ByLawyers News and Updates

Family Law

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Family Law 

NOVEMBER
  • Further Information – Added “Parenting orders – what you need to know”
  • Costs Agreements – Included reference to time limit for requesting itemised bill as per the Family Law Rules, reference to interstate costs laws added, updated interest clause
OCTOBER
  • Costs Agreements
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.
    • VIC/NSW – included reference to time limit for bringing costs assessment included total estimate of legal costs section with provision for variables and included authority to receive money into trust.
    • WA – added clause on scale fees.
  • Property Settlement Commentary – Amend – Step one – identify and value the net property 3.
  • New precedents
    • To do list – Children
    • To do list – Financial Agreement
  • 101 Family Law Answers – added new commentary on Foreign Resident Capital Gains Withholding Payments.
AUGUST
  • Divorce, Children and Property Settlement guide – New Costs Agreements added for Tasmania and Northern Territory.
  • Children commentary –  Considerations specific to children matters added to commentary on social media evidence
  • New precedents
    • Letter to other side inviting them to family dispute resolution
    • Letter to other side’s solicitor inviting them to family dispute resolution
JULY
  • Children commentary – Amended to discuss in more detail paternity and the presumption of parentage. In certain circumstances, proving parentage can be particularly important. Parentage is also a relevant consideration as the number of blended families in Australia continues to rise.
JUNE
  • Divorce commentary – Updated and restructured the commentary discussing divorce applications and reduction of court fees.
APRIL 
  • Property Settlement – New precedent added – Letter to other side’s solicitor with offer of settlement – Calderbank offer.
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • Property Settlement – Commentary concerning social media evidence in financial proceedings has been added to the property settlement guide.
  • Children commentary – Added section on making urgent applications – Early hearing and urgent orders ex parte.
FEBRUARY
  • Children commentary – Added section on variation of parenting orders. In particular, a commentary on the threshold test as established in Rice v Asplund (1978) 6 Fam LR 570 has been added.
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.
JANUARY
  • All By Lawyers Family Law cost agreements have been updated in line with the 2016 Family Law Rules itemised scale of costs.

Bankruptcy and Liquidation

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Bankruptcy and Liquidation

NOVEMBER 
  • Further Information – added more links
  • Costs Agreements – reference to interstate costs laws added and updated interest clause
OCTOBER
  • New article – Trading whilst insolvent
  • Costs Agreements
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting
    • VIC/NSW – Included reference to time limit for bringing costs assessment, total estimate of legal costs section with provision for variables, and authority to receive money into trust.
    • WA – Added clause on scale fees.
AUGUST
  • Costs Agreements added for Tasmania and Northern Territory.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
FEBRUARY
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.

Companies, Trusts, Partnerships and Superannuation

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Companies, Trusts, Partnerships and Superannuation

DECEMBER
  • New Precedent – Hybrid Trust Deed – A hybrid trust is one that combines the efficiency of a fixed trust with the flexibility of a discretionary trust.
NOVEMBER
  • New precedent – Discretionary trust deed – No appointor
  • Costs Agreements – Reference to interstate costs laws added and updated interest clauses
  • ‘Further Information’ options added
  • Self Managed Superannuation Funds commentary – Updated information regarding non-lapsing binding nominations and stamp duty
OCTOBER
  • Costs Agreements
    • WA and SA – added client and firm fields company execution clause trust account details solicitor’s lien.
    • WA – added clause on scale fees.
    • NSW/VIC – included reference to time limit for bringing costs assessment included total estimate of legal costs section with provision for variables and included authority to receive money into trust.
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.
  • Commentary – Update income tax – corporate beneficiary Div 7A loan
SEPTEMBER 
  • Amended tax amount where necessary to $175,000
AUGUST
  • Costs agreements have been added for Tasmania and Northern Territory.
JULY
  • Companies, Trusts, and Partnerships Commentary – The land tax sections of the comparative business structures table have been updated to include the foreign purchaser surcharge in NSW and the increase in absentee owner surcharge in VIC.
  • Self Managed Superannuation Funds Commentary – The commentary was amended to expand the definition of a dependent for the purposes of determining superannuation death benefit recipients.
JUNE
  • Self Managed Superannuation Funds Commentary – updates regarding amendments to superannuation fund balance caps introduced by the 2016 – 17 Federal Budget and updates for lender requirements in limited recourse borrowing arrangements also applied bringing commentary into alignment with arm’s length principles discussed in ATO practical compliance guideline 2016/5.
MAY 
  • Commentary added on discussing foreign resident capital gains withholding payments.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • Superannuation commentary now discusses replacement assets.
  • New precedents added:
  1. Custodian Deed
  2. Resolution of the directors – Act as custodian – Bank limited recourse borrowing arrangement
  3. Resolution of director as trustee – Limited recourse borrowing arrangement
  4. Resolutions for sole director – Limited recourse borrowing arrangement
  5. Limited recourse borrowing deed
FEBRUARY
  • A general minutes precedent has been added to the companies trusts and partnerships guide.
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.
JANUARY
  • Considered the forthcoming amendments to the Associations Incorporation Act 2009 and the regulations planned for later in this year.
  • Added a new Combined Shareholder and Unitholder agreement precedent into Companies, Trusts and Partnerships Guide.

Practical warning signs of insolvency for small business

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

Introduction

This article, which is designed to be used as a resource by business owners, directors, accountants and financial advisors, sets out some of the warning signs of insolvency that can be observed by ordinary business people on a day to day basis, as well as outlining the serious consequences for business owners who fail to recognise and act on those warning signs.

The current economic climate is causing many businesses to experience cash flow pressures, whether it be from reduced revenue or debtors failing to pay within trade terms. In these times, monitoring cash flow is of paramount importance to the survival of a business. Failure to ensure adequate working capital may ultimately result in liquidation or bankruptcy.

The warning signs of insolvency, as set out in this newsletter, need to be recognised and addressed in a timely manner. By obtaining professional and competent advice from solicitors, accountants and advisors, more positive outcomes can be generated for all stakeholders than might otherwise be available should business owners and directors remain in denial of the issues facing their businesses. It is important that early action is taken in order to prevent the negative consequences of business failure impacting on directors and their families.

