ByLawyers News and Updates

Honestly! Let’s talk about employee dishonesty

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By Brad Petley

ACUMEN LAWYERS WORKPLACE RELATIONS AND SAFETY LAW SPECIALISTS

In brief

An employee owes a duty to their employer to be honest in their dealings with it. This is no more apparent than when the employee is the subject of an investigation into alleged misconduct.

A recent dismissal case before Fair Work Australia (FWA), Gunning v Cetnaj Queensland Pty Ltd [2012] FWA 6627 (3 August 2012), provides useful guidance for employers about the effect of an employee’s dishonesty during an HR (human resources) investigation.

The Gunning case

The dismissed employee, Gunning, had worked as a sales representative at the Burleigh Heads branch of the employer’s lighting products business. A customer’s attempt to return a product for a refund uncovered an apparently fraudulent scheme by Mr Gunning’s flatmate, who had formerly worked as a sales representative for the employer, involving a diversion of refund money to a joint bank account of Mr Gunning and his flatmate.

The employer conducted an investigation and subsequently dismissed Mr Gunning for ‘theft and misconduct’ over his alleged involvement in the fraud.

At the unfair dismissal hearing, FWA found that the evidence did not support a finding that Mr Gunning was involved in the fraud originally investigated. However, FWA went on to find that Mr Gunning was not honest with his employer when he was interviewed about his knowledge of the fraud concerns and that of itself formed a valid reason for his dismissal. Accordingly, the employee was found to have been validly dismissed.

FWA made the following important points about an employee’s duty during an HR investigation:
  1. An employee owes a duty to his employer to be honest in his dealings with it.
  2. To do otherwise is to compromise the necessary trust and confidence that is an integral part of the employment relationship.
  3. This does not mean that an employee must answer any and all questions posed to him or her by his employer in an investigation or interview.
  4. But it does mean that an employee must respond honestly to any genuine enquiry made of the employee that is relevant to the conduct or other issues in question or under investigation.

Points to take away

  1. The existence of the relationship of trust and confidence is vital to an employment relationship.
  2. During an investigation into employee misconduct, employers may uncover or be faced with misconduct outside of that which is being investigated.
  3. A dishonest response to a genuine and relevant enquiry is destructive of the relationship of trust and confidence.
  4. A failure to respond to questions honestly can form a stand-alone (valid) reason for an employee’s dismissal.
  5. If in doubt, employers should seek advice.

Warning, warning – Taking account of past workplace sins when disciplining employees – Part 1

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By Brad Petley

Acumen Lawyers Workplace relations and safety law specialists

In brief

A recent dismissal case before Fair Work Australia (FWA) serves as a useful illustration of the issues facing employers when weighing up an employee’s poor disciplinary record and whether a dismissal would be justified.

Warning confusion

Picture this situation. You have an employee who has committed a breach of discipline in the workplace. For present purposes, we will refer to the employee as ‘Jim’. Let’s say that Jim is one hour late for work. You have interviewed him. He was unable to offer a reasonable excuse. You are wondering what to do with him. Jim is not the easiest of employees. He has received a number of warnings previously over conduct and/or performance issues. You are a tad fed up and are considering whether you can terminate Jim’s employment. You remember ‘someone’ telling you once that employers can only take account of ‘like for like’ past disciplinary issues when deciding if a justification exists for a termination of employment. None of Jim’s previous warnings have related to lateness for work. Jim is sitting outside your office. You are wondering what to do.

What does the Fair Work Act say?

Confusion over the prior warnings that may be taken into account is not uncommon amongst some employers.

In determining whether a dismissal was harsh, unjust or unreasonable, Fair Work Australia is required to take into account a number of factors. If the dismissal related to the unsatisfactory performance of an employee, FWA is required to take into account whether the person had been warned about that unsatisfactory performance before the dismissal.

In a previous edition of Workplace Acumen, we pointed out that the unfair dismissal laws in the Fair Work Act do not set out a minimum threshold (e.g. three warnings) before an employer is entitled to dismiss a misbehaving and/or underperforming employee. Depending on the circumstances of a matter there may be no necessity for a warning to have been issued before an employer is entitled to dismiss the employee. Much will depend on the facts and circumstances of the case.

Recent case

The recent Patrick Stevedores case (Tony Carrick v Patrick Stevedores Holdings Pty Limited [2012] FWA 4480) is a useful example of a dismissal involving an employee who had been issued with a number of prior warnings before he was ultimately dismissed.

In this case, the employee was dismissed in November 2011 for a serious safety breach causing a collision between forklifts at the Fishermans Island Brisbane terminal. Prior to that incident, the employee had received a final warning (in April 2011) for another safety breach. Both acts were serious breaches of Patrick’s Safety Cardinal Rules workplace safety policy.

The employee’s prior disciplinary record also included warnings for:

  • sleeping during a shift sometime during late August 2010;
  • failing to attend work on 23 December 2009;
  • using his Maritime Security Identification Card to admit another employee to the Patrick site on 14 April 2009.

