Winding up and out: the risks of ignoring a statutory demand
Background
A company may be wound up by court order if it is found to be insolvent.
The finding of insolvency may be based on section 459C(2) of the Corporations Act 2001 (Corporations Act) which requires a court to presume that a company is insolvent if a winding up application is filed within three months after the occurrence of any one of six events. Failure to comply with a statutory demand is the most common event.
A statutory demand requires a company within 21 days to pay a debt or to come to an arrangement with the creditor. Otherwise the company is presumed to be insolvent.
The company may apply to set aside the demand provided that such an application is made within 21 days. If the application is unsuccessful, then to avoid the presumption of insolvency, the company must comply with the demand within seven days after the application to set aside the demand is finally determined or within such further period as ordered by the court.
The case
In Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited [2008] HCA 9, the High Court determined that once the period for compliance with a statutory demand set out in the Corporations Act has expired, a court cannot extend time for compliance.
Esanda Finance Corporation Limited (Esanda) served a statutory demand on Aussie Vic Plant Hire Pty Ltd (Aussie) claiming over $400,000 under several hiring and chattel mortgage contracts.
Aussie applied to the Victorian Supreme Court to set aside the statutory demand. Master Efthim dismissed the application to set aside the demand but extended the time for Aussie to comply with it.
Aussie appealed the Master's decision to a single judge of the Supreme Court. After the time for compliance fixed by Master Efthim had expired, but before the appeal hearing, Aussie applied for another extension of time.
Justice Whelan in turn dismissed both Aussie's application to extend the time for compliance with the statutory demand and its appeal against the Master's refusal to set it aside.
Aussie appealed to the Court of Appeal, which by a majority of 3:2, upheld Justice Whelan's decision.
Aussie then sought and obtained leave to appeal to the High Court.
The High Court decision
The High Court was asked to consider whether or not a court has power to extend the time for compliance with a statutory demand after the statutory period has already expired.
By a 4:1 majority, the High Court decided that an order could not be made to extend the period of compliance after it had expired.
In reaching its decision, the High Court had regard to the purpose of Part 5.4 of the Corporations Act and observed that the underlying intention of the legislation is to provide for the speedy resolution of applications for debtor companies to be wound up in insolvency.
The court also found that denying courts the ability to extend time for compliance with a statutory demand after the 21 day period has expired does not impact the determination of the rights or liabilities of the debtor company or of the petitioning creditor. It merely creates a rebuttable presumption of insolvency.
Ultimately, the High Court's decision was that Esanda's statutory demand was still in force and the time for compliance had expired. Therefore, Aussie had not complied with the statutory demand and was presumed to be insolvent.
The impact
If a statutory demand is served on a company, it has a strict time limit of 21 days within which to apply to the court to have the demand set aside. Otherwise the company is presumed insolvent, despite what its financial records might indicate.
When an application for winding up is made against a company, the burden of proof then shifts to the company to prove that it is solvent; that is, to rebut the presumption of insolvency that is cast upon it as a result of non-compliance with the demand. This is clearly an unnecessary burden for a solvent company to have to bear.
When filing an application for winding up, the petitioning creditor will also file a Form 519 with ASIC, which has the effect of listing the application on the public record. Once on the record, the company will run the risk of other creditors joining the application to substitute after the company has settled with the petitioning creditor, a process which may continue until all creditors have been paid.
Other than a potential string of creditors chasing the company, there is also the inconvenience of a winding up application which involves considerable and unavoidable legal costs as well as the adverse effect of the advertisement that is required to be posted in local newspapers as a part of the winding up proceeding.
Conclusion
In summary, it is critical to act quickly when served with a statutory demand.
Many companies have their accountant's office as their registered office and it is important for accountants also to realise the importance of acting expeditiously in response to a statutory demand.
As always, if in doubt, seek legal advice as soon as possible.
Emission reporting and reduction schemes
Policy response to climate change
While there has been general scientific consensus for some time about the need to address global warming and to reduce greenhouse gas emissions, until recently policy makers have shown some reluctance to take positive steps to address those issues. This changed markedly in 2007 with the election of the Rudd Labor Government. Following Barack Obama's recent election, the USA is expected adopt ambitious greenhouse gas emission reduction targets and to champion the cause for an international consensus on the need for action.
Australian businesses need to be aware of the developments in this area so that they can proactively respond to the challenges they will increasingly present.
The current regulatory regime
At the Commonwealth level, the most important current regulatory initiatives are:
- the mandatory renewable energy target which sets a renewable power generation target of 20% by 2020;
- the National Greenhouse and Energy Reporting System (Reporting Scheme) established under the National Greenhouse and Energy Reporting Act 2007 (Cth) which commenced on 1 July 2008; and
- the Carbon Pollution Reduction Scheme (Reduction Scheme) which will commence operating on 1 July 2010.
Various state and territory initiatives have also been adopted, with the most important being the New South Wales and Australian Capital Territory Greenhouse Gas Abatement Scheme (NSW Scheme) which was implemented in 2005.
Under the NSW Scheme, mandatory greenhouse gas benchmarks are imposed on all holders of electricity retail licences in New South Wales and the Australian Capital Territory. If these benchmarks are exceeded, certain penalties will apply for each tonne of greenhouse gas emission above the benchmark. The NSW Scheme also allows the trading of emission permits.