Defining insolvency

Section 95A of the Corporations Act 2001 states that;

  • ‘A person is solvent if, and only if, the person is able to pay all the persons’ debts, as and when they become due and payable.’ AND
  • ‘A person who is not solvent, is insolvent.’

The same definition is set out in subsection 5(2) and 5(3) of the Bankruptcy Act 1966.

The solvency test imposed by law is a cash flow test, rather than a balance sheet test. Assessing solvency is not as simple as the above definition implies. At the simplest level, solvency is assessed by comparing the available current assets to the extent of liabilities that are due and payable. This is the first step when considering a ‘cash-flow test’ of solvency. Only those assets that can be readily converted into cash, such as debtors or stock, are taken into account as an available resource. Similarly, only amounts that are currently due and payable are to be considered.

However, it is necessary to look at the entirety of a company’s circumstances, rather than focusing on any one factor. Many other factors need to be taken into account, such as the ability of the business to realise assets, utilise credit resources or refinance existing debt.

Warning signs of insolvency

Being aware of the warning signs of insolvency allows directors and business owners to address those issues which may be impacting on the viability of their businesses, and to seek appropriate advice in a timely manner. In our experience, the earlier that action is taken, the better the outcome. As the solvency of a business deteriorates, three distinct phases of warning signs can be readily identified;

  • Early Warning Signs which, if recognised and acted upon, allow for the best chances of a business being able to resolve those issues threatening its ongoing viability.
  • Substantive Warning Signs indicate that a business has serious cash flow issues which need to be addressed immediately.
  • Critical Warnings Signs indicate that the winding up of the business is imminent and formal insolvency solutions need to be considered.

Set out below are the warning signs referred to above.

Early warning signs

These signs are commonly displayed by businesses as they begin experiencing financial difficulties. These early warning signs include:

  • An occasional inability to meet suppliers’ debts within trade terms resulting in increased dialogue with suppliers.
  • Using cash reserves, such as funds set aside for GST, PAYG or superannuation, to cover temporary cash shortages.
  • Reduction in discretionary spending such as stationery, maintenance or staff amenities in order to maintain profitability.
  • Increased use of personal credit cards to pay business expenses.
  • Deteriorating relationship with the bank as it starts to monitor a business more closely.
  • Inability to obtain mainstream finance as the banks have identified an increased risk of insolvency.
  • Increased level of worry about a business’ financial circumstances.
  • Accumulated trading losses eroding a business’ working capital.
  • Non-collection of debtors leading to temporary cash flow shortages.

It is worth noting that there may be no cause for alarm if it is considered that the problems are temporary in nature, and if steps are being taken to address issues if needed.

Substantive warning signs

As the financial circumstances of a business further deteriorate, the indicia of insolvency become more obvious, and begin to have an increasingly detrimental impact on the business. These substantive warning signs are:

  • An inability to obtain finance from alternate/bridging financiers.
  • Suppliers placing customers on stop supply or COD terms and/or seek to reduce the credit limit on trade accounts.
  • An inability to avoid making payments outside of trade terms, having dishonoured payments, issuing post-dated cheques or making round dollar payments in response to specific demands for payment from a supplier.
  • Requirement to negotiate formal payment plans in order to secure ongoing supply or to prevent legal enforcement commencing.
  • The inability to pay superannuation on time.
  • Reduction in staff numbers to save costs as the business cannot fund itself.
  • Choosing to ignore communications with creditors generally.
  • Staff members or internal financial controllers expressing concerns about a business.
  • Inability to prepare timely and accurate financial information, and a lack of records generally.
  • Increased level of worry about a business resulting in family or marital issues.
  • Denial of, or avoidance of dealing with, the financial difficulties of the business.

If a number of these signs are identified, then it is likely that immediate action is warranted to ensure the survival of the business.

Critical warning signs

When the financial position of a business becomes sufficiently impaired, creditors will look to enforce the amounts due by that business. Critical signs of insolvency indicate that creditors will no longer wait for the circumstances of a business to improve and will generally initiate formal recovery action in order to obtain payment. These critical warning signs include:

  • Legal demands for payment from creditor’s solicitors.
  • Commencement of court action to recover amounts owed by a business.
  • Writ’s for possession of property or garnishee notices being issued against a business.
  • Creditor’s Statutory Demands or Bankruptcy Notices being issued against a business.
  • Director Penalty Notices being issued by the Australian Taxation Office (‘ATO’) or the Office of State Revenue (‘OSR’).
  • Repossession of business assets by secured creditors.
  • Winding Up proceedings or Creditor’s Petitions being filed against the business.

These actions by creditors usually sound the death knell for a business, due to the severity of the impact they have on the operations of the business.

Consequences of insolvency

Sole traders are personally liable for the debts of their businesses and may be made bankrupt as a result of their failure to satisfy outstanding liabilities. Directors of insolvent companies risk personal liability through a range of exposures such as director penalty notices from the ATO or OSR, or through claims by a liquidator for trading whilst insolvent. Other issues may arise such as the calling up of debit loan accounts, or the triggering of liabilities under personal guarantees provided to third parties. Directors may also be held liable for breaches of their duties, particularly in respect of their conduct at a time when the company was insolvent. Both civil and criminal sanctions can be imposed against directors for breaches of duties.

O’Brien Palmer has previously issued articles which are available on the O’Brien Palmer website in which the consequences of insolvency for directors are explored, particularly in relation to;

The consequences of the foregoing can be quite serious, and as such it is recommended that where warning signs of insolvency have been identified, then directors should seek immediate professional and experienced advice.

Conclusion – the need for timely action

The warning signs set out above are not exhaustive, and not all of them will necessarily be present in an insolvent business. A business may also exhibit multiple warning signs and not necessarily be insolvent. However, a business that transitions from showing preliminary warning signs, to numerous substantive warning signs, is more than likely insolvent, or will be in the very near future. A business that exhibits any critical warning signs is most likely already insolvent, and has in all probability been so for some time.

