ByLawyers News and Updates

Subject to contract

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Whilst it is relatively simple to state legal principles, the application of those principles always depends upon the specific facts of the case. That is why it is not possible for a lawyer to advise a client what the outcome of any particular dispute will be. The best that we can do is weigh up the competing arguments and take our best shot – 80/20, 60/40, 50/50. It is for the client to decide whether they want to roll the dice and we then spend our time hoping to get a result.

One principle that is fairly well entrenched in the law relating to contracts for the sale of land is the need for the parties to have reached a concluded agreement and the unlikelihood of that requirement being satisfied if the negotiations between the parties include the expression ‘subject to contract’ and no formal contract is ultimately entered into.

Establishing the existence of a legally binding contract of sale is a serious matter for our courts and where one party to negotiations, let alone both parties, have included the phrase ‘subject to contract’ in their offer or acceptance it is usually concluded that the parties had not, as at that point in time, reached the point where they intend to be legally bound to proceed with the transaction. Faced with those facts, a reasonably experienced property lawyer would probably predict an 80/20 outcome in favour of NO CONTRACT.

BUT NO. The Queensland Supreme Court case of Stellard P/L v North Queensland Fuel P/L [2015] QSC 119 defied the odds and concluded that the negotiations had indeed been consummated notwithstanding the words ‘[T]his offer is of course subject to contract’ in the email containing the offer and the words ‘subject to execution of the contract provided’ being used in the subsequent email acceptance. Significantly, after acceptance of the offer, the purchaser submitted another form of contract and indicated that the purchaser was anxious ‘to exchange this contract as soon as possible’. The betting went to 90/10 at that stage but the result still went the other way.

It appeared significant that the vendor had another purchaser ‘on the line’ and appeared to be playing one off against the other, but that hardly seems sufficient to overcome what appeared to be a fairly clear case of both parties consciously delaying final commitment until the formal signing and exchange of contracts.

The case also considered the role of email communications in the exchange of contract environment. Victoria requires an enforceable contract to be signed by a party, or a person authorised in writing by the party, s 126 Instruments Act, and the Queensland provision requires signing by a party or a person authorised by a party. Both States have adopted the uniform Electronic Transactions Act.

There was no contest that the negotiators were authorised to bind the respective parties but the acceptance email made no reference to the representative character of the author. However the court was satisfied that this requirement could be satisfied by reference to surrounding circumstances, including telephone conversations and the offer email. This approach is reflective of the fairly ‘embracing’ attitude shown by courts to the adoption of the various Electronic Transactions Acts.

Tip Box

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

Directors beware

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

The Director Penalty Regime was introduced to give the Australian Taxation Office (ATO) power to make company directors personally liable for certain unpaid company taxation debts. It is imperative that company directors and their advisors understand the regime and its operation, in order that they can take steps to avoid personal liability.

In this newsletter, we discuss the operation of the regime, and most importantly, how director penalties are enforced. We also discuss changes to the regime introduced on 1 July 2012, which allow the ATO to hold a director personally liable even after an administrator or liquidator has been appointed to the company.

Imposition of Director Penalties

A director penalty is imposed on a director where certain company taxation debts remain unpaid at the end of the day on which they become due. A full listing of the taxation debts covered by the regime can be found in section 269-10 of Schedule 1 to the Taxation Administration Act 1953 (Cth), but the most common taxation debts to which the regime applies are PAYG withholding and superannuation guarantee charge. The regime also applies to estimates issued by the ATO in respect of these types of taxation debts.

For example, if a company withholds amounts from employee wages in respect of PAYG, the amounts withheld will become payable at a future date, known as the ‘due day’. If the withheld amounts are not paid to the ATO before the end of the due day, then a director penalty, equal to the amount of the unpaid PAYG is imposed on all directors of the company at the time the debt was incurred. The regime also applies to newly appointed or recently retired directors.

The due day for PAYG is usually the day on which a company’s BAS or IAS lodgement is due, and for superannuation guarantee charge it is one month and 28 days after the end of each financial quarter. Whilst a director penalty is imposed at this time, the ATO is prohibited from enforcing a director penalty until it has issued a Director Penalty Notice.

The director penalty and the corresponding company taxation debt are concurrent liabilities. If a company pays its taxation debt after a director penalty has been imposed under the regime, then the director penalty is also discharged to the same extent, and vice versa. Please note, discharging of a director penalty is different to remittance of a director penalty, which is discussed below.

Enforcement and Remittance of Director Penalties

The ATO must issue a Director Penalty Notice to a director and allow a period of 21 days before it can bring court proceedings against a director for the recovery of a director penalty.

The ATO is required to send a notice to the address of a director noted in the records maintained by the Australian Securities and Investments Commission, whether or not that address is current. The ATO may alternatively send notice to a director at their registered tax agent’s address.

Once a director penalty has been imposed by the ATO, there are 3 ways in which a director can have that penalty remitted, namely:

  1. causing the company to comply with its obligations to pay amounts to the ATO; or
  2. appointing a voluntary administrator to the company; or
  3. having a liquidator appointed to the company.

Directors should note that these remittance provisions are available prior to the issuance of a Director Penalty Notice by the ATO. It is appropriate for directors to consider exercising these options as soon as they become aware of taxation debts remaining unpaid after the due day.

If a valid Director Penalty Notice has been issued, and 21 days has passed since it was issued, the remittance provisions are no longer available to a company director, and either the company or the director must pay the amount due to the ATO.

Lock-Down Director Penalty Notices – The Importance of Reporting

If PAYG or superannuation guarantee charge remains unreported and unpaid for more than 3 months after the due day, a director is unable to have a director penalty remitted by the appointment of an administrator or liquidator. In these circumstances, the ATO must still issue a Director Penalty Notice, known as a Lock-Down Director Penalty Notice, and wait the required 21 days. Once the 21 days have passed, a director who receives a Lock-Down Director Penalty Notice must pay the director penalty, or cause the company to pay the corresponding company taxation debt.

It is important to note that the ATO is able to issue a Lock-Down Director Penalty Notice even after an administrator or liquidator has been appointed to a company, if applicable taxation debts that were not reported to the ATO within 3 months of the due day remain unpaid. The only way to avoid a Lock-Down Director Penalty Notice is to ensure that all company taxation debts are reported to the ATO within 3 months of the due day.