FWA took into account that the employee’s overall disciplinary record was poor and that he was the subject of a final warning at the time of the most recent breach. Not surprisingly, FWA ruled the employee’s dismissal was justified.

The point to note here is the combination of diverse disciplinary infractions that the employer took account of before deciding to dismiss.

Lessons for employers

Employers should:
  1. Employers are not required to only take into account prior warnings for the same type of performance or conduct issue (i.e. ‘like-for-like’ issues).
  2. The Patrick Stevedores case is an example of a situation where an employer justifiably took account of a series of prior warnings for a variety of workplace issues (i.e. breaches of workplace procedures, unsatisfactory performance and misconduct).
  3. If an employer is in doubt about whether it is able to dismiss an employee based on the employee’s prior disciplinary record, always seek advice.

Employer’s redundancy assumption goes awry in dismissal case

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By Brad Petley

Acumen Lawyers Workplace relations and safety law specialists

In Brief

In the recent appeal case about a redundancy, Fair Work Australia (“FWA”) rejected an employer’s “assumption” that a manager would be insulted if offered redeployment to a more junior position following a restructure: Jenny Craig Weight Loss Centres Pty Ltd v Margolina [2011] FWAFB 9137.

What does the Fair Work Act say about redundancy?

The Fair Work Act sets out a number of requirements in order for a dismissal to be considered unfair. One such requirement is that the dismissal must not be a case of “genuine redundancy.”

If an unfair dismissal claim is lodged but FWA finds that the dismissal was because of a “genuine redundancy,” it will bring the claim to an end.

A dismissal will not have been a genuine redundancy, if it would have been “reasonable” in all the circumstances for the employee to have been redeployed within the employer’s enterprise (or an entity associated with the employer’s enterprise).

The Jenny Craig dismissal case

In 2011, Jenny Craig Weight Loss Centres (“Jenny Craig”) restructured its operations resulting in a female manager’s redundancy and dismissal.

Prior to the redundancy, the woman was employed as a Regional Manager. The employee’s position involved significant responsibility including hiring and firing staff, as well as the strategic direction and revenue growth of Jenny Craig centres within her region.

The employee challenged her dismissal by lodging an unfair dismissal claim with Fair Work Australia (FWA).

Under the Microscope – The Employer’s Actions

During the appeal hearing, it emerged that:

  • The possibility of redeployment was never discussed with the employee
  • There were a number of more junior management positions vacant at the time (although of lesser responsibility and pay) including that of “Centre Leader”
  • The employee had the necessary skills, qualifications and experience for a Centre Leader position
  • If offered, the employee would have accepted a Centre Leader position
  • No alternative position was offered to the employee

An excuse put forward by the employer for failing to offer redeployment was that an offer of a lesser position, it had assumed, would be taken as a “complete insult” by the employee concerned.

The Decision

FWA held that the dismissal was not a case of a “genuine redundancy” because redeployment to a Centre Leader position would have been reasonable in all the circumstances.

Factors taken into account by FWA included that:

  • There had been an option of redeployment to a centre leader position
  • The employee had the necessary skills, qualifications and experience for that position
  • There was no reason to disbelieve the employee’s evidence that she would have accepted the position if it were offered

Lessons for Employers

Employers should:

  • If considering a restructure, be mindful of the Fair Work Act’s “genuine redundancy” requirement
  • If redeployment is available but to a lesser position – never assume that an employee will reject redeployment
  • Whether an employee may be “insulted” by a particular offer of redeployment is not a valid reason for failing to discuss redeployment with the employee
  • If in doubt about whether an employee has the relevant skills, qualifications and experience for a particular vacancy – discuss those concerns with the employee and seek his/her feedback.

Ensure compliance with workplace laws

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By Brad Petley

Acumen Lawyers Workplace relations and safety law specialists

Even though the Fair Work Act 2009 has been in full operation for just over 2 years, we are continually surprised by the amount of outdated employment contracts and workplace policies still in use. The Fair Work Act introduced the National Employment Standards (NES) and Modern Awards. The NES brought about changes to a number of minimum terms and conditions, which necessitated amendment to many existing employment contracts and workplace policies in order to bring them in line with the NES.

The risk to employers who fail to rectify non-compliant contracts is legal action by the Fair Work Ombudsman for a breach of the NES and/or a relevant Modern Award and the prospect of a civil penalty of up to $6,600 for an individual employer and $33,000 for a corporate employer.

The solution for remedying non-compliant employment contracts is relatively simple – re-issue new compliant agreements. If changes to existing agreements were merely a restatement of applicable Fair Work Act provisions, the consent of affected employees would not be needed. That is because the revised employment contract would be merely recognising the changes automatically brought about by the commencement of the Fair Work Act. Of course, if an employer wished to introduce other terms into a revised contract (unrelated to the Fair Work Act’s changes), those terms would require the agreement of the employee affected.

