ByLawyers News and Updates

Wills and estates – Death in the house

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

Survivorship

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

Sales generally

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

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

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

Sensational deaths

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

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

Death during the course of the contract

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

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

Tip Box

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

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

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By Lawyers

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

This is written to assist in quelling those fears.

What must a practitioner look out for?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For further information about how the register works:

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

Tip Box

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

Retail lease – Predominant use

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Predominant Use

By Russell Cocks, Solicitor
First published in the Law Institute Journal

Section 4(1)(a) of the Retail Leases Act 2003 provides that the Act applies to premises:

wholly or predominantly for –

  1. the sale or hire of goods by retail or the retail provision of services

The Act was designed to protect retail tenants, specifically tenants of large shopping complexes where there was a perception of disproportionate bargaining power. However the Act is not limited to large complexes, although some of the provisions apply to a ‘retail shopping centre’, which is defined as five premises owned by the one landlord, and additional restrictions apply to such premises.

As the Act applies to retail premises generally, it may apply to shops and offices in strip shopping centres and even to stand alone premises in residential or industrial areas that have a retail use. Thus a solicitor who provides services to the public from a suburban office and a panel beater in an industrial estate may be entitled to the benefit of the protections provided by the Act.

It is important to understand that it is the use of the particular premises that determines the applicability of the Act, not the character of the tenant. Thus a solicitor is no doubt engaging in retail services and the solicitor’s office will be subject to the Act, but a separate storage facility rented by the solicitor as part of the legal practice will not be covered by the Act as those premises are not used for the provision of retail services to the public.

This distinction between retail and non-retail premises is simple when separate premises are used, but the distinction is less clear when the same premises are used for both retail and non-retail purposes. Such a situation might arise, for instance, where a business rents a large warehouse facility to manufacture furniture but also has a ‘front of house’ retail sales component. Determining whether the premises are ‘retail’ will depend upon whether the ‘predominant use’ of premises is retail and two obvious tests for determining the predominant use in such a situation are the comparative area occupied by the various uses and the proportion of income derived by each use. In the present example it is likely that the manufacturing facility would occupy the majority of the area and the income derived from retail sales would be a small proportion of total income and thus the predominant use is manufacturing, and so the Act will not apply.

The dictionary meaning of ‘predominant’ is ‘greatest’ or ‘most important, powerful or influential’. However the question is not so much what is ‘predominant’ but rather ‘predominant’ what? Consideration of whether the retail component of the business occupies the ‘greatest’ amount of the area of the premises or generates the ‘greatest’ proportion of income would appear to be relevant tests, but they are not the only factors to be taken account: see Elmer v Minute Wit Enterprises P/L [2002] VCAT 1101.

That case concerned a shop in a strip shopping centre that was rented by a tenant who sold antique furniture, a scenario that would ordinarily be retail premises. However the tenant’s principal business was conducted from nearby premises and the shop was used only for display and storage, only being opened when an inquiry was directed to the principal place of business. This, in addition to other reasons, justified a finding that the premises were not retail premises within the meaning of the Act and introduced a ‘time’ test into the mix.

A similar ‘time’ test was adopted in Evans & Ors v Thurau P/L [2011] VCC 1354. The subject property was an apartment in a ski lodge which was subject to a requirement in the head lease that the apartment be available for rental through the head tenant to members of the public when not in use by the subtenant. It was argued that this meant that the property was ‘holiday accommodation’ and therefore ‘retail premises’ and that the dispute should therefore be before VCAT. Judge Anderson concluded that the fact that the snow season was limited and that the subtenant could, if they choose, occupy the premises for the whole of that season to the exclusion of the public meant that the predominant use was not retail. The fact that a retail use was one of the possible uses was not enough.

It can been seen from these cases that the determination of whether the ‘predominant use’ of premises is retail will depend upon a number of possible factors, some or all of which may play a greater or lesser role in the determination in each case. Apart from what the lease itself may provide, the courts may consider the area occupied by the retail component, the income earned by that component and the time that the retail component is utilised.