Business owners and directors should be concerned when a business begins to show early signs of insolvency. However, as noted earlier, there may be no cause for alarm if the issues are considered to be under control. Pre-emptive action usually results in a broader array of options remaining available to the business than in circumstances where the finances of the business have been neglected.

Directors and business owners should remain cognisant of the warning signs of insolvency, and seek appropriate advice as soon as any of the warning signs are identified. A solvency checklist is available here on the O’Brien Palmer website as an additional resource available to be used when undertaking such assessments.

Audio and video recordings as evidence

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By Keleigh Jane Robinson

The use of smart phones has made it easier for parties in family law proceedings to secretly obtain audio and video recordings as evidence to be used in their family law cases. The Chief Justice of the Family Court of Australia recently described such usage as ‘quite common’, ‘widespread’ and said that ‘in the vast majority of cases it is admitted’.

Given the changing nature of technology, it is increasingly likely that family law practitioners will at some point in time be faced with a client who has such recordings and seeks to have the evidence put before the court. As with any evidence in family law proceedings, the client’s perception of the value of the secretly recorded evidence can be vastly different to that of the practitioner and the court. Caution needs to be taken before such evidence is obtained and used.

State legislation

Each of the States have their own legislation in relation to recordings. In some States it is illegal to record a conversation even if the person recording the conversation is a party to that conversation. For example, if the party has obtained a recording of a conversation and all of the parties involved have not consented to the recording, it may be a breach of s 6 of the Surveillance Devices Act (1999) (Vic).

Other relevant legislation includes the Surveillance Devices Act 2007 (NSW) and the Invasion of Privacy Act (Qld) 1971.

Commonwealth legislation

Under section 138 of the Evidence Act 1995, the court has the discretion to exclude improperly or illegally obtained evidence. If the evidence was obtained in breach of the relevant State legislation, it could technically be excluded. Realistically, if there is a breach, the court needs to weigh up whether the evidence should be admitted and will consider:

  • the probative value of the evidence;
    • the importance of the evidence;
    • the nature of the evidence; and
    • the gravity of the impropriety of the contravention and whether it was deliberate or reckless.

The courts also have general discretion to exclude evidence pursuant to s 135 of the Evidence Act 1995, if:

‘the probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party, misleading or confusing or… result in an undue waste of time.’

Section 69ZT of the Family Law Act 1975 provides that the rules of evidence do not apply to child related proceedings unless the court decides otherwise. As is evidenced in cases such as Janssen & Janssen [2016] FamCA 345 (1 February 2016), the court is prepared to positively exercise their discretion on this issue when the need arises.

Case law

There are a number of cases where a judicial officer has admitted the evidence however they have subsequently noted their criticisms of the recording party’s actions. Similar to evidence sourced from social media, clients will be inclined to think they have ‘struck gold’ with a piece of evidence, however the reality is that the evidence may prove to be more damaging to them than it is to the other party.

In the case of Badger & Badger & Ors [2013] FMCAfam 124 (14 February 2013), a telephone call was recorded by a litigation guardian (who was also a police officer). The recording was not admitted into evidence.

In the case of Simmons & Simmons [2013] FCCA 304 (24 May 2013), a recording device was planted on the children by their mother before they went to spend time with the father. The evidence was admitted, however both parents were heavily criticised by the Judge who said:

‘On the material before me and, in particular, the tape recordings, I am satisfied on the balance of probabilities that the father did act in this way. This is insightful and selfish behaviour… Similarly, however, the mother’s actions in sending the child for supervised visits with recording equipment secreted on her is similarly appalling behaviour. The actions of both these parents are at best naïve and at worst a form of child abuse. In this sense they are equally culpable.’

In Janssen & Janssen [2016] FamCA 345 (1 February 2016), the wife was successful in having a recording evidencing family violence admitted in family law proceedings.

In Huffman & Gorman (NO.2) [2014] FamCA 1077, the father recorded conversations between himself and the mother, without the mother’s knowledge or consent. The father and the independent children’s lawyer sought the admission of the material. The court found that whilst the evidence was unlawfully obtained and untested at that point in time, the evidence was admitted under s 138 of the Evidence Act.

Procedure for putting recorded evidence before the court

The most appropriate method for having recorded evidence put before the court will depend on the type of evidence, the type of hearing and the attitude of the particular judicial officer overseeing the case.

As a preliminary step, recordings should be transcribed and the transcriptions attached as annexures to the affidavit. The applicant can also depose to the fact the recordings are available for production as required.

The obligations to provide disclosure also apply, therefore it is necessary to ensure that any recordings have been disclosed to the other party before ‘surprising’ them at the hearing. The duty of disclosure is not limited to evidence which is beneficial to the recording party. If their recording is detrimental to the recording party’s case, the obligation to disclose remains the same.

If counsel are appearing on behalf of your client, they will often be able to give specific advice about the preferences of a particular judicial officer. It is best to have a copy of the recordings at court so they can be played if the court requires.

In conclusion, audio and video recorded evidence may be useful, however there is potential for the evidence to backfire. If a client presents recorded evidence to you, ensure that they understand the risks as well as the benefits of using the evidence. If they ask your advice before recording such evidence, ensure they understand their obligations under State legislation and the ramifications for breaches, as well as the obligation to disclose the material, regardless of the benefit or disadvantages that using such evidence may have for their case.

Saviours or Scavengers – A review of debt advisory in 2015

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

In recent years, an industry has developed around the perceived needs of company directors and individuals to receive commercial advice prior to the appointment of an administrator, liquidator or bankruptcy trustee. Such advice is sought in the expectation that it will increase the likelihood of achieving positive personal outcomes. Commonly referred to as debt advisory, pre-insolvency advisory or business advisory, the development of this industry has encroached upon an area previously the domain of solicitors, accountants and financial advisors.

