ByLawyers News and Updates

Contract – Finance conditions 2 – A silly decision

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Umbers v Kelson confirms a silly decision.

The case concerned a finance condition in a contract for the sale of a business. The wording in that condition is effectively the same as the wording in the finance clause in the standard contract of sale and so the case has important ramifications for contracts for the sale of land.

However the circumstances surrounding the case make it dangerous to regard the decision as strong authority in relation to finance conditions generally and the legal analysis, with respect, appears defective.

THE FACTS

The purchaser had not obtained finance and sought an extension, adding that if the extension was not granted, the vendor ‘may treat this letter as written notice ending the contract’. The vendor in fact was prepared to grant the extension, but the agent failed to communicate that to the purchaser. The parties thereafter treated the contract as at an end, however one month later the agent re-enlivened negotiations and the purchaser undertook a trial of the business.

Negotiations continued for another 2-3 months, during which time the purchaser first stated that he had sufficient cash resources to complete, but then claimed to be unable to obtain finance. Ultimately the vendor resold the property and claimed damages for loss on resale. It is fair to say that the vendor was the innocent party and entitled to succeed.

MAGISTRATES COURT

The initial hearing was conducted on the basis that the parties assumed that the purchaser’s letter had terminated the contract. The issue was raised, but not argued, as it was not in contention. However there was no specific finding by the Magistrate that the letter had ended the contract, although the Magistrate’s reasons were, by his own admission, ‘slightly garbled’.

The decision was based on the purchaser’s subsequent conduct and the vendor was successful on an estoppel argument.

SUPREME COURT

On appeal, the Judge heard all the evidence and then decided that he wanted submissions on whether the letter had ended the contract. He concluded that the purchaser had ‘tried to have his cake and eat it’ and that the letter had not been effective to terminate the contract. It had merely given the vendor the option to do so.

By doing so the Judge decided the case on grounds entirely different to those argued at the hearing and whilst the parties had an opportunity to make submissions, that can be but a poor substitute for arguments in the context of a hearing. The vendor’s willingness to grant an extension is clear evidence that the vendor accepted the letter as capable of ending the contract and an argument based on misleading and deceptive conduct would have been open to the purchaser but could not be pursued in the unusual circumstances of the case.

COURT OF APPEAL

Hansen JA. delivered the judgment of the Court. He confirmed that ‘it is apparent from his reasons’ that the Magistrate concluded ‘that in the absence of a response to the 18 July letter, that the letter operated to terminate the contract’.

He was referred to a number of cases relating to termination notices and relied upon Catley v Watson. That case related to a notice of rescission of a contract of sale of land under the provisions previously contained in Table A and established a test that a reasonable person ‘would be left in no doubt as to its meaning’ and that the reasonable person would have ‘knowledge of the relevant circumstances of the transaction’ in making that decision.

His Honour concluded that the letter failed that test, that it left determination of the contract up to the vendor and was thereby equivocal. But the facts are entirely against this conclusion. The purchaser clearly thought that the letter ended the contract if an extension was not granted and the vendors also did so and they tried, unsuccessfully, to grant the extension. The representatives of the parties at the hearing assumed that to be the case, as did the Magistrate. It was only the afterthought of the Judge on appeal that first doubted the question and the test applied appears to be more the test of ‘a reasonable judge’ with years of finely tuned analytical skills, rather than ‘a reasonable person’. To penalise the polite use of the phrase ‘you may treat this letter as’ in lieu of ‘this letter is’ smacks of a legalistic, rather than reasonable test.

Further, the analogy with rescission notices appears misplaced. A notice terminating a contract based on a finance condition is a positive notice that takes immediate effect – it ends the contract instantly (unless an extension is granted). A rescission notice is a negative notice given upon default and will only end the contract if the other party fails to remedy that default and gives a period of time (usually 14 days) for the default to be remedied. Requiring absolute precision when specifying a breach that a party is required to remedy is reasonable, but imposing such a strict requirement on a notice terminating the contract based on a finance condition is a false analogy. The operative event has occurred – finance has not been obtained. The vendor is not required to take action, so absolute precision is not required. That failure to be absolutely precise results in sudden death cannot be the outcome anticipated by ‘a reasonable person’.

The right result may have been reached, but by a wrong, and dangerous, route.

Tip Box

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

Contract – Finance conditions 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Many contracts for the sale of land are subject to the purchaser obtaining approval of a loan. In most cases the purchaser will have undertaken preliminary inquiries in relation to the availability of finance and the application process will be something of a formality and result in an approval. Occasionally the purchaser will have overestimated their ability to borrow, or the financier will be dissatisfied with the security property, and the application will be unsuccessful. In those circumstances the contract comes to an end and any deposit paid is usually refunded.

Justice Smith in the Supreme Court of Victoria in the recent case of Umbers v Kelson [2008] VSC 348 had cause to consider the meaning of a relatively common form of finance condition that provided as follows:

“This contract is subject to the lender approving the finance of the purchase of the business by the approval date or any later approval date allowed by the vendor. The purchaser may end the contract if a loan is not approved by the approval date only if the purchaser has

  1. made immediate application for the loan;
  2. has done everything reasonably required to obtain the approval of the loan;
  3. serves written notice ending the contract on the vendor on or before two business days after the approval date; and
  4. is not in default under any other condition of this contract when notice is given.

Money must immediately be refunded to the purchaser if the contract is ended.”

The approval date specified in the contract was within one month of the date of the contract.

This form of finance condition is similar, but not identical, to the condition set out in the standard contract of sale of real estate. As can been seen by reference to ‘the business’ in the condition, it comes from a contract for the sale of a business, rather than land but, for all intents and purposes, it has the same meaning and effect as the standard finance condition in the contract of sale of real estate (now General Condition 14).

If the loan is not approved by the approval date it is common practice for the solicitor for the purchaser to write to the solicitor for the vendor to seek an extension. Such a request, without more, is presumed to place an obligation on the vendor to respond, hopefully with an extension, but if not then with notification that the contract has come to an end. Such a course of action is potentially hazardous as the vendor might not promptly respond and then claim that the purchaser has not exercised its right to end the contract within the specified time and has now lost that right.

