News & Events

  • Procedural Fairness in Estate Law - Recent High Court of Australia Case - Nobarani v Mariconte

    Procedural Fairness in Estate Law - Recent High Court of Australia Case - Nobarani v Mariconte

    It has been some time since there was a High Court decision concerning estates and succession law. Earlier this month the High Court of Australia considered whether procedural fairness was afforded to a self-represented litigant, Mr Nobarani during a trial in the New South Wales Supreme Court.

    Background

    Mr Nobarani was a friend of the late Iris McLaren (‘the deceased’). In December 2013, the deceased made her last Will which named her friend Ms Mariconte as her executrix and sole beneficiary of her estate.

    Mr Nobarani was named as a beneficiary of an earlier Will of the deceased. He claimed that the deceased’s 2013 Will was invalid for a number of reasons – he claimed that the deceased’s signature was forged at the time of making her Will, that she lacked testamentary capacity and that she had been under the influence of medication.

    Mr Nobarani proceeded to file 2 caveats against a Grant of Probate for the 2013 Will. The executrix then brought proceedings seeking orders that the caveats cease to be in force. The executrix also sought probate of the 2013 Will and also filed a Statement of Claim in which Mr Nobarani was not named as the defendant (and therefore, was not party to the case concerning the validity of the 2013 Will).

    NSW Supreme Court decision

    Less than a week before the trial concerning the validity of the caveats, Justice Slattery was called upon to determine an issue raised by the executrix, which was to point out that the caveats filed by Mr Nobarani had in fact expired.

    The executrix sought that the trial be held as a final probate hearing and the Court accepted. It should be noted that:

    • the Court made the decision to change the nature of the proceedings on the 14th May, noting that the trial was set down a few days afterwards on 18th May;
    • throughout the matter, Mr Nobarani was not a defendant in the executrix’s Statement of Claim concerning the validity of the 2013 Will, and as such, had only filed evidence in relation to the opposition of the caveat motion. The preparation of his case was limited therefore only to the caveat motion and nothing else; and
    • at the Trial, the executrix was represented by solicitors, junior counsel and senior counsel while Mr Nobarani remained unrepresented.

    At the trial Mr Nobarani advised the Court that he required more time to prepare for the hearing, that he had been denied an opportunity to issue subpoenas, cross examine witnesses and prepare an adequate defence.

    Ultimately, the Supreme Court held that the 2013 Will was valid, granted probate to the named executrix and ordered Mr Nobarani to pay costs.

    Court of Appeal

    Mr Nobarani appealed to the Court of Appeal on the basis that he had been denied procedural fairness.

    The Court of Appeal unanimously held that Mr Nobarani had been denied procedural fairness, but what happens next was important.

    Justice Ward and acting Justice Emmett held that although Mr Nobarani had been denied procedural fairness, that the miscarriage of justice was not so substantial to warrant a retrial, and that the denial of procedural fairness did not deprive Mr Nobarani of the possibility of a successful outcome.

    Justice Simpson had a different opinion and found that there was a possibility that retrial would have resulted in a different outcome and therefore there had been a miscarriage of justice.

    As the Court was divided, the majority decision took precedence and Mr Nobarani’s appeal was dismissed. A retrial was not ordered.

    High Court of Australia

    Mr Nobarani then appealed to the High Court of Australia.

    The High Court unanimously allowed Mr Nobarani’s appeal from the Court of Appeal and held that a new trial should be granted on the basis that Mr Nobarani was denied procedural fairness.

    Some of the notable points made by the High Court included the following:

    1. Denial of Procedural Fairness

    Citing Stead v State Government Insurance Commission, the High Court stated that ‘[a]ll the Appellant needed to show was that the denial of natural justice deprived him of the possibility of a successful outcome’.[1] The High Court confirmed that there were several denials of procedural fairness through the course of the trial however they mostly arose from the last minute change of the issue to be decided during the hearing. Ultimately, this was determined to be sufficient enough to deny the appellant ‘the possibility a successful outcome’.

    1. Insufficient Time for the Appellant to Prepare a Defence

    The High Court held that contrary to the assertions of the trial judge, the appellant did not have sufficient time to prepare for his matter.