The Reporting Scheme
The Commonwealth Government introduced the Reporting Scheme to prepare for the introduction of the Reduction Scheme and to avoid mistakes made when the European emissions trading scheme was introduced.
Under the Reporting Scheme, entities must measure and collect data about their greenhouse gas emissions and energy usage and must submit this information to the administrator of the Reporting Scheme if certain thresholds are exceeded. These thresholds are initially set quite high so that only the largest emitters and energy consumers are covered by the Reporting Scheme in the 2008/2009 reporting year. It is estimated that between 500 and 1,000 entities are currently covered under the Reporting Scheme.
To ascertain whether a particular entity is covered under the Reporting Scheme, the following process is recommended:
- First it needs to be ascertained whether the entity is a direct emitter of greenhouse gases by, for example, being responsible for a facility which directly emits greenhouse gas emissions.
- If the entity is a direct emitter, it needs to be decided whether the prescribed annual thresholds are likely to be exceeded. To assist in this process, the emissions calculator on the Government Climate change webpage (www.climatechange.gov.au/reporting/calculator) can be a useful starting point.
If the entity is not a direct emitter of greenhouse gases, it needs to be ascertained whether the amount of energy (electricity and fuels) consumed by the entity per year exceeds the prescribed annual thresholds. It has been calculated that if an entity spends about $2.8 million per year on purchasing energy, the threshold is likely to be exceeded.
If the entity in question is covered by the Reporting Scheme, the entity must measure its greenhouse gas emissions and must report those emissions to the responsible government authority.
Importantly, directors and officers of companies will be personally liable in certain circumstances for contraventions by their company of the Reporting Scheme. As a consequence, it is essential that directors and officers know and understand their obligations under the Reporting Scheme.
The Reduction Scheme
The planned Reduction Scheme is a cap and trade scheme under which Australia's total greenhouse gas emissions will be capped and the trade of emission permits.
Whether entities are covered by the Reduction Scheme will, similarly to the Reporting Scheme, be dependent on whether the entity is responsible for greenhouse gas emissions above a prescribed threshold.
The Reduction Scheme will mainly cover the following areas:
- stationary energy generation;
- upstream fuel suppliers;
- fugitive emissions and industrial processes;
- waste disposal; and
- importers of Synthetic Greenhouse Gases.
It is estimated that initially the vast majority of Australian businesses will not have to comply with the obligations imposed under the Reduction Scheme as they will not exceed the prescribed thresholds at the commencement of the Reduction Scheme.
Businesses covered by the Reduction Scheme will go through the following three step process:
- all greenhouse gases emitted by the entity over one year will be measured;
- the entity must acquire sufficient emission permits to cover its greenhouse gas emissions; and
- at the end of the year, the entity must surrender one emission permit for each tonne of greenhouse gases the entity has released during the year.
All emitters will compete for the limited number of emission permits available and hence the price of the emission permits will be set by market forces.
Emission permits will be auctioned off by the government but certain industries (eg emission intensive trade exposed industries) will receive some free emission permits as a transitional measure.
Indirect effects of the schemes
While many SMEs will not be directly covered by the obligations under the Reporting Scheme or the Reduction Scheme, indirect effects of the schemes include the following:
- input prices for materials and services will increase;
- businesses need to ensure that they can pass on the increase of their input prices to their customers; and
- consumer preferences will likely change and this may mean that companies will want to voluntarily measure and report their emissions even though they technically do not fall under the Reporting Scheme or the Reduction Scheme.
Advice provided by Hall & Wilcox
As regulation of this area will have an increasing effect on the running of businesses, decision makers should be aware of their obligations and rights under the Reporting Scheme and the proposed Reduction Scheme.
- determining whether your business is covered by the Reporting Scheme or the Reduction Scheme;
- what your obligations are under the Reporting or the Reduction Scheme;
- how to purchase, trade or create Australian Emission Units;
- whether your supply and sale contracts adequately deal with the consequences of the Reporting Scheme or the Reduction Scheme commencing;
- whether any of your green marketing claims comply with the provisions of the Trade Practices Act; and
- any property law related questions such as coastal development and environment friendly buildings.
The economic downturn and immigration
It's been all about skills
Over the last decade, Immigration policy has increasingly focussed on addressing skill shortages in the Australian economy, through:
the permanent migration program, with some 66% of migrants in 2008-09, numbering 133,500, coming under the skilled migration program; and
the temporary visa program, which has seen a huge increase over recent years to some 110,000 overseas workers and their dependents entering Australia last year. Some 25,000 of these subsequently applied for and were granted permanent residence.
Do we still need to import skills?
Responding to questions about the impact of the global financial downturn on the immigration program, the Minister for Immigration, Chris Evans, recently said that permanent migration arrangements will be reviewed later in the year. However, skill shortages in such areas as health care, mining and construction are likely to remain, notwithstanding the likelihood that there will be a larger pool of job seekers in Australia as unemployment rises. Engineers Australia predicts that there will still be a shortfall of 56,000 engineers over the next decade, which will adversely affect Australia's response to climate change and infrastructure needs. Australia's shortage of doctors and nurses is unlikely to be solved with the availability of more workers in the job market. Such shortages will still require the use of temporary visa arrangements in the short to medium term.