A more cautious approach is for the solicitor for the purchaser to write, within the specified time, advising that finance has not been approved and that the purchaser accordingly ends the contract unless the vendor agrees to an extension of time for approval. Readers are no doubt nodding in acknowledgement that that is indeed their practice, or perhaps thinking that it will become their practice in light of the previous paragraph.

Unfortunately that practice did not meet with the approval of Smith J. The words used were:

“We seek an extension of one month…In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract.”

His Honour concluded that this formula failed to terminate the contract in the event that the vendor did not agree to the extension. The purchaser tried to “have his cake and eat it” and so the vendor’s inaction simply meant that the finance condition expired and the contract became unconditional as to finance.

Arguably a letter that stated ‘in the event that an extension is not agreed to, the contract is ended’ would achieve the desired result, but it seems unfortunate that the courteous mode of expression adopted by the solicitor for the purchaser should lead to an outcome entirely outside of the anticipation of the parties.

Exercising an abundance of caution, perhaps the process of making a request for an extension of time for approval of finance ought to be separated entirely from the termination process, so that the purchaser does not risk the possibility of trying to “have its cake and eat it”. Thus a request for extension should be made by or on the day set for approval and another letter sent terminating the contract if that extension is not received within 2 days of that request. However, adopting His Honour’s style of colloquial analysis, perhaps the purchaser might then be accused of “playing with fire” as now there is not one crucial date to be complied with, but two.

Tip Box

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

Contract – Entire contract

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The recently reviewed Contract of Sale of Real Estate published jointly by the Law Institute of Victoria and Real Estate Institute of Victoria establishes 28 general conditions as the fundamental terms of the agreement entered into by the vendor and purchaser.

As a contract designed to be used by both vendor and purchaser, and sanctioned by the Department of Justice, the contract is designed to be fair to both parties. It embodies principles that have been established by many years of conveyancing practices and many more years of judicial decisions. It relies upon a solid base of statutory provisions, most of which have developed in the last 50 years and are designed to protect the consumer – namely the purchaser.

The contract does not need to refer to these statutory protections, such as those relating to off the plan sales, terms contracts, deposit release and vendor disclosure obligations in the Sale of Land Act 1962, as they apply to all contracts and cannot be removed by the contract.

Additionally, more general consumer protection legislation based on trade practices principles, such as the Fair Trading Act 1999, applies in a real estate context and are important implied statutory terms of any contract between vendor and purchaser.

Whilst these implied statutory conditions cannot be removed from the contract, it is permissible for parties to agree to additional conditions and, indeed, to agree to alter any of the general conditions, by special condition. The contractual warranty contained in general condition 2.1 to the effect that the general conditions adopt the standard 28 general conditions is designed to give the parties a clear base upon which to agree.

In many cases no further conditions will be required, but in some situations one of the parties may desire further provisions. For instance, the purchaser might want a ‘building inspection’ condition or the vendor may wish to alter the statutory sunset period for an off the plan sale. This is achieved by special condition.

Unfortunately, old habits die hard, and some vendors’ representatives have continued the old habit of adding pages of special conditions, most of which are either already dealt with in the general conditions or are mere restatements of statutory provisions and are therefore superfluous. The typical example is a special condition that states that the deposit will be held in accordance with s 27 Sale of Land Act 1962. Of course it will. That is what the Act requires.

Another relatively common special condition is an ‘entire agreement’ condition. This purports to limit the agreement between the parties to the written words of the contract and to exclude from the contract any representations or promises that may have been made prior to the contract. Such conditions often appear in off the plan contracts but may be added to contracts for the sale of existing properties.

Such a condition was considered in the case of Nifsan Developments Pty Ltd v Buskey & Anor [2011] QSC 314. That case considered a contract for the off the plan sale of a unit to be constructed near the Gold Coast. The purchasers established that the vendor developer’s in-house agent had told the purchasers that no other developments would be built in the area such as to interfere with the purchasers’ view and that the purchasers had relied upon that representation. Indeed, the agent honestly believed this to be the case as the developer had not informed the sales staff that the developer had applied to change proposed future construction by increasing the height of proposed buildings.

The purchasers sought to avoid the contract when they became aware of proposed construction that would interfere with their view. They might have sought relief for breach of contract on the basis of common law misrepresentation, but chose to pursue the statutory remedy of avoidance based on misleading and deceptive conduct in breach of the Trade Practices Act 1974. Whilst the contract cannot exclude these statutory protections, the developer argued that an essential element of this statutory right is ‘reliance’ by the purchasers on the pre-contract representations made in relation to height and that the special condition in the contract prevented the purchasers from relying on those representations.

The court decided that the developer’s representations were misleading and deceptive, that they were important to the purchasers and that the purchasers were entitled to rely upon them as the developer had control of future construction in the area. The inclusion of an ‘entire agreement’ clause did not remove those pre-contract representations from the relationship between the parties, nor mean that the purchasers were not able to rely upon those representations for the purposes of enforcing their statutory rights.

In conclusion, an ‘entire agreement’ clause may well be as superfluous as many other of the rag-tag special conditions habitually attached to contracts with little thought as to their virtue or application.

Tip Box

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

Contract – Electronic signatures

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

One of the fundamental concepts in relation to a contract of sale of land is that the contract must be in writing and signed by the parties (or at least ‘the party to be charged’). This requirement can be traced back to the Statute of Frauds of 1677 and can now be found (if you know where to look) in s 126 of the Instruments Act. The requirement that a contract be signed was designed to prevent fraud by preventing one party to an agreement claiming or denying that an enforceable contract existed in situations of uncertainty. By requiring a signature the law created certainty.

The world has come a long way in 350 years and we are now in the electronic age. Indeed, in relation to contracts for the sale of land, we are now in the age of electronic conveyancing and the long awaited EC system has been operational since November 2007 and conducted its first settlement in May 2008. Independently of any title registration system, there are various commercial transactional providers, such as EBAY, that facilitate buying and selling of assets as valuable as aeroplanes and, as reported recently in the press, are now facilitating the sale of real estate. Communication between representatives such as estate agents, lawyers and conveyancers is now consistently undertaken electronically and the question of whether a contract of sale of land that has been signed and exchanged electronically is enforceable will no doubt occupy the attention of a Victorian Court in the not too distant future. The question therefore will be; is a contract of sale of land enforceable if it is signed electronically?

