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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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  • The Drone Wars

    Google’s drone delivery service, “Wing” [1], has been rolled out in the north of Canberra after successful trial runs in Bonython and Royalla. Wing is apparently the world’s first permanent delivery drone service,[2] now serving eligible homes in Crace, Palmerston and Franklin. No longer in a galaxy far, far, away, the introduction of drone delivery has pushed the ACT to the forefront of the Drone Wars, with residents divided on whether the noise and the risks to safety and privacy are worth the convenience.

    In July 2018 when the drone trial first began in Bonython, opponents of the program had concerns regarding privacy, noise, and the danger of having someone’s hot coffee (or the drone itself) dropped on them from above.

    So who regulates the drones?

    The ACT Government has very limited scope to regulate drones as most incidents of “fly machines” falls to the Federal Government. The Civil Aviation Safety Authority (CASA) has oversight of drones and approves certified operators, but does not regulate noise or privacy. Airservices Australia can also regulate drone operators where engaged in certain commercial operations within controlled aerodromes, but their primary responsibility at this stage is to monitor aircraft (including drones’) noise. Privacy issues must be raised with the drone operator first, then may be referred to the Office of the Australian Information Commissioner (assuming the drone operator is bound by the Privacy Act). Yet finding out who is the owner of a particular pesky drone is a problem of its own. As a result of this multi-agency regulation, drone delivery currently operates in a regulatory grey area in Australia.

    So what are some of the legal issues associated with drones?


    The issues surrounding liability for injury are largely the same issues that arise in other methods of delivery. For a delivery driver that causes injury or damage, the company they work for is still liable through “vicarious liability”. For injury or damage caused by a drone, the drone company would be vicariously liable for the actions of the drone pilot, which would include the operator of the drone’s base computer. However if a person (in accepting a delivery) violated the terms of the agreement and was injured, say, by trying to take the delivered item prior to it being released by the drone or getting too close to the drone, then there may be contributory negligence and the drone company’s liability for damages may be reduced or possibly eliminated.


    While Airservices Australia regulates the noise levels of drones, it was originally stated by an Airservices Australia spokesperson that drones of the size and weight used by Wing are currently exempt from the Airservices noise restrictions. Airservices Australia has since retracted this position and will now conduct a review to create noise regulations for drones.  When approving Wing, CASA advised that they considered the possible environmental impacts (including noise pollution) and imposed limited hours of operation and the requirement to use “quieter” drones. The drones that Wing uses are measured at 55 decibels at 25 meters which in terms of noise is somewhere between a washing machine (50dB) and a vacuum cleaner (60dB). Despite no current drone specific noise restrictions, the rules of nuisance still apply, yet noting few drones are likely to reach the noise of a lawnmower (70 dB), food blender (90 dB) or diesel truck (100dB) which can be used daily from 7 am to 10 pm.


    The other main issue is the cameras that the drones use to navigate while they fly. There is currently no ‘detect and avoid’ technology which means that the drones must be piloted remotely by video. According to Wings’ Privacy Policy[3] the aircraft use cameras to assist in the delivery process and that the cameras may capture images of the user during the delivery process. The user consents for these images to be kept and associated with the users Wing account as part of the Terms and Conditions of Service. However someone living close to the delivery may not have consented to these photos and may also be viewed in the images. There would be little more than company policy preventing a pilot from viewing through nearby windows or into a “private” backyard during delivery, even if the images were not captured. It will come down to each individual drone operator as to how they manage privacy. ACT legislation does not restrict photos being taken from a public area, and several cases confirm that taking photographs of people on private property from public property (which includes form the air) is permissible.[4]

    Are drones the future?

    Research has predicted that delivery drones could inject up to $40 million to the ACT economy by 2030 so we suspect they are here to stay.

    If you need advice on personal injuries or breaches of privacy, in relation to drones or generally, contact our Litigation or Business teams.

    [1] Wing Aviation Pty Ltd has been approved by CASA as a ‘licensed and certified drone operator’.



    [4] See, e.g. Victoria Park Racing and Recreation Grounds Co Ltd v Taylor  (1937) 58 CLR 479.

     Original Article published by Riley Berry on The RiotACT.