It will be interesting to see how these factors will come into play when an inevitable question comes up for determination. That will be a dispute arising from premises used for retail sales conducted entirely by phone, fax or internet, a typical call centre environment. Such premises do not include physical access to the premises by members of the public, but certainly involve retail sales. No doubt one party will argue that public access is an integral part of retail sales within the meaning of the Act, an argument that appears to have some merit when the purposes of the Act are considered.

Tip Box

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

Co-owners and easements – Two topics

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

This column is concerned with two cases on entirely different topics, but connected by a similarity in the name of the principal parties and the fact that they are recent decisions in the Real Property List of VCAT, a jurisdiction that is growing in importance for property lawyers. Pavlovic v GEADSI Nominees P/L [2012] VCAT 997 (Pavlovic) concerns an easement and Pavlovich v Pavlovich [2012] VCAT 869 (Pavlovich) concerns co-ownership.

Pavlovic took place in a fairly conventional inner suburban setting. The two protagonists were neighbours, with Pavlovic having purchased his property in recent years with the intention of renovating and living in the property and GEADSI having constructed three units on the adjoining property some 15 years previously. At that time GEASDI had obtained from the then owner of the Pavlovic property consent to construct a stormwater drain across the Pavlovic property and a stormwater pipe had been constructed such as to take the stormwater from the GEADSI land through the Pavlovic land and to a laneway at the rear. This pipe was below the surface of the ground and Pavlovic was not aware of the pipe when he purchased the property as it was not recorded as an easement on the title, not evident to a physical inspection and he was not otherwise been informed of its existence.

Pavlovic intended to construct improvements in the backyard and discovered that the soil was so saturated that it would be necessary to remove the soil at a cost of $15,550 before commencing construction. Additionally, it would be necessary relocate the pipe to prevent the ongoing saturation of the soil below the improvements. Pavlovic wanted the pipe removed. He commenced these proceedings for an order pursuant to s 16 Water Act 1989.

GEADSI argued that the pipe constituted an implied easement and that Pavlovic, as subsequent purchaser, was bound by that easement. The Tribunal rejected that argument, effectively finding that the consent given by the previous owner did not create a proprietary right and was not enforceable against subsequent owners. An argument based on a prescriptive easement was rejected on the basis that the right to use the pipe arose by consent. The recent case of Kitching v Phillips [2011] WASCA 19 was referred to. Effectively, the Tribunal was of the view that the original temporary solution to the drainage problem should not be allowed to impact on the proprietary rights of the new owner – a glowing endorsement of fundamental Torrens principles. GEADSI was ordered to pay the costs of removing the saturated soil and to remove the pipe.

Pavlovich on the other hand concerned an application by a co-owner pursuant to the ‘partition provisions’ of the Property Law Act 1958, specifically s 228. The parties to the proceedings were registered joint tenants and, unusually, the application was not for a ‘partition’ as that word is generally understood but rather a transfer from one co-owning joint tenant to the other joint tenant. Whether VCAT had power to do so occupied the first portion of the judgement, with a conclusion that the power conferred by s 228 did indeed authorise such a transfer.

The parties were mother and son. There was evidence that as part of a downsizing exercise the mother had purchased a property but was unable to gain temporary finance, so the son was added as a joint tenant. Shortly after, the loan was repaid from the proceeds of sale of the mother’s original property and so the subject property was owned as joint tenants, although the son had effectively made no financial contribution.

Ten years later the mother applied for an order that the son transfer his interest in the property to the mother. The mother argued that it had always been intended that the son would do so when the loan was repaid. The son argued that it had been agreed at the time that the son would remain as joint tenant and then ‘inherit’ the property upon his mother’s death as gifts were made to other siblings that would be ‘offset’ by the son taking the property. Essentially the issue was a factual one and the Tribunal accepted the mother’s version.