Protecting Australian workers and conditions
Temporary visa arrangements have come under scrutiny by both media and Government over the last few years. Concerns about temporary workers being exploited or used to undermine Australian working conditions have been met with the establishment of a number of reviews to look at the appropriateness of existing visa rules and the obligations on employers who make use of these visas. In times of economic downturn, there is increased pressure to ensure Australian workers are not disadvantaged. In the words of Minister for Immigration, Chris Evans, "Employer access to temporary skilled overseas workers can only be sustained if the community has confidence in the program."
Immigration compliance - employers beware!
A range of integrity measures have recently been introduced and are foreshadowed in the next year:
Since August 2007 it is a criminal offence to knowlingly or recklessly allow someone to work or refer someone for work if that person's status in Australia is unlawful or the person does not have a visa permitting work for the employer. Maximum penalties are $13,200 for individuals, and $66,000 for corporations, and / or 2 years imprisonment. Employers should check that all new recruits are legally entitled to work.
Existing employers of 457 'work' visa holders are subject to a wide range of obligations including:
payment of a minimum salary level;
ensuring certain costs are met or paid for such as health insurance or public hospital costs;
complying with reporting and monitoring requirements; and compliance with the terms of the visa grant.
The new Workers Protection Bill aims to:
extend the sponsorship obligations framework to all temporary visas;
increase the scope of obligations that will apply to existing and new 457 visa sponsors;
increase information sharing between all levels of government;
expand powers to monitor and investigate; and introduce stronger administrative and civil penalties, including fines.
In addition, changes to temporary and permanent visa entry rules are likely to target particular skill sets or limit access where there is no longer a shortage.
Be prepared!
Non-compliance with sponsorship obligations can result in penalties or sanctions that severely disrupt business operations for employers reliant on overseas staff to deliver key projects. Employers can minimise the impact of such measures by having mechanisms and procedures in place which reduce the risk of non-compliance, including:
checking that all new recruits are Australian citizens, permanent residents or hold a visa that permits them to work;
having employment contracts that address the specific circumstances of temporary visa holders which will protect employers from additional costs and responsibilities;
understanding what sponsorship obligations mean in practical terms so that employers can implement risk minimisation strategies; and
informing sponsored visa holders of their obligations and visa conditions so they remain lawful.
What is redundancy?
An employee's job is generally regarded as having been made redundant when, through no fault of the employee, their employer decides that they no longer wish the employee's job to be done by anyone.
This includes, for instance, where the employee's duties have changed so much that for all practical purposes their original role no longer exists and also where the employee's duties are split up among other employees.
The focus is on the work performed by the employee, not the identity of the employee or the employer; it is the position, not the employee, which becomes redundant.
Entitlements of redundant employees
An employee who is made redundant is entitled to receive notice of termination or payment in lieu of notice in the ordinary way.
In addition, certain rights and entitlements may flow to an employee whose position is made redundant depending on the terms under which they are employed. Typically, this may include a right to:
- be consulted about the proposed redundancy;
- assistance finding new work; and
- redundancy (or severance) pay.
As things stand, there is no automatic legal right for a redundant employee to receive redundancy pay; in the absence of an express right to redundancy pay under an employment contract, industrial instrument, award or policy, an employee is unlikely to be entitled to redundancy pay unless they can demonstrate an entitlement based on custom and practice in the industry in which they work.
Traditionally, senior and non-award covered employees have not enjoyed redundancy entitlements. This will all change from 1 January 2010 when a new legislated right to redundancy pay is expected to come into force. From that date, employers will be required by law to pay redundancy pay to employees who, under the current system, miss out (see further below).
Redundancy pay seeks to compensate the redundant employee for the loss of non-transferable credits (ie accrued personal/sick leave, long service leave, etc) as well as the hardship caused by the loss of employment and is calculated by reference to the employee's period of service.
Employers may be exempted from paying redundancy pay depending on the terms of the relevant employment contract, industrial instrument, award or policy. For instance, it is common that no entitlement to redundancy pay will arise where:
- the employee is employed on a fixed term, casual or apprenticeship basis;
- the employer finds "acceptable alternative employment" for the employee;
- there is a sale of business and the new owner recognises the employee's service with the old owner;
- redundancy is the result of the "ordinary and customary turnover of labour".
The 2006 WorkChoices reforms also excused small business employers employing less than 15 employees under awards from redundancy pay obligations in certain situations.
Furthermore, some redundancy clauses entitle the employer to apply to the Australian Industrial Relations Commission for an order reducing or excusing the employer from paying redundancy pay.
Unfair dismissal and unlawful termination
Another important aspect of the WorkChoices reforms means that, at least for the time being, an employee covered by the federal workplace relations system who is dismissed for "genuine operational reasons" (or reasons that include genuine operational reasons) cannot bring an unfair dismissal claim against their employer.
"Operational reasons" are reasons of an economic, technological, structural or similar nature relating to the whole or part of the employer's business. This change has provided employers implementing redundancies a measure of protection from claims by disgruntled employees.