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  • Australia Starts to Move on Modern Slavery

    Modern slavery, human trafficking,  forced labour, child labour, and slavery-like practices are not typically associated with the likes of first world countries such as Australia.  However, modern slavery is rampant in global supply chains, with the International Labour Organisation having estimated that there are over 40 million people trapped in slave-like conditions, with as many as 30 million or so of those being held in slavery and slave-like conditions across the Asia-Pacific region.[1]

    In light of this phenomenon, the Parliament of Australia passed the Modern Slavery Act 2018 (Cth) (MS Act) in November last year. The Act, which came into effect 1 January 2019, imposes requirements on entities based, or operating, in Australia, which have an annual consolidated revenue of more than $100 million. Essentially, these entities are required to report annually on the risks of modern slavery in their operations and supply chains, and on actions taken to address those risks. The report will be made to the Minister for Home Affairs and will be listed on the Modern Slavery Statements Register, which will be publicly available. It is envisaged that those who fail to report will be subjected to a ‘name and shame’ regime.

    What is modern slavery?

    Although there is no universally agreed definition of ‘modern slavery’, under the MS Act, modern slavery means conduct which would constitute an offence under Division 270 or 271 of the Criminal Code (including debt bondage, forced labour, servitude, deceptive recruiting for labour or services, and forced marriage), trafficking in persons,[2] or the worst forms of child labour.[3]

    Who has to comply with the requirements in the Modern Slavery Act?

    The following are deemed ‘reporting entities’ under the MS Act:

    • Entities (both based and operating in Australia) with at least an ‘annual consolidated revenue of more than $100 million’ for the 12 month reporting period of each financial year;
    • The Commonwealth (reporting on behalf of non-corporate Commonwealth entities);
    • Commonwealth corporate entities with at least an ‘annual consolidated revenue of more than $100 million’ for the reporting period; and
    • An entity which has volunteered to comply with the requirements of the Act for that period.

    What has to be reported?

    There are slightly different requirements for single reporting entities, joint statements and Commonwealth statements, but all ‘modern slavery statements’ must:

    • identify the reporting entity;
    • describe the structure, operations and supply chains of the reporting entity;
    • describe the risks of modern slavery practices in the operations and supply chains of the reporting entity, and any entities that the reporting entity owns or controls;
    • describe the actions taken by the reporting entity and any entity that the reporting entity owns or controls, to assess and address those risks, including due diligence and remediation processes;
    • describe how the reporting entity assesses the effectiveness of such actions;
    • describe the process of consultation with any entities that the reporting entity owns or controls; (and in the case of a reporting entity covered by a joint modern slavery statement, the entity jointly giving the statement); and
    • include any other information that the reporting entity, or the entity giving the statement, considers relevant.

    What are the consequences of non-compliance?

    The MS Act does not impose monetary penalties for non-compliance. However, if a reporting entity fails to lodge a modern slavery statement, the entity may be requested to provide an explanation for the failure to comply; and/or

    • undertake specific remedial action in accordance with the above request;
    • the entity may face ‘public shaming’ by having its name and failure to comply publicised.

    These mechanisms rely on ‘reputation risk’ to incentivise compliance and drive self-enforcement.  While the MS Act has faced criticism for being “toothless” in the absence of penalties for non-compliance, such a regime is not dissimilar to the approach taken by the Commonwealth for gender equity reporting in the Workplace Gender Equality Act 2012 (Cth) (and the antecedent Affirmative Action (EEO for Women) Act 1986 (Cth).   

    Reporting modern slavery: who, when, how?

    Who do you report to?

    Reporting is done through a ‘Modern Slavery Statement,’ basically a document that identifies the reporting entity and gives an overview of their structure, operations and supply chain/s, and most crucially describes the risks of modern slavery within the operations and supply chain/s and actions taken to ‘assess and address’ the risks.

    This must be submitted to the Minister for Home Affairs, who keeps these statements in the modern Slavery Statements Register.

    When is the report due?

    The statements cover a reporting period, defined as a financial year. As this section of the Act only came into force 1 January 2019, the reporting period will cover the financial year of 2019/2020.

    The statement must be given to the Minister within 6 months after the reporting period has ended. This means entities have until 31st December of that year to lodge their statements (as the financial year ends 30th June). So, for this year (which is the first reporting period for any entity), the reporting entity will have until 31st December 2020 to submit their statement.

