles to be applied by Landlords and Tenants during commercial lease negotiations amid the COVID-19 pandemic.

The Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic, where the tenant is eligible for the JobKeeper programme and has an annual turnover of up to $50 million.

The turnover threshold will be applied to franchises at the franchisee level and in respect of retail corporate groups at the group level (rather than the retail outlet level).

However, while not mandatory for tenancies which do not meet the JobKeeper eligibility and turnover criteria, landlords are encouraged to apply the Code to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.

We anticipate that the Code will come into effect in Queensland shortly in order to implement a national approach to commercial leases.

In terms of Franchises and Retail Corporate Groups, the $50 million annual turnover threshold will be applied as follows:
• Franchises: at the franchisee level; and
• Retail Corporate Groups: at the group level.

What are the principles of the Code of Conduct for Landlords & Tenants during The Coronavirus pandemic?

The key principles set out in the Code include:
• landlords and tenants share a common interest to preserve the lease and facilitate the resumption of normal trading activities;
• landlords and tenants are required to negotiate and work towards achieving mutually satisfactory outcomes and negotiate in good faith;
• landlords and tenants will act in an open, honest and transparent manner and provide sufficient and accurate information to enable the parties to reach agreement consistent with the Code;
• the arrangements must be proportionate to the impact of the COVID-19 (coronavirus) pandemic on the tenant;
• landlords and tenants will assist each other in their respective dealings with other relevant third parties such as government, utilities and financiers in order to achieve outcomes consistent with the Code;
• landlords must not seek to permanently mitigate their risk in relation to default in negotiating the temporary arrangements; and
• each lease must be dealt with on a case-by-case basis having regard to the hardship suffered by the SME tenant (including any insolvency) and the terms of the lease.

What can be agreed between the landlord and the tenant?

The code provides that the following principles should be considered and implemented on case-by-case basis:

• tenants must continue to comply with the lease terms, subject to any temporary arrangements agreed with the landlord. A material breach will mean that the tenant is not protected under the Code;

• landlords must not terminate leases due to non-payment of rent during the COVID-19 (coronavirus) pandemic period (or reasonable subsequent recovery period).

• landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the rent ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade for the pandemic period and a subsequent recovery period;

• rental waivers must constitute no less than 50% of the total reduction in rent and may be greater where necessary to allow the tenant to fulfil its ongoing obligations, but regard must also be had to the landlord’s financial ability to provide such waivers. Tenants may waive the 50% minimum waiver requirement;

• any remaining relief may be in the form of a waiver or a deferral;

• deferred rent must be paid over the balance of the lease term, but if the balance of the lease term is less than 24 months, then the tenant may pay the deferred rent over a 24 month period, commencing after the end of the pandemic period (i.e. deferred rent could continue to be paid after the lease expiry);

• if the landlord receives any benefit due to the deferral of loan payments by its financier, the landlord should seek to share that benefit with the tenant in a proportionate manner;

• no fees or other charges should accrue on waived or deferred rent;

• landlords must not draw on a tenant’s security for the non-payment of rent during pandemic period or a reasonable recovery period;

• tenants will not be in breach of the lease if they reduce opening hours or cease to trade during the pandemic period; and

• landlords will not apply rent increases (except for retail leases based on turnover rent) during the pandemic period.

Queensland

Current Position: Legislation has been passed which allows regulations to be made for retail and other prescribed leases for responding to the COVID-19 emergency. Regulations have not yet been released or implemented.

Eligibility: Regulations may apply to non-residential leases, which includes retail shop leases and other non-residential leases, sub-leases and licences for occupation of land.

Eviction and rent increase bans: Not yet announced although expect Code will apply
Legislation provides the power to allow Regulations to implement these measures

Our advice

We recommend Landlords and Tenants seek to understand their obligations under the Code and continue to negotiate in good faith in order to preserve the relationship between the parties and obtain a mutually favourable outcome.

We recommend that you know your financial position well. You will be asked to make concessions and will need to know the extent of the concessions.

Any concession, variation, amendment or agreement should be contemporaneously recorded in writing.

For any advice or assistance, please contact us.

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Selling your business during a global pandemic – What’s involved on the legal side?

Selling A Business Now What Is Required On The Legal Side

Selling a business can be a long and detailed process at the best of times, let alone when the world is enduring a global pandemic which is affecting everything from your coffee shop down the road to the international economy. Selling a business involves not just you and your employees but also professional advisors such as your broker, valuer, accountant and lawyer. There are many decisions which you will need to make and in order to simplify this process below are the 5 steps which are needed to sell your business.

1. Preparing to sell
The first step in selling your business is preparing the business for sale, determining what it is you are selling and what is the realistic price range you are looking to achieve.