Ensure Workplace Policies and Employment Contracts are workable.

In the 2011 case of Tara Davies v Hip Hop Pty Ltd T/A Hippity Hop Child Care (an unfair dismissal case) Fair Work Australia considered an employer’s policy so poorly worded that a breach of the policy could not constitute a valid reason for a dismissal. Thus, the employer’s dismissal action was found to be unfair.

A mistake that employers sometimes make is to create unnecessary disciplinary restrictions in their workplace policies. The “3 warnings before dismissal stipulation” is somewhat of an HR myth. Some employers mistakenly include such a precondition in workplace policies as well-intentioned guidance for their managers to follow. In reality, however, such restriction would leave a manager without the necessary discretion to take dismissal action when faced with serious misbehavior, if the requisite amount of prior warnings had not been issued.

Industrial tribunals often take a dim view of an employer’s failure to follow its own procedure, if it resulted in an employee’s dismissal. Where an employee’s dismissal is found to be unfair, an order for reinstatement of the employee or the payment of monetary compensation could follow.

How many warnings are necessary?

The Fair Work Act does not set out any minimum amount of warnings that must be issued in order for a dismissal to be considered fair. Whether none, one or more prior warnings are appropriate before an employer may dismiss a misbehaving or underperforming employee, it will depend on the facts and circumstances of each case.

If an employer is unsure of its rights or obligations, advice is always recommended.

Lessons to take-away

Employers should:

  1. Audit their business’s employment contracts and policies to ensure compliance with the National Employment Standards and modern awards.
  2. If necessary – reissue new (compliant) employment contracts
  3. Amend workplace policies that are found to be non-compliant with workplace laws and/or containing flawed or overly prescriptive provisions.
  4. If there are none in place – implement written employment contracts and written workplace policies as soon as possible.
  5. Seek advice and assistance, if in doubt.

Wills and estates – Death in the house

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Death can impact on a conveyancing transaction in a number of ways, whether the death occurs prior to commencement or during the course of the transaction.

Survivorship

One common example is where one joint tenant dies after the parties have separated. The survivor claims the whole of the property by survivorship, but the beneficiaries of the deceased argue that the separation of the parties severed the joint tenancy and that survivorship does not apply. It is impossible to provide a categorical formula for resolving such disputes as each case will very much depend upon the length and circumstances of the separation. The one thing that is certain however is that the lawyers will, as always, be regarded as the bad guys no matter how the dispute is resolved.

Sales generally

The fact that a registered proprietor has died does not necessarily mean that a proposed sale has to go ‘on hold’. There may be good reasons why an asset should be disposed of promptly after the death of the owner, but equally good reasons why the estate of the deceased may take some considerable time to be finalized. A sale in such circumstances need not await all of the formalities of a grant of probate as an executor of a will is entitled to enter into a contract to sell an asset of the estate even though the executor has not obtained a grant of probate at the time the contract is entered into. The sale is made subject to the executor obtaining a grant of probate and the proposed settlement date takes that condition into account, for instance by specifying settlement ‘on the 1st June or 14 days after the vendor obtains probate’.

However an executor in such circumstances cannot enter into a terms contract as the executor is not ‘presently entitled to become the registered proprietor’ as required by s 29D Sale of Land Act.

This ability to ‘intermeddle’ with estate assets is only available to an executor named in the will and is not available to a person who may intend to apply for a grant of letters of administration of a deceased estate as such an appointment is very much at the discretion of the Court.

Sensational deaths

That someone died in a house that is now for sale is a reasonably common event. To date such circumstances have not caused the common law any concern and fall within the ambit of caveat emptor – let the buyer beware, so a vendor in such circumstances has no duty to bring the death to the attention of a prospective purchaser. That someone was murdered in the house does not alter the common law’s view, but modern statutory principles of misleading and deceptive conduct may impose additional vendor disclosure obligations. A case involving such circumstances came before the New South Wales Administrative Decisions Tribunal late last year in the context of disciplinary proceedings against an agent involved in such a sale: Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 257 and Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 299. Whilst the comments do not directly bear on the vendor’s obligations, it is noted that the vendor did in fact agree to release of the purchaser from the contract when the purchaser became aware of the circumstances of the death after entering into the contract.

A vendor proposing to sell such a property might consider including a special condition in the contract to the effect that the purchaser is aware that the former owner died whilst residing in the property and that the death occurred in unusual circumstances.

Death during the course of the contract

If a vendor dies during the course of the contract, the vendor’s lawyer should advise all parties concerned of the death and take steps to establish the ability of the legal personal representative (either executor or administrator) to complete the transaction – (1989) Law Institute Journal 1149 (December) – which may require a ‘temporary’ grant (ad colligendum bona) if settlement is imminent. Whilst the ‘easy’ solution would appear to be to rely on existing documents (particularly if the transfer of land has been signed by the deceased in anticipation of settlement) such action is fraught with danger. The same may be said of relying on a transfer signed by an attorney under power when the donor/vendor has died.

