Federal Court: Asset Surplus Not Enough to Save Company from Insolvency
On 25 August 2017, the Deputy Commissioner of Taxation (DCT) filed an application to wind up Tank Sales Sydney Pty Ltd following the company’s failure to comply with a statutory demand issued in June 2017.
The demand related to an account deficit debt under the BAS provisions of the Income Tax Assessment Act 1977 (Cth) and amounted to $269,073.15 as at 16 June 2017. It included administrative penalties and general interest charges under the Taxation Administration Act 1953 (Cth) plus superannuation guarantee charges, and an additional charge for late payment.
Last November the company filed a notice of appearance, contending that it was not insolvent, but suffering a short term cash flow issue. Relevantly, the company argued that its assets outweighed its liabilities.
The matter was heard in the Federal Court on 27 March 2018, where the DCT relied on the judgement of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 to establish its entitlement to a winding up order (unless the Company could rebut the presumption of insolvency.)
In seeking to prove their solvency, the company produced financials in support of their claim - including its 2016 and 2017 tax returns. However the DCT argued that such documents should not be allowed to be admitted to evidence because they were not audited and accordingly amounted to hearsay.
Farrell J accepted the financials, however concluded that little weight could be given to them in the absence of direct evidence to support the values indicated. Moreover, his Honour asserted that where assets cannot be converted into cash within a relatively short time, their disclosure will not prove effective in establishing solvency.
Ultimately, the court ordered that:
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- Tank Sales Sydney Pty Ltd be wound up in insolvency;
- David Lombe of Deloitte Financial Advisory be appointed the liquidator of the defendant corporation; and
- The Deputy Commissioner of Taxation's costs of proceedings be fixed at $2,897.98.
New Laws Urge ASIC to Consider Competition
On March 28, the Federal Government introduced the Treasury Laws Amendment (Enhancing ASIC’s Capabilities) Bill into Parliament, following recommendations of the Financial System Inquiry and the ASIC Capability Review. The Bill seeks to amend the Australian Securities and Investments Commission Act 2001 (“ASIC Act”) enabling ASIC to operate with greater flexibility and consider competition in its decision making processes.
The amendments outlined in Schedule 1 specify that ASIC must consider the effects its functions and powers will have on competition in the financial system. This serves to implement recommendation 30 of the Financial System Inquiry which encouraged the government to consider competition in ASIC's mandate.
According to the Bill’s explanatory memorandum, "an explicit reference to take competition issues into account would oblige ASIC to consciously consider how its actions may impact on competition in the financial system and will enable ASIC to favour one option over another due to its effects on competition."
In promoting competition, ASIC should have regard to;
- whether the decision will create a barrier to entry, making it more difficult for new firms to enter the industry;
- whether the decision will create regulatory advantages for some companies over others competing in the same sector, or generally across the industry as a whole;
- whether the decision will improve consumers’ ability to exert demand-side competitive pressure in a market;
- whether the decision will disproportionately impact small entities (for example by imposing obligations that do not appropriately scale the regulatory risks presented by those entities) and the impact that would have on competition; and
- whether alternative competitively-neutral approaches can be identified.
Schedule 2 amends the ASIC Act and removes the requirement for ASIC to engage staff under the Public Service Act 1999 (PSA). In doing so, the act adopts recommendation 24 of the ASIC Capability Report which endorsed more effective recruitment and retention strategies.
Removing the obligation for ASIC to engage staff under the PSA means ASIC will be able to compete more effectively for suitable staff. It will also allow ASIC to tailor management and staffing arrangements to suit its needs, ensuring it can effectively honour its mandate by recruiting staff with knowledge of financial markets and financial services.
Thus, the amendment serves to promote greater operational flexibility, bringing ASIC in line with Australia's other financial regulators, namely the Australian Prudential Regulation Authority and the Reserve Bank of Australia.
The bill will come into effect on 1 July 2019, at which time ASIC staff will maintain their continuity of service with ASIC, but cease to be employed under the PSA. They will instead be employed under the ASIC Act, subject to the same terms and conditions and will maintain the same accrued entitlements.