Defences to Director Penalties

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

  1. illness or incapacity (A director was unable to take part in the management of a company.);
  2. all reasonable steps (All reasonable steps were taken by a director to comply with his or her obligations, or no such steps were available.);
  3. superannuation guarantee charge – reasonably arguable position (A director adopted a reasonably arguable interpretation of superannuation guarantee charge legislation.).

Right of Indemnity and Contribution

A director that has paid a director penalty to the ATO, is entitled to recover that amount from the relevant company, in the same manner that a person can recover amounts paid under a guarantee of a company debt. A director that has paid a director penalty is also entitled to recover amounts from anyone that was also a director at the time the corresponding company taxation debt was incurred, as if all those directors were joint and several guarantors.

PAYG Withholding Non-Compliance Tax

Whilst not technically part of the regime, the PAYG withholding non-compliance tax was introduced with Lock-Down Director Penalty Notices. This new tax allows the ATO to deny a director, or their close associates, tax credits in their personal tax returns, where the PAYG withholding amounts have not been paid to the ATO. If a director has been issued a Director Penalty Notice, then they can also be denied credits on their personal tax return, for the same underlying principle company PAYG debt, in effect causing a director to pay twice at the same time. Of course if such a director does pay both amounts, it would be expected that they would obtain the benefit of the denied credits in the following period.

Garnishee on Directors’ Bank Accounts

Garnishees allow the ATO to compel payment from a third party that holds amounts due to, or on behalf of, a taxpayer that is indebted to the ATO. Once a Director Penalty Notice has been issued, and the 21 day period has expired, the ATO is entitled to seek a garnishee order against any third party that owes money to, or holds money on behalf of, the relevant director, including a director’s personal bank accounts.

Conclusion

The ATO will not hesitate to use the regime, and in particular Lock-Down Director Penalty Notices, as it is the only legislative method by which the ATO can hold a director personally liable for company debts. Directors and their advisors should ensure that timely and accurate financial information is available to facilitate prompt action when a company begins to have difficulty meeting its taxation obligations, or a director risks becoming personally liable.

The introduction of Lock-Down Director Penalty Notices to the regime means that reporting of taxation debts to the ATO is more important than ever. The looming spectre of a LockDown Director Penalty Notice should motivate all company directors to ensure that taxation debts are reported to the ATO on time, regardless of whether they are able to pay the debts being reported. Once the hard deadline of 3 months past the due day has expired, there is nothing a company director can do to avoid personal liability.

Avoiding off the plan contracts – Statutory rights

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Contracts that relate to the sale of land prior to approval of a plan of subdivision are the subject of ss 9 and 10 of the Sale of Land Act. Whilst not specifically defined as such, Off the Plan contracts are referred to as ‘prescribed contracts’ s 9AA(7).

Section 9AA

This essentially relates to the deposit that is payable under a prescribed contract.

A prescribed contract must provide that the deposit be held on trust for the purchaser pending registration of the plan, s 9AA (1)(a), and limits the deposit to a maximum of 10% of the purchase price, s 9AA(1)(b). For an abundance of caution s 9AA(2) provides that the deposit must in fact be paid into a trust account.

Failure by the vendor to comply with s 9AA(1) or (2) entitles the purchaser to rescind the contract at any time before the registration of the plan – s 9AE.

The Law Institute of Victoria copyright contract includes the required conditions.

Section 9AB

Creates an obligation on the vendor of a prescribed contract to disclose in the contract, s 9AB(1), and as an ongoing obligation during the contract, s 9AB(2), works affecting the natural surface level of the lot or adjoining land.

Breach of this obligation also justifies rescission under s 9AE. It is common in large scale land subdivision to see these ‘fill plans’ as land subdividers effectively push and pull land around to create relatively flat building allotments. Purchasers are entitled to know where large amounts of fill may be deposited as this can have a substantial effect on building costs. But it is rare to see ‘fill plans’ in sales of residential units. Everest Projects P/L v Mendoza [2008] VSC 366 accepted the argument that lots on upper floor did not have a ‘natural surface level’ for the purposes of this requirement, reserving for another day any argument about lots that may be constructed or adjoining ground level.

Section 9AC

The amendment of a plan of subdivision in a prescribed contract between the date of the contract and the time of registration of the plan of subdivision may justify rescission.

The sub-section envisages the possibility of an amendment arising from the actions of one of two sources:

  1. the Registrar of Titles may ’require’ an amendment; or
  2. the vendor may ‘request’ an amendment.

The vendor is obliged to ‘advise the purchaser in writing of the proposed amendment’ and that advice must be provided within 14 days of the registrar’s requirement or the vendor’s request.

The purchaser’s right to end the contract pursuant to s 9AC does NOT end upon registration of the plan. It ends 14 days after sufficiently specific advice of the proposed amendment is provided to the purchaser. If the vendor has amended the plan after contract and has not provided the purchaser with any, or any sufficient, advice about the amendment then the purchaser remains entitled to end the contract within 14 days of receiving such advice. If the vendor advises the purchaser that the plan is registered the contract will generally require the purchaser to settle within a period of 7 to 14 days from advice of registration. The purchaser must at that stage satisfy itself in relation to amendments as the purchaser is contractually bound to settle unless the purchaser can rely on this statutory right to avoid, which right has survived registration of the plan.

The mere provision of an amended plan by the vendor without more might not satisfy the vendor’s advice obligation.

Once advice is given by the vendor to the purchaser, the purchaser has 14 days in which to rescind the contract, but may only do so if the amendment ‘materially effects’ the lot Besser v Alma Homes P/L [2012] VSC 460 held that an amendment to the entitlement and liability Schedule materially affected the purchaser’s lot and the purchaser was entitled to rescind.

Lockwood v PSP Investments P/L [2013] VSC 10 held that a change in car parking arrangements was ‘material’. The Court held that the purchaser satisfied the sub-section by proving ‘material effect’ and did not have to additionally prove detriment. Other changes to the plan were held to be not ‘material’ and reference in this regard was made to Gold Coast Carlton P/L v Wilson [1985] Qd R 182 where minor changes to anticipated Owners Corporation charges were NOT material.