    How do you lodge a statement?

    Before the statement can be submitted to the Minister, it must be approved by the entity’s principal governing body and signed by ‘responsible member of the entity,’ such as the CEO, a director, a trustee (if the entity is a trust administered by a sole trustee) or the administrator if the company is under administration.

    Once executed, the statement must be provided to the Department of Home Affairs for publication in the Statements Register (an online central register). However, the Department of Home Affairs has confirmed that they have not yet created this online register, so stay tuned for more information about how to submit the slavery statement.

    Are there any developments in other states?

    In June 2018, the NSW Government passed the Modern Slavery Act 2018 (NSW) which has received assent but has not yet commenced. The NSW MS Act seeks to go further than the Commonwealth MS Act by extending its application to ‘businesses with $50 million in turnover (though only if they have employees in NSW)’, imposing penalties for non-compliance and establishing an Anti-slavery Commissioner who will, among other things, provide assistance and support for victims of modern slavery and make recommendations to prevent and prosecute offences of modern slavery.

    Since being passed, the NSW MS Act has been sent to the NSW Legislative Council’s standing committee on social issues, “to determine whether the Commonwealth’s comparable legislation renders part or possibly all of the New South Wales Act unnecessary”.

    Who can I get assistance from?

    The Department of Home Affairs has published guidelines, entitled Modern Slavery Act 2018: Draft Guidance for Reporting Entities. This draft guidance contains detailed explanations of the Act’s requirements and provides useful examples.

    For anyone who needs help with drafting a modern slavery statement, is aiming to improve supply chain practices, or suspects their business or a business they deal with is non-compliant with the Act, BAL lawyers offers commercially sound advice,  and can work with you to resolve these concerns.  Contact us today.

    This article was written by Gabrielle Sullivan with grateful acknowledgement of the preparatory work of Maxine Viertmann and Sarah-Graham Higgs.


    [2] As defined in Article 3 of the Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children, supplementing the United Nations Convention against Transnational Organized Crime, done at New York on 15 November 2000 ([2005] ATS 27)

    [3] As defined in Article 3 of the ILO Convention (No. 182) concerning the Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labour,  Geneva on 17 June 1999 ([2007] ATS 38)

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  • hughes v sangster

    Supreme Court avails “Unavailable” Plaintiff

    If you tell the truth, you don’t have to remember anything.

    – Mark Twain

    It is common in popular TV culture for court room dramas to include terrified witnesses facing a barrage of questions from unrelenting counsel donning robes and wigs. In keeping with this popular conception, evidence in court hearings is typically given in person (albeit the case that how this plays out in practice is often less dramatic). In some instances, witnesses can give evidence by written affidavits, though even then a witness is often required to be available in person to have the fullness of their evidence tested in the witness box.  The basis for requiring witnesses to give evidence in person is founded in hearsay rules within (almost) uniform evidence legislation across Australia – here, being our Evidence Act 2011 (ACT).  Put simply, in the absence of a primary witness giving first hand evidence of what they saw or heard, the hearsay rule prevents another person, or document, giving evidence of what the primary witness would say, if they were available and present in court (“the hearsay rule”).

    Of course, like all good laws, there are exceptions to this general starting point.   For instance, in civil proceedings, the hearsay rule does not prevent evidence being adduced of earlier representations made by the primary witness, or documents containing the primary witness’ representations, if the primary witness is “not available to give evidence about an asserted fact”.

    But what then constitutes the unavailability of a witness?  Certainly death is an obvious black and white example, though anything short of that can fall into a grey area.  For example, is a witness that is physically “available” to attend a court hearing, but mentally incapable of assisting the court, captured by the hearsay exception?

    Justice Mossop of the ACT Supreme Court recently considered the issue in Hughes v Sangster [2019] ACTSC 178.   His Honour was asked to consider whether an Alzheimer’s sufferer, who was:

    1. physically available to attend the hearing;
    2. capable of understanding questions;  but 
    3. incapable of repeating the questions or remembering their context;

    was truly unavailable for the purposes of the hearsay exception.  In the unique circumstances in the Hughes case, His Honour ruled that that the particular witness (“Mrs Hughes”), being the plaintiff in the case, was unavailable.  That had the effect of allowing a number of documents – in the form of notes and legal instructions – containing previous representations of Mrs Hughes into evidence, notwithstanding she could not be cross-examined on them.  