Queensland Court of Appeal rules that liquidators’ disclaimer trumps environmental protection order
Background
Prior to its winding up, Linc Energy Limited (in liq) (Linc) had owned and operated an underground coal gasification project near Chinchilla. A necessity of that operation was that Linc required environmental authorities issued under the Environmental Protection Act 1994 (Qld) (the EPA).
An Environmental Protection Order (EPO) was issued by the Chief Executive of the Department of Environment and Heritage Protection (Chief Executive) pursuant to section 358 of the EPA on 13 May 2016. The effect of that EPO was that Linc was compelled to comply with its duties arising from the activities undertaken on the land to take all reasonable and practicable measures to prevent or minimise harm arising from the carrying out of those activities.
Shortly after the EPO was issued, the appellant liquidators were appointed to Linc. On 30 June 2016, the liquidators gave notice disclaiming, amongst other things, the land at Chinchilla and the environmental authorities under the EPA which it held for the site. The liquidators contended that the consequence of the disclaimer under section 568(1) of the Corporations Act 2001 (CA) was that they were relieved of the requirements of the EPO, on the basis that they constituted “liabilities… in respect of the disclaimer property” as defined by section 568D of the CA.
The Chief Executive contended that notwithstanding the disclaimer of the property described above, Linc remained bound to comply with the EPO. The liquidators then applied to the Supreme Court of Queensland for a direction pursuant to section 511 CA that they would be justified in not complying with the EPO.
The proceedings at first instance
The liquidators contended, in summary, that they were relieved of their obligations under the EPO issued under the EPA (a Queensland Act) as a result of their disclaimer of the land and associated environmental authorities under section 568(1) of the CA (a Commonwealth Act), because of the operation of section 109 of the Constitution, which provides that:
When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.
In opposition to that, the Chief Executive (joined by the Attorney-General for the State of Queensland who had been granted leave to intervene) contended that section 5G of the CA applied such that the provisions of the EPA in fact prevailed over the right to disclaim (and its attendant consequences) under the CA. Relevantly, sub-section 5G(11) provides:
A provision of the Corporations legislation does not operate in a State or Territory to the extent necessary to ensure that no inconsistency arises between:
- the provision of the Corporations legislation; and
- a provision of a law of the State or Territory that would, but for this subsection, be inconsistent with the provision of the Corporations legislation.
Justice Jackson found for the Chief Executive at first instance.
The decision on appeal
The Court of Appeal unanimously decided to reverse the decision below and found in favour of the liquidators.
The Court of Appeal found, in summary, that:
- the obligations arising from the EPO were liabilities in respect of disclaimed property, irrespective of whether the environmental authority itself constituted disclaimed property.
In delivering the leading judgment, Justice McMurdo determined:
Once the land and MDL had been disclaimed, there was no activity which could be carried out by Linc to which the general environmental duty could attach, and for which this EPO could have operated in the pursuit of its stated purpose. The connection between the disclaimed property and the liabilities under the EPO is thereby clear and immediate: the liabilities under the EPO were premised upon Linc’s carrying out activity which it could not and would not carry out, once the land and the MDL had been disclaimed.
- Once disclaimed, section 568D of the CA provided that Linc’s obligations under the EPO, being liabilities in respect of the disclaimer property, terminated. It was not possible to ‘sever’ or selectively terminate some liabilities but not others.
Emphasising that the State had readily admitted and alleged that a consequence of the disclaimer of the land at Chinchilla was that it had passed to the State, Justice McMurdo, found:
It could not have been intended that by a disclaimer of property, a liquidator could cause a company to lose all of its rights and interests in or in respect of the property, but remain burdened by a liability in respect of it. That would be an absurd operation of a law which has a long recognised purpose of enabling the company to rid itself of burdensome obligations. To put the matter another way, as a matter of construction, s 5G cannot displace the effect of s 568D on some or all of a company’s liabilities but not upon the other effects of a disclaimer. Consequently, the appellants are correct in submitting that s 5G(11) could be applied in this case only by impugning the disclaimer itself.
Conclusion
The High Court of Australia dismissed the Chief Executive’s application for Special Leave to Appeal the decision of the Queensland Court of Appeal on 14 September 2018.