These provisions put a heavy burden on purchaser’s advisors in respect of checking registered plans against contractual plans.

Section 10

That we have both s 9AC and s 10 is probably a legislative quirk and there would be benefit achieved if they could be merged as they both address amendments to the proposed plan of subdivision. Importantly, s 10 is limited in its application to PRIOR to registration of the plan and if the purchaser has not exercised the s 10 rights before registration, those rights expire.

Section 10 has a ‘restriction’ focus and in fact excludes restrictions imposed by a public authority as part of the subdivisional process from justifying avoidance. However such a restriction would generally ‘materially effect’ the lot and s 9AC would apply.

Section 9AE

Section 9AE(1) is the penalty provision for breach of other provisions and allows for rescission for breach of s 9AA(1) or (2) or s 9AB.

Section 9AE(2) is a stand-alone provision creating an obligation and a right to rescind for breach. The obligation is to have the plan registered within what is known as a sunset period, being 18 months from the date of the relevant contract or such other date as is specified in the contract.

Solid Investments P/L v Clifford [2010] VSCA 59 established that whilst the vendor is free to nominate in the contract a period other than the default period of 18 months established by the sub-section, that nominated period is fixed and cannot be unilaterally extended by the vendor.

Tips

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

Avoiding off the plan contracts – Quality defects

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Quality disputes in off the plan contracts often relate to the size of the finished product

A summary of the provisions of the Sale of Land Act 1962 that allow for avoidance of off the plan contracts was published in the May 2015 Law Institute Journal. Those provisions only relate to a purchaser’s complaints with the terms of the contract, changes to the plan of subdivision or failure to complete the project within the permissible time. Those provisions do not assist a purchaser who is concerned with the end product presented by the developer at the time of settlement.

These disputes relate to the quality of the final product and generally contrast the developer’s commercial aspirations with the purchaser’s aesthetic aspirations. The purchaser was provided with architectural drawings, artist impressions, glossy brochures and perhaps even video impressions upon which the purchaser constructed a home in the sky, but the developer had a black and white construction contract with the builder and a tightly controlled budget. Inevitably, expectation comes up against the rock hard face of reality and tears are often the result.

Developers may include a self-serving ‘entire contract’ Special Condition in the contract in an attempt to quarantine these marketing tools but that is not likely to be successful – Nifsan Developments P/L v Buskey [2011] QSC 314. Thus the dissatisfied purchaser waves the marketing publications and complains that the finished product that the developer wants to be paid for ‘next week’ is nothing like the apartment that the purchaser was expecting.

Apart from the lack of panoramic views which were promised by the development (as in Nifsan), the most common complaint is size. The purchaser is often appalled when the actual size of the built apartment is substantially less than their expectations and the existence of architectural drawings can lend some weight to those complaints. The problem is that there are at least three methods of measuring the area of a building and inevitably the developer will have adopted the ‘external walls’ method and the purchaser will wish to adopt the ‘internal walls’ method. Purchaser’s financiers seem to adopt the third method which might be described as the ‘minimalist’ method, which focuses on useable space.

A purchaser was successful in avoiding a contract in such circumstances in Birch v Robek Aust P/L [2014] VCC 68. Because the vendors in these transactions will generally be engaged in trade and commerce, the provisions of the Australian Consumer Law will apply. This provides the purchaser with a whole suite of rights and remedies beyond those available in relation to a quality dispute under the common law, limited as it is by the principle of caveat emptor.

The court considered the purchaser’s claim based on the Australian Consumer Law and held that the marketing information, specifically the architectural plans with dimensions of the apartment, gave the purchaser an entitlement to expect that the final product would be reasonably consistent with those plans. That the developer might have intended the dimensions shown on those plans to be the external dimension of the building and that the purchaser expected them to represent the internal dimensions was not relevant when the court was satisfied that the actual dimensions were substantially less than the plans represented.

On one method there was a deficiency of 16%, on another 12% and on the developer’s method, 2%. The court was satisfied that the discrepancy exceeded 5% and adopted the principle in Flight v Booth (1834) 131 ER 1160 that such a discrepancy justified avoidance. The court also found a breach of the Australian Consumer Law which would justify avoidance. Arguably, such a breach might also form the basis for a claim for compensation by a purchaser who resolved to settle notwithstanding some deficiency.

This decision may be compared with Sivakriskul v Vynotes P/L [1996] VicSC 479 (unreported) that was apparently not cited to the court. The decision denied a purchaser’s claim and adopted the ‘external walls’ method, although that decision was made prior to the introduction of the Australian Consumer Law.

Tips

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

Winding up a corporate trustee

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

Introduction

Winding up a company that acts as the trustee of a trust is a common occurrence. Many of the underlying principles in liquidating a corporate trustee have long been established. However, the circumstances in which a liquidator has the power to deal with trust property still lack clarity. This has been highlighted in the conflicting decisions of the court that were handed down late last year; the first in the Federal Court of Australia in Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670, the second in the Supreme Court of New South Wales in the matter of Stansfield DIY Wealth Pty Limited (in liquidation) [2014] NSWSC 1484 (30 October 2014).

South West

The facts

The liquidator of South West sought directions from the court that he had the power to sell trust property pursuant to s 477(2)(c) of the Corporations Act 2001. The application was made in circumstances where there were potentially conflicting authorities as to the power of a liquidator in dealing with trust property. At the time of the Liquidator’s appointment:

  1. South West was trustee of the South West Kitchen Unit (Hybrid) Trust (the trust).
  2. All of the assets of South West were owned in its capacity as trustee of the trust.
  3. The trust deed for the trust provided that upon liquidation, South West was disqualified from acting as trustee.
The law

The ‘foundational concepts’ based on existing authorities were set out in the judgment of McKerracher J, delivered on 24 June 2014. These concepts are summarised as follows:

  1. A trustee has a right of indemnity out of the trust assets for expenses and liabilities incurred on behalf of the trust and a right of exoneration from liability.
  2. A trustee is entitled to the benefit of an equitable lien over the trust assets as a means of securing its rights of indemnity and/or exoneration.
  3. When a liquidator is appointed to a trustee company, the liquidator acquires the same rights of indemnity and exoneration.
  4. The equitable lien securing the trustee’s right of indemnity and exoneration does not give the (removed) trustee power of sale. Rather, it is a security which is enforceable by the trustee only by way of judicial sale or by the appointment of a receiver with a power of sale.

