ByLawyers News and Updates

Income contributions and accumulated savings in bankruptcy

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

Introduction

Debtors facing bankruptcy often ask questions about the amount of income they can earn as a bankrupt and whether they can retain surplus income that might be accumulated during the period of their bankruptcy. The purpose of this newsletter is to explain the operation of the income contribution assessment regime and the manner in which a trustee is required to deal with any accumulated savings.

Income

Pursuant to sub-section 139W(1) of the Bankruptcy Act 1966 (“the Act”), a trustee is required to make an assessment of the income of a bankrupt that is likely to be derived or which was derived during the bankruptcy period. In practice, at the commencement of the bankruptcy and then every year thereafter, a trustee will issue an income questionnaire to be completed by the bankrupt. Based on the information provided, a trustee will assess whether the bankrupt is liable to make contributions from their income. If the bankrupt is found to be liable, then the bankrupt will normally arrange to make regular installment payments.

Pursuant to sub-sections 139W(2) and 139WA(1) of the Act a trustee can issue a fresh assessment if they are satisfied that the actual income derived by the bankrupt varies from the amount originally estimated. This may occur at any time during or after the end of a contribution period or even after the bankrupt is discharged.

What is income

Section 139L of the Act defines income very broadly and includes:

  1. Wages and salary.
  2. Taxable fringe benefits.
  3. Superannuation receipts, annuities and pensions.
  4. Loans from associated entities.
  5. Income earned overseas.
  6. Business profits of a sole trader.
  7. Super contributions in excess of 9.5%.

Importantly, pursuant to section 139M(1), income is taken as being derived by the bankrupt even though it isn’t actually received by the bankrupt. For example, income which is reinvested or income which is dealt with on behalf of the bankrupt or as the bankrupt directs.

How is the assessment calculated

Section 139S of the Act provides that the amount of the contribution required to be paid by a bankrupt is 50% of the after tax income which exceeds the ‘actual income threshold amount’.

What is the actual income threshold amount

The actual income threshold amount is the amount of income a bankrupt may earn upon which no contribution is payable. In accordance with section 139K of the Act, the threshold amount is determined by reference to the number of dependants for whom the bankrupt is responsible. The current amounts, which are updated twice yearly, are set out in the table below.

Number of Dependants Threshold Amount
0 $53,653.60
1 $63,311.25
2 $68,140.07
3 $70,822.75
4 $71,895.82
Over 4 $72,968.90

It is worth noting that if a bankrupt disagrees with the assessment of their income contributions, then pursuant to section 139Z, they are able to seek a review of the assessment by the Official Trustee.

What happens if a bankrupt earns less than expected

In order to prevent a bankrupt from circumventing the income contribution provisions by earning less money than they would otherwise, a trustee may, pursuant to section 139Y of the Act, make a determination that the bankrupt receives or has received what is called ‘reasonable remuneration’ and increase his or her income for assessment purposes accordingly. This prevents the bankrupt from channelling income into other entities or coming to an arrangement with their employer, especially if related, to reduce their reportable income.

What happens in the case of hardship

If a bankrupt considers that the requirement to pay contributions will cause hardship, then pursuant to sub-section 139T(1) of the Act, they may apply to their trustee for the assessment to be varied. Sub-section 139T(2) sets out the specific grounds upon which such an application can be made. Such an application is required to be in writing and to include evidence of the bankrupt’s income and expenses. The grounds for a hardship application are as follows:

  1. Ongoing medical expenses.
  2. Costs of child day care essential for work.
  3. Particularly high rent when there are no alternatives available.
  4. Substantial expenses of travelling to and from work.
  5. Loss of financial contribution.
What happens if a bankrupt does not comply

Failing to provide information relating to income or expected income as required by the Act constitutes grounds for an objection to automatic discharge pursuant to sub-section 149D(1)(e). In addition, if a contribution amount is owed and remains outstanding prior to discharge, then a trustee may object to the discharge, pursuant to subsection 149D(1)(f). Any such objection may extend the period of the bankruptcy by a further 5 years.

If the bankrupt does not provide particulars of their income or advises that they did not derive any income, however there are reasonable grounds for believing that the bankrupt is likely to derive income then, pursuant to section 139Z, the trustee may determine the income of a bankrupt and prepare an assessment accordingly.

Trustees have a number of other powers available to them to compel the compliance of the bankrupt with their obligations in relation to contribution assessments. These include instructing the bankrupt pursuant to section 139ZIF to pay income into an account supervised by a trustee. A trustee is then required to supervise withdrawals from that account. Furthermore, if an amount remains due and payable after the date of automatic discharge, then a trustee may enforce the debt against the bankrupt in the ordinary course in accordance with sub-sections 139ZG(3) and (4) including making the debtor bankrupt again.

Accumulated savings

Sub-section 58(1)(b) of the Act states that property that is acquired by or devolves upon a bankrupt during the period of their bankruptcy vests in their trustee. Property of this nature is referred to as after-acquired property, one of the best examples being the receipt of an inheritance whilst bankrupt. Another such example might be accumulated savings. These funds would ordinarily be surplus income that may or may not have been assessed for contribution purposes. Until recently there was an assumption based on case law that accumulated savings derived from income do not vest in a trustee. However, a recent decision of the Full Bench of the Federal Court of Australia in the matter of Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio)[2015] FCAFC 30, has authoritatively examined the interaction between the income contribution regime and after-acquired property.

