News & Events

  • Captain of a sinking ship: Warning to directors who make personal sacrifices for the company’s sake

    It seems only logical: your company is in severe financial trouble, so you and your co-directors agree to reduce or even forego your wages payable by the company, to assist its financial position for the time being. But be warned that this logic comes at a cost – it is unlikely that you will be repaid those foregone wages. This is because your employment contract may be deemed to be varied by reason of the doctrine of ‘practical benefits’, which is explored in the case of Hill v Forteng Pty Ltd [2019] FCAFC 105, below.

    The Facts

    Mr Hill was an employee, director and shareholder of the company, Forteng Pty Ltd (“Forteng”), which was experiencing ongoing financial difficulties. As a result, between the period of January 2013 and December 2013, Mr Hill along with the other directors of Forteng agreed that they would receive reduced or no remuneration as employees, in order to improve the financial position of the company.

    A few years later, Mr Hill resigned as a director of Forteng and well after that, Mr Hill brought proceedings against Forteng, seeking to be repaid the amount of his salary withheld between January and December 2013 and unpaid superannuation totalling $154,876.63. Mr Hill argued that Forteng’s failure to repay him amounted to a breach of his employment contract and oppressive conduct, such that he was entitled to relief under section 233 of the Corporations Act 2001 (Cth).

    The Decision

    The judge at first instance found in favour of Forteng, which was upheld on appeal by the Full Bench of the Federal Court. Ultimately it was held that there was sufficient consideration in the form of a ‘practical benefit’ in order to vary the contract, such that Mr Hill was not entitled to relief or repayment by Forteng.

    The Court held that Mr Hill received consideration for his remuneration foregone by way of ‘practical benefits’. This is because his reduced or foregone salary was invested back into the company, thereby:

    • Improving Forteng’s financial position and preventing the company from being wound up;
    • Allowing Mr Hill to maintain his employment with Forteng (as Forteng would have been unable to pay employees, creditors and full director salaries had the directors not agreed to take reduced salaries);
    • Improving Mr Hill’s business investment (by allowing Forteng to retain employees and pay creditors); and
    • Increasing Mr Hill’s chances of being paid dividends in the future.

    As such, Mr Hill’s decision to reduce or forego remuneration was to ‘ensure the survival, future growth and enhanced value of Forteng,’[1] for which Mr Hill stood to benefit from indirectly.

    The Lessons

    1. Remember that a binding contract or contractual variation can only occur if there is consideration from each of the parties to the contract.
    2. Courts will look to the benefit gained or the detriment avoided when determining the ‘practical benefit’ as consideration.
    3. Courts appear reluctant to invalidate contracts on the basis of insufficient consideration if one party to the contract has made a promise to the other which is of “some substance”.[2]
    4. Whilst a ‘practical benefit’ is more likely to be found where the contract is executory, it is not to say that ‘practical benefits’ will not be found to exist in contracts of a different kind.
      (An executory contract is one where the parties to the contract still have continuing or future obligations to perform such as contracts for goods and services)

    If you are seeking advice on any contractual matters, or advice on corporate governance issues, talk to our Business Team today.

    Join our upcoming Business Breakfast Club on contracts to learn more about how to form legally binding agreements.

    [1] Hill v Forteng Pty Ltd [2019] FCAFC 105 [39].

    [2] Ibid [38].

    Written by Riley Berry with the assistance of Maxine Viertmann.

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  • Conditional clauses

    Conditional clauses cause contractual chaos

    It is no secret that contractual drafting can be a nightmare: even the smallest grammatical error can change the meaning and effect of a contractual clause, and one ill-considered word could jeopardise the validity of the entire contract. Some contracts contain ‘conditional clauses’, which mandate that certain events must occur or conditions be fulfilled before the contract is binding or enforceable. These clauses can have significant impacts upon the effect and enforceability of a contract, which was at issue in a recent decision of the Federal Court in ACME Properties Pty Ltd v Perpetual Corporate Trust Limited as trustee for Braeside Trust [2019] FCA 1189 (ACME Properties v Perpetual).