According to his Honour, the issue arising beyond these concepts and on which there may be some doubt in the authorities, is whether the liquidator of a trustee company that is unable to continue acting as trustee:

  1. can exercise the power of sale granted to liquidators pursuant to s 477(2)(c) of the Act;
  2. is required in each instance to obtain a court order to sell trust assets.

His Honour expressed the view that the operation of s 477(2)(c) in these circumstances had not been expressly considered in previous judgments, except in the decision of Finkelstein J in Apostolou v VA Corporation AUST Pty Ltd [2010] FCA 64A (Apostolou). In that case, his Honour found that the liquidator had a dual power to realise trust assets in the course of winding up a company which acted as trustee, where the company has both legal title and an equitable interest in the trust assets; that power being conferred pursuant to the trust deed and also pursuant to s 477(2)(c) of the Act.

The decision

In delivering his judgment, his Honour followed the decision in Apostolou, finding that:

  1. South West had both legal ownership of the assets of the trust as a bare trustee and beneficial interest in the assets as a holder of an equitable lien.
  2. There is no reason in policy or principle and none referred to in the authorities discussed, as to the why a liquidator’s powers of sale should be limited by the terms of a private trust agreement.
  3. There appears to be no constraint on the power of sale under s 477(2)(c) of the Act, nor does it impose any limitation on the power of sale insofar as the assets of a company held on trust.
  4. In the absence of any statutory constraint or other complication, there appears to be no other reason why a liquidator ought not be permitted in a straightforward case to discharge their duties to conduct the liquidation in the ordinary manner.
  5. Proceeding this way makes good practical sense avoiding the need for liquidators of trustee companies to approach the court on every occasion to seek approval to sell trust assets.

Accordingly, his Honour declared that the liquidator had power pursuant to s 477(2)(c) of the Act to sell, dispose or otherwise deal with the assets of the trust.

Stansfield

The facts

The liquidator of Stansfield sought directions from the court to the effect that the company in liquidation be permitted to sell or otherwise deal with the property of a superannuation fund. This application was no doubt filed in light of the potentially conflicting authorities but with the added complication that the property in question was held on account of a superannuation fund. At the time of the liquidator’s appointment;

  1. Stansfield was acting as trustee of the Elliot Stansfield Super Fund, a regulated selfmanaged superannuation fund (the fund).
  2. The assets of the fund totalled $108,916.
  3. The liabilities of the fund totalled $98,941.
  4. The only function of Stansfield was to act as trustee of the fund.
The law

In his judgment delivered on 30 October 2014, Brereton J said that there were two relevant potential scenarios; the first that the company in liquidation remained as trustee of the fund and the second, the company in liquidation does not remain as trustee of the fund.

The company in liquidation remaining as trustee of the fund

In relation to the first scenario, his Honour concluded that so long as the company in liquidation remained as trustee of the fund, then the liquidator was entitled (subject to the impact of superannuation laws) to administer the assets of the fund, pay the creditors of the fund, wind up the fund and recover all of his remuneration and expenses from the assets of the fund.

The company in liquidation not remaining as trustee of the fund

In relation to the second scenario, his Honour essentially agreed with the foundational concepts set out in South West which are summarised above. His Honour then when on to consider the possible application of s 477(2)(c) of the Act in light of the relevant case law and particular, the judgments delivered in Apostolou and South West.

The conclusion reached by his Honour was that he respectfully disagreed with the decision in Apostolou, finding instead that s 477(2)(c) does not empower a liquidator to sell the beneficial interest in property that a company holds on trust even if the company holds an equitable charge over that property because the property is not itself ‘property of the company’. To put that another way, a liquidator’s power to deal with property does not extend to property that is not beneficially the property of the company.

The impact of superannuation law

His Honour was obliged to also consider the operation of the Superannuation Industry (Supervision) Act 1993 (SISA) concluding that a company in liquidation becomes a ‘disqualified person’ for the purposes of that legislation but notwithstanding, remains as trustee of the fund. However, by continuing to be and act as trustee, a company contravenes s 126K of SISA and thereby commits an offence. If, as would be prudent, a company resigned as trustee once a liquidator has been appointed to it, then the liquidator would have no power of sale.

The decision

In light of the foregoing, his Honour declined to make the direction sought by the liquidator. Rather, his Honour proposed to make declarations and orders pursuant to s 479(3) of the Corporations Act 2001 to the following effect:

  1. The liquidator would be justified in causing the company to resign as trustee of the fund.
  2. The liquidator would be justified in applying to the court to be appointed as receiver without security of the assets of the fund with the powers that a liquidator has in respect of the property of a company under s 477(2)(c) of the Act.

Conclusion

It is obvious from these judgments that the law is not settled in relation to dealing with trust property in circumstances where the trustee company has been wound up and is no longer acting in that capacity. The decision in South West is commercially sensible and avoids the need for a liquidator of a trustee company to approach the court on every occasion trust property is to be sold. This of course conflicts with the judgment in Stansfield. This conflict needs to be resolved either by the legislature or the High Court of Australia. In the meantime, a liquidator appointed to a trustee company will be subject to the law of trusts in the particular state in which he or she practises and will need to seek legal advice as to the appropriate way to deal with trust assets. The partners of O’Brien Palmer are presently minded to follow the process in Stansfield until such time as they are advised otherwise.

Retail repairs

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Victorian Civil and Administrative Tribunal (VCAT) has published an advisory opinion on the interaction between the obligations created in respect of essential safety measures by the Building Regulations 2006 and the landlord’s repair obligations pursuant to s 52 Retail Leases Act 2003. Whilst nominally only an advisory opinion and therefore not binding, the fact that the opinion was given by the President of VCAT, Justice Greg Garde, makes it reasonable to expect that it will carry significant weight if these matters come to be considered by VCAT or the Supreme Court in the future.