A preliminary distinction needs to be made between a digital signature and an electronic signature. A digital signature involves an encryption device and implies the existence of an authentication network standing behind the signature. This is the process utilized in Electronic Conveyancing for execution of the transfer and involves a trusted third party signing the transfer of land on behalf of the parties. This no doubt satisfies the requirements of the Statute of Frauds.

On the other hand, an electronic signature stands alone and acts purely as a representation of the signature of the party. It is not made by hand, as is the case of a traditional signature, but rather is formed by the placing of the hand on a key, or even conceivably by voice recognition software generating the appropriate ‘keystrokes’. Does a party who ‘signs’ an email that in all other respects constitutes an enforceable contract of sale of land become bound by that electronic signature?

At common law (including the Statute of Frauds) the answer is ‘no’. But s 126 of the Instruments Act was amended in 2004 to provide that the requirements of s 126 ‘may be met in accordance with the Electronic Transactions (Victoria) Act 2000’. This Act in turn provides in s 9 that the requirement of any law for a signature is ‘taken to have been met in relation to an electronic communication if’:

  1. the signature identifies the person and indicates approval of the information;
  2. the method of communication was appropriate in the circumstances; and
  3. the person has consented to the use of electronic communication.

Thus it may be concluded that where two parties to a contract communicate with each other electronically then, subject to any other underlying contractual limitations, any agreement that they reach in relation to the sale of real estate will be binding on them when they have each sent to the other an electronic communication (email) that includes an electronic representation of their signatures. This would be satisfied by the mere typing of the name of the party at the end of the communication and certainly by the inclusion of a more formal ‘signature box’.

However it is relatively rare for parties to communicate directly in relation to the negotiations for the sale of real estate. Usually estate agents will be involved and also party representatives such as lawyers and conveyancers. Parties will not be bound by the actions of these participants in the process unless those third parties are authorised in writing by the party. However such an authorization could itself be communicated electronically. Thus, not only will a party who electronically signs a contract be bound to that contract, a party will also be bound if the party’s representative has been electronically authorised to sign on behalf of the party and does in turn electronically sign the contract. It is certainly possible to conduct the whole contractual process in cyberspace.

A few cases in Australia and England have considered these issues and there are no doubts that arguments can be raised on the way. However, essentially it appears that even concepts – such as the importance of signed documents – going back as far as the 17th Century are capable of adapting to the electronic age.

Tip Box

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

Caveats – Use them!

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The caveat is the Torrens system’s safety valve. The principle of indefeasibility allows an interest in land, once registered, to effectively destroy competing interests, but the caveat gives a competing interest holder a momentary chance to assert their interest. Unfortunately, caveats are not used frequently enough.

Callinan J. recently said:

It used to be the practice of careful conveyancers, acting for persons acquiring registrable estates or interests in Torrens title land, to lodge with the officials in charge of the Register, a caveat as soon as the agreement for the relevant dealing was made, in pre-emptive protection of their clients’ prospective legal estates or interests pending completion of their agreements and registration of the instruments perfecting them.

Colloquial evidence from the Titles Office suggests that caveats are lodged in respect of only about 25 per cent of transfers, so purchasers are engaging in high risk tactics. There can be no excuse for not lodging a caveat in a commercial transaction, but presumably caveats are not lodged in residential transactions because of the cost. The Titles Office fee is $47.30. A fair charge for preparing and lodging a caveat might be $50, so for the sake of $100 purchasers risk having their interest in the land defeated and solicitors are risking a negligence action as a result.

Black v Garnock is a recent example of the risks involved. A purchaser’s claim was defeated by a subsequent Sheriff’s writ. The failure to caveat was certainly not the only reason the purchaser lost, but that failure was heavily relied upon by the majority in the High Court in finding against the purchaser. The practical result was that the purchaser, who had completed the transaction in the face of the writ, would be required to pay out the judgment creditor’s claim so that the purchaser’s transfer could proceed to registration. No doubt the purchaser will seek compensation from their solicitor.

Sheriff’s writs are relatively rare, but competing claims arising during the life of a contract are common and the failure to caveat can cost a purchaser (and the solicitor) dearly. Preston-Lalor Credit Co-op Ltd v Razzi and Bunning Building Supplies P/L v Sgro are cases where ‘innocent’ purchasers were unable to proceed to registration as a result of a caveat lodged during the period between settlement and lodging of the purchasers’ transfer, in the latter case, just 35 minutes before. Both cases involved typical domestic conveyancing scenarios and the purchasers did not caveat. In a perfect world of ‘instant registration’ at settlement, this would not occur. But the reality is that even when solicitors lodge for registration there is a time delay, and colloquial evidence suggests that when lenders take the documents for lodging, delays of up to six months are not uncommon. When you realise that the person in front of you in the queue at the Titles Office might be lodging a competing caveat, there is good cause not to sleep at night.

There is just no sense in exposing the purchaser (and solicitor) to this risk, particularly when the antidote is so cheap. Acknowledging that an extra $50 in a competitive residential conveyancing marketplace might mean the difference between receiving instructions and not, at least advise those clients who do instruct you that they should give you instructions to lodge a caveat. In your first letter explain that there are risks of competing interests arising during the contract period and that a caveat provides protection from those interests. Consider offering not to charge for preparing the caveat, but seek authority to include the fee in your disbursements. Even if the client does not give those instructions, you have warned them and you may then enjoy a good night’s sleep.

Just another short note on caveats – a recent case, Riverview Projects Pty Ltd v Elleray & Anor [2007] VSC 150, acknowledged the right of a ‘domestic partner’ to lodge a caveat against a property owned not by the other domestic partner but against a property owned by a company substantially controlled by the other domestic partner and in which the caveator had no interest. This caveat was permitted notwithstanding that the caveator had previously acknowledged in writing that the caveator did not, and would not in the future, have any interest in that property.