    The Facts

    The applicant, ACME, leased commercial premises from the registered proprietor of the premises, Perpetual, from 2016 to 30 June 2019. Towards the end of the lease term, the parties entered into negotiations regarding a new lease, in which Perpetual was represented by its agent, ARAM Australia Pty Ltd trading as ARA Australia (ARA).

    As a result of these negotiations, ARA provided ACME with a document entitled ‘Offer to Lease’ on 25 March 2019. This ‘Offer to Lease’ document contained two leases, the first lasting a year from 1 July 2019, and the second lease commencing on 1 July 2020 for four years.

    The Offer to Lease contained a clear stipulation that it was subject to ‘formal approval of the Landlord to be given or withheld in its absolute discretion; and execution of all legal documentation by the Landlord and Tenant’.[1] On 27 March 2019, ACME signed the Offer to Lease, which was subsequently signed by ARA “for an on behalf of the landlord”, Perpetual.

    A little over a month passed before ARA notified ACME that Perpetual would be accepting an offer from a third party to lease the premises instead of proceeding with its previous offer to ACME. While the formal legal documentation had been prepared (in part) it had not been executed by either party. ACME commenced proceedings against Perpetual to enforce the Offer to Lease.

    ACME submitted that the Offer to Lease (as signed by both parties) constituted a binding agreement to lease. Perpetual, on the other hand, argued that the Offer to Lease was not binding because the agreement was subject to all the legal documentation for the proposed leases having been executed, which had not yet occurred, and was subject to the Landlord’s formal approval (which had not been given despite ARA signing the Offer to Lease on Perpetual’s behalf).

    The Decision

    The Federal Court found in favour of the landlord, Perpetual, deciding that the Offer to Lease did not constitute a binding agreement to lease. His Honour emphasised the significance of the contractual words “subject to execution of all legal documentation by the Landlord and Tenant”, which had the effect of making the contract binding upon fulfilment of that condition.  His Honour said that the effect of those words was such that no contract was to come into existence independently of the legal documentation, which had not been executed.

    A key distinction was drawn between the facts of this case and the case of RTS Flexible Systems,[2] which had similar facts albeit with a crucial difference. In RTS, unexecuted draft contractual documentation, which contained a ‘subject to contract’ clause, was found to constitute a binding contract because there was substantial subsequent conduct by both parties which indicated the parties had reached a binding agreement, thereby waiving the conditional clause.

    The Lessons

    This case serves as an important warning to potential contracting parties to read the contract carefully before signing, keeping an eye out for any ‘conditional’ or ‘subject to’ clauses. It is also important to be cognisant of the effect of these clauses, as courts are likely to give full effect to the ordinary language, which may render the contract unenforceable until such conditions are fulfilled.

    If you are seeking advice on any contractual matters, or advice on agreements to lease, talk to our Business Team or Real Estate Team today.

    [1] ACME Properties Pty Ltd v Perpetual Corporate Trust Limited as trustee for Braeside Trust [2019] FCA 1189 [6].

    [2] RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG (UK Production) [2010] 1 WSLR 753.

    Written by Katie Innes & Ben Grady with the assistance of Maxine Viertmann.

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  • Opening the Car Door to Trouble

    With more cyclists on the road, colliding with an open car door as you ride blissfully down a road, is a recognised hazard of cycling in an urban setting.  This is often referred to as “dooring”.  Injuries can range from being shaken up, to a broken collar bone, to more serious and life threatening injuries.

    So whose fault is it when a cyclist gets “doored”?

    Cyclists are usually required to ride in bike lanes or to the left of traffic, which places them close to parked cars.  Before opening a car door, a driver and passenger are required to check not just for oncoming cyclists but, in case another car or pedestrian is approaching behind them.