    What were the facts? 

    Mrs Hughes and the defendant, are mother and daughter; sadly with a difficult history. In 1999, Mrs Hughes and the defendant purchased a block of land in Nicholls as joint tenants (”the Property”).  Mrs Hughes financed the land purchase and construction costs, totalling $380,000.  It was Mrs Hughes’ position that the agreement with the defendant required the defendant’s 50% contribution (that is, $190,000) to be paid over time in consideration for her respective interest in the Property.  

    The defendant did not disagree with this starting position.  However, she held that, when calculating the $190,000, Mrs Hughes had also agreed to “take into account” an amount of $125,000 which was previously offered to the defendant by Mrs Hughes but never paid. The defendant also maintained that she had paid for a number of household contributions over the years she resided with Mrs Hughes, which should be applied as contributions towards discharging the $190,000 owed by her.  Beyond these contributions, it was common ground that the defendant also made various payments totalling $20,000, prior to moving out of the Property in 2007.

    The alleged $125,000 contribution came about from a letter written by Mrs Hughes to the defendant in 1997, two years prior to the Property being purchased.  In her 1997 letter, Mrs Hughes expressed a desire to discharge the defendant’s mortgage to the tune of $125,000, “should [she] be able to”. As events transpired, Mrs Hughes did not settle the defendant’s mortgage.  Equally, a liability of Mrs Hughes to the defendant in the sum of $125,000 was not documented in any way in relation to the purchase of the Property when that transaction took place in 1999.  To the contrary, as the defendant made her various payments towards the purchase, Mrs Hughes wrote receipts which noted the running tally of what was left owing on the defendant’s $190,000 contribution.  On one occasion, these receipts were confirmed by a counter-note of the defendant which read “$183,000 owing”.

    Despite this, a dispute ensued between Mrs Hughes and the defendant from 2007 onwards, when the defendant moved out of the Property and refused to make any further contribution towards it or its upkeep.  Mrs Hughes instructed solicitors to negotiate a buy out of the defendant’s share, though the negotiations were unsuccessful. Due to a combination of financial and health reasons, Mrs Hughes was then unable to pursue the matter.

    Eventually, in December 2016, Mrs Hughes was diagnosed with moderate to severe Alzheimer’s dementia.  In January 2017, her husband, Mr Hughes, was appointed by the ACT Civil and Administrative Tribunal as guardian and manager of Mrs Hughes’ finances and property.  Upon his appointment, Mr Hughes sought to downsize Mrs Hughes to a smaller, more maintainable home, in the south coast. However, the unresolved title issue at the Property meant that he could not do so without the defendant’s consent, which was only given conditional upon her 50% interest on the title being recognised.

    Left with little alternative, Mr Hughes commenced proceedings in the ACT Supreme Court seeking the Property be sold, with the beneficial interests of Mrs Hughes and the defendant to be adjusted to reflect their respective contributions to the Property’s purchase.  As Mr Hughes was not privy to any of the discussions between Mrs Hughes and the defendant which led to the Property being purchased, Mr Hughes relied almost solely on handwritten and typed instructions of Mrs Hughes to her former lawyers, prior to her losing capacity – arguing that the documents were admissible evidence as Mrs Hughes was otherwise not “not available” for the purposes of the hearsay rule.  

    What was the issue?  

    Evidence was taken at the hearing from Mrs Hughes’ treating geriatrician, Dr Selvadurai, who confirmed the nature of Mrs Hughes’ Alzheimer’s condition.  Relevantly, Dr Selvadurai gave evidence that Mrs Hughes’ condition, despite being in a quite advanced form, did not prevent her from understanding a question.  Rather, the difficulty lay in Mrs Hughes inability to retain the question in her mind for long enough to answer it in a reliable way. This medical evidence was relevant in the face of the following nuances to the hearsay rule in the Evidence Act 2011.

    Firstly, section 63 of the Evidence Act provides an exception to the hearsay rule, if a person who made a previous representation (here, Mrs Hughes) is not available to give evidence about an asserted fact (here, being what happened in 1999 when the Property was purchased).