Building Regulations 2006 and preceding regulations create obligations to maintain essential safety measures in respect of various categories of premises. These regulations in turn rely on s 250 of the Building Act 1993 to allocate responsibility for the carrying out of those works on the owners of the premises and s 251 provides that if the owner does not carry out the work, the occupier may do so and recover the cost from the owner.

Section 52 Retail Leases Act 2003 creates repair obligations on the owner of the premises in respect to the structure, the fixtures, the equipment and the fittings. The obligation is to maintain the premises in a condition consistent with the condition of the premises when the lease was entered into, however if the lease was renewed the relevant comparative condition is the condition at the time of renewal Ross-Hunt P/L v. Cianjan P/L [2009]VCAT 829.

At first blush it would appear that these two obligations are entirely consistent and place those obligations firmly on the owner/landlord. However it was suggested that whilst the obligation to perform the work fell upon the landlord, the lease might nevertheless allow the landlord to recover the cost of those works from the occupier/tenant as ‘outgoings’. The Advisory Opinion decided that such a provision in a lease would be inconsistent with s 251(6) that provides that the s 251 applies ‘despite any covenant or agreement to the contrary’. This principle would apply equally to a lease that was covered by the Retail Leases Act as to one that was not covered by the Act.

Further, the Advisory Opinion concluded that s 52 Retail Leases Act 2003 strengthened the argument that the landlord was responsible for the maintenance of essential safety measures and is prohibited from seeking to pass those costs on to the tenant.

It may therefore be concluded that any attempt in a lease of commercial premises to pass to the tenant the cost of compliance with the landlord’s obligations under the Building Regulations will be void. This is because such a provision is inconsistent with s 251 Building Act and in respect of premises subject to the Retail Leases Act, is also contrary to s 52 of that Act.

Tip Box

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

Why would anyone want to be a director?

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

A GUIDE TO DIRECTOR’S DUTIES

Introduction

Many people who accept an appointment as a company director or secretary are completely unaware of the potential risks they face from personal liability, civil penalty or criminal conviction. These risks arise primarily from failing to comply with statutory duties contained within the Corporations Act 2001 (‘the Act’) that largely mirror those duties which have been enshrined in the Common Law. In addition to those duties, there are a plethora of obligations imposed upon directors by other state and federal legislation such as taxation laws, employment standards, work health and safety regulations, environmental protection measures, consumer protection strategies, Australian Stock Exchange listing rules for publicly listed companies and privacy protocols.

In short, a person acting as a director should take his or her duties seriously. This is especially true in times of financial difficulty. This newsletter will concentrate on the duties of directors, other officers and in some cases employees as set out in the Act and the potential liability for breaching those duties.

Who has a duty to comply?

It is important to consider the persons who are obligated to comply with their statutory duties. Section 9 of the Act defines ‘officer’ to include a director, secretary or any person who acts in the position of a director, regardless of the name that is given to their position. A person who acts in the position of a director is often referred to as a ‘shadow-director’. It is worth noting that external administrators are similarly subject to the same duties as officers.

Directors duties

General Duties – Civil Obligations

Set out in the table below are the duties of company officers which if contravened, give rise to civil obligations.

Duty Relevant Information
Care &
Diligence
Section 180(1)		 An officer of a company must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would in the same circumstances.
Defence
Section 180(2)		 Business Judgement Rule – A person who makes a “business judgment” does not breach their duty, if they:

make the judgment in good faith for a proper purpose; and

do not have a material personal interest in the subject matter of the judgment; and

make an informed decision; and

rationally believe that the judgment is in the best interests of the corporation.
Good Faith
Section 181		 An officer of a company must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.
Use of
Position
Section 182		 A person who is an officer or employee of a company must not improperly use their position to:

gain an advantage for themselves or someone else; or

cause detriment to the company.
Use of
Information
Section 183		 A person who obtains information because they are, or have been, an officer of a company or an employee must not improperly use that information to;

gain an advantage for themselves or someone else; or

cause detriment to the company.

If a person does not meet these requirements, and the Court is satisfied that the person has contravened one of the sections, then the Court can make a declaration of contravention pursuant to section 1317E of the Act, and:

  1. impose a fine of up to $200,000 (section 1317G of the Act); and
  2. disqualify a director from managing companies (section 206C of the Act).

The Courts are also able to impose other remedies for breach of duty. Section 598(2) of the Act provides that where the Court is satisfied that a person is guilty of fraud, negligence, default, breach of trust, or breach of duty and the company has suffered or is likely to suffer loss or damage as a result, then the Court may, on the application of either the Australian Securities and Investments Commission (‘ASIC’), an Administrator, a Liquidator or a person nominated by ASIC, make an order pursuant to section 598(4) of the Act directing that person:

  1. to pay money or transfer property to the company; and
  2. to pay to the company the amount of the loss or damage.
General Duties – Criminal Offences

Section 184 of the Act effectively states that an offence is committed if a person recklessly or dishonestly breaches sections 181, 182 or 183 of the Act. Persons who commit these offences may be criminally liable and be fined amounts up to $220,000 and/or be imprisoned for up to five years.

Insolvent Trading

Section 588G(1) of the Act imposes a duty on directors to prevent their companies from trading whilst insolvent. This section applies if a person was a director of a company at the time when the company incurs the debt and is insolvent at that time or becomes insolvent as result of that transaction and the director had reasonable grounds to suspect the company was insolvent or would become insolvent as a result of entering that transaction.

Breaching this duty can result is in ASIC seeking from the Court a declaration of contravention against a director and the imposition of a civil penalty pursuant to sections 1317E and 1317G of the Act. In addition and on an application for a civil penalty order, the Court has the power pursuant to section 588J of the Act to make orders:

  1. disqualifying a person from managing companies (section 206C of the Act); and
  2. requiring a person to pay to the company compensation equal to the loss or damage suffered by the company.