It nevertheless remains crucial for employers considering implementing redundancies to be mindful of their legal obligations when selecting employees for, and implementing, redundancy. Importantly, the WorkChoices changes do not protect employers from unlawful termination or discrimination claims where it is shown that the employer in choosing an employee for redundancy discriminated against them on grounds of race, sex, family responsibilities, disability, age, union membership or the like.
Fair Work Bill 2008
On 25 November 2008, the Federal Government introduced its new Fair Work Bill (FW Bill) into the House of Representatives.
A summary of the main provisions of the FW Bill is available on our website.
Key aspects of the FW Bill which impact redundancy are as follows:
National Employment Standards
One of the more significant changes to be introduced is a new general statutory right to receive redundancy pay.
The FW Bill includes a new minimum right for employees covered by the federal system to be paid redundancy pay by their employer if their employment is terminated:
- at the employer's initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the ordinary and customary turnover of labour; or
- because of the insolvency or bankruptcy of the employer.
The entitlement will be calculated by reference to the employee's base rate of pay and will range from four weeks' pay for an employee with at least one year but less than two years' continuous service with the employer to 12 weeks' pay for an employee who has at least 10 years' continuous service.
Only an employee in a business with 15 or more employees will be entitled to redundancy pay. In addition, certain employees will be excluded including those employed on a fixed term basis, on probation, casual or seasonal employees, apprentices and others. The FW Bill also contains a mechanism for some employees to be excluded by regulation. While details have yet to be announced, it is anticipated that this exclusion may apply to employees earning above an income threshold.
Employers will be able to apply to Fair Work Australia, the government's new "one-stop-shop" for information, advice and assistance in relation to workplace relations matters, which may reduce the amount of redundancy pay if the employer:
- obtains other acceptable employment for the employee; or
- cannot pay the amount.
The changes are expected to commence from 1 January 2010.
Modern awards
Another important impending change is award modernisation. The award modernisation process is being conducted by the Australian Industrial Relations Commission (AIRC) and is due to be completed in relation to priority industries and occupations by 31 December 2008. The entire process is to be competed by 31 December 2009.
Modern awards will apply to employees earning $100,000 or less a year who perform work historically regulated by awards.
The AIRC recently released an exposure draft of the priority modern awards. In its response, the government expressed concern about the inclusion of provisions that extend redundancy arrangements to small business. The response remarked that "an appropriate balance does not appear to have been struck between employee entitlements and employer costs when introducing a small business redundancy entitlement".
It remains to be seen how the AIRC will respond to the government's feedback.
Abolition of genuine operational requirements exception
Another significant change is the abolition of the genuine operational requirements exclusion in respect of unfair dismissals referred to above.
The FW Bill also provides that there will be no unfair dismissal in the case of "genuine redundancy". However, a redundancy will not be "genuine" where it would have been reasonable for the affected employee to be redeployed in the employer's business or that of an associated entity of the employer. If this provision is retained in the final legislation, it will make it difficult for larger employers to argue that a genuine redundancy has occurred for unfair dismissal purposes. These changes are proposed to commence from 1 July 2009.
Conclusion
Employers and employees alike should be mindful of recent and proposed changes to the law in this area.
Employers need to carefully consider their contractual and statutory obligations when contemplating redundancies so as to best manage their financial exposure and avoid the
legal pitfalls.
Similarly, employees whose positions are (or are expected to be) made redundant should familiarise themselves with their rights both to notice of termination and to severance pay so as to ensure those entitlements are honoured in full.
Workplace anti-discrimination law
State and Territory legislation
Each of the States and Territories has its own umbrella legislation regulating discriminatory conduct, including in the workplace. The legislation, which operates concurrently with the federal system, follows a broadly similar model.
In Victoria, the Equal Opportunity Act 1995 (EO Act) prohibits discrimination against job applicants, employees and independent contractors. Sexual harassment is also outlawed.
The Victorian legislation currently contains exceptions which enable an employer to be excused from conduct that would otherwise be discriminatory in certain situations. The exceptions include where employers discriminate:
in limiting offers of employment to people of one sex if it is a genuine occupational requirement that employees are of a particular sex;
in determining who should be offered employment (for small businesses employing no more than the equivalent of five people on a full-time basis); and
in setting reasonable requirements to take account of the reasonable and genuine requirements of the job.
The EO Act is administered by the Victorian Equal Opportunity and Human Rights Commission. The Commission receives complaints from people affected by discriminatory conduct and runs conciliations.
Where a compliant can't be conciliated or conciliation is unsuccessful, it can be referred to the Anti-Discrimination List of the Victorian Civil and Administrative Tribunal (VCAT) for determination.
VCAT's powers include ordering the employer to refrain from committing any further contraventions and requiring the employer to pay compensation or do anything to redress any loss, damage or injury suffered by the employer. There is no monetary cap on damages.
Commonwealth legislation
At Commonwealth level, there are five main anti-discrimination statutes – namely, the Racial Discrimination Act 1975; Sex Discrimination Act 1984; Human Rights and Equal Opportunity Commission Act 1986; Disability Discrimination Act 1992; and Age Discrimination Act 2004.
