ByLawyers News and Updates

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

Defamation and Protecting Reputation

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Defamation and Protecting Reputation

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.
JUNE
  • Updated figure for damages for non-economic loss under section 35(3) of the Defamation Act 2005 updated for 2016. The figure is uniform across all jurisdictions.
MAY
  • Case Law – Succession – added new case under ‘Child Omitted from will’ heading – Brimelow v Alampi [2016] VSC 135.
  • Business structures – Comparative table – Included land tax for TAS WA ACT and NT.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH

 

Practice Management

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Practice Management

September 
  • Commentary added on receipting of trust money in NSW
May 
  • Expanded non-compliance with cost disclosure obligations and added new anti-voiding rule 72A – disapplication of s 178(1) and (2) of the Uniform Law.
March 
  • Updated – Trust statement requirements where balance of the ledger account or record is zero – Recent amendments to Rule 52 of the Legal Profession Uniform General Rules 2015 – VIC and NSW.
  • Commentary added on the Law Practice Confirmation and Trust Money Statement – Requirement in NSW – Link to dedicated Law Society login page added.

 

Beware the trap of the disgruntled employee – Part 1

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By Brad Petley

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

It’s a familiar situation – an employee who pushes their manager’s buttons.

Challenging and questioning rather than simply getting on with things – ‘like the others do’. Disgruntled employees with unresolved workplace issues can be difficult to manage. Some employers adopt a ‘put up with it or there’s the door’ position. Yet, managing a disgruntled employee is not as easy as that.

Traps abound for the unwary – as today’s article, in Part 1 of our series, shows.

Case 1 – How not to handle a workplace dispute

Luckman v HP Bowral Pty Ltd T/A Highlands Property [2016] FWC 1250 (3 March 2016)

Ms Luckman worked in a permanent part time capacity for a property management company.

Her role involved managing a portfolio of properties, including sales and leasing.

Two disputes arose during Ms Luckman’s employment.

First Dispute

The first dispute arose when Ms Luckman considered that she had a full-time workload although she was working in a part-time capacity, based on the amount of properties she was expected to manage.

The dispute was resolved after Ms Luckman raised issue with her manager.

Second Dispute

The second dispute arose over a management decision that Ms Luckman would be managing two new properties in addition to her normal duties.

Ms Luckman was advised of the decision on 13 August 2015.

Ms Luckman objected to management’s decision on the basis that although she would be burdened with the responsibility for managing the properties, she would be effectively denied the associated sales commissions because each sale would occur during hours when she was not at work.

Later that day, Ms Luckman was invited to a meeting with the employer’s General Manager, Mr Walker.

Meeting – 13 August 2015

During the meeting Mr Walker explained the reasons for the decision and advised that he did not consider the transfer of work to her as unusual or uncommon.

Ms Luckman disagreed with Mr Walker’s explanation and at the conclusion of the meeting made comments along the lines of “I’m done, I’m over it, I’m out of here.”

Email exchange

After returning to her desk, Ms Luckman sent Mr Walker an email which included the following:

“Further to our meeting today as I feel there is nothing more to discuss it would be appreciated if the files could now be handed over so I can continue the management of those properties.”

Mr Walker responded by email which included the following:

“You may feel there is nothing more to discuss, but there is. It’s nothing to lose sleep over but I will make time for us to meet again.”

Dismissal

On 20 August 2015 Ms Luckman was invited to a further meeting with Mr Walker.

At the start of the meeting Mr Walker read out a letter terminating Ms Luckman’s employment.

The letter advised ‘misconduct’ as the reason for Ms Luckman’s dismissal.

Unfair dismissal claim

Ms Luckman challenged the termination of her employment by way of an unfair dismissal application to the Fair Work Commission.

The verdict

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

Conduct not inappropriate

The FWC considered that the conduct of Ms Luckman in the meeting did not amount to a valid reason for her dismissal.

Although observing that Ms Luckman had been angry and hostile during the meeting of 13 August, the FWC recognised that there had been no use of inappropriate or foul language, or threatening or abusive behaviour, by either party.

The FWC also recognised that Ms Luckman’s email to Mr Walker immediately after their meeting demonstrated that she was ready to follow the instruction about the management of the two properties in question.

In particular the FWC commented:

‘The meeting on 13 August 2015 was a robust discussion where an employee had the courage to voice her disapproval over the way that she perceived that she had been victimised over the last four years.

The mere fact that there was no swearing or threatening language used solidifies the view that Mr Walker’s decision to terminate Ms Luckman’s employment was a monumental over reaction.’

Robust workplace discussions

Importantly for employers, the FWC made the following observation about robust discussions between employers and employees:

‘Robust discussions between employees and employers are a part of the Australian industrial landscape.

The notion of master/servant where an employee was not allowed to question the decision of the employer disappeared with the industrial revolution.’

Ultimately, the FWC handed down a decision of unfair dismissal.

