The requirement under the corporations legislation to notify the Australian Securities and Investments Commission (ASIC) within 45 days of the creation of a registrable charge is generally well understood in the business world.
However, there tends to be less familiarity with requirement to notify ASIC of the variation of a registrable charge where the variation results, among other things, in an increase in liability secured by the charge.
The latter requirement has been brought into sharp focus by the decision of the Supreme Court of Queensland in
Re Octaviar Ltd; Re Octaviar Administration Pty Ltd1, which highlights the potentially serious financial consequences that can flow to a lender who fails to comply with it.
Facts of the case
The case involved two loans made by a financier to two different borrowers. The repayment obligations of each borrower were guaranteed by a third party guarantor company. The second loan was also secured by a fixed and floating charge over the guarantor.
The charge was expressed to secure the guarantor's obligations under the "Transaction Documents" which was defined, in customary fashion, to include the guarantee of the second loan and "any other document which the lender and the borrower... agree in writing is a Transaction Document".
The lender and the guarantor later agreed that the previously unsecured guarantee of the first loan would also be a "Transaction Document" in the manner contemplated by the charge document. However, no amendment was made to the charge itself and no notice was given to ASIC.
Court's decision
The court found that the parties' agreement to bring the first guarantee within the scope of the fixed and floating charge was effective to vary the charge and thereby increase the liabilities secured by it, but the failure to notify ASIC of the change rendered the charge void to the extent that it purported to secure the guarantee of the first loan.
Consequences of decision
The decision has sent shock waves through the financing community.
It is probable that the decision will not affect "all moneys" charges that do not identify a specific loan. This is because the liability is agreed at the outset and no change is needed to capture a new and different liability.
However, in other cases, when a secured facility is increased by a variation to the original charge a new notice to ASIC will be required. Also, the instrument effecting the variation will need to accompany the notice, meaning that commercially sensitive information may need to be lodged on a public register.
Suggestions for lenders
Set out below are some practical steps that lenders can take to shore up their position.
Review existing agreements
First, documentation supporting existing secured loans should be reviewed to determine whether or not it is expressed to secure "all moneys" or obligations under a specific document.
If the charge secures obligations under a specific document, and the liability under the charge has been increased, ASIC should be notified as soon as possible.
Once notice is given, the six month period will start to run. At the end of that period, the charge will be a valid and enforceable security in respect of the increased facility amount.
Take care drafting future agreements
Lenders are also encouraged to consider using an "all moneys" charge for future transactions.
In addition, if a variation needs to be made to a charge by designating another loan to be included as a secured obligation, commercially sensitive information should be contained in a separate document to the instrument which varies the charge. This will enable parties to avoid having that sensitive information filed with ASIC and consequently being open to inspection by the public.
1 [2009] QSC 37 (6 March 2009)
Transitioning to Australia's new IR system: Fair Work Act 2009
Timeline
The following timeline outlines key dates leading up to the introduction of Australia's new IR legislation and also some of the main changes that have been introduced.
- March 2006: Howard Government introduces WorkChoices reforms. The changes include introduction of Australian Fair Pay and Conditions Standard enshrining key minimum employment entitlements, significant restrictions on unfair dismissal claims and curtailment of the jurisdiction of the Australian Industrial Relations Commission.
- April 2007: ALP releases 'Forward with Fairness' IR policy which commits the ALP in government to establishing 'a new industrial relations system for Australia that is fairer, simpler and more productive'.
- November 2007: ALP wins federal election following campaign which directs public attention to impact of WorkChoices with vocal backing from union movement.
- March 2008: Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008 commences. Key aspects include prohibition on new AWAs, introduction of interim individual statutory contracts known as ITEAs and reinvigoration of award modernisation process.
- November 2008: Fair Work Bill 2008, which proposes a complete re-write of Australia's federal IR legislation, introduced into federal parliament.
- March 2009: Fair Work Act 2009 passes parliament in amended form following eleventh hour deal brokered between ALP and cross bench senators. Key elements include:
- Establishment of Fair Work Australia (to replace AIRC, Workplace Authority and Workplace Ombudsman).
- Introduction of National Employment Standards or NES. The NES broadly reflect the minimum entitlements of employees under the current Australian Fair Pay and Conditions Standard (maximum working hours, annual leave, personal leave, parental leave, etc) but also include a new right for parents and carers to request flexible working arrangements plus new legislated rights to community service leave and redundancy pay.
- The NES will be supplemented by new modern awards which will set the minimum terms and conditions for employees in particular industries or occupations. Modern awards will commence from 1 January 2010.