    In most cases, the person who opens a door is responsible, if a cyclist gets doored.  It is possible for the person who opens the door to argue that the cyclist should have avoided the door.  Usually, there is very little a cyclist can do to avoid these accidents.  A cyclist may have sufficient time to swerve to avoid a car door but, in a worst case, result in the cyclist end up being struck by an oncoming car.  As scary as getting doored is, a cyclist hitting the car door rather than swerving into oncoming traffic could be the better (and less painful) option, avoiding a potential fatal outcome.

    When a cyclist makes a personal injury claim against a driver or passenger, the cyclist must prove that the driver or passenger failed to act in a reasonable manner before opening their door.  The driver or passenger is required to make sure that no cyclist is approaching or riding by before opening their door.

    Legislation exists in the Territory which provides “a person must not cause a hazard to any person or vehicle by opening a door of a vehicle, leaving a door of a vehicle open, or getting off, or out of, a vehicle”.  Violators of this law can be subject to a maximum fine of $3,200.  However, this fine is minimal compared to the financial costs as well as the pain and suffering that a victim of a dooring accident may incur.

    A tricky issue arises when a child opens the door. In this instance, the responsible adult driver or the parent could be held responsible for the child’s actions.  This will depend on a close examination of the control that the driver or parent has over the child at the time, and what could be reasonably expected of a child as to their capacity to judge and appreciate the risk of opening the door.  The standard of care will vary according to the age of the particular child.  Judged by this standard, the closer the age of the child to the age of majority (18 years), the less the standard of care will be expected of the adult.

    With the increasing awareness of the dangers of doors, many cyclist-friendly countries have introduced a simple technique that drivers and passengers can adopt to help reduce the danger of opening a door in the path of a cyclist.  This is, simply open the car door using the hand furtherest away from the door.  Specifically, use your left hand on the driver side, and right hand on the passenger side to open the door.  This technique involves the motorist naturally rotating their body and checking over their shoulder for approaching traffic when opening a car door.

    Raising awareness that serious injuries can be caused from poor timing when you open a car door as a cyclist approaches or rides by will reduce the potential for injury to cyclists.

    If you have been injured in a bike accident, contact us to speak with an experienced injury lawyer.

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  • joint tenancy

    Modern Couples’ Guide to Joint Tenancy

    Joint tenancy has long been the norm for couples owning assets together. But many are unaware that another form of ownership – tenancy in common – may better suit their needs. This article explores the benefits and possible drawbacks of this lesser known form of ownership.  For the modern couple more closely resembling the Brady Bunch than the Flintstones, tenancy in common may be the answer.

    What’s the main difference between joint tenancy and tenancy in common?

    Joint tenancy and tenancy in common are forms of asset co-ownership, typically written into legal contracts pertaining to home ownership. The key difference between the two is their effect on the distribution of assets at the death of one of the partners. Joint tenancy is governed by the rule of survivorship. This means that at a partner’s death, their share of any joint assets become the sole property of the surviving partner.  Tenancy in common, on the other hand, sees asset shares distributed according to the terms of each partner’s will.

    In what situations is tenancy in common preferable?

    Tenancy in common may be preferable where couples wish to bequeath their share of assets in different ways.  In a recent example, Re Wilson[1], a husband (Leonard) and wife (Austral) initially owned their assets as joint tenants. Austral’s will set out her wishes for the distribution of her assets, but she was subsequently diagnosed with dementia and sadly lost the capacity to alter her will. Leonard, assuming on the basis of her diagnosis that she would predecease him, severed their joint tenancy in favour of tenancy in common to ensure his wife’s wishes would come to fruition.  Without this action, Austral’s assets on her passing would move to her surviving partner and hence not be distributed according to how she hoped.  It was a twist of fate that Leonard passed away first, however his actions ensured both partners’ dying wishes were taken care of.

    When may joint tenancy be preferable?