Tip Box

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

Tenant’s caveats and the sale or mortgaging of freehold property

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A lease (as opposed to a licence) undoubtedly creates an interest in land in favour of the tenant. A lease for more than three years may be registered on the title to the land and a lease for any period entitles the tenant to lodge a caveat. Registration of the lease will require production of the certificate of title and, in the normal course of events, an order to register from the registered proprietor. This implies a degree of co-operation between landlord and tenant and is usually only achieved in the context of negotiations when the lease begins, as anytime thereafter the landlord is not obliged to cooperate and is unlikely to do so. A caveat does not require production of the title nor formal consent of the landlord and for this reason is a ‘simpler’ way of recording the tenant’s interest. That it is not often utilized flows from the statutory recognition of tenants in possession as paramount interests.

A registered proprietor/landlord may feel affronted that their otherwise unencumbered title is weighed down by such a caveat lodged by a tenant, but there is no basis for such an objection. This feeling of discontent is often further aroused in a landlord when a lender to the tenant seeks to obtain some security for the loan made to the tenant. The landlord may be offended that its title bears the blot of a debt to a third party, but again no objection can be taken as just as the lease creates an interest in land, so too can that interest be encumbered. However the landlord is not obliged to consent to or co-operate with such a scenario and a lender to a tenant that seeks consent to the mortgage of lease or to its registration may find that the landlord simply refuses to consent or to make the title available. However a lender’s caveat can be lodged without the landlord’s consent or production of the title, so a lender may lodge a caveat claiming an interest as mortgagee of the leasehold estate.

A landlord might seek to prevent such a situation arising by including a condition in the lease that declares such action to be a breach of the lease making it liable to termination, but such a solution seems to far outweigh what is essentially a cosmetic problem.

The recording of the interest of a tenant or a lender to a tenant, either by way of registration or caveat, often causes problems when the freehold interest-holder in the property seeks to mortgage or sell the property. A lender over, purchaser of, or lender to a purchaser of, the freehold conventionally desires a ‘clear’ title, but the interests of the tenant and/or tenant’s mortgagee are registered or recorded and are viewed by some as a ‘blot’ on the title. Whilst a careful analysis of the legal situation should result in the lender or purchaser acknowledging that they take subject to the lease (and any subsequent mortgage of that lease) regrettably ‘careful analysis’ is rarely an apt description of the conventional demand for a clear title, particularly in relation to a lender. The vendor/borrower of the freehold is then between a rock and a hard place with its new lender, purchaser or purchaser’s lender demanding that the lease/mortgage of lease be removed and the vendor/landlord having no right to insist upon removal of those (temporary) encumbrances. There is no solution other than a careful explanation that the tenant/tenant’s mortgagee has the right to maintain the registered/recorded interest and that the vendor/landlord sells subject to those interests. In a sale situation it is prudent to include such an acknowledgement in the contract, although that will simply mean that the problem of convincing a purchaser’s lender of the need to settle without a ‘clear’ title passes from the vendor to the purchaser.

The problem is exacerbated by the common habit of caveators lodging caveats that forbid dealings ‘absolutely’. It is possible to include limited restrictions in caveats, such as ‘unless such instrument is expressed to be subject to my claim’ but regrettably the standard form provides ‘absolutely’ as the default claim and it is rarely changed. This means that even if the registered proprietor is able to convince its lender, purchaser, or lender to its purchaser that their transaction can proceed subject to the lease or mortgage of lease, the caveat acts as an absolute prohibition. This must then be explained to the tenant/mortgagee and arrangements made for replacement of the caveat with a caveat claiming a limited interest. Caveators in such situations are generally loath to act as there is ‘nothing in it for them’ but the threat of proceedings to have the caveat removed (and claim the cost of such proceedings) may encourage co-operation. Courts have shown a dislike for the inappropriate use of absolute restrictions.

A caveator may consent to a dealing. This might even apply in the case of an absolute prohibition and may provide a compromise between withdrawal and disputation. The consent will mean that the dealing takes priority over the caveat and whilst that might remain attractive to a tenant, who is independently protected as a paramount interest, it might not be attractive to a mortgagee of the lease. In any event, if a caveator is asked to consent, the caveator would be entitled to claim reasonable legal costs in respect of that consent.

Tip Box

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

Technical guide: Voting at meetings of creditors of insolvent companies

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Introduction

The holding of meetings of creditors is a necessary and important part of the corporate insolvency regime and is the primary mechanism for creditors to exercise their rights in dealing with insolvent companies.

The necessity to hold such meetings arises from the operation of numerous sections contained in Parts 5.3 to 5.6 of the Corporations Act 2001 (‘the Act’). Regulations 5.6.11 to 5.6.36A of the Corporations Regulations 2001 govern the meeting process.

This technical guide will address the right of creditors to vote at meetings and summarise the manner in which resolutions are carried.

Who is a creditor for voting purposes

The term ‘creditor’ is not defined in the Act. Generally, a ‘creditor’ is taken to mean a person who has a debt or claim against a company that is provable in a winding up. Pursuant to section 553(1) of the Act, debts or claims provable in every winding up means;

‘all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company’.

For the purposes of voluntary administration, a ‘creditor’ is taken to have the same meaning as set out above: Selim v McGrath[2003] NSWSC 927 at 68.

Section 553(1) of the Act refers to ‘debts’ and ‘claims’. A debt may be defined as a liquidated sum in money which is due from the debtor to the creditor: Rothwells Ltd v Nommack (No 100) Pty Ltd [1990] 2 Qd 85 at 86. The term ‘a liquidated sum’ refers to an agreement between the parties of a precise amount. This is contrasted to a ‘claim’ which is unliquidated which requires the court to determine the amount payable. The classic example of an unliquidated claim is a claim for damages for breach of contract.

Section 553(1) also refers to future and contingent debts or claims. An often used definition of ‘contingent creditor’ is a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date: Re William Hockley [1962] 1 WLR 555.

The importance of these words lies in their insistence that there must be an existing obligation and that out of that obligation, a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen: Re William Hockley [1962] 1 WLR 555.