- Unfair dismissal claims will again become an issue for SMEs. Employees of small businesses (less than 15 employees) who have worked for 12 months will be able to make a claim. Employees of other businesses will only need to have worked for six months to be able to make a claim. Employers will also need to become familiar with the new Small Business Fair Dismissal Code and the concept of 'genuine redundancy' (which replaces the current genuine operational reasons exemption).
- Introduction of a new system of enterprise agreement making including new requirement for parties to bargain with one another in good faith and for agreements to pass the 'better off overall test' or BOOT (not the current no-disadvantage test).
- New rules which expand the situations where the industrial instruments that cover one employer will transfer to a new employer in a transfer of business (including asset sales, transfer between associated entities, outsourcing and insourcing). Different provision is also made for the treatment of entitlements of transferring employees.
- Expansion of union rights of entry.
In the same month, the Fair Work (Transitional Provisions and Consequential Amendments) Bill 2009 is introduced into parliament to deal with the technical detail of how parties operating under the current IR system will transition into the new regime from 1 July 2009. The legislation is quite long and complex. Key elements include:
- Existing industrial instruments (to be known as 'transitional instruments') will continue to operate past their nominal expiry date until terminated or replaced by a new agreement.
- There will be a six month bridging period during which new enterprise agreements will continue to be assessed against the current no-disadvantage test, not the 'better off overall test', which will apply from 1 January 2010.
- The new transfer of business rules will operate in relation to transactions and restructures that complete on or after 1 July 2009.
- From 1 January 2010, the NES will apply to all employees in the federal system including those working under transitional instruments.
June 2009: Transitional legislation and further legislation to deal with referral of state industrial relations powers and consequential amendments to other federal laws passes parliament. Government also introduces draft legislation to deal with compulsory paid maternity leave for eligible employees from 2011.
1 July 2009: Majority of Fair Work Act 2009 provisions (apart from National Employment Standards and modern awards) commence operation.
1 January 2010: New National Employment Standards and modern awards to commence.
Conclusion
Particularly in relation to collective agreement-making and unfair dismissal, the recent legislative changes in this area mark a significant departure from the way in which things have worked under WorkChoices.
SMEs are likely to be especially impacted by the renewal of the unfair dismissal jurisdiction which, for employers with less than 100 employees, has not been on the radar since 2006.
Beyond that, in many ways, the new legislation requires businesses and employees alike to rethink and change the way in which things have been done in the workplace. Those who are most familiar with the new system will be best placed to respond to the challenges it presents.
Dismissal of senior employees: A case study
This article outlines some of the key considerations that should be taken into account when a company proposes to dismiss senior managerial staff and illustrates how those considerations can be used to inform matters that should be dealt with when a senior employee joins.
Key considerations
Senior employees in management positions will typically not be protected by awards or collective agreements or have access to statutory remedies such as unfair dismissal. Nonetheless, there are a number of legal issues of which employers wishing to dismiss senior staff need to be mindful.
Termination with notice
As Jane's appointment letter does not set out the period of notice required to terminate her employment, the company will be required to give her "reasonable notice". Given Jane's seniority and length of service with the company, and the difficulty she is likely encounter securing equivalent replacement employment in the current climate, her reasonable notice entitlement could be anywhere between six and 12 months. If the company moved to terminate her without honouring that entitlement, Jane would have a good claim for compensation (up to say $300,000) against the company.
In an ideal world, the company would have had Jane sign an employment contract containing customary clauses dealing with termination and giving the company the right to determine whether or not the notice period is worked out. A well drafted contract would have saved the company from its current predicament.
General law duties
In addition to the reasonable notice requirement, other general law doctrines may affect the termination of an employment contract.
For instance, the doctrine of 'mutual trust and confidence' may impose a duty on the company not to conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employee and employer.
While the doctrine has not yet been fully endorsed by an Australian appellate court, there are signs that courts may be becoming increasingly willing to imply a duty of mutual trust and confidence in employment contracts.
Recent case law suggests that breach of the implied duty of mutual trust and confidence may enable Jane to seek further damages for distress and disappointment.
Restraint of trade
Jane's appointment letter does not contain a clause preventing her from competing with the company or soliciting its employees after her employment ends. This will mean that the company will have real trouble preventing her from working for a competitor and poaching the company's staff after she leaves.
Courts keenly protect the freedom of individuals to practise their trade and the law will presume that a contractual clause which purports to restrict an employee's right to compete following termination of employment is unenforceable. However, an employer who can prove that a post-employment restraint is reasonable and necessary to protect its legitimate business interests may be able to rebut the presumption.
Well drafted restraint clauses can provide important protection particularly where a senior employee has had access to information and developed commercial relationships capable of causing serious damage to the business.