Settlements conducted in such circumstances are liable to be challenged by the ‘prodigal son’ or other unexpected potential beneficiary of the deceased’s estate who finds that the main asset of the estate has been disposed of and distributed on the basis of a transfer which took place after the death of the deceased.

Tip Box

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

What you need to know about the the Personal Property Securities Act 2009

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By Lawyers

Many practitioners have expressed concerns as to how the new legislation will affect them, and expressed fears they will overlook actions they should take.

This is written to assist in quelling those fears.

What must a practitioner look out for?

Generally a practitioner will need to either search the registry to establish that personal property is not encumbered, or to register a security interest that has been documented to ensure the priority of that interest.

Registration and search will be the everyday actions that practitioners take to protect their client’s interests. Both are simple processes and in time will become second nature.

Security interests covered by the Personal Property Securities Act (PPSA) include:

  • charges;
  • mortgages and pledges;
  • conditional sale agreements;
  • sale of goods subject to retention of title;
  • hire purchase agreements;
  • consignments; and
  • leases of goods.

The central fact to remember is that the Act provides a method of establishing priority of competing interests in personal property. It does not affect the efficacy of agreements vis-a-vis the parties and it does not apply to real property.

Existing agreements and arrangements need not be recreated, however if required there are security agreement precedents provided in the Step-by-Step publication.

There is a two-year grace period to allow for the implementation of the new arrangements and registration of security interests.

However note security interests in goods supplied on retention of title basis will not necessarily have the benefit of the transitional grace period, so consideration should be given to registering them after commencement of the Act.

Existing charges registered with ASIC, and many other financial arrangements such as those recorded in registers of encumbered vehicles, will be automatically migrated to the PPS Register.

To assist practitioners to avoid any oversights we have included reminders or cues in the instructions checklists for sale of business, mortgage, lease, and sale and purchase of real estate.

The PPSA will not be of much relevance to conveyancers unless there is personal property included in the sale that sensibly might be subject to finance. A search of the registry to ensure it is unencumbered is easily made. This doesn’t mean searching for the usual fixtures or minor inclusions in residential sales, but rather something such as an expensive ride on mower.

On the other hand, when acting on the purchase of a business a search should be made to ensure that the goodwill, stock, plant and equipment are not encumbered.

Practitioners will clearly not be caught out when issues are specifically raised by clients – for instance, in relation to such matters as retention of title clauses in their terms of trade – as they will have time to research our commentary and other sources and to direct the client to the array of available information.

The main arrangements clients will need to reconsider are as follows:

  • Supply contracts that contain a retention of title clause may require registration as purchase money security interests to protect the interests of the seller.
  • Equipment leases or bailments of more than 12 months may require registration to protect the interests of the equipment owner.
  • Leases of more than 90 days duration of serial numbered goods may require registration to protect the owner’s interests.
  • Some charges in joint venture agreements may need to be reviewed.

The usual transactions that will trigger the need for action are when a client wishes to secure a debt on personal property or when a client is buying or lending on security of personal property.

Some examples
  1. Sale of business with money left in, secured on any part of the business such as stock, plant and equipment, goodwill and licences: a common situation.
  2. Sale of personalty with vendor finance: a common situation.
  3. Companies giving directors or shareholders charges over assets to secure loans: a common situation.
  4. Provision of goods subject to retention of title until paid: clients will need to review their terms of trade and decide whether they need to register and if so, whether they will register or simply take the risk with their regular customers.
  5. Lease of personalty: not often seen in small practices.
  6. Sale of real estate with fixtures or fittings that are subject to finance agreements that need to be discharged: unusual.

The Personal Property Securities Register has developed five interactive tutorials to assist practitioners:

  • Getting started;
  • Creating a registration;
  • Creating an account;
  • Searching the PPS Register; and
  • Creating a secured party group.

For further information about how the register works:

Email: enquiries@ppsr.gov.au
Phone: 1300 007 777 (1300 00PPSR)

Tip Box

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

Pre-packs – Do they have a place in Australian insolvency practice?

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

You may have noticed the occasional reference in the media to fraudulent phoenix activity and attempts by government agencies such as ASIC (Australian Securities and Investments Commission) and the ATO (Australian Taxation Office) to ‘crackdown’ on serial offenders, particularly in the building and construction industry. Phoenix activity typically involves the transfer of the business assets of a company to a new entity, with creditors being left behind with no real prospect of payment.

There has been recent discussion in the profession about the distinguishing features of a phoenix and a bird of a different feather known as a ‘pre-pack’. In the United Kingdom, pre-packs are a legitimate and accepted means to phoenix the business of a company. In Australia, there is no formal pre-pack procedure although variations of the process are often used by those who specialise in the area, particularly in the turnaround sphere. Where this occurs, the bona fides of the directors are often treated with scepticism. However in many instances, the transfer of assets from one company to a related entity may in fact be in the best interest of all stakeholders of the insolvent company.