‘A future claim is distinguishable from a contingent claim in that, while both are foundered on an obligation existing as at the commencement date of the winding up, a future claim will arise at some time thereafter while a contingent claim may arise. A typical example of a future claim is a claim for rent that will become due under a lease which is in existence at the commencement of the winding up’: Community Development Pty Limited v Engwirda Construction Company [1966] (120 CLR 455 at 459).

Notwithstanding the broad meaning of ‘creditor’, there are certain debts that are not provable in a winding up. These include debts that are court imposed penalties (s 553B of the Act) and debts that are not legally enforceable such as debts arising from illegal transactions, statute barred debts and court imposed penalties.

Creditors who may vote

Pursuant to regulation 5.6.23(1), a person is not entitled to vote as a creditor at a meeting of creditors unless his or her debt or claim has been admitted wholly or in part by the administrator or liquidator, or he or she has lodged with the chairperson of the meeting particulars of his or her debt or claim, or if required, a formal proof of debt.

Regulation 5.6.23(2) states that:

a creditor must not vote in respect of:

  1. an unliquidated debt; or
  2. a contingent debt; or
  3. an unliquidated or a contingent claim; or
  4. a debt the value of which is not established,

unless a just estimate of its value has been made.

This regulation is consistent with section 554A(2) of the Act which states that where the liquidator admits a debt or claim as at the relevant date that does not bear a certain value, he or she must either make an estimate of the value of the debt or claim, or refer the question of the value of the debt to the court.

In addition, regulation 5.6.24 deals with the debts or claims of creditors holding security. These claims will be discussed later herein. There are further regulations (5.6.23(3) and 5.6.46) dealing with bills of exchange, promissory notes and other negotiable instruments or securities that are outside the scope of this technical guide.

Entitlement of unsecured creditors to vote

Debts and Claims Not Requiring a Just Estimate

The power to either admit or reject a proof of debt or claim for the purposes of voting is given to the chairperson pursuant to regulation 5.6.26(1). Notwithstanding the unqualified reference in that regulation to proofs or claims being admitted or rejected, a chairperson can partially admit a debt or claim: Expile Pty Limited v Jabb’s Excavations Pty Limited and Anor [2004] NSWSC 284 at 37.

Generally speaking, the admitting for voting purposes of claims not requiring a just estimate, is a relatively simple process as most debts or claims, such as those of trade suppliers, can be easily established to the chairperson’s satisfaction. However, the process can become quite complicated, especially when dealing with contingent and unliquidated claims. Meetings involving large numbers of creditors can also present problems as proofs of debt and particulars of debts and claims are often handed up for adjudication immediately before the commencement of the meeting. In such circumstances, there is no time for extensive debate and deliberation on the merits of a claim nor is it possible to undertake extensive enquiry in relation to those claims.

As stated above in regulation 5.6.23(1), a chairperson will admit a creditor to vote in circumstances where that:

  1. creditor’s proof of debt has been admitted, either in part or in full;
  2. creditor has furnished to the chairperson particulars of the debt or claim, whether it be formally by way of a proof of debt not yet admitted or informally by way relevant documentation such as copy statements and invoices.

In relation to those creditors who fall under category (ii) above, a chairperson will be mindful of the significant difference between establishing an entitlement to vote at a meeting and establishing an entitlement to participate in a dividend distribution. This means that in the case of the former, a person need only establish a prima facie entitlement to vote as compared to the latter where there is a much greater burden of proof.

Obviously the adequacy of the particulars provided in support of a debt or claim will vary enormously and depend on the circumstances. In addition, the chairperson may have preexisting knowledge of a debt or claim, gained from access to a company’s books and records or from discussions with directors where such matters as disputed debts or claims are raised. A chairperson when adjudicating for voting purposes upon proofs of debt not yet admitted and particulars of debts or claims, will be looking to ensure:

  1. that the debt or claim was incurred with the company concerned;
  2. that the date the debt or claim was incurred predates the date of administration or liquidation;
  3. that the documentation provided in support of the debt or claim is adequate to prima facie establish the existence of a liability for a debt or claim;
  4. whether there are any claims for set off;
  5. whether the debt or claim is subject to any security;
  6. whether the debt or claim is disputed by the directors.

If the chairperson is in doubt as to whether a proof of debt or claim should be admitted or rejected, then in accordance with regulation 5.6.26(2), he or she must mark the proof of debt or claim as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained. However this regulation will only apply where there is actual doubt in respect of whether the proof should be admitted or rejected as compared to doubt as to the value which should be assigned to the claim.

Debts and Claims Requiring a Just Estimate

Debts and claims requiring a just estimate comprise contingent and unliquidated debts and claims and debts the value of which has not been established. Before these creditors can be admitted to vote, regulation 5.6.23(2) requires a just estimate to be made of the debt or claim. These debts or claims should be dealt with as follows:

  1. if an estimate has been made of the debt or claim by the person attending, then the chairperson will need to assess whether or not the estimate is just. If so, the claim should be admitted for voting purposes;
  2. if no estimate has been made or if the chairperson considers the estimate made by the person is not just, then the chairperson, acting reasonably, will need to make the just estimate of value and permit the person to vote for that amount;
  3. if a just estimate cannot be made, then the person should not be allowed to vote (regulations 5.6.23(2));
  4. if the claim cannot be quantified by a just estimate, but it appears that the person is a creditor for at least some amount, then it is appropriate to admit the person for voting purposes at a nominal value of one dollar;
  5. if a just estimate has been made as required by the regulation, but the chairperson remains in doubt as to whether the person should be allowed to vote at all, then the chairperson must mark the proof or claim as objected to in accordance with regulation 5.6.26(2).

Entitlement of secured creditors to vote

In order to vote, a secured creditor must pursuant to regulation 5.6.24(1), estimate in its proof of debt or claim, the value of the security held otherwise the security is surrendered. The creditor is entitled to vote only in respect of the balance, if any, due to the creditor after deducting the estimated value of that security: see regulation 5.6.24(2). If the secured creditor votes in respect of the whole debt or claim, then the creditor is taken to have surrendered the security, unless the court on application, is satisfied that the omission to value the security arose from inadvertence: see regulation 5.6.24(3).