The facts of the case are relatively simple. An undischarged bankrupt used money that was held in a bank account to acquire shares, the money was derived from income earned within the period of the bankruptcy that did not exceed the actual income threshold amount. The bankrupt informed the Official Trustee of his intention to acquire a motor vehicle that was to be funded from the sale of the shares. The bankrupt was informed that the shares vested in the Official Trustee pursuant to sub-section 58(1). The bankrupt sought a review of the stance taken by the Official Trustee.

In essence, the court found that the shares vested in the Official Trustee in accordance with subsection 58(1)(b). The court went on to say that accumulated savings derived from income during the period of the bankruptcy would also constitute after-acquired property. In considering this, the court was conscious of sub-section 134(1)(ma) which gives a trustee the power to:

‘make such allowance out of an estate as they think just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt’.

Interestingly, the court also put the proposition that if the money was being accumulated to acquire tools of trade for income earning purposes then the bankrupt may be able to retain the money on the basis that such tools of trade, if acquired, constitute property that is not available to creditors pursuant to sub-section 116(2)(c).

Conclusion

This case makes it abundantly clear that it is in the best interests of all bankrupts to be open and transparent with their trustee in relation to their income and to manage any contributions for which they are liable. In circumstances where a bankrupt saves their surplus income and does not pay regular instalments to their trustee, then a trustee may take possession of the accumulated savings and the bankrupt could remain liable to pay assessed contributions. This may become a situation where a trustee can exercise their discretion pursuant to sub-section 134(1)(ma) of the Act, taking into account the circumstances of the bankrupt.

Directors beware – Piercing the corporate veil – The ATO and DPNs

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

Directors beware

The Director Penalty Regime (‘the Regime’) was introduced to give the Australian Taxation Office (‘ATO’) power to make company directors personally liable for certain unpaid company taxation debts. It is imperative that company directors and their advisors understand the Regime and its operation, in order that they can take steps to avoid personal liability.

In this newsletter, we discuss the operation of the Regime, and most importantly, how director penalties are enforced. We also discuss changes to the Regime introduced on 1 July 2012, which allow the ATO to hold a director personally liable even after an Administrator or Liquidator has been appointed to the company.

Imposition of director penalties

A director penalty is imposed on a director where certain company taxation debts remain unpaid at the end of the day on which they become due. A full listing of the taxation debts covered by the Regime can be found in division 269-10 of Schedule 1 to the Taxation Administration Act 1953 (Cth), but the most common taxation debts to which the Regime applies are PAYG Withholding (‘PAYG’) and Superannuation Guarantee Charge (‘SGC’). The Regime also applies to estimates issued by the ATO in respect of these types of taxation debts.

For example, if a company withholds amounts from employee wages in respect of PAYG, the amounts withheld will become payable at a future date, known as the ‘Due Day’. If the withheld amounts are not paid to the ATO before the end of the Due Day, then a director penalty, equal to the amount of the unpaid PAYG is imposed on all directors of the company at the time the debt was incurred. The regime also applies to newly appointed or recently retired directors.

The Due Day for PAYG is usually the day on which a company’s BAS or IAS lodgment is due, and for SGC it is one month and 28 days after the end of each financial quarter. Whilst a director penalty is imposed at this time, the ATO is prohibited from enforcing a director penalty until it has issued a Director Penalty Notice.

The director penalty and the corresponding company taxation debt are concurrent liabilities. If a company pays its taxation debt after a director penalty has been imposed under the Regime, then the director penalty is also discharged to the same extent, and vice versa. (N.B. Discharging of a director penalty is different to remittance of a director penalty, which is discussed below.)

Enforcement and remittance of director penalties

The ATO must issue a Director Penalty Notice to a director and allow a period of 21 days before it can bring court proceedings against a director for the recovery of a director penalty. The ATO is only required to send a notice to the address of a director noted in the records maintained by the Australian Securities and Investments Commission, whether or not that address is current. The ATO may alternatively send notice to a director at his or hers registered tax agent’s address.

Once a director penalty has been imposed by the ATO, there are three ways in which a director can have that penalty remitted, namely;

  1. Causing the company to comply with its obligations to pay amounts to the ATO; or
  2. Appointing a Voluntary Administrator to the company; or
  3. Having a Liquidator appointed to the company.

Directors should note that these remittance provisions are available prior to the issuance of a Director Penalty Notice by the ATO. It is appropriate for directors to consider exercising these options as soon as they become aware of taxation debts remaining unpaid after the Due Day.

If a valid Director Penalty Notice has been issued, and 21 days has passed since it was issued, the remittance provisions are no longer available to a company director, and either the company or the director must pay the amount due to the ATO.

Lock-down director penalty notices – the importance of reporting

If PAYG or SGC remains unreported and unpaid for more than three months after the Due Day, a director is unable to have a director penalty remitted by the appointment of an Administrator or Liquidator. In these circumstances, the ATO must still issue a Director Penalty Notice, known as a ‘Lock-Down Director Penalty Notice’, and wait the required 21 days. Once the 21 days have passed, a director who receives a ‘Lock-Down Director Penalty Notice’ must pay the director penalty, or cause the company to pay the corresponding company taxation debt.

It is important to note that the ATO is able to issue a Lock-Down Director Penalty Notice, even after an Administrator or Liquidator has been appointed to a Company, if applicable taxation debts that were not reported to the ATO within three months of the Due Day remain unpaid. The only way to avoid a Lock-Down Director Penalty Notice is to ensure that all company taxation debts are reported to the ATO within three months of the Due Day.