    Mr Nobarani only had 3 clear business days to:

    • consider the statement of claim;
    • prepare and serve a defence;
    • issue any subpoenas with an abbreviated return date before trial; and
    • locate any witness and secure them for the trial.

    The trial judge had made this assertion of the basis that the matter had been set down for some time. However, the trial judge had not taken into account that the trial date was set for the issues surrounding the appellant’s caveats and not the substantive Will challenge. In fact, no directions had been given in relation to the substantive Will challenge.

    1. Issues surrounding self-represented litigants generally

    Mr Nobarani had a limited understanding of court procedure and evidence rules. In addition, his command of the English language was lacking.

    The High Court found it unsurprising therefore that his case was vague and disordered but was careful not to give the appellant a privileged status as a self-represented litigant. The fact that Mr Nobarani was a self-represented litigant did play a factor in the High Court’s decision.

    Unfortunately for the parties involved, due to the procedural irregularity, the matter remains unresolved and is now set for a new trial at the New South Wales Supreme Court. Interestingly, Mr Nobarani does not stand to benefit significantly under the earlier Will of the deceased, and receives only some specific items of the deceased jewellery. Given the matter has now spanned over 2 years, one wonders whether the parties (and particularly Mr Nobarani who may continue to be unrepresented and is due to receive little from the earlier Will) still have the ‘stamina’ to continue with the re-trial.

    This case will serve as a warning to all practitioners (and judges alike) of the importance of affording sufficient time to both sides of a case in order to allow adequate case preparation and therefore afford each party procedural fairness.

    Written by Golnar Nekoee, Director, Wills and Estate Planning

     

    [1] (1986) 161 CLR 141 at 147.

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  • Business Breakfast Club August Summary - Asset Protection and Voidable Transactions: Controlling Risks

    Business Breakfast Club August Summary - Asset Protection and Voidable Transactions: Controlling Risks

    This month at Business Breakfast Club, we discussed asset protection strategies and transactions which are voidable by a Trustee in Bankruptcy. There are a number of asset protection strategies to consider, particularly when carrying on a business, and there is no one perfect strategy. BAL Director, Katie Innes shared some of her insights on the topic. In addition to discussing some of the more common asset protection strategies Katie touched on:

    Voidable Transactions

    There are a number of transactions that are voidable by a Court where companies are in administration or liquidation, and when individuals become bankrupt. In particular, we focused on three types of voidable transactions under the Bankruptcy Act 1966 (Cth).

    Undervalued Transactions – s 120 Where a transfer of property may be void if the transfer took place in the period of 5 years before the commencement of the bankruptcy and the transferee gave no consideration (or less than market value) for the transfer.

    Intention to Defeat Creditors – s 121 Where a transfer of property may be void if the property ‘would probably have’ become part of the bankrupt’s estate or ‘would probably have’ been available to creditors if the property had not been transferred. The transferor’s main purpose in making the transfer must be to either to prevent the property from becoming divisible amongst their creditors or to delay the process of making the property available. This purpose can be reasonably inferred from the circumstances, particularly if the transferor was, or was about to become, insolvent at the time of the transaction.

    Avoidance of preferences – s122 A transfer of property by a person in favour of a creditor can be void if the transfer had the effect of giving the creditor a preference, priority, or advantage over other creditors and was made within certain time periods.

    Cases & Practical Lessons

    Case studies help demonstrate how transactions can be scrutinised in practice. We looked at the seminal case of Cummins v Cummins[1] and whether quarantining assets against possible future liabilities can be for the purpose of defeating creditors, and Silvia v Williams[2] which reiterates the benefits of documenting loans contemporaneously and seeking professional advice on protection of assets (to show the intention behind certain transfers).

    For more information, please contact Katie Innes. The next Business Breakfast Club will take place on 14 September 2018. If you would like to attend, please contact us.

    [1] The Trustees of the Property of John Daniel Cummins, a Bankrupt, v Cummins [2006] 227 CLR 278.

    [2] Silvia (Trustee) v Williams, in the matter of Williams (Bankrupt) [2018] FCA 189

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  • Country Of Origin Labelling Changes - Greater Certainty For Consumers

    Country Of Origin Labelling Changes - Greater Certainty For Consumers

    We all know and recognise the green triangle with the yellow kangaroo, a mark of products that are proudly Australian. Due to changes in the rules governing its use, we may be about to see a lot more of it.