A breach of this duty is a criminal offence pursuant to section 588G(3) of the Act if the failure to prevent the company from incurring the debt was dishonest. Furthermore and in the event of liquidation, if a director has breached this section, then pursuant to section 588M(2) of the Act, the company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the loss or damage suffered by the company. Alternatively, a creditor of the company, may with the consent of the liquidator, begin proceedings pursuant to section 588M(3) of the Act to recover from a director as a debt due to the creditor, an amount equal to the loss and damage suffered by the creditor directors who are the subject of claims in relation to insolvent trading may be able to avail themselves of the defences which are set out in section 588H of the Act.

Maintenance of Proper Books & Records

Section 286(1) of the Act imposes an obligation on company directors to maintain adequate books and records that:

  1. correctly record and explain its transactions and financial position and performance;
  2. enable true and fair financial statements to be prepared and audited.

This obligation extends to transactions undertaken by a company as a trustee.

Section 286(2) requires that the books and records of the Company be maintained for a period of seven years. Pursuant to sections 344 and 1317E of the Act, the penalties for breaching these duties may include:

  1. the imposition of a fine of up to $200,000 (section 1317G of the Act);
  2. disqualification from managing companies (section 206C of the Act).

Section 588E(4) of the Act provides that where a company is being wound up, and in circumstances where that company has failed to maintain proper records or retain them for the requisite period, then the company will be presumed to be insolvent for the period for which the records are not available. This can give rise to serious consequences where it is being alleged that a director has allowed a company to trade whilst insolvent.

Click here to view ASIC website – What books and records should my company keep?

Trust liabilities

Corporate trustees are very common. Pursuant to section 197 of the Act, where a company is acting as or purporting to act as trustee and incurs a liability which it cannot meet, a director of that company can be held liable to discharge the whole or part of the liability if the company is not entitled to be fully indemnified against the liability out of trust assets because of one or more of the following:

  1. the company has breached its trust;
  2. the company was acting outside the scope of its powers as trustee;
  3. a term of the trust denying, or limiting, the company’s rights to be indemnified against the liability
General Requirements

In addition to the foregoing, the Act requires directors to:

  1. update the company database maintained by ASIC as required to ensure its accuracy in accordance with sections 142, 146, 168, 205B, and 205D of the Act.
  2. comply with all reasonable requirements and provide proper assistance to validly appointed external administrators pursuant to sections 475 and 530A of the Act.
  3. refrain from acting as a director of a company, whether formally appointed or not, if excluded from doing so pursuant to sections 206B and 206C of the Act. This most relevantly excludes bankrupts or anyone who has entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966.
  4. disclose to other directors of their companies any potential material conflicts of interests that they might have in relation to the conduct of their duties as director in accordance with sections 191 – 195 of the Act.

External administrators’ obligation to report to ASIC

A liquidator, in carrying out an investigation into the affairs of a company and the conduct of its principles, has a statutory duty pursuant to section 533 of the Act to file a report with ASIC if the expected dividend is less than 50 cents in the dollar, setting out any identified potential offences or breaches of duty committed by officers, employees or shareholders of a Company. At its discretion, ASIC may require the liquidator to submit a supplementary report particularising the alleged offences or breaches of duty, and may also provide funding for that purpose. Similar provisions apply to a voluntary administrator or receiver if appointed.

Conclusion

If company officers and employees adopt ethical and prudent business practices, then they are unlikely to breach their statutory duties. ASIC has issued an explanatory memorandum as to the general duties of directors and other officers, those duties being summarised above. In the summary, ASIC advises that company officers can greatly reduce their exposure by having appropriate insurance, and if they carry out their duties by;

  1. being honest and careful in their dealings.
  2. remaining active and involved in the company’s operations.
  3. making sure that their companies can pay their debts on time.
  4. maintaining proper financial records.
  5. acting in the best interests of their companies.

As always, directors should take appropriate professional advice from their accountants, solicitors and advisors if they are in any doubt as to their duties, or as to the consequences of potential breaches.

Click here to view ASIC website – Your company and the law

Owners corporations

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law has a number of special requirements when a property that is affected by an owners corporation is going to be sold. These requirements can mean that the preparation of the obligatory Vendor’s Disclosure Statement is delayed until an Owners Corporation Certificate is obtained from the owners corporation manager and may require the vendor to pay an insurance premium that the vendor was not expecting.

Owners Corporation Certificates

Many owners corporations are well managed, either by a ‘local’ manager who is one of the owners or by a ‘professional’ manager engaged for that purpose. Generally speaking large scale apartment developments retain a professional manager who will provide an Owners Corporation Certificate for a fee and even the smaller managers usually undertake this task expeditiously. The fee is approximately $150 in respect of each owners corporation and the certificate is usually provided within 10 days of request.

However not all owners corporations have appointed managers. Smaller, two, three and four lot owners corporations may have existed for many years without an operational owners corporation. This presents a problem in relation to provision of an Owners Corporation Certificate. A common way of overcoming this problem was for the vendor’s solicitor to prepare and have the vendor sign a standard Owners Corporation Certificate revealing no meetings, no fees and no insurance and include it in the Vendor’s Statement. However, as a result of amendments in 2014, such an owners corporation has been deemed to be ‘inactive’ and no Owners Corporation Certificate is required. This has simplified the situation in relation to TWO lot owners corporations.

However this option is not available for the sale of a lot in an owners corporation of more than two lots as s 11 of the Sale of Land Act requires that a vendor of a lot affected by an owners corporation must ensure that the owners corporation has insurance in place as required by the Owners Corporation Act. In addition s 60 of the Owners Corporation Act REQUIRES the owners corporation to take out public liability insurance in respect of common property (such as a common driveway). TWO lot plans are exempt from this requirement, s 7, and may therefore be exempt from providing an Owners Corporation Certificate if otherwise ‘inactive’; that is they have not met and have no fees.

Insurance

The difficulty with an owners corporation of more than two lots that does not have a manager is that no-one will have arranged this common property insurance. Individual owners simply pay their own building insurance and no common property insurance is taken out. Indeed an individual owner will often make the point that a careful inspection of their individual building insurance policy reveals that it extends to cover the owner’s liability in relation to common property. But that is irrelevant as the Act requires the owners corporation to ‘have’ the insurance, not the individual owner. That there is likely to be ‘double insurance’ in such cases is equally irrelevant.