    Where tenancy in common provides flexibility, joint tenancy provides simplicity.  If both partners have identical wishes for the distribution of their assets, then joint tenancy is likely to simplify administration of the estate. No matter who passes first, the assets will be distributed in exactly the same way (provided, of course, that the surviving partner does not then change the terms of their will).

    Ensuring your tenancy arrangements are in order

    Ensuring your affairs are in order can be as simple as considering these two questions:

    1. Do you and your partner have identical wishes regarding the distribution of your assets?
    2. Will your assets be distributed in accordance with your wishes if you die before your partner?

    If you answered no to either or both of the above then it may be worth getting in touch with one of our estates lawyers to discuss severing your joint tenancy in favour of tenancy in common.

    Adapted by Reuben Owusu from the original article titled Severing joint tenancies: Getting it right can make all the difference by David Toole, Legal Director, Estates & Business Succession.

    [1] [2019] VSC 211; BC201902441

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  • director proprietary

    Kicked out of your own company? Federal Court finds in favour of oppressively and unfairly treated director

    It is every director’s worst nightmare: a rogue co-director locks you out of your business, removes your directorship, reduces your shareholding to nil and absconds with company profits: all without your knowledge or consent. Unfortunately, this nightmare was the reality for the plaintiff in the recent Federal Court case of Miao v I Need A Massage Pty Ltd, in the matter of I Need A Massage Pty Ltd [2019] FCA 1199

    The Facts

    The plaintiff, Ms Miao and the defendant, Mr Luo were both directors and shareholders of the company, I Need A Massage Pty Ltd, which was used to purchase and operate a massage business in Brisbane. As part of this arrangement, the parties agreed to contribute equally to the purchase price of the business, thereby taking equal shares in its income and expenses. Approximately one year passed before Ms Miao and Mr Luo had a serious personal dispute which caused their business relationship to break down irretrievably. Following this dispute, Mr Luo took steps to lock Ms Miao out of the business, and subsequently removed her as a director of the company. A month later, Mr Luo altered the company’s share register to reduce Ms Miao’s shareholding to nothing. Finally, Mr Luo sold the company’s business and retained the proceeds of sale for himself. All steps were taken without Ms Miao’s knowledge or consent. Ms Miao claimed this conduct was “oppressive” under ss.232 and 233 of the Corporations Act 2001 (Cth).

    Ms Miao applied to the Federal Court seeking orders that she be given access to financial records of the company, company meeting minutes, that the ASIC register be rectified and an order that the company be wound up.

    The Decision

    The Federal Court found in favour of Ms Miao, finding that Mr Luo acted without proper authority and in an oppressive manner.

    Justice Reeves decided to exercise his discretion to order a winding up of the company under section 233(1)(a) of the Corporations Act 2001 (Cth), due to the fact that the conduct of the company’s affairs, namely Mr Luo’s act of removing Ms Miao as director, reducing her shareholding to zero and excluding her from the operation of the business was oppressive or unfairly prejudicial to Ms Miao as director and member of the company.

    His Honour considered the fact that the winding up of a successful and prosperous company is not taken lightly, but instead requires a ‘strong case’. Nevertheless, His Honour found that winding up was justified because there were no other remedies available to Ms Miao for the unfairly prejudicial manner in which Mr Luo had acted and the company was not one which could be said to be “successful and prosperous”; the appointment of a liquidator was the only relief available to Ms Miao.

    The Lessons

    1. A director of a proprietary company cannot remove another director unless there is a resolution of the shareholders;
    2. A director cannot reduce a shareholder’s shareholding without their knowledge, consent or proper authority to do so;
    3. Judges have demonstrated their reluctance to exercise their discretion to order the winding up of a ‘successful and prosperous’ company. However, if winding up is the only remaining and suitable avenue of relief for an aggrieved plaintiff, they are more inclined to exercise their discretion to do so; and
    4. The court is more likely to exercise its discretion to wind up a company if:
      • There is continuing animosity between the shareholders/directors, that would make continued operation of the company difficult if not impossible;
      • If there is a ‘real risk’ of further oppression; and
      • If the company’s present activities are very limited.[1]

    If you are seeking advice on any disputes between directors or shareholders, contact our Business Team today.