    The Country of Origin Food Labelling Information Standard 2016 (the Standard) has been in place since 1 July 2016 but in a voluntary capacity only. As of 1 July 2018 Country of Origin (COO) labelling under this Standard is now mandatory, which means greater certainty for consumers who want to know whether their food is Australian made and grown. So what does this mean for you?

    The Standard provides for mandatory COO labelling requirements for food that is sold (including offered or displayed for sale) in Australia. It is designed to regulate country of origin food claims by prohibiting businesses and individuals from:

    1. supplying or manufacturing food that does not comply with the Standard; and
    2. making false, misleading or deceptive representations about a food product’s place of origin.

    Scope of the rules

    The Standard applies to most foods offered or suitable for ‘retail sale’ in Australia. The net is cast widely capturing anything used or represented as being for human consumption, as well as any ingredients, additives or substances used for preparing those things. There are a number of exceptions, including certain unpackaged products, products for export, those made and packaged on the premises where it is sold, and food or products sold in facilities such as schools, restaurants, prisons, hospitals and fundraisers. ‘Therapeutic goods’ under the Therapeutic Goods Act 1989 also escape the reach of the Standard.

    The new law establishes different labelling requirements depending on whether an item is classified as a priority or non-priority food. Non-priority food categories include seasonings, confectionery, biscuits and snack foods, soft drinks and sports drinks, alcoholic drinks, tea, coffee and bottled water. Everything else is a priority food. While all foods must include a statement of origin and the minimum proportion of Australian ingredients in a bar chart, the kangaroo symbol is only mandatory for priority foods.

    Grown, produced, made and packed

    It is important that businesses understand the concepts that apply under the Standard to ensure that accurate claims are made about their products. ‘Grown’, ‘produced’ and ‘made’ all have very particular meanings under the Standard, referring to the provenance of the food and its ingredients, as well as changes in their size, substance, identity and character. The Australian Competition & Consumer Commission (ACCC) has released useful guidance for businesses to help them better understand these terms and their obligations under the Standard.[1]

    It is important to note that a food cannot be considered as being grown, produced, or made in Australia unless it has also been packed in Australia.

    Enforcement

    If businesses fail to comply with the Standard, they risk breaching the Australian Consumer Law. The ACCC are responsible for enforcing the new laws and will conduct market surveillance checks on over 10,000 products. ACCC Deputy Chair, Mick Keogh, noted that companies have had two years to implement the new labelling system, indicating that those who have failed to do so risk serious financial hardship.[2]  The ACCC will be scrutinising the truth in labelling so that if a company claims that its product is 100% produced or grown in Australia, the company will be required to document or provide evidence to justify that claim to the ACCC.

    If you have any questions about how the mandatory country of origin labelling laws apply to you or your business, please get in touch with our Business team.

     

    [1] Australian Competition & Consumer Commission, Country of Origin food labelling: A guide for business (24 April 2017)

    [2] Rachel Carbonell, Farmers hope new food labelling laws spur consumers to buy more Australian produce, 29 June 2018, ABC News

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  • Smart Contracts for Commercial Leasing - Don't Believe the Hype?

    Smart Contracts for Commercial Leasing: Don't Believe the Hype?

    There is plenty of hype surrounding the potential for blockchain-based smart contracts to revolutionise the real estate industry.

    Smart contracts are computerised contracts under which a party can pre-authorise its terms to be performed automatically. Though the risk of ‘computer hacking’ immediately comes to mind, these contracts use and share encryption and distributed ledgers which are designed to be resistant to manipulation. A simple example is a vending machine. The consumer and the vending machine company both trust that the machine will dispense a can of soft drink if, and only if, a coin is dropped in the coin slot.

    Supporters of smart contracts suggest the technology offers many benefits for commercial leasing, including:

    • Automatic payment of rent and outgoings;
    • Integration with the Internet-of-Things (IoT);
    • Immediate detection of breaches (such as non-payment of rent) and automatic forfeiture of security; and
    • Collection of data to allow for forecasting and analysis of market trends.