As a result, it remains to be seen whether the decision elicits a response from state legislatures or environmental authorities seeking to bind liquidators to remedial actions required under an EPO notwithstanding disclaimer, whether by legislative intervention or by careful phrasing of the EPO to the effect that its requirements do not create liabilities in property capable of disclaimer.The next battleground may well be whether valid disclaimer of property has occurred in particular instances. No express finding was made on that point by Justice Jackson at first instance because the matter had proceeded on the premise that disclaimer had occurred because of admissions made by the respondents. Yet notwithstanding the “unambiguous” admissions made, the respondents sought in the appeal to depart from that position and put in issue the disclaimer, which the Court of Appeal did not permit.
The risk of service by post: Court finds bankrupt at fault for not receiving mail
Last month the Federal Court handed down their decision in the case of Szepesvary v Weston (Trustee), in the matter of Szepesvary (Bankrupt) (No 2) [2018] FCA 87. The case considered an application by Szepesvary to annul bankruptcy pursuant to s153B of the Bankruptcy Act 1966 and to set aside the bankruptcy notice upon which the creditor’s petition was based, pursuant to s 30(1) of the Bankruptcy Act.
The debt associated with the bankruptcy notice had been assigned to ACM Group Ltd by Westpac Banking Corporation. Westpac contended they subsequently provided Szepesvary with a written notice that his liability previously owing to Westpac was due and payable to ACM. At trial, ACM relied on Westpac's computer records which indicated the notice had been sent to Szepesvary's residence on 6 October 2011.
Szepesvary claimed he did not receive the Notice until many years later, at which point he was already bankrupt. Despite this, Szepesvary acknowledged he could not recall all of the correspondence he received from Westpac and ACM dating back to 2011. He also testified that the house in which he lived had multiple letterboxes and that it was not uncommon for his mail to be mistakenly delivered to his neighbour.
In determining whether the notice had been served to Szepesvary, O'Callaghan J considered s134 of the Property Law Act 1958 (Vic), which specifies that an absolute assignment of writing will only be effective if express notice is given to the debtor.
Moreover, his Honour referred to s160(1) Evidence Act 1995 (Cth), which states:
- "It is presumed (unless evidence sufficient to raise doubt about the presumption is adduced) that a postal article sent by prepaid post addressed to a person at a specified address in Australia or in an external Territory was received at that address on the fourth working day after having been posted."
Lastly, O'Callaghan J referred to the judgement of Jacobson J in Leveraged Equities Limited v Goodridge:
- "It is trite law that there is a prima facie presumption of fact that an envelope addressed and posted and not afterwards returned reached its destination in the ordinary course of post."
Accordingly, his Honour concluded ACM had presented sufficient evidence to support a finding that the Notice had been adequately addressed and posted, and that Szepesvary's evidence was not sufficient to negate the presumption.
O'Callaghan J emphasized the role of a recipient in the correct service of a document, drawing upon the finding of Lindgren J in Deputy Commissioner of Taxation v Trio to conclude that the risk of non-delivery created by Szepesvary could not have been known by Westpac:
- "There are strong policy reasons why any risk arising from the fact that there is no letter box or any other facility for receipt of mail at the registered office or from such an arrangement should lie with the company. It is the company that chooses not to have such a facility or to have as its registered office premises to which it is not practicable for mail to be delivered."
Ultimately the case was dismissed with costs. It serves as a timely reminder to all parties of the importance of ensuring documents are served correctly when delivered by post.
Unfair Contract Terms: Court Quashes JJ Richards Standard Form Contracts
Last October the Federal Court of Australia handed down their decision in the matter of Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd. The case centered on JJ Richards standard form contracts, with the ACCC alleging the contracts contained unfair terms.
It followed a series of amendments to Australian Consumer Law, implemented in late 2016, which extended the ACL’s scope to protect small businesses from unfair terms in business-to-business standard form contracts.
Following the amendments, the ACCC notified JJ Richards that there appeared to be a number of unfair terms within its standard form contracts. However the company failed to address these concerns and so the ACCC commenced proceedings.