Defences to director penalties

In the event that proceedings are commenced against a director, there are only limited defenses available to company directors. Those defenses are:

  1. Illness or Incapacity (A director was unable to take part in the management of a company.)
  2. All Reasonable Steps (All reasonable steps were taken by a director to comply with his or her obligations, or no such steps were available.)
  3. Superannuation Guarantee Charge – Reasonably Arguable Position (A director adopted a reasonably arguable interpretation of Superannuation Guarantee Charge legislation.)

Right of indemnity and contribution

A director that has paid a director penalty to the ATO, is entitled to recover that amount from the relevant company, in the same manner that a person can recover amounts paid under a guarantee of a company debt. A director that has paid a director penalty is also entitled to recover amounts from anyone that was also a director at the time the corresponding company taxation debt was incurred, as if all those directors were joint & several guarantors.

PAYG withholding non-compliance tax

Whilst not technically part of the Regime, the PAYG Withholding NonCompliance tax was introduced with Lock-Down Director Penalty Notices. This new tax allows the ATO to deny a director, or their close associates, tax credits in their personal tax returns, where the PAYG Withholding amounts have not been paid to the ATO. If a director has been issued a Director Penalty Notice, then he or she can also be denied credits on their personal tax return, for the same underlying principle company PAYG debt, in effect causing a director to pay twice at the same time. Of course if such a director does pay both amounts, it would be expected that he or she would obtain the benefit of the denied credits in the following period.

Garnishee on directors’ bank accounts

Garnishees allow the ATO to compel payment from a third party that holds amounts due to, or on behalf of, a taxpayer that is indebted to the ATO. Once a Director Penalty Notice has been issued, and the 21 day period has expired, the ATO is entitled to seek a garnishee order against any third party that owes money to, or holds money on behalf of, the relevant director, including a director’s personal bank accounts.

Conclusion

The ATO will not hesitate to use the Regime, and in particular Lock-Down Director Penalty Notices as it is the only legislative method by which the ATO can hold a director personally liable for company debts. Directors and their advisors should ensure that timely and accurate financial information is available to facilitate prompt action when a company begins to have difficulty meeting its taxation obligations, or a director risks becoming personally liable.

The introduction of Lock-Down Director Penalty Notices to the Regime means that reporting of taxation debts to the ATO is more important than ever. The looming spectre of a LockDown Director Penalty Notice should motivate all company directors to ensure that taxation debts are reported to the ATO on time, regardless of whether they are able to pay the debts being reported. Once the hard deadline of three months past the Due Day has expired, there is nothing a company director can do to avoid personal liability.

Subdivision – Owners corporation repairs

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Owners corporations often face an inherent conflict of interests when determining responsibility for repairs and maintenance undertaken by the OC.

Part 3 of the Owners Corporations Act (Vic.) 2006 (the Act) is headed ‘Financial management’. Division 5 of that part has specific provisions relating to asset management and s 46 obliges the OC to repair and maintain common property. Section 47(1) obliges the OC to repair and maintain services that affect more than one lot and the common property and s 47(2) anticipates that the OC may, as a matter of practicalities, be required to repair and maintain a service that relates to a lot, rather than to the common property. Even at this simple level the OC may be faced with deciding how the cost of any such work should be apportioned, first between the OC and lot owners and then between individual lot owners.

However the issue becomes more complicated with s 48 establishing a regime whereby the OC can require a lot owner to repair and maintain the lot and undertake those repairs if the lot owner fails to do so and then recover those costs from the lot owner. Here the OC is clearly being put into a position of conflict with an individual lot owner, who is a member of the OC and entitled to expect the OC to carry out its functions in the interest of all lot owners, including the individual lot owner. Disputes about the need for the OC to perform the work and the level of benefit (and consequent liability) for the individual lot owner are clearly capable of leading to disputation. Section 49(2) adopts the policy ‘that the lot owner of the lot that benefits more pays more’. This appears to be an entirely acceptable policy from an objective point of view but involves an assessment of ‘benefit’, and this may well be in dispute in many situations. Section 28(3) concerning lot owner liability also raises this question of ‘benefit’.

These issues are not new to strata living. Simons v Body Corporate Strata Plan No 5181 [1980] VicRp 12 concerned apportionment of responsibility between an individual lot owner and the OC in respect of a defective exterior wall, which was common property. The OC argued that the repairs would be for the benefit only of the lot owner (who should therefore bear the cost) but the court determined that it was in the interests of all lot owners for the repairs to be effected and that it was therefore appropriate for the OC to bear the cost. Seiwa P/L v Owners Strata Plan 35042 [2006] NSWSC 1157 took the issue further and concluded that, when the failure of the OC to maintain the common property caused damage to a lot, that lot owner had a cause of action in negligence against the OC for damages to the lot. Seiwa concerned water penetration via a balcony – a not unusual occurrence. The court concluded that the balcony was common property and had not been adequately maintained, so the issue was not ‘who should be responsible for the repairs’ but rather ‘who was responsible for damage flowing from lack of repairs’. More recently, Liu & Anor v Owner Corporation No PS 501391P (Owners Corporation) [2010] VCAT 1441 found an OC responsible for damages suffered by a lot owner as a result of the OC’s failure to repair and maintain common air conditioning but in Circle Developments P/L v Owners Corporation PS1897 (Owners Corporation) [2012] VCAT 1941 a lot owner who sought to replace air conditioning at the cost of the OC was unsuccessful and suffered an adverse costs award.