The Tribunal concluded that whilst the son was a legal joint tenant, beneficial ownership resided entirely with the mother, therefore the son was ordered to transfer his interest in the property to the mother so that she would become sole legal and beneficial owner. Concern was raised, but dismissed, that because the Tribunal was therefore finding that the son had no beneficial interest, he could not be a co-owner within the meaning if the Act and VCAT therefore had no jurisdiction.

This is similar to an argument raised in Garnett v Jessop [2012] VCAT 156. Jessop was the sole registered proprietor and Garnett sought partition on the basis that he had made contributions and therefore held an equitable interest on the basis of a constructive trust. VCAT dismissed a submission that only legal (registered) owners qualify as ‘co-owners’ within the meaning of the Act and held that a party claiming an equitable interest is a ‘co- owner’ and therefore entitled to seek partition.

Tip Box

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

Lease – Landlords beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent. Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent. It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact. However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”

That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises. Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion. The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.

The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was overholding in accordance with the terms of the ‘standard’ lease. The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks. Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.

This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546. This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods. The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.

The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant. The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.

The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods. The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods. Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies. This argument was accepted.

The landlord relied upon two clauses in the lease to justify its actions. Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘reentry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant. The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’. It followed that such a clause is contrary to public policy and therefore void. It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.

The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.” The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.

This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods after termination of the lease. It simply means that such clauses must be very carefully drawn.

Addendum: Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546 reconsidered by Supreme Court at Asian Pacific Building Corporation Pty Ltd v SharonLee Holdings Pty Ltd [2013] VSC 11.

Tip Box

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

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

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

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

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

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

What is a phoenix company?

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

Is phoenix activity fraudulent?

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

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

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

The applicable provisions of the Corporations Act are as follows:

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

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

What is a pre-pack?

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

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

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

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

Why pre-pack and not administration?

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

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

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

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

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

Conclusion

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

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

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

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

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

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

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

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

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

Directors to become personally liable for unreported PAYG

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

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

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

Directors to become personally liable for unreported superannuation guarantee charge

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

PAYG withholding non-compliance tax

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

The new DPN regime

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

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

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

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

What do these changes mean?

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

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

Sheriff’s sale – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A sheriff’s sale is one of the true curiosities of the world of property law – to borrow a phrase, ‘a riddle wrapped up in an enigma’. The urban myth conjures up visions of the dastardly sheriff riding in on his pitch-black steed to wreak havoc on the ‘innocent’ villager. As a recent case confirms, there is not likely to be a Robin Hood in the wings waiting to swoop in at the last minute to set things right; indeed, quite the contrary.

Kousal v Suncorp-Metway Limited [2011] VSC 312 cast the defendant bank in the role of an innocent bystander seeking the direction of the court. The plaintiff was the purchaser from the sheriff and sought to require the defendant to make the certificate of title to the property available to allow for registration of the transfer from the sheriff. Herein lies the reason why the matter had proceeded to this point: the owner of the property and person most likely to suffer the harsh consequences of the sheriff’s sale was not a party to the proceedings and had steadfastly failed to take appropriate steps to protect his interests. As a consequence the law, like a steamroller, had followed its unrelenting course to ‘justice’ and the case became another episode in the tales of sheriff’s sales.

The story began as a simple debt claim in the Magistrates’ Court. A creditor claimed payment from the debtor (the ‘innocent villager’ in our tale). Irrespective of the merits of the claim, it appears that the debtor did not contest the claim and judgment was entered. This failure to engage in the legal process, repeated time and again, by the judgment debtor is the true cause of the problems that arose as, whilst many such judgments go unenforced, this judgment debtor was the registered proprietor of real estate and thus susceptible to the sheriff’s sale procedure.

The judgment of the Magistrates’ Court was raised to the Supreme Court and a writ of seizure and sale was issued. These were previously known by the far more exotic – and perhaps appropriately theatrical – name of fieri-facias, commonly abbreviated to fi. fa. This writ calls upon the sheriff to sell the judgment debtor’s assets and account to the creditor for the proceeds of sale to the extent of the judgment and costs, and to the judgment debtor for any balance. The likelihood of a mortgage to a third party, the role played by the defendant bank in this case, serves to add a further complicating factor. The sheriff only has power to sell the interest of the judgment debtor in the property, and therefore any sale is subject to all encumbrances affecting the property at the time of sale. Thus the mortgagee bank was not liable to lose the protection of its mortgage; it was simply being asked in these proceedings to make the title available to allow for the registration of the transfer of the interest of the judgment debtor by the sheriff to the plaintiff.