The anti-discrimination statutes adopt a broadly similar regulatory model whereby:
discrimination on particular grounds (eg race, sex, disability and age) is unlawful in particular areas of life including the workplace;
employers are vicariously liable for the unlawful conduct of their employees unless they can show that reasonable steps were taken to prevent the relevant act; and
principal and independent contractor relationships as well as trade unions, recruitment consultants and employer and employee organisations are typically covered.The Human Rights and Equal Opportunity Commission (HREOC) administers the federal system.
HREOC investigates complaints and conducts informal meetings (conciliations) which seek to resolve complaints quickly and inexpensively.
If conciliation is unsuccessful, the complainant can apply to the Federal Court or the Federal Magistrates' Court. The courts powers include issuing a declaration not to repeat or continue the conduct, ordering reinstatement and awarding damages if discrimination is proven.
In addition to the anti-discrimination legislation, the Workplace Relations Act 1996 provides recourse to employees where:
their employment has been terminated unfairly or unlawfully (including on the grounds of race, colour, sex, sexual preference, age, physical or mental disability, marital status, family responsibilities, pregnancy, religion, political opinion, national extraction or social origin); or
they have been discriminated against because they are, or are not, members of an industrial organisation.
Common law claims
Most discrimination claims are pursued through either the State or Commonwealth systems outlined above. However, it remains open to employees affected by workplace discrimination to bring claims based on the common law of contract and / or tort.
Typically, such claims are only brought by well resourced senior employees who claim to have suffered significant financial loss as a result of alleged discriminatory conduct.
Recent law reform activities
In recent times, concerns have been raised about the effectiveness of Australia's anti-discrimination legislation. In particular, the legislation has been criticised for placing too heavy a burden on individuals affected by discrimination to take action.
Governments have in turn announced and are considering a range of initiatives designed to encourage a more proactive approach to compliance and to provide equality of opportunity to all people regardless of their personal circumstances.
Victorian reforms
An example of recent reform of the law in Victoria is the Equal Opportunity Amendment (Family Responsibilities) Act 2008.
This Act amended the EO Act with effect from 1 September 2008 to provide job applicants, employees and other workers with responsibilities as parents and carers with an enforceable legal right to request their employers to take steps to accommodate those responsibilities.
Employers must now take positive steps to accommodate employees with parent and carer responsibilities, including by considering altered working hours, job share, work from home, or part-time work arrangements.
An employer can only refuse a request on reasonable business grounds. The legislation contains a non-exhaustive list of factors to be considered in determining whether or not an employer's refusal to accommodate an employee's request is reasonable, including:
the employee's personal circumstances;
the nature of the role and the arrangements required to accommodate the parental or carer responsibilities;
the financial circumstances of the employer;
the size and nature of the workplace and business.
While the amendments do not mean that employers must agree to every request for flexible working arrangements, the law does now require each such request to be seriously considered.
It is not enough for employers to refuse a request for flexible work arrangements simply because they have not offered such arrangements in the past or because they do not fit in with the business' normal practices. Employers who operate in that way do so at their peril.
In addition to the amendments mentioned above, a comprehensive review of the EO Act was completed in mid-2008. The review made a number of recommendations which are under currently consideration by the State government. New legislation can be expected in the new year.
Commonwealth reforms
The National Employment Standards (NES) (which form part of the government's substantive workplace relations changes and are expected to commence from 1 January 2010) will give an employee who is a parent or who has responsibility for the care of a child under school age with a legally enforceable right to request their employer for a change in their working arrangements to assist the employee to care for the child.
The employer may refuse the request on reasonable business grounds only. The recently released Fair Work Bill (FW Bill) does not define what constitutes reasonable business grounds.If a request is refused, written reasons must be provided to the employee within 21 days of the request.
The right will only operate in relation to permanent employees who have completed at least 12 months of continuous employment with the employer immediately before making the request and casual employees who have been employed on a regular and systematic basis during the 12 months immediately before the request and who have a reasonable expectation of continuing engagement on a regular and systematic basis.
The FW Bill makes it clear that the courts will not be able to order that an employer has acted unreasonably in refusing a request for flexible working arrangements which removes any real sting from the new right.
However, and notably, the FW Bill expands the range of protections that are currently available to employees and prospective employees who are affected by discriminatory conduct in the workplace. At the moment, those protections are generally limited to protection from dismissal on discriminatory grounds. The FW Bill (if it becomes law) will significantly expand the range of discriminatory conduct prohibited by the legislation.
Implications for employers and employees
Recent changes to Victorian legislation require employers to carefully consider requests by parents and carers for flexible working arrangements.
The FW Bill contains several changes. Of those, the proposed expansion of the protections available to employees (and prospective employees) from discriminatory conduct by their employers is likely to have the biggest practical impact.
Finally, there are indications that state and federal governments will move in the near term to modernise Australia's anti-discrimination laws more broadly. The likelihood is that the reforms will mean that:
employers are required to take steps to more proactively ensure that their workers are not subject to unlawful discriminatory conduct;
employees who believe they have been discriminated against will have more immediate access to the courts and tribunals;
the powers of the bodies tasked with overseeing the anti-discrimination legislation will be expanded; and
recalcitrant employers will run an increased risk of incurring more significant penalties.