Insolvency professionals are now unable to provide advice in this area if they want to subsequently act in a formal capacity. This is as a result of the duties imposed upon them pursuant to the provisions of the Corporations Act 2001, the Bankruptcy Act 1966 and the Code of Professional Practice developed by the Australian Restructuring Insolvency & Turnaround Association (‘ARITA’); in particular the independence requirements and the duty to act in the best interests of creditors.

Debt advisors, acting as advocates for their clients, provide advice on restructuring company and personal assets with the aim of protecting them from the insolvency process. Proponents of the industry say that it maximises asset value for creditors, motivates ethical behaviour by directors and bankrupts and assists in maintaining the integrity of the insolvency industry.

Critics are more inclined to believe that the industry legitimises fraudulent phoenix activity, reduces the assets which might otherwise be available for creditors, results in vulnerable people being taken advantage of and generally undermines the objectives of the insolvency profession.

(For a review of what differentiates fraudulent from legitimate phoenix activity, creditors are referred to our previous newsletter entitled “Pre-Packs – Do they have a place in Australian insolvency practice?” available on our website.)

Corporate debt advisory

Regardless of your point of view and taking into account the number of people operating in this area, the industry appears to be thriving. Unlike solicitors, accountants and financial advisors, debt advisors are unregulated and often do not have professional qualifications.

At O’Brien Palmer, we have had mixed experiences working with corporate debt advisors.

A number of operators have been highly professional in their approach and have delivered positive outcomes for their clients. There are many debt advisors who practice in a manner which maximises asset value for the benefit of creditors, potentially retains asset value for their clients, simplifies the insolvency process and reduces costs.

The same cannot be said for a number of other advisors. Some operators have spent time working in the insolvency industry and take advantage of the realities of modern insolvency administration, such as the limited scope of investigations conducted in circumstances where a liquidator is unfunded, the role played by creditors who rarely fund the activities of a liquidator or bankruptcy trustee, and the limited resources of the Australian Securities & Investments Commission (‘ASIC’). Although ASIC reviews all corporate insolvency appointments in order to identify individuals advising directors to act illegally, and although insolvency practitioners have powers and duties to deal with fraudulent phoenix activity within the current legal frame work, some debt advisors lead their customers to believe that getting caught is a numbers game, and that the odds are in their favour.

We have observed circumstances where directors have been;

  • advised to transfer assets for undervalue or otherwise engage in potentially fraudulent phoenix activity.
  • encouraged to destroy company books and records.
  • instructed to create security interests in an attempt to defeat creditors.
  • charged excessive fees for the services provided.
  • advised to generally engage in behaviour designed to frustrate an insolvency practitioner in the completion of his or her duties.

In the event that such actions are identified as a result of a practitioners’ investigation, then the practitioner may be required to report the conduct to ASIC, or to take appropriate steps to recover assets for the benefit of creditors.

Personal debt advisory

Personal debt advisors can help people manage their debt levels and to avoid formal insolvency solutions such as bankruptcy. By negotiating with individual creditors and with access to alternate sources of finance, personal debt advisors can help people manage their debt levels whilst aiming to avoid formal insolvency. Importantly, they are also helping individuals free up personal capital to assist with the funding of their businesses.

Where formal appointments can’t be avoided, debt advisors have assisted debtors to prepare themselves for the effects of the bankruptcy, and have assisted with the subsequent formulation of a proposal to be put to creditors in order to compromise their debts and to have their bankruptcy annulled.

That said, personal debt advisors are not immune from criticism. We recently became aware of a case where a personal debt advisor claimed fees in excess of $7,000 to open a file and form the view that the only option available to his client was to declare himself bankrupt. Others have paid high fees to advisors who have done nothing more than to process hardship applications with their banks, and then received no further assistance in rectifying their personal financial situation. Unless managed carefully, the engagement of personal debt advisors may merely delay the inevitable, and can make the situation worse.

Selecting a debt advisor

Separating the sales pitch from the substance can be difficult for individuals, especially when facing extreme financial stress. In corporate matters, it is common for highly competitive debt advisors with access to the court lists to make contact with directors before they themselves are aware that an application to wind up their company has been filed, and then use high pressure tactics to ensure directors engage their services.

This occurs not withstanding that the debt advisors are usually unqualified to give legal advice in connection with winding up proceedings and in circumstances where engaging a lawyer will come at an additional cost to the company or its director.

Choosing the right advisor is extremely difficult in such a new and unregulated industry, and the consequences of getting it wrong can be calamitous. If you are aware that a client is in contact with a debt advisor, then we recommend that you advise your client to proceed cautiously.

Specifically, in assessing the services offered by debt advisors, potential clients are encouraged, wherever possible, to;

  • seek advice from multiple sources, including accountants and solicitors who are required to act in the best interest of their clients.
  • be cautious of high pressure sales tactics and advisors who claim to be experts.
  • not be pressured into making an immediate engagement or committing on the spot.
  • be wary of promises which seem too good to be true, as they usually are.
  • enquire as to the background and qualifications of the advisor, and to ensure that the advice provided is impartial and not skewed by the benefits accruing to the advisor for work referred.
  • be realistic about the work to be completed by the advisor, as some advisors will structure a financial solution in order to maximise their fee.
  • negotiate payments which are directly related to positive outcomes.
  • avoid open ended engagements, and restrict engagements to specific tasks.
  • check all written agreements closely and carefully, and have them reviewed by a solicitor.

Conclusion

At O’Brien Palmer, we have worked successfully with some highly professional debt advisors. If you feel unable to advise your clients in relation to pre insolvency matters, then we can recommend a number of operators with whom we have had successful dealings, or we can provide you with some general advice on specific insolvency related topics.

We do not accept commissions for referrals, nor do we pay commissions for engagements, so you can be assured of the impartiality of our recommendation. We encourage individuals faced with financial pressure to work collaboratively with their accountants, solicitors and if appropriate, with reputable debt advisors.

We also encourage such individuals to contact us at O’Brien Palmer for an obligation free assessment of your circumstances and the options which remain available.