The plaintiff had entered the fray as an existentialist Robin Hood. Rather than fight off the sheriff and return the villager’s home, the plaintiff became the purchaser at the sheriff’s sale, first bidding $100 and finally $1000 for the right to take a transfer from the sheriff. Given that the property was apparently valued in excess of $600,000 and the mortgage was around $400,000, the prospect of a $200,000 profit appeared to be good shopping.

At this point the sheriff’s sale process appears to have gone feral. A person can lose their home, in which they have an equity of $200,000, and the judgment creditor, who initiated the process, stands to receive nothing, as the sale price of $1000 would not even cover the sheriff’s costs. Whether the villager is an idiot or not, that cannot be justice. Mukhtar AsJ. also expressed concern in relation to this outcome and repeated a call first made in 1982 for a review of this procedure, which appears to be ‘ill adapted to modern conditions’.

Without doubt, the judgment debtor/registered proprietor should have done more to help himself. He sought the assistance of a private lawyer, but regarded that as too expensive. He followed the usual trail around the various free legal services, but appeared to weary of the travel. No doubt a lack of English greatly affected his understanding of the significance of the documents that he received, but by the end he would have needed a wheelbarrow to transport them and yet he still came before the court and shrugged his shoulders, unable to see the steamroller diligently rolling towards him. Mukhtar AsJ. made orders that ensured that the process could not proceed without coming to the attention of the person most affected by the orders, even though not a party to these particular proceedings, but in the end concluded that ‘[t]he Court can do no more’ (para 41).

Mukhtar AsJ. identified a number of areas of concern in relation to the sheriff’s sale process:

  1. that the prospect of a sale being made without any reserve price can lead to a perception that the property is being sold under value and call into question the duty of the sheriff to the judgment debtor to sell for the ‘best price’ (para 35);
  2. that the application for a sale without reserve, which can be made after an unsuccessful sale with a reserve, should not be made ex parte, but rather with notice to the judgment creditor;
  3. that consideration should be given to holding sheriff’s sales on-site, rather than at the sheriff’s office, with additional advertising. The implication is that a sheriff’s sale ought more resemble a traditional auction; and
  4. that, in appropriate circumstances, a court may need to set a ‘not below’ price, something of a misnomer in a ‘no reserve’ auction.

Tip Box

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

Breach of section 32

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By Russell Cocks, Solicitor

Published in 2011, First published in the Law Institute Journal

The Vendor’s Statement required by the seller of real estate pursuant to s 32 of the Sale of Land Act 1962 is a fundamental document in the conveyancing process. Designed as a consumer protection mechanism, the statement requires the vendor to disclose certain items of relevant information to a prospective purchaser.

Perhaps reflective of a ‘boom market’ in real estate in the new millennium, there have not been many recent cases that have considered this section. Purchasers in such a market are less likely to complain and more likely to take a long term view that capital growth may remedy minor blemishes. Add to this the uncertainty of legal proceedings and enormous cost consequences of failure and it is little wonder that contested cases are rare. Nicolacopoulos v Khoury [2010] VCC 1576 – the writer’s firm acted for the purchaser plaintiff – therefore comes as a rare treat for the property connoisseur.

The vendor instructed a conveyancer to prepare a Vendor’s Statement, which formed part of a contract of sale. The property was a lot on a plan of subdivision and it was, as a matter of law, affected by an owners corporation. This was an agreed fact at the hearing, but the conveyancer had incorrectly taken the view that the property was not affected by an owners corporation as there was no ‘common ground’. This was apparently a reference to the fact that the subdivision was a two-lot subdivision with both lots having separate road access, so there was no common property. Nevertheless, there was an owners corporation, even if in name alone – the euphemistic ‘inoperative owners corporation’.