We encourage readers to continue to watch this space.
Franchising: is more regulation really needed!
Franchising Code
The Trade Practices (Industry Codes – Franchising) Regulations 1998 (Franchising Code) regulates the franchise relationship.
To comply with the Franchising Code, often franchisors present prospective franchisees with 100 page disclosure documents to consider prior to entering into a franchise agreement.
The Franchising Code protects prospective franchisees and franchisees by requiring franchisors to, among other things:
- disclose information about the franchisor, the system, the franchise agreement and related agreements;
- not enter into a franchise agreement unless it receives a statement from the prospective franchisee that it received or waived its right to receive independent legal, usiness and accounting advice;
- provide the franchisee with a seven day 'cooling off' period to terminate the franchise agreement and be refunded money; and
- if there is a dispute, attend mediation.
Changes to the Franchising Code were introduced earlier this year with much of the focus on pre-franchise disclosure. Some of the more controversial changes included requirements for:
- franchisors to disclose contact details of past franchisees (unless the past franchisees request otherwise);
- franchise agreements and related agreements to be given to the franchisee in executable form 14 days prior to entering into the franchise agreement or paying non-refundable money; and
- franchise agreements to not contain or require a waiver of representations made by the franchisor.
In the case of Ketchell v Master of Education Services Pty Ltd, the NSW Court of Appeal found a franchisor liable for not obtaining the franchisee's written acknowledgment that it had received, read and had a reasonable opportunity to understand all the information provided by the franchisor. The court considered that this breach made the franchise agreement illegal.
At the time, this decision created a lot of uncertainty for the franchising sector and seemed to add yet another level of complexity for franchisors. Fortunately, the decision was overturned by the High Court earlier this year.
Causes of action for franchisees
Prospective franchisees and franchisees have rights under the Trade Practices Act 1974 (Cth) (TPA), if the franchisor:
- makes a misleading or false representation; or
- acts unconscionably.
It is good practice for franchisors to check that no false or unauthorised representations are made by its employees by asking prospective franchisees to complete a questionnaire.
The 2008 case of Van Camp v Muffin Break Pty Limited, where a franchisor's employee was found to have induced a prospective franchisee to enter into a franchise agreement based on its misleading representations concerning profitability and the site, provides a sautary warning.
A well drafted questionnaire will capture such representations, which allows the franchisor an opportunity to clarify or retract the representations before the prospective franchisee signs a franchise agreement.
Also this year, the Australian Competition and Consumer Commission (ACCC) investigated Bakers Delight in relation to allegations that it had engaged in misleading and deceptive conduct and unconscionable conduct towards franchisees. In particular, there were allegations made by franchisees that Bakers Delight engaged in 'churning' (that is, selling a franchise site repeatedly where it was aware the site would fail). The ACCC concluded, after a 12 month investigation, that the allegations were unsubstantiated.
Government enquiries and expected changes
In early 2008, both the South Australian and Western Australian governments considered 'churning' as part of their inquiries into franchising.
The issue has also been considered by the federal parliamentary inquiry into franchising. The Franchising Council of Australia (FCA) and the ACCC were heard at the recent public hearings; both submitted that there weren't systematic problems in franchising requiring new laws.
Despite these submissions, the federal inquiry has recommended that a statutory duty of good faith be introduced into the Franchising Code.
Other key recommendations made by the Federal inquiry, that were not endorsed by the FCA, include:
- pecuniary penalties for breaches of the TPA; and
- introduction of an online registration system.
Conversely, a recent Senate inquiry into unconscionable conduct, which was run separately to the Federal inquiry, did not recommend that a statutory duty of good faith be introduced on the basis that it would create too much uncertainty.
Also notable is the fact that the Western Australian government is now considering introducing its own state-specific legislation. If introduced (and especially if the other state governments follow suit), nationwide franchise systems will need to comply with federal and state-based legislation. This is likely to be a real area of concern for franchisors and is well out of step with harmonisation of state and federal laws being championed by the federal government in other areas.
The franchising sector will be keeping a close eye on these developments.
Counterfeiting: what are your rights?
Background
Counterfeiting is widely acknowledged as a serious problem across many industries.
There are avenues available to protect distributors and manufacturers of toys and hobbies when they encounter products which appear to be counterfeit or otherwise copied from the original product.
There are two main areas of law that can be relied on to prevent the importation and sale of counterfeit products:
- the Trade Practices Act 1974 (Cth) (TPA); and intellectual property (IP).
The TPA
The TPA contains several consumer protection provisions, one of the most important being section 52. Some things to note about section 52: it prohibits a corporation from engaging in misleading and deceptive conduct; and any company which engages in misleading and deceptive conduct could be in breach, including importers, wholesalers, retailers, advertisers and manufacturers. As it is a consumer protection provision, there does not even need to be an intention to mislead or deceive for a breach to occur.
Examples of conduct that could be caught by section 52 include:
- importing goods in packaging which is similar to packaging on well-known, original products; and
- advertising or displaying for sale counterfeit goods without distinguishing them from the well-known original.