Two 2013 Victorian cases have also considered the relationship between the OC and an individual lot owner in the context of repair and maintenance. Owners Corporation PS326519P v May (Owners Corporations) [2013] VCAT 933 also concerned air conditioning, with the lot owner replacing air conditioning in the unit, but intruding into common property in doing so. The OC successfully sought an order requiring the lot owner to remove the air conditioning and reinstate the common property.

Mashane P/L v Owners Corporation RN 328577 [2013] VSC 417 specifically considered the responsibility of a lot owner to pay a levy to partly pay for certain repairs and maintenance and whether it was appropriate for the OC to fund the balance of those works from funds held in a maintenance fund. The property consisted of 39 apartments, 5 of which did not have a balcony. The lot owner of one of those apartments argued that those 5 lots should not have to bear the cost of repairs and maintenance to the balustrades on the balconies of the other apartments as those 5 lot owner derived no benefit from the work, returning full circle to the question raised 33 years before in Simons.

Mashane was an appeal from a VCAT decision rejecting the lot owner’s objection to payment. The judge was not satisfied that the VCAT decision was wrong in law and the lot owner’s appeal was therefore dismissed, resulting in a similar conclusion to Simons that the expense was to be met from common funds. Macaulay J. did undertake a useful analysis of the machinations of OC levies and use of a maintenance fund by the OC.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Deterioration – General condition 24 has teeth

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

One of the innovations introduced by the 2008 standard contract of sale was a procedure designed to deal with the problem of deterioration of the property between the day of sale and the proposed settlement date.

Such deterioration is typically discovered by the purchaser when exercising the right given by general condition 22 to ‘inspect the property during the 7 days preceding and including the settlement day’. Consequently, the parties are ‘time poor’ when it comes to resolving such a problem and general condition 24 was introduced to provide a procedure to quarantine a dispute in relation to the condition of the property at settlement and allow the transaction to settle notwithstanding that the side issue had not been resolved.

General condition 24.1 provides the starting point by establishing that the property remains at the risk of the vendor until settlement and general condition 24.2 requires the vendor to deliver the property ‘in the same condition it was in on the day of sale’. Thus the purchaser has contractual rights if the property is in a deteriorated condition at settlement, however, general condition 24.2 includes the qualification that any such deterioration must exceed ‘fair wear and tear’. This effectively means that a purchaser must accept minor deterioration and the example of a hot water service that no longer works is a common example of ‘fair wear and tear’.

But deterioration beyond fair wear and tear would not automatically give the purchaser the right to delay settlement or make a unilateral deduction from the amount due at settlement for the estimated cost of rectification. Perpetual Trustee Company Ltd v Lindlirum Pty Ltd & Anor [2009] VSC 182 found that deterioration beyond fair wear and tear might only enable a purchaser to seek compensation after settlement. It may therefore be concluded that there are 3 levels of deterioration:

  1. fair wear and tear – that the purchaser must accept;
  2. minor deterioration – that entitles the purchaser to compensation but not to delay settlement or seek a deduction in the purchase price; and
  3. major deterioration – that will entitle the purchaser to delay settlement.

General condition 24.4 is designed to deal with the second category, minor deterioration, by establishing a process whereby the purchaser nominates an amount – not exceeding $5000 – to be deducted from the purchase price and paid to a stakeholder pending resolution of the dispute after settlement, but only if the purchaser pays an equivalent amount to the stakeholder from the purchaser’s own funds.

Thus the purchaser can be confident that funds will be available after settlement if the dispute is decided in favour of the purchaser but the vendor can equally be confident that, if the dispute is decided in favour of the vendor, the vendor will receive the full price and there will also be funds available to satisfy the vendor’s costs in defending the claim. Essentially the purchaser must ‘put his money where his mouth is’.

Patmore & Anor v Hamilton [2014] VSC 275 is the first case to consider general condition 24 and it has provided some clarification as to the meaning and effect of the new provision. The court approved the purchaser’s method of calculating the amount to be deducted as being based on a quotation for the cost of rectification. The court also approved the purchaser’s nomination of the selling agent as the stakeholder. Importantly the court held that the vendor was obliged to submit to the procedure and, once the purchaser had submitted the quotation, nominated the stakeholder and arranged for payment of the deducted amount and the purchaser’s equivalent contribution, the vendor was obliged to settle and resolve the dispute after settlement. In summary, the court concluded that general condition 24 means what it says and that the vendor is obliged to comply with the condition.

The vendor had argued that the deterioration was covered by fair wear and tear, but the court held that substantial water penetration through a tiled roof was beyond fair wear and tear. The vendor also argued that general condition 24 was not compulsory and that the vendor had not agreed to the appointment of the agent as stakeholder and that the purchaser had not in fact made the payments to the stakeholder. The court held that the purchaser had established a willingness to make the necessary payments to the nominated stakeholder and that the vendor, by refusing to accept the nomination, was the cause for non-payment. The purchaser was therefore entitled to end the contract and reclaim the deposit. Additionally, the purchaser was entitled to legal costs generally and on an indemnity basis for the trial. All this over a dispute involving $2640!