In those circumstances s 32(3A) requires the vendor to include in the Vendor’s Statement an Owners Corporation Certificate, issued pursuant to s 151 Owners Corporation Act 2006, and accompanying documents. Failure to do so entitles the purchaser to rescind the contract pursuant to s 32(5), subject to the limitation created by s 32(7).

There was no contest that there was a breach of s 32(3A) and a consequent right to rescind pursuant to s 32(5), but the vendor argued that the vendor was saved by s 32(7). To come within the protection of subsection (7) the vendor had to prove:

  1. that the vendor had acted ‘reasonably’; and
  2. that the purchaser was ‘substantially in as good a position as if all relevant provisions had been complied with’.

The first question raised the issue of the vendor’s liability for the statements in the Vendor’s Statement. This issue had been the subject of conflicting authority, with Payne v Morrison [1991] V ConvR 54-428 holding a vendor vicariously responsible for the unreasonable (negligent) conduct of an adviser and Paterson v Batrouney & anor [2000] VSC313 suggesting that vicarious liability was not appropriate and that only personal liability was relevant. Fifty-Eighth Highwire v Cohen and Anor [1996] VicRp 57 had also considered the issue, without needing to reach a decision on the point.

Ultimately Ginnane J. adopted a similar course to Fifty-Eighth Highwire v Cohen and avoided deciding whether vicarious liability was sufficient as he was satisfied that the vendor had been personally negligent and therefore had not acted reasonably. Unlike Paterson v Batrouney, where there had been total reliance on the adviser, Ginnane J. held that the vendor should have been aware of the existence of the owners corporation and therefore bore personal responsibility for ensuring adequate disclosure.

The second issue concerned the consequences of the breach on the purchaser. The vendor made two arguments on this point:

(a) that the Vendor’s Statement had not misled the purchaser.

The purchaser’s evidence was that she was particularly interested in the property because the sales brochure began with the words, ‘Say good-bye to the body corporate’. She presently owned a property subject to a body corporate (owners corporation) and she was very concerned that a new property should not be affected by an owners corporation. The vendor argued that the purchaser purchased the property because of the brochure and that the absence of the Owners Corporation Certificate in the Vendor’s Statement had not influenced the purchaser’s decision.

Ginnane J. held that if the information required by subsection (3A) had have been included in the Vendor’s Statement, then it was likely that the purchaser would have been made aware that the property was subject to an owners corporation and would not have purchased the property.

(b) that the owners corporation was dormant.

The vendor gave evidence that the owners corporation had never met and that no levies had been struck. For all intents and purposes, the owners corporation did not exist.

This argument was not accepted. The mere existence of the owners corporation and the possibility that it could be enlivened was sufficient to establish a detriment.

Whilst the issue of detriment was to be determined objectively, the purchaser’s subjective characteristics were a relevant consideration. So too was the fact that parliament had decreed that certain information was required; and, it may be presumed, such consumer protection aspirations are not to be lightly ignored.

The matter came before the court as a vendor-purchaser summons based on s 49 Property Law Act. As such, the issue for determination was limited to the issue arising from s 32 Sale of Land Act, and the question of the negligence of the conveyancer or misrepresentations of the agent were not matters before the court. Nevertheless, the purchaser was able to establish that the agreed breach of subsection (3A) was not saved by subsection (7).

Tip Box

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

Subdivision – Off the plan sales – Best endeavours – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The sale of land ‘off the plan’ is a common occurrence in the property market. Its principal virtue is that it provides certainty to both vendor (as to the sale) and purchaser (as to the eventual purchase) of the subject property. Whilst there may be some delay in relation to the eventual settlement, which cannot occur until the proposed plan of subdivision is registered at the Land Titles Office, both parties can be confident that, upon registration, the contract will proceed to settlement on the agreed terms.