The TPA also contains significant product liability provisions. Generally, under Part V Division 2A, manufacturers and importers of goods are liable to compensate consumers if their products do not meet standards based on implied contractual terms. These terms require goods to be of merchantable quality; be reasonably fit for their purpose; and relate to the quality of goods sold by description and by sample.
Intellectual Property
In contrast to the TPA (which focuses on the protection of consumers), intellectual property generally focuses on private property rights.
The grant, registration or subsistence of an intellectual property right gives the owner exclusive rights in respect of that intellectual property. The intellectual property is infringed where one or more of those exclusive rights are exercised without authority from the owner of the IP.
The most common forms of intellectual property are:
The owner of a registered trade mark has the exclusive right to use that trade mark in Australia in respect of goods and services that are covered by the registered mark. Generally, importation of products or packaging which bear an identical or deceptively similar trade mark without consent from the owner of the trade mark will infringe the registered trade mark. Clearly, trade marks are most closely associated with brands and logos. It is possible to enforce unregistered trade marks under the TPA and the law of passing off. However, it is generally much more difficult to do as compared to enforcing registered trade marks.
Patents grant legal monopoly rights in respect of inventions that are claimed in the patent. Importantly, only a valid, granted patent can be enforced. It is possible that certain functional aspects of a product will be protected by a patent.
A registered design protects the visual features of a product, not how the product works. A registered design will protect the three dimensional shape of a particular product themselves (ie its unique appearance).
Copyright
Summary
There are a number of potential claims available to distributors and manufacturers in the case of suspected counterfeit products. The strength and type of the claims, who could be liable and which party has the legal right to bring such claims requires careful analysis having regard to the circumstances of a particular case.
Sale of business: Making your business more attractive to potential buyers
Background
In the current gloomy economic climate, it may seem counterintuitive for business owners to worry about getting their businesses in shape and ready for a sale.
But because a business does not become ready for sale overnight, now is an excellent time to begin to put into place the structure and the processes that a buyer will expect to see in a good business. Making the effort now may prove well worth the investment if and when you choose to sell.
In any event, a number of the steps outlined in this article make good business sense, and so are worth undertaking even if you do not end up selling your business.
Is your business properly structured?
A too complicated business structure may put off potential buyers. We often see even small businesses with overly complicated structures, involving numerous trusts, companies and related entities, with the assets and operations of the business spread between them.
Even worse, a business owner's personal assets are sometimes mixed in with the business assets, or the ownership of significant assets may be entirely unclear which can make it hard for a potential buyer to know what they are buying and from whom.
If your business isn't structured in a way that will make a sale as straightforward as possible, consideration should be given to a pre-sale restructure consolidating all of the assets into an appropriate entity.
As there are likely to be taxation issues in implementing a restructure of the business assets (including the possibility of being charged stamp duty and losing the pre-CGT status for assets acquired before September 1985), you should always consult a tax lawyer or accountant for advice on the best sale structure for you.
Are your accounts and financial records in good order?
Well kept and up to date accounting records that follow Australian generally accepted accounting standards are essential in assessing the value of a business and its growth and earnings potential, and are therefore of real interest to potential buyers. Buyers also often require audited accounts (to ensure that an independent third party has vetted the accounts).
Rigorously kept financial records can benefit a seller above and beyond their role in explaining the financial position and performance of the business to a buyer. The condition of a business' financial records can tell a buyer something about the condition of the business generally – that is, a seller who keeps his or her financial records in good order is likely to have kept the business in good order, too.
Do you have a management team in place to carry on the business once you are gone?
Often the owner of a business is an integral part of the operation and future growth potential of the business. If the owner wants to retire or do something else after the sale, the issue of who will manage the business going forward will need to be addressed.
A buyer sometimes will have the resources to operate the business itself or may bring in a new management team. However, this is often not the case. In order to maximise the value of the business to a buyer, the business should have a management team in place that will be able to take the business forward in the absence of the owner. This would involve having all people in key positions signed up to written employment contracts which contain, among other things, adequate notice and restraint clauses.
Have important relationships been committed to paper?
Similarly, important customer, supplier and other relationships should be documented where possible. If there are no long term customer or supplier agreements in place, it can make it much harder to persuade a potential buyer that those arrangements will continue post-sale. Committing important relationships to paper is not only important in terms of a potential sale; it is also prudent practice in the day to day running of a business as it reduces the risk that a vital client or supplier will unexpectedly stop dealing with the business or change its trading terms.
When considering such agreements, be alert to change of control (which are most relevant in the context of a share sale) and anti-assignment clauses (which are most relevant in the context of an asset sale). The difference between the two in terms of the sale of a business is that in the case of a change of control clause, the other party to the contract has the right to consent to a sale of the shares in the company that owns the business and is party to the contract. In contrast, under an anti-assignment clause, no consent is required if the company's shares are sold, because the same company is still party to the contract, even though it is owned by a different entity.
Is your business exposed to any unusual or significant risks or liabilities?