Now that general condition 24 has been confirmed as an enforceable contractual term, vendors may be more prepared to negotiate a compromise in relation to such claims. By requiring the purchaser to ‘put up or shut up’ general condition 24 sifts out frivolous claims and a vendor who is faced with a purchaser that invokes general condition 24 would do well to consider making a concession in relation to the purchaser’s claim so that the settlement can bring an end to the relationship between the parties.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Vendor statement review

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

During 2012 the Department of Justice undertook a review of vendor disclosure obligations, specifically with a view to reducing red tape. The Sale of Land Amendment Bill 2014 amends s 32 of the Sale of Land Act and will come into effect on 1 October 2014 if not proclaimed before.

Perhaps the most significant change is the total restructure of the section. Section 32 has been amended many times since its introduction in 1982 and this review has taken the opportunity to totally recast the format of the section with a view to making the section more logical in its layout by collecting together subsections that relate to topics such as financial matters, insurance, permits and title. This change will challenge practitioners to relearn the section and may, in itself, improve comprehension of the section.

The other significant change is the introduction of the concept of a due diligence checklist that is to be made available to prospective purchasers.

Section 32

This foundation section creates the obligation on a vendor to ‘give’ to a purchaser a Vendor Statement before the purchaser signs the contract. The section does not require a separate copy of the statement to be included in the contract, thus theoretically halving the number of copies required. In fact the existing obligation to have a separate Vendor Statement together with a separate copy in the contract was generally honoured in the breach, with common practice being to simply include the Vendor Statement in the contract. It is anticipated that this practice will continue and vendors will provide the Vendor Statement as an attachment to the contract, although technically this will not be necessary.

Subsequent subsections of the Sale of Land Amendment Act require disclosure of:
  • s 32A – Any mortgage that is not to be discharged, any existing charge, details of outgoings and additional terms contract information.
  • s 32B – Building insurance, but only if risk passes to the purchaser, and owner-builder insurance.
  • s 32C – Easements, et cetera, and planning information, including bushfire prone areas and road access. In relation to planning, a new requirement to disclose ‘the name of any planning overlay’ has been included.
  • s 32D – Notices ‘made’ in respect of the land. This is largely as before, but slightly changed to introduce the qualifying phrase ‘directly and currently’ affecting the land. This may be perceived as limiting the type of notice that may be encompassed by the subsection.
  • s 32E – Building permits issued within the last 7 years, if the property includes a residence. As at present, this does not require disclosure of permits that have not been issued, whether a permit was required or not.
  • s 32F – Owners corporation particulars. This is perhaps the most significant change. The owners corporation information can still be provided by a certificate obtained from the owners corporation, but it may also be provided by the owner directly. Importantly, if the owners corporation is ‘inactive’, no information is necessary. An owners corporation is ‘inactive’ if it has not met, fixed fees or held insurance in the last 15 months.
  • s 32G – Growth areas infrastructure contribution information.
  • s 32H – Services. However the vendor must now disclose services that are not connected, rather than the existing requirement to disclose services that are connected. If services are connected at the day of sale, the vendor has no disclosure obligation.
  • s 32I – Title. A copy of a register search statement and diagram (plan of subdivision) must be provided, together with proof of right to sell (if applicable). Any proposed plan of subdivision must also be included.
  • s 32J – Proof. Disclosure may be achieved by attaching relevant documents but other than title documents, no documents are required and disclosure may be made by simply providing the information.
  • s 32K – Is the avoidance provision and allows a purchaser to rescind the contract if the vendor provides false or inadequate information. As at present, the right is subject to the purchaser proving that the vendor acted unreasonably and that the purchaser has suffered detriment.
  • s 33 – Due diligence checklist. This is designed to alert a prospective purchaser to various consumer protection issues. A vendor (or agent representing the vendor) of residential property must ensure that the purchaser has access to the checklist, however failure to do so will not entitle the purchaser to rescind the contract. The checklist will be published on the website of Consumer Affairs Victoria.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Vendor statements and leases

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Section 32 Sale of Land Act 1962 requires a vendor of land to provide a proposed purchaser with certain information about the land prior to the signing of a contract as a means of consumer protection and an equalization of the bargaining position between the parties.

However s 32 does not specifically refer to an obligation to provide a copy, or particulars of, any lease affecting the land and it has been common practice for vendors not to provide a copy of a lease in the Vendor Statement. Whilst it was relatively common for particulars of the lease to be included in the contract, there was no strict obligation to do so and the vendor’s alternate rights of providing vacant possession or receipt of rents and profits could sometimes create difficulties.

Indeed there was authority for the proposition that s 32 did not require disclosure of a lease. Thai, Hoa v Cinta P/L [1997] VicSC 526 specifically considered the question and decided that s 32 did not require disclosure of a lease in the Vendor Statement. This case referred to two previous Supreme Court decisions that had reached the same conclusion: George G. Collings (Aust) P/L v Stevenson [1990] VicSC 620 and Krakowski v Eurolynx Properties Ltd [1992] VicSC 62.

That decision was made in the context of a contract that did include particulars of the lease within the contract but the tenant was in substantial breach of the lease as at the date of the contract, which was not disclosed, and the purchaser sought to rely on the s 32 obligation to disclose the lease and, more importantly, to disclose the tenant’s failure to comply with the terms of lease. Byrne J. decided that s 32 did not require disclosure of the lease and therefore failure to disclose the tenant’s failure to comply with the lease could not constitute grounds for avoidance pursuant to s 32(5).