    [1] Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 494.

    Written by Riley Berry and Maxine Viertmann

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  • illegal phoenixing

    Phoenix activity and director identification numbers: August Business Breakfast Club summary

    This month at the Business Breakfast Club, BAL Lawyer Riley Berry spoke about new developments in combatting illegal phoenix activity and the potential implementation of Director Identification Numbers.

    Illegal Phoenix Activity

    Illegal phoenix activity is a term that is often used when a new company is created to continue the business of a company that will be deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements. The Australian Government is making the prevention and punishment of illegal phoenix activity one of its top priorities.

    A primary tool in this fight is the Phoenix Taskforce which is a joint effort comprised of 35 agencies including the ATO and ASIC. We discussed recent prosecutions of phoenix activity that have occurred as a result of the increased scrutiny of the taskforce.

    We also canvassed the legislative reform the Government has been undertaking in this space:

    1. Introduction of the Insolvency Law Reform Act 2016 which changed the law relating to the registration and discipline of liquidators and the conduct of external administrations;
    2. Introduction of the Treasury Laws Amendment (2017 Enterprise Incentive No. 2) Act 2017 which focussed on honest business restructuring. This legislation creates a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency; and
    3. Introduction of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 on 4 July 2019 which introduces a suite of new criminal offences and civil penalty provisions for company directors and other persons that facilitate ‘creditor-defeating dispositions’.

    Combatting Illegal Phoenixing Bill

    This proposed Bill sets out a new term, ‘creditor-defeating dispositions’ which, if passed, will be inserted into the Corporations Act 2001.  A ‘creditor-defeating disposition’ is ‘a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up’.

    The Bill also proposes to set up new powers, including:

    • Allowing liquidators to apply for a court order to make creditor-defeating dispositions voidable in certain situations;
    • Allowing ASIC to recover company property disposed of or benefits received under a voidable creditor-defeating disposition for the benefit of the company’s creditors; and
    • Preventing directors from improperly backdating resignations or ceasing to be a director where that would leave the company with no directors.

    Director Identification Numbers

    The reintroduction of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill also foreshadows the likely reintroduction of proposed changes to amend the Corporations Act 2001 to introduce director identification numbers. This would see that each person who consents to being a director being assigned a unique identifier that they will retain even if their directorship ceases or they become a director of another company.  It will allow traceability of a director’s relationships across companies and prevent the use of fictitious identities, whether accidental or intentional. It aims to monitor and deter phoenix activity as well as control and flag any repeated unsavoury behaviours of a director across different companies.

    We recommend that all directors keep an eye on this space to see what changes are introduced.

    If you are concerned or have questions about how these changes might affect you, please contact BAL Lawyers Business Team.

    We hope you can attend our next Business Breakfast Club, which will be held on Friday 13 September 2019.  Please RVSP here.

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  • liquidator conduct

    Dropping the gavel and donning the microscope: Court ordered inquiries into liquidator conduct

    What are Court ordered inquiries into liquidator conduct?

    Courts have a range of powers in relation to liquidators, including the power to order an inquiry into the external administration of a company and thus, the conduct of liquidators under sections 90-5 to 90-20 of Schedule 2 to the Corporations Act 2001 (Cth), previously, section 536 of the Corporations Act 2001.

    These provisions give Courts the ability to make such orders either on its own initiative or in response to an application made by ‘a person with a financial interest in the external administration of the company, an officer of the company, a creditor or ASIC’. The Court also has a broad power to ‘make such orders as it thinks fit in relation to the external administration of a company’, including an order that a person cease to be the external administrator of the company or an order requiring a person to repay to the company remuneration paid to the person in the course of external administration.

