Federal Budget Introduces Anti-Phoenixing Measures
In the recent federal budget, the Government has vowed to combat illegal phoenix activity by reforming existing corporations and tax laws and granting the Australian Taxation Office additional power. Accordingly, the proposed changes are credited as complementing the work of the Government’s Phoenix, Serious Financial Crime and Black Economy taskforces, with Federal Treasurer Scott Morrison asserting they will ensure small businesses “don’t get ripped off by other businesses who deliberately go bust to avoid paying their bills.”
Illegal phoenixing occurs when a company’s directors allow a business to collapse in order to avoid paying creditors, either through directors resigning or through the business going into administration. All too often the practice results in customers not receiving goods or services they have paid for, lost payments for small businesses and lost wages and entitlements for affected employees. Ultimately, it has an adverse impact on the economy, with illegal phoenix operators gaining an unfair advantage over honest businesses.
Under the proposed budget, the government has allocated $40million to be spent over the next four financial years, introducing new phoenix offences to target those who conduct or facilitate illegal phoenixing. Specifically, these measures endeavour to prevent directors from backdating their resignations, limiting the ability of directors to resign and restricting the ability of related creditors to appoint or remove external administrators.
Moreover, it will expand the ATO’s power to retain refunds where there are outstanding tax lodgements and will extend the Director Penalty Regime to include GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts.
England: Court Upholds Rock Solid Contract
Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
The Supreme Court has held that a clause in a contract, which required modifications to that contract be in writing and signed by both parties, invalidated a subsequent oral agreement to vary the contract. Specifically, the issue before the court was whether the No Oral Modification (NOM) clause was legally effective.
Background
Rock Advertising entered into a licence with MWB to occupy office space for a fixed term of 12 months. The licence contained a clause requiring all variations to be set out in writing and signed on behalf of both parties.
However, it was later agreed that the payment schedule would be varied. Despite this, MWB treated the variation as merely a proposal and rejected the new schedule before excluding Rock Advertising from the premises for failing to pay the arrears. Ultimately, MWB terminated the licence.
At first instance, the County Court found that the oral agreement did not satisfy the formal requirements of the NOM Clause. The Court of Appeal subsequently reversed the decision, holding that the oral variation amounted to an agreement to dispense with the NOM clause. MWB consequently brought proceedings to the Supreme Court.
The case focused on whether the agreement to vary the payment schedule was effective, despite being in breach of the requirements of the NOM clause.
Decision
The Supreme Court overturned the Court of Appeal’s decision, unanimously holding that the absence of the writing and signatures required by the NOM clause rendered the oral agreement to vary the contract invalid. In doing so, Lord Sumption found that the proper understanding of party autonomy is that parties may agree to bind their future conduct, however that agreement will be definitive. Consequently, as the contract stipulated that variations to the contract were to be in writing, the oral variation was deemed invalid.
In this instance, Rock Advertising argued that MWB acted on the agreement and that the doctrine of estoppel should therefore apply to prevent unfairness. Specifically, they contended that MWB should not be able to rely on the NOM clause to invalidate the oral variation. However, the court ruled that estoppel did not arise on the facts of this case.Rather, the court held that for estoppel to arise, there needed to be evidence of words or conduct which unequivocally represented the variation as valid, and that it needed to be something more than the informal promise itself.
Business Implications
This case serves as a timely reminder for businesses whose contracts are governed by English law, that they should seek to ensure all stakeholders are aware that informal and oral variations to contracts containing NOM clauses will not be enforceable. They should also note that the defence of estoppel may be difficult to establish and should be careful to follow the strict provisions of any NOM clause.
Ultimately, it provides that where a contract contains a NOM clause, the parties can be certain that the written contract represents the contract in entirety.
Federal Government to Introduce Harsher Penalties for White-Collar Crime
In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Federal Government has announced it will crack down on penalties for corporate misconduct. In doing so, it has accepted the majority of recommendations made by the Senate Economics References Committee and the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce reports, with harsher penalties to apply to both directors and corporations who have breached their duties.
Relevantly, ASIC infringement notices will also be expanded to cover a broader range of financial services and managed investments infringement.
The amendments will also introduce new maximum penalties.
For Individuals:
- the greater of 5,000 penalty units (currently $1.05 million);or
- three times the value of the benefits obtained or losses avoided; and
For Corporations:
- greater of 50,000 penalty units (currently $10.5 million); or
- three times the value of the benefits obtained; or
- Losses avoided, or 10% of annual turnover in the 12 months before the misconduct, up to a total of one million penalty units ($210 million).
The proposed changes signal a significant reform of current legislation, in which the maximum civil penalty for individuals is $200 000, and $1million for corporations.
Whilst individuals and corporations who are found to have breached their duties must be held accountable, in upholding the rule of law, it is equally important that individuals and corporations are made aware of the impending amendments.
Court Rules Against Setting-Off Unfair Preference Claim
In the recent case of Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) the Federal Court was required to determine whether a set-off was available to Melrose Cranes, pursuant to s 553C of the Corporations Act 2001 (Cth).