By O’Brien Palmer

Insolvency and Business Advisory

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

2015

Out-of-hours employee misconduct and social media misuse

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Author Brad Petley, Principal of Acumen Lawyers, and the By Lawyers employment law specialist.

Social media use by employees has brought many headaches for employers.

Plenty of sobering warnings have been written by the experts.

A social media issue affecting your workplace can happen in an instant – as today’s hypothetical shows.

An employee heckles a golfing superstar then takes to social media

This article is actually based on an incident reported earlier this year when a golf spectator at the Valspar Championship in Florida heckled well known PGA Tour professional Ian Poulter: See Ian Poulter Heckler from Valspar Fired from Job at Florida Southern – Golf.com (17 March 2016).

After the heckling, the spectator took to twitter, boasting:

“…Ian Poulter is making the walk from 12 to 13. I yell ‘you will NOT make the Ryder Cup team!’ Followed by a ‘YOU WILL HIT IT IN THE WATER!’ Ian turns to a rules official and asks that my friend and I be removed from the premises. We talk to the cops, rules official and they ask us to wait until Ian moves on to the next hole and we could return to the Hooters tent. Ian hit his tee shot on the the (sic) par 3 into the water, thins (sic) we got kicked out, and we’re still boozing! I’m swimming circles in Ian Poutler’s (sic) brain and might (probably) kept him off the Ryder Cup Team..LETS GO!”

Unfortunately for the spectator, he got more than he bargained for when his tweet came to the attention of Poulter.

Poulter tweeted back and at the same time tagging the twitter accounts of the spectator’s employer:

“I’m sure @FSC_Athletics & @FscSports are really proud of your professionalism. I wish you the very best Ian”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Events then took an unfortunate turn for the heckling tweeter as within days his employer (in response to media enquiries) issued this blunt statement:

“He’s no longer employed at the institution.”

So, let’s apply the circumstances of the heckling spectator story as a hypothetical under Australian workplace laws – could you take disciplinary action?

What if it happened in Australia?

The starting point is to bear in mind that the hypothetical employee’s conduct occurred outside of working hours so it may be genuine private activity (no matter how distasteful) with no connection to the employment.

In certain circumstances an employee’s out of work activities (including social media activity) may breach an implied or explicit term of their employment contract thus permitting disciplinary action.

As to the out-of-hours conduct that would justify dismissal, the courts have said:

  • An employee may be validly dismissed because of out of hours conduct – BUT that conduct must be such that:
  • it is likely to cause serious damage to the employment relationship; or
  • the conduct damages the employer’s interests; or
  • the conduct is incompatible with the employee’s duty as an employee.
  • In the absence of such considerations an employer has no right to control or regulate an employee’s out of hours conduct.

See Rose v Telstra Corporation Limited Print Q9292 [1998] AIRC 1592 (4 December 1998)

Could disciplinary action be taken against our hypothetical employee?

It is fair to say that the employee’s conduct raises serious issues about his continuing employment.

However, today’s hypothetical cannot cover all of the issues and arguments that could be put forward in an unfair dismissal case.

Cases will always turn on their individual facts.

What are some of the key facts and issues?

Remember – in our hypothetical the adverse publicity risk is high and the employee is identified on social media as an employee of your organisation.

The out-of-hours behaviour is given wide public exposure by the heckled golfer (who has more than 2 million followers) in his twitter retort and making your organisation’s identity clear by tagging its twitter account name.

There’s the issue of the impact on your organisation’s interests by the employee’s conduct.

You would need to consider the following factors:

    • What is the potential impact of adverse publicity?
    • Could the employee’s actions harm relationships between your organisation and its clients, suppliers or sponsors?
    • Could commercial arrangements with those parties be cancelled as a result?
    • Could there be an impact on the organisation’s ability to source new customers, clients or sponsors?

By engaging publicly in disruptive, hooligan-like behaviour at an international sporting event, our hypothetical employee would certainly raise questions as to whether his actions had damaged the relationship of trust and confidence.

The courts have recognised when it comes to the relationship of employer/ employee:

  1. trust and confidence is a necessary ingredient and
  2. there must be sufficient trust to make the employment relationship viable and productive: See Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186. A common question explored by our industrial relations tribunals in unfair dismissal cases about misconduct is about whether the relationship trust and confidence was irreparably damaged by the employee’s actions.

Relevant to trust concerns would be the employee’s boastful statements on social media about his antisocial behaviour.

The impact would become more grave if the employee held a senior position of greater trust such as a management or supervisory role.

Takeaway points

    • In certain circumstances an employee’s out-of-work conduct can justify disciplinary action (including dismissal).
    • The courts have issued guidance principles for when such behaviour would justify dismissal.
    • Even if there is a valid reason to dismiss, don’t forget the impact of unfair dismissal laws; fairness principles may impact to make a dismissal harsh, unjust or unreasonable.
    • A social media policy is recommended for all workplaces to aid the prevention of misconduct involving social media.
    • If in doubt as to your rights to discipline an employee, seek advice before acting

The Impact of Bamford on Trust Deeds and Trust Resolutions

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Subscribers to our Companies, Trusts, Partnerships and Superannuation product, and LEAP Office users, will be acquainted with the content written by Greg Vale, a By Lawyers author.

Following the Bamford decision Greg circulated a letter to his clients, which is reproduced below for your information.

Our trusts take into account this decision.

Getting it right – the impact of bamford on trust deeds and trust resolutions

On 30 March 2010 the High Court handed down its much awaited decision in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10.

In response to Bamford on 2 June 2010 the ATO released a Decision Impact Statement (‘DIS’) and Practice Statement Law Administration PS LA 2010/1, which outlines how the ATO will treat the determination of trust income.

The High Court decision and ATO response are significant and affect every trust in Australia. In particular they affect how trust deeds and income distribution resolutions must be drafted to obtain the optimum tax outcome.

The significance of the High Court’s reasoning in Bamford is that it confirms that it is possible to define and modify ‘trust income’ through the drafting of one’s trust deed. The advantage of being able to define and modify trust income is that it can create circumstances which remove adverse tax consequences or even allow more beneficial tax outcomes to be achieved.