    Secondly, section 4 to the Dictionary to the Evidence Act defines the ‘Unavailability’ of a person to include, amongst other reasons, if:

    (b) the person is…  not competent to give evidence; or

    (c) the person is mentally or physically unable to give evidence and it is not reasonably practicable to overcome that difficulty.

    Section 13 of the Evidence Act provides guidance as to when a witness may be not competent (for the purposes of the section 4(b) definition above).  In the face of section 13, the distinction between the section 4(1)(b) and 4(1)(c) definitions in the Dictionary may often be one with little difference, as section 13 says:

        1. A person is not competent to give evidence about a fact if, for any reason (including a mental, intellectual or physical disability);
          1. the person does not have the capacity to understand a question about the fact; or
          2. he person does not have the capacity to give an answer that can be understood to a question about the fact;

      and that incapacity cannot be overcome.

      In the context of the evidence given by Mrs Hughes’ geriatrician, the first limb of the section 13 test of competency did not excuse Mrs Hughes from having to give her evidence first hand.  If asked a question, her doctor’s evidence was that Mrs Hughes could understand it. However, the argument the followed was whether Mrs Hughes had “the capacity to give an answer that [could] be understood to a question about the fact”.  Relevant to that question, the defendant’s submission was that Mrs Hughes’ inability to give a cogent or reliable answer is a distinct issue to whether her answers could be understood.  After all, to answer “I don’t remember”, is a response to a question which makes sense.  Ultimately though, this is where the broader exclusion at the definition at section 4(1)(c) of the Dictionary was applied by Justice Mossop to find that Mrs Hughes’ Alzheimer’s condition was a mental condition which rendered it ‘not reasonably practicable’ for her to give evidence in person.  This permitted her previous instructions to her former lawyers being admitted into evidence, notwithstanding Mrs Hughes was not able to be cross-examined on them.

      Of course, just because Mrs Hughes’ notes were capable of being taken into evidence, the question of what weight should be applied to them was a further issue to be considered.  In this respect, even in the absence of Mrs Hughes being available to be cross-examined, Justice Mossop considered Mrs Hughes’ notes to be more reliable than the evidence of the defendant, whose evidence on central issues His Honour found to have involved ‘forensically targeted reconstruction’.  In particular, His Honour rejected answers provided by the defendant which attempted to avoid the probative value of the receipt signed by the defendant which acknowledged “$183,000 owing”

      What was the outcome?

      Notwithstanding Mrs Hughes was not available at the hearing to give evidence (either to advance her case, or to rebut the defendant’s counter argument), Justice Mossop rejected the defendant’s contention that the amount of $125,000 was to be deducted from the defendant’s contribution.  His Honour also rejected the defendant’s ancillary arguments that other day-to-day household contributions were “taken into account”

      The Property was thus ordered to be sold, with the defendant’s interests in the Property adjusted to reflect her contributions towards its purchase.  As the evidence showed the defendant contributed $20,000 towards the $380,000 purchase price, the defendant’s interest was, in effect, reduced to only 5.26%. 

      The lesson

      Exceptions to the hearsay rule can be technical.  Whilst the breadth of documentary hearsay evidence admitted in the Hughes case may have been an exception to the norm, it equally is true that a party should not assume that their first-hand evidence will be preferred by the court solely on the basis that their opponent is unavailable to give their evidence in the usual way.  

      Whilst Mrs Hughes is still alive, many elements of her case were analogous to litigation involving a deceased estate where family members have conflicting evidence as to what promises have been made by a deceased (that is, ‘unavailable’) person.  In such situations, the courts have held that:

      … in a claim based on communications with a deceased person, the court will treat uncorroborated evidence of such communications with considerable caution.

      In the case of Hughes, the court applied such caution in rejecting the evidence of the defendant that went to the critical issues of the case.  In doing so, Justice Mossop was left finding in favour of Mrs Hughes, notwithstanding she was unavailable for the entirety of the proceeding.  Whilst Mrs Hughes may never fully comprehend the ramifications of the outcome in her favour, she may at least now downsize with her husband, as she had sought to do for several years prior to the court proceedings becoming necessary.

      To speak with a lawyer from our Estates or Litigation team, contact us today.

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