As to the question of whether Ms Luckman could be reinstated, the FWC rejected a claim by the employer that there had been a breakdown of trust in the employment relationship.

Lessons for employers

  • Robust workplace discussions between an employer and employee are an accepted feature of the Australian employment landscape.
  • An employee may raise a workplace issue directly affecting him/her providing it is raised in an appropriate way.
  • Employers are not entitled to deem the mere raising of workplace issue as misconduct or insubordinate behavior.

New Publication – Defamation

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As of today, our library of publications now includes a Defamation & Protecting Reputation publication.

It is a complete guide to acting in defamation and related areas of the law including privacy, breach of confidence, injunctive relief, Injurious falsehood, and misleading and deceptive conduct.

You can find out more about what documents, forms and commentaries the guide includes by looking through the Table of Contents.

You can also check out ‘Public shame – Justice and defamation in the digital age‘, an interesting article we posted on online shaming and the defamation law in Australia.

As always, if you have any questions, please email us at support@bylawyers.com.au.

 

Employment Law

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Employment Law

JANUARY
  • Commentary added on “Cashing out annual leave”
NOVEMBER 
  • Further Information – Added new links
  • Costs Agreements – Reference to interstate costs laws added and updated interest clause
OCTOBER
  • Costs Agreements
    • SA and WA – 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, total estimate of legal costs section with provision for variables, and 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.
  • New article – Out-of-hours employee misconduct and social media misuse
SEPTEMBER 
  • New article added – Beware the trap of the disgruntled employee – Part 2
AUGUST 
  • Costs agreements have been added for Tasmania, ACT and Northern Territory.
JUNE 
  • Commentary updated in line with Fair Work Commission’s high income threshold for 2016. The threshold is relevant for the purposes of protection from unfair dismissal, compensation available from an unfair dismissal claim and the applicability of modern awards to certain employees.
APRIL 
  • New article published – Beware of the trap of the disgruntled employee – Part 1
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • New commentary on casual employees included.
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.

Recent case law developments may have significance for directors and creditors

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

Introduction

Two decisions from the Supreme Court of New South Wales may be of interest to some readers. Although these decisions have been much commented upon within the insolvency industry, we have noted that the implications of these decisions may not have been broadly disseminated to others. The most recent decision pertained to the winding up of a corporate trustee, the result of which potentially exposes directors to significant personal liability. The second decision impacts on secured creditors when a company over which it holds security enters into voluntary administration.

Winding up a corporate trustee

INDEPENDENT CONTRACTOR SERVICE (AUST) PTY LIMITED (IN LIQ) (ICS) (NO 2) [2016] NSWSC 106

Readers may recall that in April 2015, we published an article about two conflicting decisions pertaining to the winding up of a corporate trustee. One of those decisions was handed down by his Honour Brereton, J. The decision in ICS flows on from his earlier judgement.

The Facts

ICS acted as trustee of the Independent Contractor Services Trust (the ICS Trust) that carried on a labour hire business. Following the completion of an audit, the Australian Taxation Office raised significant debts against ICS and as a result an administrator was appointed to ICS and it was subsequently wound up. The administrator/liquidator realised assets of the ICS Trust in the course of completing their duties. The ATO lodged a proof of debt in the winding up for $11.594M which included a priority claim of $2.274M in respect of unpaid superannuation guarantee charge. The liquidator applied to the court for numerous orders and directions but relevantly, directions were sought as to:

  1. the manner in which monies were to be distributed;
  2. the liquidator’s entitlement to remuneration.

The Distribution of Trust Assets

His Honour Brereton J found that section 556 of the Corporations Act (the Act), which sets out the order of priority for the distribution of monies realised from the assets of liquidated companies, does not apply to distributions from the proceeds of trust property. Although conceding that the law in relation to the distribution of trust property was not settled, Brereton J reasoned that the creditors of the trust should rank equally in the distribution of trust property. In any event, he said that in this particular case, even if subsection 556(1)(e) of the Act applied, the superannuation guarantee charge would not rank in priority as the contractors engaged by ICS were not its employees.

Remuneration

A liquidator of a company that is the trustee to a trading trust is entitled to be paid his or her costs and expenses. Approval of remuneration is ordinarily sought from creditors by liquidators pursuant to either section 473 or 499 of the Act. However, His Honour effectively said that these sections apply to company property only. Consequently, a liquidator of a trustee company must have his remuneration and disbursements approved by the court if they are to be paid out of the realisation of trust property.

Implications for Trustees & Directors

This decision may potentially impact upon directors of trustee companies in circumstances where superannuation or other employee entitlements remains unpaid at the date of the trustee company being wound up. Previously, we have published articles about the potential exposure of directors who do not properly manage the solvency or statutory compliance (superannuation, PAYG withholding) of their companies and become the subject of director’s penalty notices issued by the Australian Taxation Office (ATO) or other liabilities for breach of duty including the duty to prevent the company from trading whilst insolvent.