Importantly, regulation 5.6.24(4) states that regulation 5.6.24 does not apply to meetings of creditors convened under Part 5.3A of the Act dealing with voluntary administration, or meetings held under a deed of company arrangement.

Two interesting questions arise, namely:

  1. Can a secured creditor vote in a winding up without surrendering its security notwithstanding the provision of regulation 5.6.24(1)?

The answer to the question is yes but only if voting is on the voices rather than a poll, the reason being that voting on the voices or by a show of hands does not involve voting on the whole of the debt. This is because when a vote is taken on the voices or by a show of hands, each creditor who votes has one vote only and thus the outcome is determined by numbers, not the value of debt: Selim v McGrath[2003] NSWSC 927 at 81. That being said, if the secured creditor uses the full value of its debt when voting by way of a poll, then it has surrendered its security in doing so.

  1. Does a chairperson have a duty to inform a secured creditor when voting of its actions or omissions?

We consider that a chairperson has no such duty to inform. However, a chairperson, acting reasonably when determining the voting entitlements of a secured creditor, would in the ordinary course look at the value, if any, that had been attributed to the security. If no value was attributed to the security, then it is likely that a discussion would ensue and in our opinion that discussion would eventually lead to a prudent chairperson, informing the creditor of the consequences of its actions.

Voting on resolutions

Outcome of voting on the voices

Pursuant to regulation 5.6.19(1), a resolution put to the vote of a meeting of creditors must be decided on the voices unless a poll is demanded, before or on the declaration of the result of the voices by:

  1. the chairperson; or
  2. at least 2 persons present in person, by proxy or by attorney and entitled to vote at the meeting; or
  3. by a person present in person, by proxy or by attorney and representing not less than 10% of the total voting rights of all the persons entitled to vote at the meeting.

Unless a poll is demanded, the chairperson must declare that a resolution has been carried, or carried unanimously, or carried by a particular majority, or lost: see regulation 5.6.19(2). A declaration is conclusive evidence of the result to which it refers, without proof of the number or proportion of the votes recorded in favour of or against the resolution, unless a poll is demanded: see regulation 5.6.19(3).

Notwithstanding these regulations, many chairpersons will ask creditors to vote by raising their hand as this gives a more accurate counting of the vote.

If a poll is demanded, then regulation 5.6.20 states that the chairperson is to determine the manner in which it is to be taken and the time at which it is to be taken.

Outcome of voting by way of poll

If a poll has been demanded, then pursuant to regulation 5.6.21(2), a resolution is carried if:

  1. a majority of the creditors voting (whether in person, by attorney or by proxy) vote in favour of the resolution; and
  2. the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting (whether in person, by proxy or by attorney).

Conversely, regulation 5.6.21(3) states that a resolution is not carried if:

  1. a majority of creditors voting (whether in person, by proxy or by attorney) vote against the resolution; and
  2. the value of the debts owed by the corporation to those voting against the resolution is more than half the total debts owed to all creditors voting (whether in person, by proxy or by attorney).

To put it more simply, for a motion to be carried, there will need to be a majority in number and value of creditors voting for the motion. For a motion to be lost, there will need to be a majority in number and value voting against the motion. It will therefore be obvious that it is possible for a motion to be neither carried nor lost. This outcome is provided for in regulation 5.6.21(4) which states that, if no result is reached under sub-regulations (2) or (3), then the chairperson may either;

  • exercise a casting vote in favour of the resolution, in which case the resolution is carried; or
  • exercise a casting vote against the resolution, in which case the resolution is not carried; or
  • not exercise a casting vote, in which case the resolution is not carried.

Exercising the chairperson’s casting vote

The chairperson has been given the power to exercise a casting vote in order to quickly resolve a deadlock. It is most often used in the context of voluntary administration where the future of a company is to be determined. The chairperson’s use of the casting vote has been examined extensively by the courts. The main legal principles that govern the use of that vote are summarised here under: see Provident Capital Limited v Kelso Building Supplies Pty Ltd (In Liquidation)(Receiver & Manager Appointed) [2008] FCA 868 at 19.

  1. The chairperson should exercise the casting vote to resolve a deadlock unless there is some good reason to refrain from doing so. Failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the person’s duty;
  2. The chairperson must weigh up all relevant factors and act honestly and according to what he or she believes to be in the best interests of those affected by the vote, and for a proper purpose;
  3. The exercise of the casting vote is most appropriate in circumstances where either creditors with a majority in value have such an overwhelming interest that it is inappropriate to allow a majority in number who do not have the same monetary interest to carry the day, or vice versa;
  4. However, there is no presumption in favour of the majority in value, although any large disproportion between the values of the debts of the numerical minority and the numerical majority will be a factor to be taken into account. In favouring the numerical minority, the chairperson will need to be satisfied that he or she is acting in a manner consistent with (ii) above.

By way of general comment:

    1. When determining the future of a company under administration, the chairperson would normally exercise a casting vote consistent with the opinion expressed in his or her section 439A report.
    2. Before exercising a casting vote, the chairperson must declare his or her rational for exercising the vote (whether for or against a resolution) or choosing not to exercise the vote. The reasons are to be minuted: see Code of Professional Practice for Insolvency Practitioners issued by the Australian Restructuring Insolvency & Turnaround Association 2015 at 24.7.4 page 187.
    3. Exercising a casting vote in favour of a resolution approving remuneration is generally unacceptable and considered to be a breach of fiduciary duty: see Code of Professional Practice for Insolvency Practitioners issued by the Australian Restructuring Insolvency & Turnaround Association 2015 at Pg 188.
    4. Exercising a casting vote in favour of a resolution to remain in office is generally acceptable if it can be shown to be in the interest of the administration of the company: see Krejci as liquidator of Eaton Electrical Services [2006] NSWSC 782.

Effective communication skills for solicitors

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Clear communication

Lawyers are not taught communication skills in university. It is something that they learn ‘on the job’ and often with little supervision. It is little wonder that it is the root cause for many complaints made by clients about their lawyers. This is most evident in the area of costs, where clients complain that the lawyer has failed to communicate the way that costs are calculated, or indeed that costs would be charged for certain work. It is for this reason that parliament has seen fit to legislate minimum levels of information that must be disclosed by a lawyer to a client in relation to costs.