Transfer of Jane's shares
Another problem facing Jack and John is that Jane has built up a significant shareholding.
While together they retain control of the company, John and Jack have no contractual ability to force Jane to sell her shares if they decide to terminate her employment. As a consequence, she is likely to use her shares as leverage against them in any settlement negotiations.
This problem could have been avoided had a special employee class of shares been created and issued to Jane requiring her to return her shares on exit or alternatively if a shareholders' agreement giving John and Jack a right to buy her shares on the basis of a pre-determined valuation been put in place.
Conclusion
Employers who ensure arrangements with senior employees are well documented will be best placed to manage any issues which arise if the relationship deteriorates to a point where dismissal is the only option.
Jacob Uljans, Trainee Lawyer, contributed to writing this article.
Brand protection opportunities
Background
Amid the stories of gloom and doom that have pervaded much of the mainstream press in recent times, the Australian Financial Review published an article earlier in the year which cited comments by a number of marketing experts that a downturn actually presents opportunities for brand owners to strengthen the commercial value of their brands
1.
With those comments in mind, we have set out below some ways businesses can prepare to position themselves to be ahead of their competitors from a brand protection perspective when the economic climate improves.
Tips for brand owners
- Register early: First, if you develop a new trading name, logo, product name or other trade mark, look to apply for trade mark registration as early as possible. Even if you don't intend to use the relevant trade mark immediately, you will generally have a period of up to five years from the date of filing to commence using the mark (provided you intended to use the mark in good faith at the time of filing).
- Think about brand extension: When filing trade mark applications, look to obtain protection not only in respect of the products and services you currently use the brand for, but also the products and services you intend to use the brand for in the future. This can assist in preventing others from obtaining trade mark rights in respect of products or services you may wish to extend your brand into in the future.
- Have searches done: Developing and promoting a new brand can be a very significant financial investment. Accordingly, before investing significant amounts of money in a new brand, it is recommended to have professional searches done to:
- assess whether the brand may infringe already existing trade marks; and
- confirm that the brand is in fact available for trade mark registration.
Carrying out these preliminary searches could ultimately be a significant cost-saving exercise, particularly if any trade mark infringement or similar issues arise.
- Be vigilant: A trade mark owner's exclusive rights can be significantly diluted if another business makes concurrent use of a similar mark or obtains trade mark registration of a similar mark. As a consequence, it is important to:
- monitor any use of similar trade marks; and
- where appropriate, take enforcement action as soon as possible.
Expand your domains: In our experience, it is quite common for disputes to arise regarding the registration and use of domain names.
Domain name registration is largely still a 'first in, best served' process. Although action can be taken against cyber squatters and others who register domain names in bad faith, these proceedings can be costly and time consuming.
Consequently, it is important to:
- consider whether registration of an appropriate portfolio of domain names in respect of trading names, product names and other brands has been obtained; and
- be aware of new types of domain names which become available (such as the recently launched .aisa and .mobi domain names) and consider whether to apply for registration.
Don't miss your chance!
The current economic climate presents valuable opportunities for business owners from a brand protection perspective. While competitors' attention is focussed elsewhere, savvy brand owners can take steps to consolidate legal rights in a new brand or improve the protection of an existing portfolio.
1 'Show some polish and burnish that brand', Australian Financial Review, 12 February 2009.
Tenant in trouble? What you can do
The different types of insolvency
When a corporate tenant becomes insolvent, the landlord's rights depend upon the type of insolvency administration to which the tenant is subjected. Being familiar with the different options and the ways in which they are administered will enable property owners to act early and put themselves in the best possible position when faced with an insolvent (or potentially insolvent) tenant.
The three most common forms of insolvency administration which may affect corporate tenants are discussed below.
Voluntary administration
An administrator may be appointed by:
- the board of directors passing a resolution that the company is insolvent or is likely to become insolvent at some future time (s436A of the Corporations Act 2001(Cth) (CA));
- a liquidator or provisional liquidator if he or she thinks that the company is insolvent or is likely to become insolvent at some future time (s436B of the CA);
- or a secured creditor who is entitled to enforce a charge on the whole, or substantially the whole, of a company's property (s436C of the CA).
Within weeks, the administrator must convene a meeting of creditors and provide what is commonly referred to as a 's439A report'. The s439A report is compiled by the administrator detailing the company's business, property, affairs and financial circumstances and must include a statement setting out the administrator's opinion about each of the following matters:
- whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
- whether it would be in the creditors' interests for the administration to end (and return to business as usual); or
- whether it would be in the creditors' interests for the company to be wound up (liquidated).