Exit strategy
At this stage you should be engaging with your accountant and lawyer to obtain advice on your exit strategy including whether you should be structuring the sale as a share sale or an asset sale and the different tax implications of these approaches. The structure of the sale is important as taxes can have a large impact on the amount you actually receive from the sale as well as whether the business is attractive to potential purchasers for instance by allowing a purchaser to claim the GST going concern exempt and avoid having to pay GST on top of the purchase price.

Key terms
During this time, you should also be considering what will be the key terms of the sale including:
1. The purchase price range you are targeting
2. Whether you are selling the whole or part of the business
3. Whether you are retaining any intellectual property or assets?
These key terms should be communicated to potential purchasers as a starting point for negotiations and it should be made clear that the transaction is subject to a formal agreement being drafted and executed by the parties.

Purchase price range
The purchase price range you are targeting is important given if the price is too high, potential buyers may not make an offer and if you price it too low you may not achieve the best possible price. In determine the price range we recommend that you engage a valuer or discuss this with your accountant to calculate a reasonable and realistic price. As part of this, you will need to ensure your figures are maintained and are attractive to a potential buyer. Generally, potential purchasers will want to go over the financial statements of the business before they will make an offer and generally this would cover a period of between 1 and 3 financial years.

Advertising your business
Once your business is ready you will need to start advertising your business for sale which can be done via, brokers, websites, newspapers and trade publications. During this time, you may also receive enquiries for further information (such as the finances noted above) and we recommend that before you provide any information you should have the potential buyer sign a confidentiality agreement. Additionally, whenever providing information or making a representation to the buyer care needs to be taken to ensure that the information true and correct to avoid any claims of false and misleading conduct.
2. Negotiating and executing the contract of sale the deal
When negotiating the sale of your business with the buyer, both of you will need to come to an agreement on the key terms of the agreement which should include:
4. the purchase price;
5. the amount of the deposit (commonly 10% of the purchase price) and when this is due;
6. the date of settlement
7. whether the contract will be made subject to certain conditions such as finance, licence transfers, lease assignments or due diligence and if so the time period in which these conditions need to be satisfied;
8. whether the stock is included in the purchase price or whether a stock take is required;
9. the transfer of employees;
10. the liabilities and contracts to be assumed by the acquirer;
11. the terms of any restraint of trade on the seller; and
12. what assets are included or excluded from the sale.

Your lawyer will be able to assist you in the negotiation of the terms of the sale of your business and will be able to draft a contract of sale setting out all of the terms agreed, listing the assets the buyer is purchasing, listing any contracts the buyer is assuming (e.g. service contracts or leases), the warranties given under the contract, what employees are transferring, how and what adjustments will be made to the purchase price together with protections for the seller in the event that the buyer defaults.

Once the terms of the contract are finalised the parties will then execute the contract and the buyer should pay the deposit to the seller or an agreed deposit holder within the time period specified in the contract.

3. Pre-Settlement
Between the date the contract is signed and the date of Settlement, the parties will usually need time to work towards settlement by signing various documents, organising for the assignment of or new agreements with third parties such as landlords, employees and service contractors, the release of security interests registered over the business, applications for licences and permits, obtaining finance and completing any due diligence enquires. The duration of the pre-settlement period is usually around 30 days but in simple matters there may be no pre-settlement period and for more complex matters the pre-settlement period can continue for up 2 – 3 months.

4. Settlement
At settlement your lawyer will either physically or electronically finalise all of the obligations in the contract of sale by handing over all of the required documents, keys, transfer agreements and releases to the buyer in exchange for payment of the purchase price. On the settlement date, the parties also agree on the settlement statement which specifies the purchase price and any adjustments required under the contract. Common adjustments include:
1. adjustments of outgoings on the lease;
2. adjustments for payments for goods or services received in advance;
3. adjustments for employee entitlements; and
4. the value of stock where stock is not included in the purchase price. This is normally agreed between the buyer and you as part of a stock take occurring the night before the settlement date.
When both parties are satisfied that everything required to be supplied under the contract at settlement has been supplied, the transfer of the business will be complete and the buyer will officially take over the business.

5. Post-Settlement
After the sale is completed there may be ongoing obligations between the parties such as an obligation on the seller to provide tuition to the buyer, the lodging of documents with government and/or statutory bodies to record the transfer of the business or pay stamp duty. It is recommended that a copy of the contract of sale and/or any other key documents are kept in a safe place as a record of the sale transaction for at least 7 years.

A final note

It’s crucially important that both throughout the sale and post-settlement that all parties keep themselves savvy to any new government regulations which could affect contractual agreements or asset valuations.

How can we help?

The Rostron Carlyle Rojas Lawyers team pride themselves on remaining on the forefront of changing laws and regulations amid COVID-19. If you are looking at selling or buying a business or would like further advice in relation to the sale of a business, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected]. 

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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.

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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.