In passing it may be noted that the purchaser really was ‘barking up the wrong tree’ when it sought to avoid the contract for breach of s 32. The better course of action, and one most likely to be pursued today, would have been to rely on the vendor’s misleading and deceptive conduct in representing in the advertising that the tenant had been in occupation for 6 years and was a ‘good’ tenant. In fact, it appears that a new tenant had recently taken over the lease and was nearly 6 months in arrears at the time of sale!

Whilst the collective authority of those cases was against any obligation to disclose lease particulars in the Vendor Statement, the previously generally accepted practice of disclosing a lease, or particulars thereof, in the contract was confirmed in the 2008 form of contract that, for the first time, required the vendor to specifically nominate whether the sale was subject to a lease and include particulars thereof, by adopting the default position that vacant possession was required unless the words ‘subject to lease’ were included ‘in the box’. In this manner a prospective purchaser does have access to the terms of the lease, although the contractual disclosure obligation does not specifically extend to an obligation to disclose tenant’s breaches. Such a situation might call into play issues of misrepresentation by silence and similar principles.

It therefore came as something of a surprise when Macauley J. in Vouzas v Bleake House P/L [2013] VSC 534 concluded, without deciding, that s 32 does require disclosure of a lease. This decision was in the context of a claim by the purchaser that the vendor should have disclosed a proposed assignment of the lease and, by failing to do so, had not fulfilled the obligation to disclose ‘restrictions’ pursuant to s 32(2)(b). Krakowski was noted as contrary authority to this proposition but Macauley J. took solace in a comment by Nettle J. in IGA Distribution P/L v King & Taylor P/L [2002] VSC 440 doubting Krakowski. Thai and Collings were not cited.

The issue will fall to be resolved the next time the issue comes before the Supreme Court, although given that the current situation is merely a conflict of opinion, a binding decision will not come until the Court of Appeal makes a pronouncement. Given that leases are now disclosed by virtue of the contractual mechanism, the issue really is not whether leases are to be disclosed pursuant to s 32 but rather whether changes or non-compliance are to be disclosed. With respect, such issues are better dealt with in the context of principles developed over time to deal with misleading and deceptive conduct, as indeed was the case in both IGA and Vouzas.

Section 32 has been the subject of a statutory overhaul with changes due to take effect in the near future. A later column will consider these changes in detail, suffice to say that the changes do not introduce further obligations that are likely to burden a vendor and in fact some changes will ease the load without undermining the consumer protection aspirations of the section.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Property – Rules and undertakings

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

New rules are being considered that will change the present r 27.2 offence of giving a conditional undertaking to an offence of asking for a conditional undertaking.

Legal practitioners are under stringent obligations to comply with undertakings that they may give. Specifically rule 27.1 Professional Practice and Conduct Rules 2005 requires practitioners to honour undertakings given to third parties.

Further rule 27.2 makes it an offence for a practitioner to give an undertaking that requires the cooperation of a third party. It can be seen that the logic behind such a prohibition is to prevent the practitioner from defending a charge of failing to honour an undertaking by blaming the failure on the actions of a third party. Simply giving such an undertaking is itself a breach of r 27.2, although one would imagine that it would be the failure to honour the undertaking that might trigger disciplinary proceedings.

The Supreme Court in Simon v Legal Services Commissioner[2014] VSC 185 considered an appeal from a Victorian Civil and Administrative Tribunal (VCAT) finding that Simon had been guilty of professional misconduct by failing to honour an undertaking. The facts concerned litigation funding finance. Simon introduced his client to a lender who had the client sign an Irrevocable Authority to Simon to direct repayment of the litigation funding to the lender from the anticipated proceeds of litigation. Simon had no direct obligations pursuant to that order but accepted the order by way of a separate document referred to as a ‘response’ whereby Simon acknowledged the order and agreed to account to the lender.

Simon was unable to ‘account’ to the lender as he did not receive the funds. The Commissioner charged Simon with misconduct in giving an undertaking ‘which required the actions of a third party’ and Simon was found guilty of misconduct. However VCAT’s decision was based on the fact that Simon had undertaken to pay the money to the third party and failure to do so was a breach of r 27.1. Simon appealed to the Supreme Court and the decision was set aside on the basis that Simon had been charged with giving an undertaking that required the ‘actions of a third party’ (r 27.2) but was found guilty of failing to ‘honour an undertaking’ (r 27.1). The charge was referred back to VCAT.

Simon argued before VCAT that the response, which is the document that was either an undertaking that he did not honour contrary to r 27.1 or an undertaking requiring the action of a third party contrary to r 27.2, was not an undertaking at all but merely an acknowledgement by Simon that provided that he received the funds he would account to the lender. Certainly it would have been possible for Simon to ensure that the response, which was drafted by the lender, was worded in that way and he failed to do so, but it appears to read too much into the document to interpret it as an unequivocal promise by Simon to pay funds to the lender. It is more in the nature of a conditional promise. With respect, there is no breach of r 27.1.

In relation to r 27.2, had Simon taken more care to ensure the response was worded in a way that made it clear that provided Simon received the funds he would account to the lender, then it is suggested that the response would not have been in breach of r 27.2.