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

Although the ATO accepts that Bamford means that trust deed clauses can be used to define trust income and can thus influence how the net income of a trust will be taxed, it provides a series of caveats, including the potential application of the general anti-avoidance rule or trust stripping rules in circumstances involving a deliberate mismatch between income entitlements and tax outcomes.

Great care is required in the drafting of the yearly income distribution resolutions. Following Bamford, there is a clear benefit in ensuring that one’s trust deed confers sufficient powers to allow a trustee to determine trust income in each income year. Accordingly, in relation to the 2009/2010 income year and onwards, we consider that all trustees should undertake the following steps in light of Bamford.

Step 1 – Trust deed review

Trustees should review the trust deed in conjunction with their tax and legal advisors to determine whether: 1. The trust deed defines trust income and if so, how the definition operates to determine its capacity to minimise adverse tax consequences going forward; 2. The trust deed provides the trustee with adequate powers to modify trust income, including the power to reclassify items as income or capital and vice versa and allocate expenses and losses as appropriate; 3. There are appropriate streaming provisions and whether they are adequate going forward.

Step 2 – Consider amending the trust deed

Where the trust deed does not contain an adequate definition of trust income or powers to enable the trustee to stream or modify what constitutes trust income, then trustees should consider whether it is beneficial to amend the trust deed to resolve these deficiencies. Tax and legal advice should be sought prior to amending the trust deed so as to avoid any adverse tax consequences. For example, the ATO have already flagged the issue of trust resettlements in this context.

Step 3 – Review the drafting of the trustee resolutions

Trustees should review how they draft their distribution resolutions to ensure that an appropriate tax outcome will be achieved. Binetter Vale Lawyers can carry out the necessary review of your client’s trust deeds and provide advice as to the appropriate amendments in the wake of the decision in Bamford and considerations to take into account when drafting income distribution resolutions for a total of $250 (unless advised otherwise in advance). Separately, for an additional charge to be advised as part of the trust deed review, we are able draft the relevant deeds of amendment and provide tax and legal advice on the issue of resettlement as appropriate.

Further, any deeds of amendment will be accompanied with advice as to the types of resolutions appropriate for that deed.

*This article has interest and relevance for practitioners in all states.

Trading whilst insolvent

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By O’Brien Palmer

What is insolvent trading

Directors have many duties, one of which is to prevent their company from trading whilst insolvent. Pursuant to s 588G of the Corporations Act 2001 (the Act), a director breaches that duty if they cause the company to incur a debt in circumstances where they knew, or ought to have known, that the company is insolvent, or likely to become insolvent as a result of that transaction. If proven, directors can be charged, fined and/or become personally liable for the debts incurred by the company whilst it was insolvent.

What is solvency

Definitions

Section 95A of the Act states:

  1. A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
  2. A person who is not solvent is insolvent.

Unfortunately, the usefulness of these definitions is limited except to the extent that the wording of the legislation recognises cash availability as the primary determination of solvency. For further guidance it is necessary to refer to case law.

Assessing a company’s solvency

The importance of cash flow in determining solvency was articulated by his Honour Dodds-Streeton J in his judgment in the matter of Crema Pty Ltd v Land Mark Property Developments Pty Ltd [2006] VSC 338, where he stated that:

Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.

The assessment of the solvency of a company requires an analysis of the totality of the company’s circumstances, including industry norms and available credit. This firm was involved in an often reported case known as Southern Cross Interiors Pty Ltd (In Liquidation) & Anor v The Deputy Commissioner of Taxation [2001] NSWSC 621. In his judgment, His Honour Palmer J. stated that the following propositions could be drawn from the established authorities:

  1. A company’s solvency is a question of fact to be ascertained from considering its financial position as a whole.
  2. In considering a company’s financial position as a whole, the Court must have regard to relevant commercial realities, such as what resources are available to a company to meet its liabilities as they fall due.
  3. In assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity, it is proper to have regard to the commercial reality that creditors will not always insist on payment strictly in accordance with their terms of trade but that does not constitute a cash or credit resource available to the company.
  4. The commercial reality that creditors will normally allow some latitude for payment of their debts does not warrant a conclusion that the debts are not payable at the contracted time.
  5. In assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract.

These propositions, whilst informative, are somewhat broad. A further and useful commentary on solvency was given by his Honour Mandie J in a judgment delivered in the high profile case of ASIC v Plymin & Anor [2003] VSC 123 (otherwise known as the Waterwheel Case). Justice Mandie adopted 14 indicia of insolvency which are now often utilised in assessing the solvency of a company. However, this list is not exhaustive. The Australian Securities & Investments Commission (ASIC) has published a guide on the warning signs of insolvency. You are also referred to a newsletter previously issued by O’Brien Palmer entitled Practical warning signs of insolvency for small business.

Temporary or endemic cash flow insolvency

A company is insolvent where the available resources are insufficient to meet the debts that are due and payable at that specific point in time. These resources do not necessarily have to be assets of the company, which is why the balance sheet can be irrelevant to the assessment of solvency. The ability of a company to draw on available credit resources is also relevant to any determination of solvency.

It is relevant to distinguish between a company that is insolvent and a company that is experiencing temporary cash flow issues. In the judgment of his Honour Jacobs J in the matter of Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321, it was acknowledged that:

…a temporary lack of liquidity is to be distinguished from an endemic shortage of working capital where liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed.

An endemic shortage of working capital will be apparent where the company is utilising credit funds on terms that it cannot comply with or at debt levels beyond that which it can service. It would also be evident in circumstances where a company is otherwise displaying numerous signs of insolvency.

How a liquidator proves insolvency

Steps to prove the date of insolvency

In order to determine the date on which a company is deemed to have become insolvent, an insolvency practitioner will review the available books and records of a company, as well as records obtained from third party sources such as creditors, banks and statutory authorities. In conducting this review, the practitioner is looking for evidence of indicia of insolvency. The key indicia of insolvency include the following:

  1. overdue trade creditors;
  2. overdue taxation liabilities;
  3. recovery action being initiated by creditors;
  4. no access to alternate finance;
  5. Payment of debts by way of instalments.