A director’s capacity to recover monies paid to the ATO under the director’s penalty notice regime in respect of a company’s debts may be restricted in circumstances where employees remain unpaid on finalisation of the winding up of a trustee company as a result of the distribution of trust assets amongst trust creditors equally without regard to the priority usually afforded employee creditors. The failure of directors to ensure employee creditors are not disadvantaged may also exacerbate the negative impact of having breached their statutory and fiduciary duties to employees, creditors and other beneficiaries. As such, the decision highlights the importance of directors acting in this dual capacity to ensure that all employee entitlements are paid in full prior to winding up or replacing a corporate trustee.

Secured creditor and voluntary administration

BLUENERGY GROUP LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT DOCA) (ADMINISTRATOR APPOINTED) (BLUENERGY) [2015] NSWSC 997

The Facts

Until recently, when a company went into administration and a deed of company arrangement was propounded, it was generally accepted that secured creditors would not be bound by the terms of the deed of company arrangement unless they voted for it. This allowed companies to manage their unsecured creditors without impacting on the rights of parties to whom the company had granted securities. However, for the first time since the introduction of Part 5.3A of the Act, the generally accepted practice that secured creditors would not be affected by deed of company arrangement agreements has been fundamentally altered.

In this case, Keybridge Capital Ltd (Keybridge) had advanced $300,000 to Bluenergy Group Ltd (Bluenergy) and was granted a second ranking circulating security interest in the assets of Bluenergy. In April 2014, voluntary administrators were appointed to Bluenergy. At that time, Keybridge was owed approximately $1.3 million.

A deed of company arrangement was approved by the creditors of the company and executed on 18 August 2014. The deed of company arrangement provided that all creditors’ claims were extinguished at the commencement of the deed. Keybridge did not participate in the voting as was standard practice for a secured creditor who did not intend to be bound by the terms of the deed of company arrangement.

On 19 March 2015, Keybridge appointed an administrator to Bluenergy pursuant to section 436C of the Act. The administrators of the deed of company arrangement objected to this appointment on the grounds that the deed of company arrangement had extinguished the debt owed to Keybridge. As such, the deed administrators argued that Keybridge was unable to appoint an administrator and that the appointment of the administrator be terminated.

Keybridge defended its actions on the grounds of subsection 444D(2) of the Act, which states in part that a deed ‘does not prevent a secured creditor from realising or otherwise dealing with the security interest’. The exception to this provision of the Act is if the secured creditor had voted for the deed of company arrangement or the court has ordered otherwise.

Findings in relation to Secured Creditors Rights

His Honour Black J found that:

  1. the deed of company arrangement extinguished the personal interest of Keybridge in the secured property (that is the debt owed by Bluenergy) in accordance with subsection 444D(1) of the Act by force of the release contained in the deed which took effect from the date of its execution;
  2. by reason of Keybridge abstaining from voting, that release was subject to the preservation of the ability of Keybridge to realise or otherwise deal with its proprietary interest in the property that was subject to its security immediately prior to the release of claims effected by the deed of company arrangement;
  3. even though Keybridge was entitled to appoint an administrator, the appointment should be terminated as it frustrated the purposes of Part 5.3A in that it was likely prejudicial to the interests of creditors who had approved the deed of company arrangement and in any event, there was no utility in its continuance as the only debt owing in the subsequent administration was the previous administrator who opposed the second appointment in circumstances where the debt to Keybridge had been extinguished.

In summary, the effect of the deed of company arrangement in these circumstances was to extinguish the debt owed by the company to its secured creditor without compromising the rights that the secured creditor held over the property of the company the subject of its security. Although it was entitled to appoint an administrator to the company, there was no point in doing so as it was effectively no longer a creditor of the company and the only remaining creditor of the company opposed the appointment.

Implications for Secured Creditors

This decision has serious implications for secured lenders and will probably result in secured creditors becoming more interventionist in deed of company arrangement negotiations, particularly in relation to release provisions which often do not become effective until conclusion or effectuation of the deed of company arrangement. It could also result in secured creditors seeking to block approval of deed of company arrangement proposals or exercising rights to appoint a receiver and manager.

Directors beware

by

By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

The Director Penalty 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 section 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 and superannuation guarantee charge. 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 lodgement is due, and for superannuation guarantee charge 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. Please note, 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 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 their registered tax agent’s address.

Once a director penalty has been imposed by the ATO, there are 3 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 superannuation guarantee charge remains unreported and unpaid for more than 3 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 3 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 3 months of the due day.

Defences to Director Penalties

In the event that proceedings are commenced against a director, there are only limited defences available to company directors. Those defences 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 and several guarantors.

PAYG Withholding Non-Compliance Tax

Whilst not technically part of the regime, the PAYG withholding non-compliance 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 they 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 they 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 3 months past the due day has expired, there is nothing a company director can do to avoid personal liability.

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