Rule 27.2 should not prevent a practitioner giving an undertaking that involves the actions of a third party provided that the undertaking is expressed as being conditional on those preliminary actions. It is for the beneficiary of the undertaking to then decide whether the beneficiary is prepared to accept those terms. Rule 29.2 ought to be restricted to prohibiting undertakings that are dependent on undisclosed actions of third parties.

VCAT in Simon found that by signing the response Simon had promised the lender that settlement would occur and that the money would be paid. But the response does not say that and, with respect, it is difficult to imagine a litigation lawyer making such a promise or a lender expecting a document drafted as a ‘response’ to constitute an unconditional guarantee. Simon’s failing was to not take more care before signing the document that was put to him by the lender.

New rules are being considered by the Commissioner that will change the present r 27.2 offence of giving a conditional undertaking to an offence of asking for a conditional undertaking. However, such a rule should not prevent a person who requests an undertaking acknowledging that the beneficiary accepts that preconditions may exist before the undertaking is honoured. In the Simon situation, requesting an undertaking from Simon that, upon receipt of the funds, he account to the lender would not be in breach of the rule.

However, on balance, it appears preferable to maintain the offence as the giving, rather than the requesting, as this will cover all such inappropriate undertakings rather than just those sought by practitioners.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Personal Property Securities Act

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Conveyancing is concerned with the transfer of land and improvements from one owner to another. The doctrine of fixtures means that the improvements on the land are considered by the law to be part of the land and therefore a contract for the sale of real estate simpliciter does not involve the sale of personal property and the Personal Property Securities Act 2009 (PPSA) has no application to such a contract.

Vacant land

Subject to what is said below in relation to corporate vendors, a vendor’s response to an inquiry from a purchaser about the PPSA in the sale of vacant land is to simply confirm that the contract does not relate to personal property and the PPSA is not relevant.

Residential sales

However it is traditional for land contracts to include a provision for the sale, in addition to the land, of chattels – or now, goods – that pass with the land. In the residential context this includes such things as carpets, blinds, light fittings and the like which add no real value to the land but which vendors generally leave upon departure and purchasers, often vehemently, expect will remain with the property. It is estate agents who traditionally complete this part of the contract and, in a rush to make a commission, little care is likely to be taken to distinguish between chattels and fixtures. It is therefore not unusual to find ‘stove, hot water service and swimming pool pump’ listed as goods, whereas they are truly fixtures and not subject to the PPSA.

Items that are in fact goods will almost invariably fall within the exemption in s 47 PPSA that excludes personal or domestic items valued at less than $5000. Therefore the vendor’s response to a request for release in such circumstances should again be that there is no personal property sold pursuant to the transaction that is subject to the PPSA.

The PPSA may be applicable in contracts for the sale of land that also include the sale of a substantial item of personal property. Generally this will be in the context of a substantial commercial or industrial property and the parties will be alive to the possible application of the PPSA. In that case the quite complex provisions of general condition 7 of the contract of sale guide the release procedure.

Company charges

Prior to the introduction of the PPSA a charge against an asset of a company could be registered at ASIC (Australian Securities and Investments Commission). These charges were ‘migrated’ to the PPSA. Registration was not limited to personal property owned by the company and could in fact extend to a fixed and floating charge over all of the assets of the company, including real estate. The significance of registration of such interests, and the need for their release, was recognised in Naval and Military Club v Southraw P/L & Anor [2008] VSC 593 and it is best to conclude that the safest course of action is to search the Personal Property Securities Register and insist upon release of such charges.

The purpose of release is to prevent a claim after settlement by a third party claiming an interest under the charge, however once the purchaser is registered as proprietor of the land the principle of indefeasibility will mean that the purchaser takes the property free of any such interest. Therefore the only concern relates to the period between settlement and registration, during which time the dispute would be between two unregistered interests, the first of which (the charge) would have priority in time. However the purchaser would be entitled to argue that the chargee was entitled, indeed obliged, to register the charge on the title by way of caveat and failure to do so constitutes postponing conduct.

The chargee might argue that a caveat would only have achieved notice and that the purchaser had notice (or constructive notice) from registration on the PPSA. However s 300 PPSA specifically provides that registration on the Personal Property Securities Register is not to be deemed constructive notice so a purchaser who does not search may be in a better position than one who does.

Release

The predecessor to general condition 7 acknowledged the possibility of a letter of comfort in relation to such charges but general condition 7 now only envisages a formal release of PPSA charges. The purpose of release in this context is to overcome ‘notice’ and it would appear reasonable that, should the purchaser search the Personal Property Securities Register and thereby gain notice of a charge, then obtaining a letter of comfort (as distinct from a formal release) should mean that the secured party would be unable to argue that the purchaser should be subject to the secured party’s interest when comfort has been given by that secured party in respect of that interest.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Contract – New special conditions for contract of sale

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The 2008 Contract of Sale of Real Estate was amended in 2012, principally in response to the Personal Property Securities Act 2009 (Cth) (the Act). As an indication of the complexity of the Act, it has been decided to make further amendments to the standard contract that again largely address the requirements of the Act, although the opportunity has been taken to make some amendments that can largely be described as housekeeping.

Rather than going through the process of arranging for a new contract to be adopted by regulations, these amendments have been achieved by adding a set of special conditions to be made available to all users of the standard contract. The contract has always accepted that changes can be made by special condition and the new format merely means that all standard contracts will have both general conditions and special conditions. Further special conditions can be added to these standard special conditions (numbered 1-5) as required. The changes may be summarised as follows.