If the business is subject to any unusual and significant liabilities (such as environmental liabilities) or disputes, those liabilities or disputes should be addressed (preferably by getting rid of them) before the sale process starts. Few things are surer to reduce interest from prospective buyers than a large dispute or liability hanging over the business. If the business is saddled with a problem of this kind at the time of sale, it is likely one of three things will occur:
a potential buyer will withdraw from the sale process;
the buyer will require that, as a term of the sale, the owner of the business retain the liability after the sale; or
the buyer will seek to have the purchase price reduced to account for the liability.
Are any licences required and can they be transferred?
Make sure that any necessary government licences, permits or consents are maintained and kept up to date.
You should also find out whether these licences or permits are transferable and, if so, on what terms and conditions. We have experienced a number of significant business sales that have been held up (sometimes for months) because the owners were not aware of the assignment requirements for relevant licences and permits.
You should also consider whether any government benefits such as subsidies or tax credits will be able to be transferred to the buyer.
Do you need some help to put your business in shape?
If you have never sold a business before and your business is large enough to warrant it, we highly recommend that you engage a business broker when you decide to sell.
Even before you get to that point, you may want to consult a corporate advisor and other advisers (such as accountants and lawyers) to assist you in getting the business ready.
The issues listed above are by no means comprehensive. They are, however, a few of the key practical matters that business owners should think about and possibly work on now, even if they are not currently considering selling. You never know what is around the corner.
Risky Business? Put your Trust in Trusts
Discretionary Trusts
Discretionary or family trusts are widely used to structure personal and business assets to reduce exposure to risk.
In addition to protection from creditors, discretionary trusts offer:
tax planning advantages, and
the ability to preserve wealth and allow for ease of transmission through the generations.
Here we look at the asset protection advantages in particular.
'Mere Object'
Assets held in discretionary trusts are not owned by any of the beneficiaries, trustees, appointors or guardians.
Beneficiaries of a discretionary trust do not have an interest in the assets. A beneficiary is regarded as a 'mere object' having a right only to be considered as a potential beneficiary.
This means that the trust assets are not available to be divided up between any creditors of any beneficiary if they encounter financial difficulties.
'Alter ego'
The Richstar case decided in 2006 relating to the collapse of the Westpoint group of companies brought into question the protection offered by trust structures.
The case was an interlocutory application in relation to the appointment of a receiver under the Corporations Act 2001. ASIC made an application to have a receiver appointed in relation to assets held in trusts established for the benefit of the various defendants. The question was that could the trust be said to be "property" for the purposes of the Corporations Act? If the answer was 'yes' then the receiver could be appointed in relation to the trust property preventing it from being dissipated by the defendants.
ASIC argued that the four defendants had a contingent interest in the discretionary trusts. French J. agreed that this was the case where the trust was "controlled by a trustee who is in truth the alter ego of a beneficiary" because it is as "good as certain" that beneficiary will receive benefits. Where a discretionary beneficiary is also the trustee or the director and shareholder of a corporate trustee and/or the appointor then that beneficiary has "effective control".
ASIC succeeded and receivers were appointed in relation to the assets of the discretionary trusts under consideration.
This case represents a clear departure from commonly understood principles regarding interests in trusts. A vast number of family trusts could fall into the 'alter ego' category referred to in the judgment.
However, the case decided the extent of the defendants' 'property' only for the purposes of the appointment of a receiver and could be said to be limited in its application to the appointment of a receiver in similar circumstances.
A recent decision acknowledges a restrictive reading of the Richstar decision.
Ms Smith and the cats
In this case, a property was purchased by a discretionary trust. The corporate trustee of the trust company was controlled by Dr Ward.
By reason of an error in the drafting of the trust deed, Dr Ward was omitted as a beneficiary of the trust. However, it was accepted by the parties that the trust deed should be rectified to include Dr Ward as one of the beneficiaries.
In her Will, Dr Ward left 'my property' to a Ms Robyn Smith with a right to reside in the property for at least 15 years. This right to occupy was subject to Ms Smith agreeing to look after Dr Ward's cats. The Public Trustee was appointed executor of Dr Ward's Will.
As the property was owned by the corporate trustee as trustee of the trust at the time of Dr Ward's death, the property did not form part of Dr Ward's estate.
Nonetheless, a number of arguments were put forward by Ms Smith to try to enforce the gift. One of those arguments was described as the 'beneficial ownership by virtue of control' argument. Ms Smith argued that because Dr Ward had the power to control the exercise of the trustee's discretion to appoint the trust property to Dr Ward, Dr Ward was the beneficial owner of the property.
This argument was rejected by the Court. The Court specifically held that neither the fact that Dr Ward was in a position to control the exercise of the trustee's powers nor the fact that she could cause the trustee to distribute the income and capital of the trust to her meant that she was the beneficial owner of the property.
In considering the application of the Richstar decision to this case, the Court noted:
"I do not understand [Richstar] to establish that because a beneficiary of a discretionary trust controls the appointment or removal of the trustee, or controls the exercise of the trustee's powers and can appoint trust property to himself or herself, that the holder of such a power is the beneficial owner of the trust property irrespective of the terms of the deed'.
Accordingly, this case supports the reading down of the Richstar decision.
Future Proof
In the current climate risk surrounds us. We cannot know with certainty what the future holds, but we can evaluate risk, and for a small price, put in place valuable planning. Trusts remain an important tool in protecting assets from risk.