In this newsletter, we explore phoenix activity and examine the pre-pack concept.

What is a phoenix company?

A phoenix company is usually considered to be one which is established to carry on the business of an insolvent company, using the assets and employing the staff of the insolvent company, but without accepting liability for its debts. In most cases, the members and directors of the phoenix company are the same or at least related to those of the insolvent company. The business rises from its burden of debt in a new corporate entity, using the same or a similar name, but the creditors of the insolvent company are left to recover what they can for the amounts owed to them through the liquidation process.

Is phoenix activity fraudulent?

Current legislation does not explicitly prohibit phoenix activity. However the process is one that can be easily abused with the result that the activity is often referred to as being fraudulent. Examples of phoenix activity generally considered to be fraudulent include:

  1. transferring the business and/or assets of a company to a new entity for less than fair market value and/or on terms considered to be uncommercial;
  2. establishing a corporate structure for the express purpose of defeating creditors by incurring liabilities through that company whilst keeping assets safe in a related entity;
  3. deliberately incurring company debt immediately prior to the transfer of the business and/or its assets, without having any expectation that the company would be able to pay that debt.

In order to combat such activity, remedies are available within the Corporations Act, which has a number of provisions dealing with breach of duties by directors as well as provisions designed to protect creditors in the event of insolvency. Proven breaches of these provisions can result in civil and/or criminal penalties. Furthermore, the ATO is strengthening its powers using the director penalty notice regime by providing disincentives to fraudulent phoenix activity by making directors personally liable in certain circumstances for their company’s unreported unpaid superannuation and pay-as-you-go withholding amounts.

The applicable provisions of the Corporations Act are as follows:

  1. If the phoenix sale of a company’s business and assets is for less than fair market value or on terms considered to be uncommercial, then it may be challenged as an uncommercial transaction (section 588FB), as an unreasonable director-related transaction (section 588FDA), or as a transaction to defeat creditors (subsection 588FE(5)).
  2. If the sale is not in the best interest of the creditors, the directors may have breached their duties to the company and its creditors. These duties include the duty to act with care and diligence (section 180), to act in good faith and for a proper purpose (section 181) and to not improperly use their position or any information obtained because of their position to gain advantage for themselves or cause detriment to the company (sections 182 and 183). Should it be proven that the breach of any of these sections occurred with either deliberate intention or recklessness, then the breach may result in criminal liability for the director/s (section 184).
  3. Pursuant to subsection 598(2), where the court is satisfied that a person is guilty of fraud, negligence, breach of trust or duty and the company has suffered loss or damage as a result, the court may make such orders as it thinks appropriate in relation to that person.
  4. If employees and employee entitlements are not handled correctly, the director risks committing the criminal offence of entering into a transaction with the intention of avoiding employee entitlements (section 596AB).
  5. If the directors do not prevent all unnecessary liabilities from being incurred once they realise a company may be insolvent, or likely to become insolvent, then they may have breached their duty to prevent insolvent trading (section 588G) and risk being held personally liable for those debts. If the failure to prevent liabilities from being incurred is proven to be dishonest, then the breach may constitute a criminal offence (section 588G(3)).

Proponents of pre-packs argue that, if properly completed, directors will avoid breaching the above legislative provisions.

What is a pre-pack?

A pre-pack is a sale process through which the sale of the business and/or assets of an insolvent company is agreed prior to the appointment of an insolvency practitioner, whose task is to review the sale terms and, if thought appropriate, ratify the sale. The model adopted in the United Kingdom has elements that would not be considered acceptable under Australian law and practice. For example, in the United Kingdom, an insolvency practitioner will work with management to arrange the sale of the business and assets and, after those arrangements have been made, he or she will then be formally appointed as administrator. The conflict of interest is obvious. The pre-pack model, modified to suit the Australian environment, has three distinct steps, namely:

  1. Preparation
  2. The directors will have the business and assets of the company valued by a reputable valuer. The sale of the company’s business and assets should be based on this valuation to ensure that fair market price is obtained.
  3. The directors should prevent all non-essential debts from being incurred. In doing so, they will reduce any exposure to insolvent trading.
  4. Execution
  5. The directors then arrange the sale of the company business and/or assets to another entity, for fair market value. A conditional contract would be executed together with an agreement to operate the business under licence. To prevent the appearance of any impropriety, the completion of the contract should be subject to ratification by an administrator who would in the ordinary course seek creditor input.
  6. The employees of the company would ordinarily be transferred to the new company, which will accept responsibility for their accrued entitlements.
  7. The business continues being operated by the new company.
  8. Ratification
  9. The insolvent company then appoints an administrator (or possibly a liquidator), who will investigate the sale, test the market if appropriate, and report to creditors. The expectation of management is that the sale will be ratified. If that transpires then the administrator will complete the sale.
  10. If the sale is not ratified, then the contract will be rescinded. Responsibility for operating and selling the business would then revert to the administrator.