Special condition 1

Replaces general condition 7 with a new general condition 7 that amends the requirements associated with the Act in the light of experience gained from dealing with the Act in recent years.

General condition 7 remains unwieldy, but that is really a function of the Act as this general condition attempts to fully deal with issues arising from personal property registration. It must be noted that this general condition is not applicable to the great majority of real estate contracts, as such contracts rarely include the transfer of personal property that is subject to the Act. Nevertheless, the general condition is available for those transactions that do trigger the operation of the Act.

Special condition 2.1

Replaces general condition 13.1(b)

AND

Special condition 2.2

Replaces general condition 13.4

These two changes relate to the GST farming business exemption. Neither change is intended to change the substance of the general condition and merely reflects some expert feedback that has been received in relation to the general condition.

Special condition 3.1

Replaces general condition 17.1

AND

Special condition 3.2

Replaces general condition 17.2

These two changes allow for email service and provide that email service is effected when the email is received.

Special condition 4

Replaces General Condition 18

This change corrects reference to the role of the nominee from ‘purchaser’ to ‘transferee’.

A nomination does not substitute the nominee as a ‘purchaser’ but rather allows the nominee to be an additional or replacement ‘transferee’.

Special condition 5

Adds general condition 12.4 in relation to stakeholding

Section 27(7) Sale of Land Act provides that, if a purchaser fails to respond to a request for release of deposit within 28 days, the purchaser will be deemed to be satisfied with the particulars and deemed to have given consent. This amendment deems the purchaser to have also accepted title in such cases.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Contract – Is there a contract?

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Determining whether negotiations between a vendor and a prospective purchaser have reached the stage where it can be said that a legally binding contract of sale of land has come into existence is a question that often occupies the attention of courts. The legal principles to be applied are rarely in dispute; it is the application of those well established principles to the particular facts of the case that causes contention and requires judicial determination.

In summary, a legally enforceable contract requires:

  • writing;
  • signing;
  • offer;
  • acceptance; and
  • communication of acceptance

in an environment where it is possible to determine the:

  • parties;
  • property; and
  • price.

Given the number of elements that comprise contract formation it is perhaps not surprising that the question comes before courts on a regular basis. Recently, Victorian courts at the opposite end of the legal spectrum have considered the application of these legal principles and reached opposite opinions as to whether a contract existed in particular circumstances.

Austlii has made the judgments of the County Court available for consideration and, whilst those judgments are of limited judicial significance, consideration of those decisions adds to an understanding of the underlying principles. Robles & Moser v Pigg [2014] VCC 1127 was an application for specific performance of a contract of sale of land by the purchaser. The essential issue was whether there was a contract that could be enforced, the vendor arguing that the negotiations between the parties fell short of the threshold requirements of a contract. There is no doubt that the factual circumstances had certainly reached the very tipping point of enforceability as the written document setting out all of the required information was in the hands of the vendor. The contract, signed by the purchaser, was emailed to the vendor. She responded to the agent by email stating, ‘I will accept the offer but I am having difficulty scanning the contract’. The agent advised the vendor that he would communicate the vendor’s acceptance to the purchaser and requested that the vendor return the signed contract by fax if scanning was a problem. The next day the vendor emailed the agent to say that she would not accept the offer and thereafter refused to proceed with the contract.

The vendor’s evidence was that she had not signed the contract and that her email was an indication of her future intention. If accepted, that meant that the crucial element of signing was absent and no contract existed. The judge rejected the vendor’s evidence and preferred to infer from the vendor’s email that the vendor had printed the contract, had signed it and then discovered the difficulty in relation to scanning the signed document. That being the case, all elements of a contract were satisfied and the purchaser was entitled to specific performance.

Alternately, the judge accepted that the vendor’s ‘signature’ on the email of ‘Jessica’ constituted sufficient signing of the contract for the purposes of s 126 Instruments Act 1958. It is well accepted that the ‘signature’ that needs to be found can be found in a document ‘outside’ of the formal contract document and s 9 Electronic Transactions (Victoria) Act 2000 now means that the signature can be ‘found’ in a document created and transmitted digitally. Over 500 years we have moved from a wax seal, through a formal signature to the present position of acceptance of an informal digital signature.

At the opposite end of the legal spectrum, the Victorian Court of Appeal also considered the question of the requirement of a signature on a contract of sale of land in Update P/L v. Commissioner of State Revenue [2014] VSCA 218. Imposition of liability to pay a tax is often referrable to an event that takes place between taxpayers, sometimes determining which of those taxpayers will be liable to pay the tax or whether tax will be payable at all. Therefore the principles relating to contract formation are relevant to determining tax liability.

One such example is the imposition of liability to pay growth areas infrastructure contribution (GAIC). This case concerned an appeal by a purchaser of land against the imposition of GAIC as a consequence of the purchase. GAIC was only payable if the contract came into existence after a certain date. The purchaser sought to argue that the contract was in existence prior to that date but faced the difficulty of establishing that a binding contract existed notwithstanding that the vendor had not signed. With respect, it can only be the fact that the tax approached $1 million that enticed the purchaser to argue that an unsigned contract could be enforceable. The purchaser sought to rely on months of negotiations and ultimate acceptance by the purchaser of the vendors’ longstanding terms to establish the contract, but nevertheless fell at the signature hurdle as the vendors had not signed the contract prior to the relevant date. No surprise there.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

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