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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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