Importantly, the insolvency practitioner to be appointed administrator should not advise on the process. This ensures that, following appointment, the administrator can act, and be seen to act, independently of those involved in the transaction.

If, for some reason, a sale was completed prior to appointment, then it is likely that the company would be wound up by way of a creditors’ voluntary liquidation. In those circumstances and as in any winding up, the liquidator would review the sale, and in the event it is found to be unreasonable, then he may, if commercial to do so, seek to overturn the sale under the voidable transactions provisions of the Act. The liquidator would then realise the assets for the best price possible.

Why pre-pack and not administration?

The voluntary administration regime was introduced in 1993, and was designed to provide a flexible mechanism for a company’s affairs to be administered in such a way that maximises the chances of the company or its business remaining in existence or, if that is not possible, results in a better return to creditors. It does this by imposing a moratorium on the company’s creditors, giving an administrator time to investigate the company’s affairs and consider a proposal for the company’s debt to be compromised. The proposal can take many forms and, if accepted by creditors, the company will then enter into a Deed of Company Arrangement (DOCA).

As the legislative framework for flexible restructure is already in place, then why bother with a pre-pack sale? Critics of the voluntary administration process argue it is cumbersome, intrusive, costly and detrimental to the business. Proponents of pre-packs claim they offer a better chance for existing management to save their business and for creditors to maximise their return. They say pre-packs do this by:

  1. ensuring the continuation of the business in a new entity;
  2. preserving the goodwill of the business and its suppliers and customers;
  3. maximising the value of company business and assets;
  4. avoiding a costly trade-on administration pending a sale.

In addition, creditors should have the comfort of knowing the sale is subject to review and ratification by an independent administrator. However, there are other considerations that need to be taken into account, namely:

  1. The company will still have go through the administration process and bear the consequential costs of the administrator possibly testing the market and dealing with enquiries which may extend to entering into negotiations for the sale of the business and assets.
  2. The appointment of an administrator and the subsequent winding up of the company will still leave the directors exposed to potential claims under the Corporations Act – for example, claims resulting from trading whilst insolvent. This means that the directors may still have to consider propounding a DOCA as part of the pre-pack process, further adding to the costs that might be incurred.
  3. The directors or owners of the entity acquiring the business and assets will need to arrange funding not only of the agreed purchase price but also ongoing working capital. In many instances buying the business and assets of a company will not be a practical option.

Conclusion

The debate surrounding phoenix activity continues, in which the cost to the community is contrasted with the efficiency and other benefits of the pre-pack process. Should directors who phoenix the business of their companies be held more accountable? Or should the interests of creditors in an increased commercial return supersede government concerns over the director’s bona fides? The government is considering further legislative amendments to inhibit deliberate, cyclic, fraudulent phoenix activity. In this regard you might be aware that earlier this year, the government introduced what is commonly called the Similar Names Bill, which sought to amend the Corporations Act to make a director of a failed company personally liable for its debts where the related entities had the same or similar names. We understand this Bill has made no progress but it is an indication of the government’s intentions.

Whilst the voluntary administration regime already provides a mechanism for the restructure of a company’s business, it is often criticised. Proponents of pre-packs argue that a pre-pack sale of a company’s business will in many instances deliver better results than can be achieved through a standard administration, and that sufficient safeguards already exist within the Corporations Act to protect creditors’ interests. We consider that, in certain circumstances, a formal pre-pack process may be more effective than voluntary administration. We also consider that the concept deserves to be further explored.

This article was written by O’Brien Palmer insolvency authors. They are a specialist practice with national affiliations, focusing on corporate and personal insolvency and business recovery. They are committed to assisting solicitors help their clients understand and navigate the complex realms of insolvency.

The ATO rises and ups the ante – ATO granted new powers to pursue directors

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

The Tax Laws Amendment (2012 Measures No.2) Bill 2012 received royal assent on 29 June 2012 and has commenced operation. This bill extends the existing director penalty notice (DPN) regime to make directors personally liable for their company’s unpaid superannuation in addition to pay as you go (PAYG) withholding amounts. This legislation acts retrospectively in respect of PAYG liabilities. It is more urgent than ever that directors be aware of the PAYG and superannuation liability position of their companies to ensure they do not become personally liable for the debts of those companies.

The new regime enables the Australian Taxation Office (ATO) to take action under the DPN system for all PAYG and superannuation debts that remain unreported and unpaid from 29 June 2012, including PAYG liabilities incurred prior to the commencement of the bill, which remain unreported for more than three months. Further, directors who fail to comply with their reporting requirements may become liable to pay the new PAYG withholding non-compliance tax, which can be set-off against PAYG credits due to directors. If directors have not reported on these liabilities for the period ending 31 December 2011, it is already too late.

Although it may take some time for the ATO to implement and utilise these new powers, company directors are risking increased enforcement action if they fail to deal with outstanding tax and superannuation liability now. The following is a guide to the director penalty notice regime and a summary of the changes which have taken effect.