The report must also set out the administrator's reasons for those opinions, such other information to enable the creditors to make an informed decision, and if a deed of company arrangement is proposed, a statement setting out the details of the proposed deed. Generally the overriding factor to be considered is what option will result in the best return to the creditors.
Receivership
A secured creditor with an enforceable debenture or charge over an asset or assets of a company is entitled to appoint a receiver where the terms of the debenture and circumstances allow it. It has the effect of the receiver entering into possession of, or taking control of, the property of a company.
The appointment of a receiver is generally undertaken to protect the secured creditor's interests should a company's assets come under threat due to financial instability or insolvency. In certain circumstances, parties seeking to protect their interests may also apply to the court for a receiver to be appointed.
Any surplus funds or assets remaining after completion of the receiver's duties will be returned to the control of the company. Commonly, an administrator will have been appointed by this stage and it will be the administrator's responsibility to deal with the remaining funds or assets in the best interests of the remaining creditors.
Liquidation
Liquidation of a company may be commenced when a company is solvent or insolvent, and done voluntarily or by court order. The liquidator's role is to wind up all of the affairs of the company, which often involves realising the company's assets to ensure the best returns to the creditors.
If the company is insolvent, meaning it is unable to pay its debts as and when they fall due, then it may be wound up:
where the members or directors of the company have resolved to wind up the company, subject to the control of the creditors (creditors' voluntary winding up); or
on the application by the company, a creditor, a contributory, the liquidator, ASIC or APRA to the court to wind up the company pursuant to s462 of the CA (compulsory liquidation).
A solvent company may be wound up in any one of the following situations:
- for reconstruction purposes for a group of companies;
- where the assets of the company are sold rather than the shares, leaving a dormant company shell;
- where it is just and equitable to do so; or
- in hostile circumstances, where the conduct of a company's affairs, company actions or a resolution is contrary to the interests of the members or is oppressive to, unfairly prejudicial to or unfairly discriminatory against a member or members of the company.
These situations may also be either voluntary or compulsory.
However, no matter the reason for the liquidation the ultimate outcome is the same - the existence of the company comes to an end and the company is deregistered.
Common questions
Is the lease automatically terminated if the tenant is subject to an insolvency administration?
Often the terms of a lease will allow the landlord to terminate the lease where the tenant is subject to an insolvency administration or other "insolvency event" (generally defined in the lease).
If the tenant is placed under administration, the landlord cannot take possession of the property or otherwise recover it unless the landlord obtains the administrator's written consent or leave of the court, in accordance with s440C of the CA.
Where a receiver has been privately appointed, leases or contracts are not automatically terminated. A receiver, acting as agent of the company, may repudiate the contract if it is of no advantage to the company, but should be aware the receiver may then be liable for damages.
However, where a receiver is court-appointed, contracts that impose active obligations on a company are terminated.
If a tenant company is in liquidation, the lease will remain in force unless it is specifically disclaimed by the liquidator in accordance with s568 of the CA, or terminated by the landlord in accordance with the terms of the lease - which will usually contain a provision to that effect.
Can the landlord recover rent?
Among the most important issues for a landlord when their tenant becomes subject to an insolvency administration will be their ability to recover rent.
Briefly:
- Administrators are liable to pay rent for any period (beginning five days after the administration begins) throughout which the company continues to use, occupy, or be in possession of the property and the administration continues under s443B(2) of the CA, unless the court excuses them from liability (such an application will only be granted in limited circumstances).
- A tenant company will continue to be liable for rent even when a receiver has been appointed, unless that receiver has done something to demonstrate that he or she has assumed personal responsibility, or has incurred the debts expressly or by necessary implication. If so, the receiver will then become personally liable for the rent.
- As liquidators assume control of the company, replacing the directors, any debts that continue to be incurred are treated as those of the company and the liquidator is not generally held to be personally liable for rent.
Arrears of rent (for the period before the tenant became subject to an insolvency administration) cannot be recovered from an administrator, receiver or liquidator. The landlord will generally have no choice but to prove as an unsecured creditor.
In addition, due to an automatic stay on legal proceedings in administrations (s440D of the CA) and liquidations (s471B of the CA), a landlord cannot commence or proceed with legal action against a tenant company unless it obtains the consent of the administrator (in the case of an administration) or the leave of the court (in relation to either an administration or a liquidation). Leave will be granted only in rare circumstances.
Unlike administrations and liquidations, receivership does not cause an automatic stay on legal proceedings. Therefore tenant companies under receivership may be sued for arrears of rent or damages, or the landlord may enforce a provision for re-entry if the terms of the lease allow.
Who gets the fit out?