Off the plan sales are common in a variety of circumstances, but the two principal scenarios are:

  1. sales of vacant land; and
  2. sales of homes.

Land sales

These sales generally fall into one of two categories:

  1. small-scale subdivisions, perhaps only creating as few as two lots; or
  2. large-scale subdivisions, including ‘greenfield’ sites, creating multiple lots.

Whilst projects in these two categories can have enormous differences in scale – from 2 lots to 1000 or more lots – the same legislative framework guides the subdivisional process (Subdivision Act 1988 (Vic)) and the same legislative framework regulates the vendor’s obligations, and purchaser’s rights, on sale (Sale of Land Act 1962 (Vic)).

Pursuant to the Subdivision Act, the vendor is required to satisfy the local council, acting in a supervisory capacity, that the proposed plan satisfies all of the subdivisional requirements of council and service authorities; and, when satisfied, council will seal the plan and provide a statement of compliance. These documents are then lodged with the Land Titles Office and, in the normal course of events, the plan is registered and settlement may take place.

The Sale of Land Act prohibits completion of the sale until registration of the plan, imposes pre-contract requirements and creates during-contract rights, which are essentially designed to protect purchasers.

The 2008 contract of sale, widely used for sales generally, adopts these broad guidelines; and it is possible to create a contract for an off the plan sale relying on the particulars of sale and general conditions alone, without the need for any special conditions or annexures. This is particularly so for small-scale developments, although larger-scale subdivisions involving substantial earthworks may require the inclusion of a plan showing ‘works affecting the natural surface level’: s 9AB Sale of Land Act.

Home sales

Again, these sales generally fall into one of two categories:

  1. small-scale subdivisions, creating just a few lots for sale; or
  2. multi-unit subdivisions, including high-rise developments.

The same subdivisional and registration processes apply to these developments, with the added complication that councils generally will not issue a statement of compliance until construction of the development is complete.

Such contracts envisage the construction of improvements on the land during the contract, and a special condition will usually be added to the effect that the contract is not a major domestic building contract and that the vendor will enter into a major domestic building contract with a registered builder. The extent of detail provided to the purchaser in respect of the improvements to be erected is not regulated and may vary from reliance by the purchaser on a glossy brochure provided by the vendor (which is not included in the contract) to a full copy of the major domestic building contract (including specification) that the vendor has or will enter into. It is fair to say that purchasers ‘take on faith’ that the vendor will ultimately deliver to the purchaser at the expiration of the contract the product, in all its glory, that was touted as being sold when the purchaser entered into the contract.

Once the contract has been signed and the project is underway, the purchaser enters purgatory – a state of perpetual waiting. Even if the project is a mere land subdivision, ages can pass before the plan is registered. If a home is being constructed, long periods of inactivity cause concern. The default period between contract and settlement (14 days after notification of registration of the plan) is 18 months, but contracts can adopt another period and contracts spanning 60 months are common.

A recent case has considered the vendor’s obligations in terms of completion of the project within the required period: Joseph Street Pty Ltd & Ors v Tan & Anor [2010] VSC 586. The project was a relatively small development by the vendor of six units. The contract completion, or sunset, period was 15 months, and the vendor had entered into a contract with a registered builder for construction of the units. Regrettably, the builder ‘went broke’ and the project was substantially delayed while the vendor put other construction arrangements in place. The sunset period expired, the vendor rescinded the contract and the purchaser sought specific performance. No doubt, given the rising housing market, the property had appreciated and both parties sought to take advantage of that situation.

To succeed, the purchaser had to establish that the vendor was in breach and thus not entitled to rescind. The purchaser sought to do so on the basis of a breach by the vendor of an express contractual obligation to use ‘best endeavours’ to complete the contract within the sunset period. It was also agreed that such an obligation was an implied term of the contract. The court concluded that the true cause of the delay was the collapse of the builder, an occurrence that was beyond the control of the vendor. The vendor had therefore fulfilled its contractual obligations to use best endeavours and was entitled to rescind, thereby retaining the (more valuable) property.

Tip Box

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

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