Directors to become personally liable for unreported PAYG

Where a company’s PAYG liabilities remain unreported to the ATO for more than three months after the due date, the ATO may make directors personally liable immediately; and, although still required to issue a DPN prior to commencing enforcement action, the appointment of an administrator or liquidator to the company will no longer prevent directors from becoming personally liable for the company’s tax debt. The due date for reporting purposes depends on the company’s PAYG withholding amounts:

  • small withholders – $25,000 annually or less, 28 days after quarter end; and
  • medium withholders – $25,001 to $1 million annually, 21 days after month end.

Most companies which haven’t reported to the ATO on PAYG liabilities for the quarter ending 31 March 2012 will have until 21 July 2012 to report, or their directors risk being made personally liable for the amounts outstanding. For the June 2012 quarter, the final date will be 21 October 2012. Lodgement dates vary from month to month and companies lodging via a tax or BAS agent have an extra month.

Directors to become personally liable for unreported superannuation guarantee charge

Where a company has not paid superannuation by the 28th day after the end of each quarter, it is required to lodge a superannuation guarantee charge (SGC) statement by the 28th day of the following month – that is, in the second month. In circumstances where the statement is not lodged on time, the ATO can now make directors personally liable for outstanding superannuation, by issuing a DPN. This includes making directors liable based on estimates of SGC owing, rather than merely on reported figures, and liability will arise three months after the relevant lodgement date. Therefore the lodgement date for a June 2012 quarterly SGC statement would be 28 August 2012, with personal liability arising from 28 November 2012.

PAYG withholding non-compliance tax

In certain circumstances, directors and associates of directors will be prevented from obtaining PAYG credits in their individual tax returns where the company has failed to pay withheld amounts to the ATO. These amounts will be the lesser of the amount that the company has failed to remit to the ATO or the amount of tax withheld by the company from the director’s income.

The new DPN regime

In order to recover a director penalty from a director (in respect of PAYG or superannuation) the ATO must issue a DPN and wait until the expiration of 21 days from the date of the notice to commence proceedings. Personal liability is not triggered if within 21 days of the issue date:

  • the company complies with the obligation;
  • an administrator is appointed to the company; or
  • the company is placed into liquidation.

The critical change is that, where three months has lapsed since the due date, and the underlying liability remains unreported and unpaid, there is no relief from the director penalty by placing the company into administration or liquidation.

Therefore, the key issue under this new regime is that, in order to avoid personal liability, all liabilities should be reported no later than three months after the due date.

What do these changes mean?

To ensure directors do not become personally liable for company debts, directors should take the following steps:

  • ensure that business activity statements and other reporting requirements are lodged with the ATO within the required timeframes;
  • ensure that PAYG and superannuation amounts are reported and remitted to the ATO and relevant superannuation funds within the required timeframes;
  • increase the monitoring and awareness of their company’s taxation and superannuation liabilities, and act promptly where problems are identified;
  • increase the communication with the ATO where debts have been incurred beyond the company’s ability to meet them within the required timeframes;
  • seek immediate advice from their accountant or an insolvency practitioner at the first signs of trouble; and
  • if a DPN is received, then immediate compliance is required to ensure that the corporate veil is not pierced.

The impact of Bamford on trust deeds and trust resolutions

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By Greg Vale, Binetter Vale Lawyers

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.

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.

Tip Box

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

If the ATO doesn’t get you, then the OSR might

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

Much has been written about the alternative courses of action available to the Australian Taxation Office (ATO) in collecting outstanding taxes and the aggressive attitude being adopted by it in effecting debt recoveries. In this paper, we focus attention on the New South Wales Office of State Revenue (OSR), which also has a formidable arsenal at its disposal for the recovery of overdue taxes and in particular payroll tax.

The Office of State Revenue

The OSR is a division of the Department of Finance and Services. It administers state taxation and revenue programs for and on behalf of the government and thus the people of New South Wales. A major source of revenue for the OSR is payroll tax, the imposition of which arises under the operation of the Payroll Tax Act 2007 (PTA).

The Taxation Administration Act 1996 (TAA) provides for the administration and enforcement of the PTA and a number of other taxation laws including the following:

The general administration of the TAA and the other taxation laws including the PTA is undertaken by the Chief Commissioner of State Revenue who assesses the tax liability of a taxpayer and collects the tax payable.

Collection of unpaid payroll tax and other taxes under the Taxation Administration Act

If a tax debt remains unpaid, then the Chief Commissioner can seek payment from third parties and/or directors and former directors of corporations. The relevant provisions of the TAA in relation to the collection of unpaid tax are summarised hereunder:

(a) From third parties

Pursuant to subsection 46(1) of the TAA, the Chief Commissioner can, by written notice, require persons instead of the taxpayer to pay the debt. Those persons include the following:

  • a person by whom any money is due or accruing or may become due to the taxpayer;
  • a person who holds or may subsequently hold money for or on account of the taxpayer;
  • a person who holds or may subsequently hold money on account of some other person for payment to the taxpayer;
  • a person having authority from some other person to pay money to the taxpayer.