The amended legislation stipulates that a contract will be ‘unfair’ where it is one sided or excessive, creates a ‘significant imbalance’ between the parties and where its provisions are not reasonably necessary to protect the benefiting party’s legitimate interest. Moreover, it deems that a small business contract exists where, at the time of assent;
- the relevant business employs fewer than 20 people; and
- the upfront price payable under the contract is no more than $300 000 or $1million if the contract is for more than 12 months
At trial, JJ Richards was found to have included a total of 8 unfair clauses within its standard form small business contracts. The decision rendered all illegitimate clauses void and thus JJ Richards was unable able to rely on any provisions;
- allowing JJ Richards to unilaterally increase its prices;
- binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term;
- removing any liability for JJ Richards where its performance is “prevented or hindered in any way”;
- allowing JJ Richards to charge customers for services not rendered for reasons that are beyond the customer’s control;
- granting JJ Richards exclusive rights to remove waste from a customer’s premises;
- allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days;
- creating an unlimited indemnity in favour of JJ Richards;
- preventing customers from terminating their contracts if they have payments outstanding and allowing JJ Richards to continue charging customers equipment rental after the termination of the contract.
Ultimately, the decision serves as a timely reminder to large businesses of the need to review small business standard form contracts. It upholds the Australia's commitment to protecting small businesses and highlights the importance of revising clauses that may otherwise be rendered void and unenforceable if challenged as unfair pursuant to the ACL.
The ACCC has since published a report addressing common terms of concern in small business contracts. It offers guidance on how best to manage contracts in light of the amendments and outlines a number of strategies implemented by other other companies across a broad range of industries.
Your Guide to Debt Disputes: What to Do If You Haven't Been Paid
What is a debt dispute?
Debt disputes exist where an individual disagrees with another person, business or company about a specified sum, valued up to and including $25 000.
Debt disputes may be commenced in relation to money owed for:
- an unpaid invoice or account
- IOUs
- unpaid rental or hire fees (excluding residential tenancy matters)
- goods or services provided for a previously determined price
- money lent and not repaid
- dishonoured cheques
Who may commence a debt dispute?
Any person may commence a debt dispute, provided the debt:
- is valued at no more than $25 000;
- arises from a prior agreement regarding payment of a sum of money; and
- derives from an agreement that is no more than six year old
Where a debt exceeds $25 000, but is no more than $150 000, claims are to be lodged with the Magistrates Court. For all debts exceeding this amount, disputes are to be heard in either the Supreme or District Court.
How can I resolve the dispute?
The first step in the debt recovery process is to issue the other party with a letter of demand. This letter must outline the dispute, including the outstanding sum and a defined period of time within which the dispute must be settled before legal action is commenced.
What is the QCAT Application Process?
Where parties fail to reach an agreement in the specified time frame, they may apply to have the matter heard by the Queensland Civil and Administrative Tribunal.
Lodging an application
Applicants must complete and lodge Form 3 - Application for minor civil dispute - minor debt, either in person, via post or online. Once QCAT has received the application and the accompanying application fee, they will return two stamped copies of the application - one for your records and one for the respondent. You must personally hand the respondent their copy as soon as practicable, and no later than 90 days after lodging the application.
Responding to an application
The respondent will then have 28 days from the date of service to file a response to the application. Where the respondent fails to respond to the application within this timeframe, you may apply to the tribunal seeking a default decision ending the matter, by lodging Form 6 - Request for decision by default - minor civil dispute - minor debt.
Where a response is lodged and the dispute relates to an amount exceeding $3000, the parties will be issued a notice to attend mediation. If the matter is unable to be resolved in mediation, it will be heard before the tribunal and a final decision will be made. If the amount in contention is less than $3000, the matter will advance directly to the tribunal for hearing.
Exploring the Rise of Australia's Paperless Property Market
In our increasingly digitalised world, technological advances are having an unprecedented impact on almost every facet of modern business. Most recently, the digital revolution has converged on the real estate industry following the establishment of PEXA and the paperless property market.
PEXA (Property Exchange Australia) was first developed in 2010 in conjunction with ANZ, Westpac, CBA, NAB, Macquarie Bank and the state governments of Queensland, New South Wales, Victoria and Western Australia. It followed a 2008 Council of Australian Governments (COAG) meeting which sought to modernise the paper-based property settlement process.