As a result of this review, it can become apparent that at a certain point in time, sufficient indicia of insolvency are present to justify a conclusion that the company was insolvent at that time.

Section 588E(3) of the Act provides that where the evidence supports a determination that a company became insolvent at a time within 12 months prior the company being wound up, it is presumed that the company was insolvent throughout the period between that time and the date that the company is wound up.

If the company has not maintained adequate books and records in compliance with s 286 of the Act, then a presumption of insolvency arises for the period in which the books and records have not been properly maintained. Section 588E(4) of the Act states that if a company does not keep comprehensive and correct records of its accounts and financial position, or if it does not keep records of a transaction for seven years after its completion, then that company will be presumed to be insolvent during the period to which the records relate.

Not only is the inability to maintain financial records an indicator of insolvency, but failure to maintain proper books and records may render a company legally insolvent from a date which is earlier than it actually became insolvent.

Debts incurred

After a date of insolvency is established, the liquidator will then assess the debts incurred after that date, in order to determine the quantum of the personal liability of a director for trading whilst insolvent.

Claim for trading whilst insolvent

Where it is determined that a company has traded whilst insolvent, then an insolvency practitioner will in the ordinary course report this alleged contravention to ASIC in accordance with either ss 422, 438D or 533 of the Act.

A liquidator appointed may also take steps to seek compensation from the director(s) for the quantum of the debts incurred by the company after it became insolvent. These steps usually involve the issuance of a letter of demand to the director(s) for repayment of a fixed sum of money. The liquidator may also instruct a solicitor to further pursue the claim where the initial demand is ignored or commercial settlement cannot be reached. The liquidator may be required to commence proceedings against the director(s) to seek compensation orders.

In circumstances where there are multiple directors, the liquidator is entitled to recover from whichever of the directors is most commercial to pursue. That director has a right of indemnity against their fellow directors to recover an equitable share of the amount recovered by the liquidator.

Defences available to directors

Directors may have defences to a claim made for insolvent trading. Section 588H of the Act states that a director can claim a defence where he or she:

  1. had reasonable grounds to believe that the company was solvent at the time it incurred the debt, and that it would remain solvent even after incurring the debt;
  2. can prove that the person in charge of providing accurate information concerning the company’s financial status and solvency was performing this task, and led the director to believe that the company was solvent and would remain to be so even after incurring the debt;
  3. had good reasons not to be involved in the management of the company when it incurred the new debt, such as a result of a serious illness;
  4. can prove that they took all reasonable steps to prevent the company from incurring the debt.

Consequences of insolvent trading

A director who has been charged with insolvent trading faces several consequences.

Civil penalties

Company directors may face fines of up to $200,000 in circumstances where their breach was not dishonest.

Criminal penalties

If trading whilst insolvent is proven to be of a dishonest nature, then directors can face criminal convictions for this breach. A criminal charge carries a maximum penalty of $220,000 and five years imprisonment. A person may also be disqualified from managing corporations.

Compensation orders

If a liquidator suspects a person may have breached their duty in preventing the company from trading whilst insolvent, then he or she, a creditor, or ASIC can take action against the director pursuant to s 588M of the Act. A Court may order that the director repay the company to the value of the debts incurred from trading whilst insolvent.

It should be noted that a creditor can only take this action with the permission of the liquidator or leave of the court, and may only pursue the director for the value of its debt.

Holding company liability

Section 588V of the Act provides that a holding company may be liable for the insolvent trading of its subsidiary in circumstances where the directors of the holding company were aware, or should have been aware, of the insolvency of the subsidiary company.

The impact of repayment arrangements on solvency

Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq) [2015] FCA 319

Background

Mr Barry Boné was the sole company director of Petrolink Pty Ltd (Petrolink). In December 2011, Mr Smith was appointed as liquidator of the company.

The liquidator brought an action against the director seeking compensation for insolvent trading pursuant to s 588G of the Act for the losses suffered by Petrolink’s creditors.

In this dispute, the liquidator claimed that Petrolink was insolvent from 30 June 2009 until the date on which the winding up commenced and that Petrolink continued to trade and incur debt throughout this period. However, the director argued that his company was only insolvent from July 2011.

Relevant to the outcome of the case was the fact that Petrolink had entered into a payment arrangement with the Australian Tax Office (ATO), its main creditor, in order to discharge its outstanding debts.

The director’s defence

The director argued that any reasonable person would have believed that the company was solvent based on the payment arrangement he had established with ATO, which he argued deferred the debts of the company such that they were no longer due and payable. He also stated the company was generating significant revenue throughout the period.

The ruling

His Honour, Gleeson J, found that any reasonable person in the position of the director would have grounds to believe that the company was insolvent and that despite the revenue being generated by the company, its debts remained unpaid. In regard to the payment arrangement, the Court found that the payment arrangements negotiated with the ATO did not have a material effect on the solvency of Petrolink because of the shortness of their duration and the fact that none of them had the effect that Petrolink was not required to pay its outstanding tax liability imminently. The payment arrangements in fact demonstrated that Petrolink was continuing to experience common features of insolvency.

Ultimately, His Honour determined that Petrolink was insolvent from 12 May 2010 and the director was found to be liable to the liquidator for an amount of $669,582.86.

In addition, while the Court did not find that the director had acted or conducted himself dishonestly, it did not exempt him from being held personally liable for insolvent trading. The Court ruled that the director did not seek professional advice about the company’s financial position despite being advised in June 2010 that if Petrolink continued to trade, it may be trading whilst insolvent.

The principle

Directors should be aware that entering into payment arrangements does not provide relief from the debt being due and payable, and may simply be an assistance measure for companies requiring short-term relief. Director’s should be aware that in entering into repayment arrangements with the ATO, they may be providing evidence to a subsequently appointed liquidator that the company was insolvent and that the director was aware of the insolvency. As such, caution should be exercised by directors when entering into repayment arrangements that they only take on repayment commitments that the company can comply with else they risk incurring a personal liability for insolvent trading.