Lawyers spend much of their time communicating with other lawyers, engaging in legal-speak. Successive generations of lawyers fall under this spell as it is assumed that something that has worked in the past will continue to work in the future. But this fails to recognise that society changes and as the wider community has become more educated it has been less prepared to accept the obfuscation of the legal profession’s modes of communication.

Lawyers need to recognise that modern clients want advice communicated to them in a language that they can understand. This applies to both face-to-face contact and written advice. Client interviews need to be conducted in an environment where the client feels relaxed and not intimidated and written advice needs to confirm the problem, summarise the applicable law and give the client clear alternatives for further action.

It goes without saying that the costs consequences of those actions needs to be clear.

Client interviewing – principles and techniques

The interview room

If it is accepted that a client needs to feel comfortable in an interview, then it is reasonably obvious that reasonable efforts should be taken to make the client feel comfortable and thereby to increase the prospects that the client will instruct – and continue to instruct – the firm. Simple things matter – like being on time, or having the client notified if you are delayed; offering the client a glass of water, or tea and coffee; taking the time to ask how their day has been before launching into the deepest secrets of their life.

Client may feel more comfortable in a dedicated interview room, with a ‘round-table’ environment, as opposed to an across-the-desk interview in the lawyer’s office. Many firms have adopted an interview room where the client can feel that they are participating in a process, rather than being subjected to an examination. Additionally, the absence of clutter – a perennial problem with lawyers’ offices – in a dedicated interview room allows the client to feel confident that the client is, at least for that moment, the sole focus of the lawyer’s attention, rather than just another of the lawyer’s many problems. It also suggests that the lawyer is well-organised and professional. However, a stark interview room with just table and chairs is not particularly inviting and efforts must be made to make the environment warm and friendly. Plants, cushions and some nice prints or photos can do wonders!

If a separate, dedicated room is not possible then the lawyer’s office should be as tidy as possible and any documents or files which might identify any other client must be removed or obscured. A client is hardly likely to be filled with confidence if they see other people’s personal details spread out on the desk so that they can see them – they instantly think that next week their details will be similarly exposed to the next new client.

Preparing for a client interview

Preparation is essential for a good interview. But this applies equally to both sides. The lawyer must be prepared with a basic idea of the matters to be discussed, but equally steps must be taken to prepare the client. Requesting that the client make some notes before coming to the interview, indicating the basic questions that will be asked and ensuring that the client brings any relevant information will aid in ensuring that the interview proceeds smoothly.

Review the By Lawyers Retainer Instructions before the conference – and use them in the client interview – to ensure that no relevant information or issues are overlooked. Also review the By Lawyers commentary for the area of law about which the client is coming to see you – having the law and practice fresh in the mind when taking instructions prompts the lawyer to ask the right questions and give the right advice.

Make sure you have sufficient time for the interview – don’t schedule appointments too close together, especially if you don’t really know what a client is coming to discuss. A complicated narrative which raises many issues cannot be squeezed into twenty minutes and once instructions are provided there may be consequent or urgent matters to attend to immediately.

Also make sure you will not be interrupted. If there are urgent things requiring your attention – a call to take, a document to sign – tell the client this at the start of the interview and seek their permission for you to attend as required. It will never be withheld, but it is courteous and professional to ask for it.

Taking a witness statement

All of the comments relating to client interviews apply equally to interviewing witnesses and taking their statements. Witnesses can be critical to a client’s case and should be treated with care and respect. Witnesses are also, frequently, future clients.

Interviewing and the use of interpreters

The need for an interpreter can dramatically complicate an interview. Lawyers can become frustrated by the ‘downtime’ involved in translations. Clients can be frustrated when, despite an interpreter, they feel disconnected from the interview. Extra care must be taken to ensure the client understands the advice and that clear, cogent instructions are received.

Expense often militates against a professional interpreter and a friend or relation of the client undertakes that role. This can lead to the interpreter putting their own ‘spin’ on the interview. Using a member of staff to interpret can overcome this difficulty but is not always possible and cultural differences can impact on that arrangement. Patience is required in abundance and consideration should be given to scheduling two interviews to obtain the information that might be obtained from one interview not involving an interpreter.

Giving advice – identifying options

There is never one answer to a legal question. Lawyers know that a decision may come down to a 4/3 split in the High Court, but clients believe that there can only be one answer and it will favour them. All possibilities, from the worst to the best, must be identified and then some attempt made to predict the most likely. The client must know and understand that the lawyer does not guarantee any particular outcome and that severe consequences may flow from an unfavourable decision. The lawyer must protect him or herself by a detailed letter setting out those possible results.

How can I be sure my client understands me?

Confirmation of oral advice in writing is the only way that a lawyer can prove the advice that was given. As to whether the client understands that advice, the lawyer can never be too sure. Asking a client in an interview may elicit a positive result and asking a client to sign and return a copy of the written advice will at least provide objective evidence of the advice. But there is no way of knowing absolutely that the client truly understands the advice.

One basic step that should always be taken is to ask a client if they can hear and see properly, if they can read and if they understand English. Many people are, for example, embarrassed that they cannot read, so asking them to read something is not a guarantee that they have understood it. If in doubt, ask questions – and make notes of having done so.

Plain language advice

One way of improving the possibility that the client will truly understand the advice is to adopt plain language. Lawyers who communicate in legalese including obtuse Latin phrases virtually sentence their clients to ignorance and it is accordingly hardly surprising that when the client gets a result that were not expecting, the client refuses to pay the bill and lodges a complaint. It can be even more rankling for the lawyer when the client achieves an outcome that the lawyer regards as successful, but the client still complains as the client has not been able to understand the advice and that a successful outcome has been achieved.

Plain language letter writing

Writing in plain language is simply writing from the recipient’s point of view and expressing yourself in clear, straightforward language within a structure that is simple and logical. Avoiding repetition and tautology – the lawyer’s favourite mistake – will go a long way to simplifying letters. Avoiding long paragraphs, by setting out a series of thoughts in dot-point form, will make the letter easier to read. Always think of it from the client’s point of view and write accordingly.