PEXA fosters Australia's transition to e-conveyancing by reducing the manual processing and paperwork associated with traditional conveyancing transactions. It allows lawyers, conveyancers and financial institutions to lodge documents and arrange financial settlements digitally, ensuring a faster and more convenient conveyancing process.
PEXA group executive Mike Cameron claims the move to e-conveyancing has had a resounding impact on the efficiency of Australia's property system. Unlike the traditional system, in which 20% of settlements are delayed a median of seven days, PEXA facilitates immediate settlement and payment.
Consequently, the model is tipped to resolve a class of 'irreconcilable legal decisions' associated with the priority of multiple unregistered interests. Since money is electronically transferred almost instantaneously post-settlement, PEXA reduces the gap between settlement and registration that is inherent in traditional conveyancing. Accordingly, PEXA's digital capabilities reduce the risk of a secondary interest being created in the property before registration is finalised.
Ultimately, by reducing the window of opportunity for multiple unregistered interests to be created, PEXA is set to alleviate pressure from the court system - which currently resolves such matters on a case by case basis.
The move to e-conveyancing and the potential afforded by PEXA offers exciting prospects for Australia's expanding property industry, and with PEXA having facilitated more than $100 billion worth of property transfers, it is clear Australia supports the move.
Government Announces Comprehensive Reform of Bankruptcy Law
On Wednesday the Federal Government introduced the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 into the House of Representatives, seeking to amend the existing Bankruptcy Act 1966.
The bill follows a shift in the Australian market that has seen an increase in debt agreements and subsequent decline in bankruptcies year-on-year since 2007, and has been described by Attorney-General Christian Porter as the ‘first comprehensive overhaul of Australia’s debt agreement system in a decade’.
According to the Bill's Explanatory Memorandum, the new measures serve to 'boost confidence in the professionalism of administrators, deter unscrupulous practices, enhance transparency between the administrator and stakeholders, and ensure that the debt agreement system is accessible and equitable', so that those involved should have reason to place trust in the system.
So what amendments is the Bill seeking to introduce?
Debt Agreement Assets Threshold increased to $222 000
The Bill proposes to double the current assets threshold amount and in effect, broaden the scope of debtors who are eligible to lodge a debt agreement proposal.
Under existing law, a debtor may not present a debt agreement proposal if the value of their property exceeds $111,675.20.
As such, the proposed amendments seek to reflect current Australian property prices, acknowledging that the existing asset threshold precludes a significant proportion of Australians from accessing the debt agreement system.
Payment to reflect debtor’s income
A debtor may not submit a debt agreement proposal if the total proposed payments exceed the debtor’s yearly after-tax income by a certain percentage. The Bill contains a legislative instrument which grants the Attorney-General power to determine this percentage, however is yet to stipulate an exact figure.
Maximum Three Year Period for Debt Agreements
The Bill provides that a debtor is unable to propose a debt agreement that would last longer than three years from the day the agreement is made.
Moreover, it specifies that where three years have passed and a debtor has not satisfied the obligations contained in the agreement, the agreement will continue until it terminates, ends or otherwise concludes, pursuant to Part IX of the Bankruptcy Act 1966.
Stricter Regulations for Debt Agreement Administrators
Debt agreement administrators will be required to obtain adequate and appropriate indemnity and fidelity insurance in order to have their applications for registration and renewal of registration approved by the Official Receiver.
In processing registration applications, the Inspector-General will be required to review applicants as soon as practicable and must produce a decision within 45 days of conducting an interview. The Bill also grants the Inspector-General power to deny registration where an individual is not a fit and proper person.
For a comprehensive list of the proposed amendments see Bankruptcy Amendments.
The Gig Economy and Employment Law: Why Uber is set to Drive Change
With the gig economy converging on Australia in recent years, a growing number of Australians are rejecting traditional employment in favour of casual contracts. The booming digital landscape is seeing users offer their skills and services through platforms such as Uber, Deliveroo and AirTasker, however critics are warning the model compromises the protections afforded by conventional work.