Conclusion

Directors need to be aware of the serious consequences of trading whilst insolvent, and the importance of seeking early professional advice about their company’s status and financial position. Taking the appropriate steps and action is not only a defence to any proceedings, but may be essential to the survival of the company. Where directors are not adequately informed or fail to deal with the potential insolvency of their companies in accordance with their duties as a company director, then they have a greater risk of becoming personally liable for the debts of their companies.

Tip Box

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

Beware the trap of the disgruntled employee – Part 2

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By Brad Petley

Principal of Acumen Lawyers, and the By Lawyers employment law specialist.

A takeover of an established business can be fraught with anxiety for a new employer and the remaining employees.

The previous trusted employer-employee relationship is gone.

New relationships take time to build.

Changes to pre-existing arrangements may not go over well with the remaining employees.

A disgruntled employee who takes to Facebook requires a careful response – as today’s article shows.

Case 2 – How not to handle a disgruntled worker

Vosper v Solibrooke Pty Ltd [2016] FWC 1168 (1 March 2016)

The employee in question, Ms Vosper, was employed by a cake making business from 24 October 2012 in a permanent part-time capacity.

Ms Vosper’s employment spanned the sale of the business on 3 July 2015 until it ended with her dismissal in September 2015.

The Beginnings of a Workplace Dispute

Late on 21 September 2015, at the completion of her workday, Ms Vosper was issued with one week’s notice of termination from her part-time employment.

Ms Vosper was told that her part-time role was “not in line with the business staffing needs”.

In the same meeting (21 September), Ms Vosper was offered new employment but as a casual and on a lower base pay rate (excluding casual loading).

Ms Vosper advised the employer that she did not wish to accept the offer of casual employment.

Facebook message 1– a storm brews

On the morning of the next day (22 September) Ms Vosper sent a Facebook message to her sister (Ms King) – the prior owner of the business.

Ms Vosper advised of termination of her permanent employment and the corresponding offer of a casual position.

During the ensuing Facebook communication exchange, the former owner, Ms King, expressed her displeasure at what had occurred.

Facebook message 2– a not so happy goodbye

On the same day (22 September) Ms Vosper published a private Facebook message as follows:

“I just wanted to let you know that I am finishing up at Angie’s at the end of the week. Time to move on with a new focus. Thanks for all the hard work you have given Karen and I.”

In reply to a “what happened” response Ms Vosper said:

“Angie and Lloyd did my 3 months review and explained that they no longer want to have the part time position and gave me a weeks notice. They offer me casual however I have decided to move on.”

Facebook message 3 – the former owner weighs in

On the same day (22 September) Ms King (the former owner), sent the following message to another employee of the business:

“Hey do you mind if I ask if everything is ok at work!?? Robyn isn’t being treated very well at all. And I was just hoping you were doing ok!”

Dismissal

The employer did not take kindly to the release of information.

Late that night (22 September), the employer sent a dismissal letter by email to Ms Vosper.

The letter advised Ms Vosper that she was dismissed without notice as of 21 September 2015.

In part, the letter stated:

“… you have left us with no alternative but to terminate your employment with immediate effective due to you breaching our request for Confidentiality less than 24 hours after specifically discussing this with you during your review yesterday evening. …”

“… we made it clear that any discussion with anyone about anything to do with the business that could be seen as derogatory, in particular your sister with whom we were experiencing difficulties at present with but we were doing everything we can to not involve with you.”

Unfair dismissal claim

The dismissed employee challenged the termination of her employment by way of an unfair dismissal application to the Fair Work Commission (FWC).

The verdict

The FWC ultimately found the dismissal to have been unjust and unreasonable and thus – unfair.

During the hearing of the matter, the employer put forward a number of arguments to justify the dismissal including:

  • alleging redundancy of the employee’s position
  • performance concerns
  • misconduct arising out of an alleged breach of confidential information
No Redundancy

The FWC rejected the employer’s assertion that Ms Vosper was made redundant.

The FWC found that restructuring changes were not so substantial as to render Ms Vosper’s position no longer being required to be performed by anyone.

No unsatisfactory performance

The employer raised performance concerns during the hearing including alleged lateness, and inadequacy of cake making and decorating skills.

In finding that there was no basis for finding the dismissal was due to performance, the FWC recognised that:

  • the alleged lateness incident was not raised with the employee
  • no warning had been issued about poor performance
  • the employee was not provided with any opportunity to improve in response to cake making concerns
  • the employer’s offer of further training only occurred at the time of the dismissal
What about the Facebook communications?

The FWC summarised the employee’s communications to others (via her Facebook page) as follows:

  • Ms Vosper had been dismissed from her employment because the new owners had told her that they no longer want to have the part-time position and she was being forced to casual employment.
  • She had rejected casual employment and had decided to move on.
  • She had been given her one week’s notice.

The FWC was scathing of the employer’s arguments that the Facebook communications were derogatory and breached confidentiality.

“There is nothing derogatory in these statements. There is no confidential business information in these statements. No reasonable person could believe that this information was either derogatory or confidential business information. An employee has a right to complain about their employment rights and their treatment at work. We do not live in a society where employees are prohibited from discussing their employment status or their treatment at work with others.” [underlining added]

The FWC commented disapprovingly that the employer did not discuss its concerns with the employee about perceived derogatory remarks or an inappropriate release of confidential business information.

The FWC considered that there did not appear to have been any reasonable basis for the employer’s concern of a breach of confidentiality.

Even if there were a reasonable basis for concern, the FWC commented that it was doubtful that the concerning conduct would have amounted to serious misconduct.

Lessons for employers

  • An employee’s airing of workplace dirty laundry may not necessarily involve a release of confidential information
  • An employee is entitled to complain about their employment rights and workplace treatment
  • Employers should have a clear process for the raising of a workplace grievance and the resolution of complaints
  • An employee is entitled to be disgruntled – providing it does not manifest in misconduct or unsatisfactory performance
  • Think before acting

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