Negotiation – principles and techniques

Dealing with clients is only one of the essential skills that a lawyer requires. Dealing with other lawyers is another. The practice of law is about being able to sift from a set of facts what is important and what is not and then understand the possible legal consequences of those facts. There is never one legal answer, there are a range of possibilities and it is the lawyer’s function to achieve the best outcome for the client in the circumstances. This is where negotiation skills are important, again a skill that is not taught at law school and must be acquired on-the-job.

Negotiation – the principled approach vs. the positional bargainer

There are a range of methods of negotiation; from the bull-at-the-gate blusterer who tries to intimidate the opposition, to the silent assassin who lays in wait until the very last minute, then pounces. Most people however adopt a middle ground, designed to leave some room for the other side to manoeuvre in. Most experienced lawyers can pick a person operating at the edges and maintain their position, but occasionally the ‘positional bargainer’ will enjoy success. However that success is not usually repeated a second time round.

Brinksmanship is a common, but dangerous, negotiating tool. If adopted, always retain the means of climbing back from the brink and be prepared to eat humble pie if the need arises.

All the ethical constraints attached to court proceedings are equally applicable to the negotiation process as to any litigation at the end of that process: see for example Legal Practitioners Complaints Committee v Fleming [2006] WASAT 352 – probate matter, which also makes the point that merely attaching a ‘without prejudice’ label to communications will not excuse professional misconduct.

Mediation

The lawyer should be the ideal person to be involved in a mediation, either as a representative of a party or as a mediator. The lawyer is trained and experienced in distilling the important facts in any given situation and identifying the crucial issues. And the lawyer knows that achieving a 100% outcome from a legal dispute is at best, very expensive and at worse, very unlikely. Indeed, some lawyers have embraced the mediation model of dispute resolution very successfully, but the average lawyer is in fact not well suited to mediation. This is because the average lawyer still relies heavily on processes that delay decision making and serve to confuse and mystify participants. Mediation to such lawyers is an unwelcome challenge.

Clients are best served by lawyers who embrace and facilitate mediation.

That 90% of settlements appear to be achieved in the last half hour of an all-day mediation is probably no more due to the tactics of the lawyers than the intransigence of the clients.

A lawyer is prohibited from misleading their opponent during the conduct of court proceedings. That prohibition applies equally to mediation: Legal Services Commissioner v Mullins [2006] LPT 012 (Queensland).

Drafting terms of settlement

Terms of settlement can often be drafted in an emotional and stress-charged environment. Great care needs to be exercised and some preparation by way of having draft terms of settlement ready should always be undertaken.

A client must be provided with information relating to legal costs at the time of settlement: Section 177 Legal Profession Uniform Law.

Stamp duty concessions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Since the Stamps Act morphed into the Duties Act, it is not even correct to refer to the tax imposed on a transfer of land of land as ‘stamp duty’, however old habits die hard and it may take a generation or two to eradicate this habit. There is no particular justification for the government imposing a tax on this event, it is simply a convenient way for the government to raise revenue and given that the government controls the Titles Office, a citizen is not able to rely on the benefits of indefeasibility of title unless the tax is paid – a great incentive to compliance.

However various concession in relation to duty are recognised by the Act and duty may be exempt or reduced in transactions involving (amongst others) a trustee, domestic partners, family farm, principal place of residence and ‘off the plan’ sales.

Duty is normally calculated on the consideration paid for, or value of, the real estate transferred. This is generally represented by the contract price. However dutiable consideration does not include any amount paid in respect of a building to be constructed on the land after the date of the contract (s 21(3) Duties Act). This concession therefore means that the amount used for calculation of duty is not the contract price, but rather the contract price less the cost of construction works performed on the property between the date of the contract and the date of completion (Revenue Ruling DA.016). This reduction in duty is appealing to a purchaser in a transaction involving the sale of ‘yet to be constructed’ units and is therefore commonly referred to as an ‘off the plan’ concession, but it is not limited to transactions involving unregistered plans of subdivision. Indeed, in its simplest form, it applies to the sale of a stand-alone building sold prior to, or during the course of, construction. The cost of works performed after contract, and hence the amount available to reduce duty, will be greatest when the property is sold before construction has commenced and will gradually reduce as the purchase occurs later in time in the construction process, with no concession available if construction is complete when the contract is signed.

To establish the extent of the concession the purchaser must establish the cost of works performed during the contract and this is achieved by the vendor providing the purchaser with a Land & Building Packages statutory declaration (Form 4 available at www.sro.vic.gov.au). Completion of this form requires access to detailed cost of construction information, information that will not normally be available to the vendor’s solicitor. It requires the builder to have very precise information as to the cost of construction and to be able to apportion those costs to reflect the costs incurred after the date upon which the contract of sale was entered into. If the sale is of a stand-alone building these costs may be relatively simple to identify, but many of these transactions are as part of a multi-storey development and there may have been substantial infrastructure costs (including the cost of acquiring the land) incurred to reach the stage where the actual construction can commence. The calculations are complicated by the need to take account of the effect of GST on the actual cost of construction as well as on the sale price. The SRO does provide a ‘live’ version of the Form 4 on its website that will undertake the mathematical calculations when the information is entered. It is recommended that solicitors not attempt to prepare these forms but rather ensure that the builder/vendor fully understands the need to provide precise information.

A most unsatisfactory practice exists of including a figure in the contract of sale that represents a notional value of the land component of an off the plan sale. This figure is often as low as $40,000 and immediately creates a false impression in the purchaser that duty will be calculated on that figure. This is rarely so and results in a purchaser being liable to pay much more duty than was expected, a most unhappy turn of events. Inclusion of such amounts might in fact constitute misleading and deceptive conduct and whilst a vendor might protect itself by the inclusion of a ‘no representations’ clause, it recommended that a more generic clause, such as ‘the vendor will provide the purchaser with a statutory declaration establishing the cost of construction undertaken after the date of contract’ be included in such contracts.

The vendor’s obligation to provide a statutory declaration to the purchaser arises from Condition 12 of the Table, but if the purchaser nominates a substituted purchaser the vendor has no obligation to provide a second declaration detailing construction costs incurred after the nomination.

Tip Box

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

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