    When will a court order an inquiry into the conduct of liquidators?

    Courts may order an inquiry into the external administration of a company either on their own initiative or on application by creditors. In both cases, Courts have full discretion as to whether or not to order an inquiry or not.

    Courts are likely to order an inquiry if:

    • There is criticism regarding to the conduct of a liquidator connected to performance of the liquidator’s duties; and
    • There is a well based suspicion indicating a need for further investigation, which involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering.”[1]

    When Courts are considering whether or not to exercise their discretion to conduct an inquiry, it may take into consideration the following factors:

    • the nature and gravity of the alleged misconduct;
    • the strength of the evidence of such misconduct;
    • any explanation offered by the liquidator;
    • the existence of other available remedies;
    • the extent to which the liquidation has progressed;
    • the amount of money likely to be involved;
    • the availability of funds to pay for any inquiry;
    • the likely benefit from the inquiry;
    • the applicant’s legitimate interest in the outcome; and
    • whether there has been delay in making the application.

    To put this into context, we will look at a recent case: Australian Securities and Investments Commission v Wily & Hurst [2019] NSWSC 521

    The Facts

    In 2016, ASIC made an application to the New South Wales Supreme Court pursuant to the then section 536 of the Corporations Act 2001, seeking an order for an inquiry into the conduct of two liquidators during their involvement in the liquidation of a number of companies linked to Crystal Carwash chain. ASIC alleged that the liquidators were potentially liable for a range of breaches, including failing to disclose potential conflicts of interest, failing to disclose to ASIC suspected shadow directorships and failing to disclose potential conflicts of interest, particularly as many of the liquidated companies in question shared common directors and registered addresses. 

    The Result  

    In May 2019, the NSW Supreme Court dismissed ASIC’s application with costs. Justice Brereton was not satisfied that there was a “well-based suspicion” indicating a need for further investigation into the liquidators’ conduct, more specifically:

    • ASIC was unable to substantiate its claims of a conflict of interest as they were unable to prove that the companies had common referrers in regards to the external administrations in question;
    • ASIC did not identify any actual conflicts of interest for the liquidators and the Court held that a potential conflict does not preclude liquidators from acting;
    • ASIC failed to prove that the liquidated companies’ directors were shadow directors of each other company;
    • ASIC failed to prove that the companies’ directors were engaged in phoenixing activity for which the liquidators failed to disclose. His Honour stated that just because one company “goes into liquidation, another with the same ownership and directors commences to provide the same services to the same customers does not amount to illegal phoenixing”[2]; and
    • ASIC claimed that the liquidators failed to report matters to ASIC according to s 533 of the Corporations Act 2001,[3] but His Honour found that s 533 did not require liquidators to report to ASIC that a company may have shadow directors.

    Key Takeaways

    There are two main things to take away from this case.

    First, ASIC’s application and involvement in this case demonstrates its increasing willingness to actively investigate and pursue allegations against liquidators.

    Second, this case illustrates the Court’s reluctance to make orders granting an inquiry into the conduct of liquidators unless there is a ‘well-based suspicion’ warranting a further investigation, which involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering”.[4] Thus, allegations against liquidators must be substantial enough to justify the exercise of the Court’s discretion on this matter. That being said, Courts have shown their willingness to intervene where liquidators are proven to have fallen short of their duties so as to cause or threaten to cause substantial injustice in some way. For more information, see this article.

    Written by Katie Innes with the assistance of Maxine Viertmann.

    If you have questions about a liquidator’s conduct, or the investigative provisions, talk to our Business Team or Litigation Team.

    [1] Australian Securities and Investments Commission v Wily & Hurst [2019] NSWSC 521 [36].

    [2] Ibid [77].

    [3] S 533 of the Corporations Act 2001 (Cth) requires a liquidator of a company to make certain disclosures to ASIC regarding certain offences that may have occurred prior to the liquidation by officers of the company or others.

    [4] Ibid [36].

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