These notices operate in a manner similar to what are commonly referred to as ‘tax garnishee notices’ issued by the ATO. The recipient of such a notice must pay the money to the Chief Commissioner on receipt of the notice, or when the money is held by the person and becomes due to the taxpayer, or after such period (if any) as may be specified by the Chief Commissioner, whichever is the later: subsection 46(5). A person subject to a requirement under subsection 46(1) must comply with the requirement. Failure to do so may result in a penalty of $11,000: subsection 46(6).

(b) From directors and former directors of corporations

Section 47B of the TAA operates in a manner similar to the Director Penalty Notice regime under the Income Tax Assessment Act. Pursuant to subsection 47B(1), if a corporation fails to pay an assessment amount in accordance with a notice issued by the Chief Commissioner, then the Chief Commissioner may serve a compliance notice on one or more of the following persons:

  • a person who is a director of the corporation;
  • a person who was a director of the corporation at the time the corporation first became liable to pay the tax, or any part of the tax, that is included in the assessment amount or at any time afterwards.

A ‘compliance notice’ is defined in subsection 47B (2) as a notice that advises the director or former director on whom it is served that if the failure to pay the assessment amount is not rectified within the period specified in the notice, being a period of not less than twenty-one days, the director or former director will be liable to pay the assessment amount.

However, subsection 47B(3) states that a failure to pay an assessment amount is rectified if:

  • the assessment amount is paid; or
  • the Chief Commissioner makes a special arrangement with the corporation for the payment of the assessment amount; or
  • the Board of Review waives or defers payment of some or all of the assessment amount; or
  • an administrator of the corporation is appointed under Part 5.3A of the Corporations Act 2001 (‘the Corps Act’); or
  • the corporation begins to be wound up within the meaning of the Corporations Act.

If the failure to pay the assessment amount is not rectified within the period specified in the compliance notice, then the director or former director on whom the compliance notice was served is jointly and severally liable with the corporation to pay the assessment amount: subsection 47B(4).

Directors should note that a person does not cease to be liable to pay an assessment amount because the person ceases to be a director of the corporation, but a former director of a corporation is not liable for any tax for which the corporation first became liable after the director ceased to be a director of the corporation: subsection 47B(5).

The defences that are available to directors and former directors are set out in section 47E, which states that it is a defence to the recovery of an assessment amount if it can be established that:

  • the director or former director took all reasonable steps that were possible in the circumstances to ensure that the corporation rectified the failure to pay the assessment amount; or
  • the director or former director was unable, because of illness or for some other similar good reason, to take steps to ensure that the corporation rectified the failure to pay the assessment amount.

Collection of unpaid payroll tax under the Payroll Tax Act

(a) From group members

Readers of this newsletter would be aware, even if it is only in general terms, of the grouping provisions of the Payroll Tax Act. We do not propose to review those provisions in this paper except to very briefly set out the groups that can be constituted:

  • groups of corporations that are related bodies within the meaning of the Corporations Act (section 70);
  • groups arising from the use of common employees (section 71);
  • groups of commonly controlled businesses (section 72);
  • groups arising from interests in corporations (section 73); and
  • smaller groups subsumed by larger groups (section 74).

Importantly, if a member of a group fails to pay an amount that the member is required to pay in respect of any period, then pursuant to subsection 81(1) every member of the group is liable jointly and severally to pay that amount to the Chief Commissioner. One or more members in the group will be issued with an assessment for the amount outstanding, with payment to be effected within twenty-one days.

(b) From principal contractors

Part 5 of Schedule 2 of the PTA applies where a principal contractor enters into a contract for the carrying out of work by a subcontractor and employees of the subcontractor carry out work in connection with a business undertaking of the principle contractor: clause 17(1) of Schedule 2.

If, at the end of the period of 60 days after the end of a financial year, any payroll tax payable by the subcontractor in respect of wages paid or payable to the relevant employees during the financial year for work done in connection with the contract has not been paid, then the principal contractor is jointly and severally liable with the subcontractor for the payment of the payroll tax: clause 17(2).

However, the principal contractor is released of the liability if the subcontractor provides a written statement declaring, inter alia, that all payroll tax payable for work done in connection with the contract has been paid: clauses 18(1) and (2).

Finally, the principal contractor is entitled to recover from the subcontractor, as a debt in a court of competent jurisdiction, any payment made by the principal contractor as a consequence of a liability arising under Part 5: clause 19.

This article was written by O’Brien Palmer insolvency authors. They are committed to assisting solicitors help their clients understand and navigate the complex realms of insolvency. As part of that commitment, they are pleased to answer any questions regarding their services and offer a complimentary and obligation free initial consultation to establish the nature of the problem and the manner in which they can be of service.

O’Brien Palmer is a specialist practice with national affiliations, focusing on corporate and personal insolvency and business recovery.

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