Here, the liquidators of CPS submitted that $308 544.58 worth of payments made to Melrose Cranes constituted unfair preferences.
In defending the claim, Melrose Cranes unsuccessfully raised the defence of 'good faith', the doctrine of ultimate effect and the 'running account' defence, before asserting an entitlement to set off $80 774.23, pursuant to s553C of the Act. In supporting this claim, Melrose Cranes maintained that this figure represented the amount CPS was indebted to it at the date of the appointment of the administrators.
The liquidators urged the Court not to adopt this view, arguing that setting-off should not be available in the context of preference claims. In doing so, they contended that the application of existing case law including Re Parker was 'plainly wrong' in this context as it related to setting-off voidable transaction claims and not preference claims. Ultimately, they argued that applying such cases here would be contrary to the statutory purpose of the Act.
However, the court upheld the finding of Re Parker, contending that a set-off in section 553C applies to voidable transaction claims, including unfair preference claims.
The liquidators subsequently relied on s553C(2) to argue that setting-off is expressly prohibited where a person has notice of a company's insolvency, and thus was not available to Melrose Cranes. The Court agreed, concluding that Melrose Cranes had notice of the company's insolvency at the time it gave credit in respect of the outstanding indebtedness.
In reaching this conclusion, the court submitted that a person will have notice of a company's insolvency if, pursuant to s95, the person has actual notice of the facts that indicate the company lacks the ability to pay its debts when they fall due.
Accordingly, Markovic J rejected Melrose Cranes' application to have the proposed sum set-off on the basis that it was "clear that a reasonable person in Melrose Cranes' circumstances would have had grounds for suspecting insolvency at the time of each of the transactions."
Court Rejects Mossgreen's Art Collection Levy
White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63
In December 2017 administrators were appointed to Mossgreen Pty Ltd, a well-known Australian auction house and gallery. The administrators sought to recover over $1 million in costs from consignors by charging $353.20 per lot for the return of goods. In some instances this meant that the total value of a consigners property was exceeded by the collection charge, and so many consigners opposed the directions.
Subsequently the administrators applied to the court in March this year, seeking approval for their nominated course of action. They argued that they held an equitable lien over the consigned items and were therefore entitled to recover costs by imposing a levy for the release of items.
At first instance, Perram J dismissed the directions sought, concluding the stocktake did not relate to Mossgreen's property and subsequently did not fall within the administration of their affairs.
On appeal, the court opposed this view, finding that it was within the statutory functions of the administrators to continue to perform the function of holding the consigned items, and as part of doing so, take steps to manage and return the items. It concluded that in certain circumstances, a lien could arise in favour of administrators for costs incurred dealing with claims for the return of items, even where there was no ownership claim by the company under administration.
Despite this, the court ultimately rejected the appeal, arguing that there was no basis for an equitable lien of the kind sought here because:
- Many of the costs incurred related to items which the administrators knew had been abandoned and were of little value;
- If a stocktake were needed, this need arose from a breach of Mossgreen's obligations as a bailee, being the failure to maintain an adequate inventory system for consigned items; and
- Much of the costs had been incurred for the benefit of the general body of creditors, including in relation to the sale of a part of Mossgreen's business. The owners of the consigned items had no interest in this, as they would not benefit from such a sale.
Does the Rejection of a Calderbank Offer Automatically Give Rise to the Award of Indemnity Costs?
Linville Holdings Pty Ltd v Fraser Coast Regional Council (No 2) [2018] QSC 62
On the 6 November 2017, Jackson J of Brisbane’s Supreme Court handed down his decision in the matter of Linville Holdings Pty Ltd v Fraser Coast Regional Council [2017] QSC 252. Ultimately, his Honour concluded that for each of the financial years ending 30 June 2015, 30 June 2016 and 30 June 2017, the Fraser Coast Regional Council (FCRC) failed to validly make and levy rates and charges in accordance with the Local Government Act 2009.
Following this, Linville applied for an order for costs of the proceeding on the basis that on 23 March 2017, FCRC had rejected their offer to compromise. In doing so, Linville relied on the principle in Calderbank v Calderbank to argue that costs should be assessed on the indemnity basis.
However Jackson J contended that the refusal to accept a Calderbank offer did not of itself warrant the exercise of the courts discretion to award indemnity costs. Instead, he argued that a court must also consider whether the rejection of the offer was unreasonable in the circumstances.
Here, the Calderbank offer of compromise required that the FCRC compromise both the present proceeding and the related Magistrates Court proceeding. Although this was unusual, Jackson J concluded that “if FCRC agreed to waive those rates and charges in order to make the declarations sought in the present proceeding unnecessary, it was not unreasonable for Linville to propose the settlement of the Magistrates Court on similar terms.”
Despite this, the court held that just as Linville’s offer was not unreasonable, nor was FCRC’s rejection of it. Specifically, Jackson J contended that it was reasonable for FCRC to take into account that the course proposed by Linville would have favoured Linville over other ratepayers and that FCRC instead sought to have the matter resolved by judgment.
Thus, it was held that while FCRC should be ordered to pay Linville’s costs, the costs should not be assessed on the indemnity basis.
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:
-
- 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.