Many owners corporations ignore this common property insurance obligation for many years with no consequence. But the problem arises for any owner who decides to sell. Section 11 of the Sale of Land Act requires that the insurance be in place at the time of sale and gives the purchaser the right to AVOID the contract at any time up until settlement if the insurance is not in place. No vendor can afford to knowingly enter into a contract that can be avoided by the purchaser at any time; therefore compliance with s 11 is practically mandatory.

The vendor is under time pressure to organise this common property insurance quickly as the sale process has begun. Whilst it is possible for the vendor to approach other owners to contribute to this insurance, that often does not work out as the other owners may not be contactable or may have no interest in contributing to this expense which, unless they too propose to sell, holds no real benefit for them. The selling owner then generally arranges the insurance at their own expense so that the proposed sale can proceed and is very unhappy about having to incur this unexpected expense (usually around $500). Whilst the vendor is able to require the purchaser to contribute to this expense in relation to the balance of the year after settlement as part of the adjustment process, this can only be for a proportional share of the premium based on the number of lots in the plan. Only the proportion that relates to the lot sold can be adjusted and the vendor has to bear the balance of the premium if the vendor is unable to recover a contribution from other lot owners, which is unlikely.

A halfway house in this scenario is that one of the owners, whilst not acting as a manager, has arranged common property insurance and other owners have contributed to the cost. In that case the vendor can provide an informal Owners Corporation Certificate setting out the insurance particulars and a statement that for all other purposes the owners corporation has been ‘inactive’.

Practitioners are invited to photocopy this explanation and send it to clients in appropriate circumstances.

Tip Box

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

Mortgage stress

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Whilst there is considerable consistency between the property laws of Victoria and New South Wales, there are also significant differences.

Some differences in practice are:

  • nomination in New South Wales is virtually unheard of as it creates a second duty, but is common in Victoria as it does not; and
  • deposit release is prohibited in New South Wales but common in Victoria.

Some differences in the law are:

  • acquiring an easement by prescription is banned in New South Wales but still available in Victoria; and
  • there is no equivalent in New South Wales to Victoria’s statutory right to clawback fraudulent transactions s 172 Property Law Act 1958.

Perhaps the best known example of the difference was the view previously held in New South Wales that the existence of an illegal structure on land constituted a defect in title and allowed a purchaser to avoid the contract. This was in contrast with the Victorian view that such a defect was merely a quality defect and that the vendor was protected by the principle of caveat emptor. The New South Wales view was ‘corrected’ (that is; brought in line with Victoria) by the Court of Appeal in Carpenter v McGrath 40 NSWLR 39 and consistency has reigned since.

In recent years a significant difference has again occurred with New South Wales taking a ‘radical’ view of the impact of fraud in certain mortgage transactions. In both jurisdictions it is accepted that whilst fraud is an exception to indefeasibility, nevertheless registration of a fraudulent instrument by a party who was not party to the fraud will be indefeasible. Mortgagees have therefore been able to rely on mortgages that have been fraudulently signed provided that the mortgage was registered and the mortgagee was not itself a party to the fraud. However in New South Wales an argument was accepted that it was possible to look ‘behind’ the mortgage at the document that constituted the agreement to repay as it was that document that created the obligation that justified the mortgagee’s security interest and the extent of the mortgagor’s covenant to repay was to be determined by a consideration of the contractual agreement between the parties.

If that contract (loan agreement) created an obligation to repay a specific amount then the covenant to pay protected by the indefeasible mortgage was enforceable. However if the loan agreement referred to an ‘all monies’ mortgage relating to past and future advances then it was said that the mortgagor’s covenant to pay arose contractually from the ancillary documents that related to the actual advances and that if those documents were fraudulent then the covenant to repay arose outside of the protection of the indefeasible mortgage. Essentially, it was said, no money was advanced pursuant to an ‘all monies’ mortgage as the money was advanced pursuant to forged documents.

Victorian mortgagees quaked in trepidation as an army of decisions mounted on the north bank of the Murray River set to wreck havoc on Victorian all money mortgages but Pagone J. in Solak v Bank of Western Australia [2009] VSC 82 manned the ramparts and beat off the hordes by upholding an all monies mortgage and the lenders breathed a sigh of relief. However a Trojan Horse has appeared in the form of Perpetual Trustees Victoria Limited v Xiao [2015] VSC 21. Hargrave J. has adopted the New South Wales analysis of an all monies mortgage and has described the decision in Solak as ‘plainly wrong’.

The scene is now set for a definitive decision by the Victorian Court of Appeal on what is an important point of law. According to Xiao a mortgagee of a forged all monies mortgage is not able to enforce the mortgage or undertake a mortgagee’s sale. Whether confirmation of Xiao will have retrospective repercussions is a matter for the future.

The mortgagor’s victory in Xiao was somewhat pyrrhic as Hargrave J. went on to find that Xiao in fact held the property on trust for the forger (her husband) and that the lender was entitled to judgment against the husband, who had also been joined as a defendant. Hargrave J. was obliged to overcome the presumption of advancement applying to a transfer from husband to wife but did so by finding adequate evidence that it had been the intention of the husband at the time of transfer to retain the beneficial interest in the land.

The mortgagee would therefore be faced with the need to enforce this judgment by way of a Warrant of Execution rather than a mortgagee’s sale. The mortgagee’s possession of the certificate of title would aid that exercise.

Tip Box

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

Income contributions and accumulated savings in bankruptcy

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

Introduction

Debtors facing bankruptcy often ask questions about the amount of income they can earn as a bankrupt and whether they can retain surplus income that might be accumulated during the period of their bankruptcy. The purpose of this newsletter is to explain the operation of the income contribution assessment regime and the manner in which a trustee is required to deal with any accumulated savings.

Income

Pursuant to sub-section 139W(1) of the Bankruptcy Act 1966 (“the Act”), a trustee is required to make an assessment of the income of a bankrupt that is likely to be derived or which was derived during the bankruptcy period. In practice, at the commencement of the bankruptcy and then every year thereafter, a trustee will issue an income questionnaire to be completed by the bankrupt. Based on the information provided, a trustee will assess whether the bankrupt is liable to make contributions from their income. If the bankrupt is found to be liable, then the bankrupt will normally arrange to make regular installment payments.