If the tenant is under administration, the landlord can only recover property in the tenant's possession (including fit out belonging to the landlord) if it has the consent of the administrator or has obtained the leave of the court. These restrictions do not apply if the landlord took possession of the premises before the date the administration commenced under s441F of the CA.
The landlord can generally recover its fit out if the tenant is in receivership (where the landlord holds a charge over that property) or liquidation, as the company is prevented from
dealing with that property.
Can the landlord terminate and re-enter?
As previously discussed, most commercial leases will contain a provision allowing the landlord to terminate the lease in the event that the tenant becomes subject to an insolvency administration or other insolvency event as defined in the lease.
If the tenant company is under administration, the landlord is still entitled to give a notice terminating the lease, but unless the court or the administrator consents, it cannot recover possession of the leased premises until the administration is completed.
It appears that this moratorium on recovery of the premises will apply even if the administrator itself is in breach of the lease - for example, if the administrator remains in possession of the premises but fails to pay rent. In such a case, the landlord's only remedy would be to pursue the administrator for recovery of rent.
Any rent received from an administrator after termination by the landlord but prior to the recovery of possession should be specifically acknowledged by the landlord as receipt of "mesne profits" (rather than rent). This will avoid any argument that the acceptance of rent has created a new lease.
Where the tenant is under receivership or in liquidation, the landlord may terminate and re-enter if entitled by the terms of the lease. The notice of termination should always be served on the receiver or liquidator as well as the tenant.
Put yourself in the best possible position
When entering a lease
Always take additional security in relation to a lease - cash bonds or bank guarantees are the safest option, as personal guarantees from the directors can be worthless if guarantees have also been given to other creditors.
Once the lease is in force
Act early to claim on any security held and, if necessary, take possession of the premises if it appears that a tenant is experiencing serious financial difficulty (assuming there has been a default entitling termination of the lease). This will enable the landlord to take steps to re-let the premises before its rights to do so are restricted by any insolvency administration.
If the tenant becomes subject to external control
Always deal with the administrator, receiver or liquidator in the first instance as the directors will no longer have the power to bind the company (this is not always the case in a receivership). And get in contact early - being kept "in the loop" will enable the landlord to take steps to minimise its loss by, amongst other things, re-letting the premises as soon as possible or coming to a mutually beneficial arrangement with the administrator, receiver or liquidator.
Bankruptcy and your super: Getting it right
Contributions
The Bankruptcy Act 1966 (Cth) was amended to address the outcome of the High Court's decision in Cook v Benson1. It was held in that case that a trustee in bankruptcy could not recover amounts transferred from a retirement fund to another superannuation fund after the bankruptcy of the member as the amounts rolled over to the fund by or on behalf of the member were made in good faith and for consideration (ie the member had a right to receive benefits on retirement).
As a result of the changes to the Bankruptcy Act, a trustee in bankruptcy can now claw-back any contribution made on or after 28 July 2006 with the intention to defeat creditors irrespective of whether the contribution was for valuable consideration.
Proving intention to defeat creditors
A court will consider historical patterns of contributions and whether a contribution is 'out of character' in determining whether a contribution has been made with the 'intention to defeat creditors'. There is also a deeming provision which establishes a rebuttable presumption that a contribution was made to defeat creditors if it occurs at a time when it could be inferred from the person's circumstances that he or she was, or was about to become, insolvent. Therefore, the trustee in bankruptcy will be looking for a sharp rise in contributions, or a large one-off contribution to superannuation, in the months leading up to the bankruptcy.
Benefits
Generally, superannuation benefits are quarantined from creditors. However, the trustee in bankruptcy is able to deal with any income of the bankrupt, which includes income from an annuity or pension that, when combined with the bankrupt's other income, is above the base income threshold amount (currently $41,250.30). However, as income does not include a lump sum benefit, a bankrupt may receive lump sums (subject to satisfying a condition of release) without those payments being available to creditors.
The timing of any lump sum paid from super to a person with solvency issues is crucial. If a person takes a lump sum prior to being declared bankrupt, the payment will be available to creditors. However, once the person has been declared bankrupt, a lump sum payment (including an in-specie distribution) is likely to be quarantined from creditors.
An example
If a bankrupt receives correspondence from a trustee in bankruptcy seeking to void a contribution, the bankrupt should not transfer ownership of the relevant property to the trustee in bankruptcy until a formal notice of recovery and court order is served on the fund trustee. The Australian Taxation Office has confirmed that, in the absence of a court order being issued and served on the fund trustee, transferring an asset to the trustee in bankruptcy will be treated as a member withdrawal. This could result in the member being taxed as though they had received the benefit and the fund trustee could breach superannuation law if no condition of release has been satisfied.