Pursuant to sub-sections 139W(2) and 139WA(1) of the Act a trustee can issue a fresh assessment if they are satisfied that the actual income derived by the bankrupt varies from the amount originally estimated. This may occur at any time during or after the end of a contribution period or even after the bankrupt is discharged.

What is income

Section 139L of the Act defines income very broadly and includes:

  1. Wages and salary.
  2. Taxable fringe benefits.
  3. Superannuation receipts, annuities and pensions.
  4. Loans from associated entities.
  5. Income earned overseas.
  6. Business profits of a sole trader.
  7. Super contributions in excess of 9.5%.

Importantly, pursuant to section 139M(1), income is taken as being derived by the bankrupt even though it isn’t actually received by the bankrupt. For example, income which is reinvested or income which is dealt with on behalf of the bankrupt or as the bankrupt directs.

How is the assessment calculated

Section 139S of the Act provides that the amount of the contribution required to be paid by a bankrupt is 50% of the after tax income which exceeds the ‘actual income threshold amount’.

What is the actual income threshold amount

The actual income threshold amount is the amount of income a bankrupt may earn upon which no contribution is payable. In accordance with section 139K of the Act, the threshold amount is determined by reference to the number of dependants for whom the bankrupt is responsible. The current amounts, which are updated twice yearly, are set out in the table below.

Number of Dependants Threshold Amount
0 $53,653.60
1 $63,311.25
2 $68,140.07
3 $70,822.75
4 $71,895.82
Over 4 $72,968.90

It is worth noting that if a bankrupt disagrees with the assessment of their income contributions, then pursuant to section 139Z, they are able to seek a review of the assessment by the Official Trustee.

What happens if a bankrupt earns less than expected

In order to prevent a bankrupt from circumventing the income contribution provisions by earning less money than they would otherwise, a trustee may, pursuant to section 139Y of the Act, make a determination that the bankrupt receives or has received what is called ‘reasonable remuneration’ and increase his or her income for assessment purposes accordingly. This prevents the bankrupt from channelling income into other entities or coming to an arrangement with their employer, especially if related, to reduce their reportable income.

What happens in the case of hardship

If a bankrupt considers that the requirement to pay contributions will cause hardship, then pursuant to sub-section 139T(1) of the Act, they may apply to their trustee for the assessment to be varied. Sub-section 139T(2) sets out the specific grounds upon which such an application can be made. Such an application is required to be in writing and to include evidence of the bankrupt’s income and expenses. The grounds for a hardship application are as follows:

  1. Ongoing medical expenses.
  2. Costs of child day care essential for work.
  3. Particularly high rent when there are no alternatives available.
  4. Substantial expenses of travelling to and from work.
  5. Loss of financial contribution.
What happens if a bankrupt does not comply

Failing to provide information relating to income or expected income as required by the Act constitutes grounds for an objection to automatic discharge pursuant to sub-section 149D(1)(e). In addition, if a contribution amount is owed and remains outstanding prior to discharge, then a trustee may object to the discharge, pursuant to subsection 149D(1)(f). Any such objection may extend the period of the bankruptcy by a further 5 years.

If the bankrupt does not provide particulars of their income or advises that they did not derive any income, however there are reasonable grounds for believing that the bankrupt is likely to derive income then, pursuant to section 139Z, the trustee may determine the income of a bankrupt and prepare an assessment accordingly.

Trustees have a number of other powers available to them to compel the compliance of the bankrupt with their obligations in relation to contribution assessments. These include instructing the bankrupt pursuant to section 139ZIF to pay income into an account supervised by a trustee. A trustee is then required to supervise withdrawals from that account. Furthermore, if an amount remains due and payable after the date of automatic discharge, then a trustee may enforce the debt against the bankrupt in the ordinary course in accordance with sub-sections 139ZG(3) and (4) including making the debtor bankrupt again.

Accumulated savings

Sub-section 58(1)(b) of the Act states that property that is acquired by or devolves upon a bankrupt during the period of their bankruptcy vests in their trustee. Property of this nature is referred to as after-acquired property, one of the best examples being the receipt of an inheritance whilst bankrupt. Another such example might be accumulated savings. These funds would ordinarily be surplus income that may or may not have been assessed for contribution purposes. Until recently there was an assumption based on case law that accumulated savings derived from income do not vest in a trustee. However, a recent decision of the Full Bench of the Federal Court of Australia in the matter of Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio)[2015] FCAFC 30, has authoritatively examined the interaction between the income contribution regime and after-acquired property.

The facts of the case are relatively simple. An undischarged bankrupt used money that was held in a bank account to acquire shares, the money was derived from income earned within the period of the bankruptcy that did not exceed the actual income threshold amount. The bankrupt informed the Official Trustee of his intention to acquire a motor vehicle that was to be funded from the sale of the shares. The bankrupt was informed that the shares vested in the Official Trustee pursuant to sub-section 58(1). The bankrupt sought a review of the stance taken by the Official Trustee.

In essence, the court found that the shares vested in the Official Trustee in accordance with subsection 58(1)(b). The court went on to say that accumulated savings derived from income during the period of the bankruptcy would also constitute after-acquired property. In considering this, the court was conscious of sub-section 134(1)(ma) which gives a trustee the power to:

‘make such allowance out of an estate as they think just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt’.

Interestingly, the court also put the proposition that if the money was being accumulated to acquire tools of trade for income earning purposes then the bankrupt may be able to retain the money on the basis that such tools of trade, if acquired, constitute property that is not available to creditors pursuant to sub-section 116(2)(c).

Conclusion

This case makes it abundantly clear that it is in the best interests of all bankrupts to be open and transparent with their trustee in relation to their income and to manage any contributions for which they are liable. In circumstances where a bankrupt saves their surplus income and does not pay regular instalments to their trustee, then a trustee may take possession of the accumulated savings and the bankrupt could remain liable to pay assessed contributions. This may become a situation where a trustee can exercise their discretion pursuant to sub-section 134(1)(ma) of the Act, taking into account the circumstances of the bankrupt.

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