    However the technology still faces many difficulties in overcoming:

    • The legislative requirements which mandate written leases and legislative reform or variations;
    • The loss of discretion and flexibility between the parties; and
    • The loss of flexibility associated with using proprietary technological platforms.

    We can expect smart contracts to become a hotly debated topic in the real estate industry but, at least in these early stages, smart contracts for commercial leasing may be more likely to be used in standard form contracts, such as for pop-ups or co-sharing spaces. For more complicated leasing arrangements solicitors will likely stay at the forefront to ensure the proper preparation and execution of the terms of the contract (lucky for us!).

    If you require assistance with your commercial leasing arrangements, please contact us.

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  • Business Breakfast Club July Summary - Sexual Harassment, Discrimination and Bullying At Work - What Your Organisation Needs To Do About It

    Business Breakfast Club July Summary - Sexual Harassment, Discrimination and Bullying At Work - What Your Organisation Needs To Do About It

    This month at Business Breakfast Club, we discussed sexual harassment, discrimination and bullying laws and their affect on individuals in the workplace. BAL Director, Gabrielle Sullivan gave a practical overview of these topics and explored what organisations need to do to prevent and respond to these issues as employers.

    What constitutes Discrimination, Bullying and Sexual Harassment?

    Discrimination involves unfair or unfavourable treatment of an individual because of a ‘protected attribute’, or imposing a condition or requirement with which a person with a ‘protected attribute’ cannot comply because of that attribute. Examples of attributes that are protected include things such as sexual orientation, gender identity, marital or relationship status, pregnancy or potential pregnancy, and also family responsibilities.

    Bullying is repeated unreasonable behaviour (whether intentional or unintentional) that creates a risk to an individual’s health and safety. Bullying is a work, health and safety concern and may be subject to the scrutiny of WorkSafe ACT or SafeWork NSW.

    Sexual harassment is unwelcome conduct of a sexual nature that a reasonable person would anticipate would offend, intimidate or humiliate an individual.

    Importantly, whether conduct is ‘unwelcome’ is subjective. It is based on how the recipient perceives and experiences the conduct in question. Conversely, whether the conduct is ‘offensive, intimidating or humiliating’ behaviour is objective and determined with reference to whether a reasonable person in the same situation would have anticipated that offence, intimidation or humiliation might result from the behaviour.

    Sexual harassment is both a type of discrimination and a type of bullying, but has significantly higher compensation orders available for victims.

    Prevention techniques & Responding to Complaints

    The best technique to prevent and deal with sexual harassment, discrimination and bullying is to create a respectful workplace by:

    • modelling respectful behaviour from the top of the organisation down;
    • having a policy in place that includes definitions and reporting procedures (a Work Health & Safety Act requirement);
    • increasing staff awareness of the policy; and
    • responding to complaints promptly and reasonably, and in accordance with the policy.

    The key objective in responding to complaints should always be the efficient and fair resolution of complaints for all parties. This means no reprisals or unnecessary escalation within the organisation. Employers also need to remember they must manage the interests of all parties in this process (not just the complainant).

    For more information, please contact Gabrielle Sullivan or see our HR Breakfast Club website:

    http://hrbreakfastclub.com.au/industry/employment-corner/sexual-harassment/

    http://hrbreakfastclub.com.au/industry/employment-corner/bullying-and-harassment/

    The next Business Breakfast Club will take place on 10 August 2018. If you would like to attend, please contact us.

    A copy of the slides is available here.

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  • A game of snakes and ladders restraints of trade and ladder clauses

    A game of snakes and ladders: restraints of trade and ladder clauses

    Ladder clauses have become an essential part of restraint of trade clauses in Australia. However, significant policy concerns with the use of these clauses bring into question their continued acceptance, particularly in contracts for employment. Recent decisions concerning restraints of trade and ladder clauses suggest that the courts’ patience with clauses of this kind may be waning.

    Restraint of trade clauses are a staple inclusion in many employment contracts, and for good reason. Employers have a legitimate interest in protecting their confidential information, maintaining customer relationships and preserving a stable and trained workforce. In fact, one academic suggests that restraint of trade clauses are so essential to the preservation of an employer’s interests that any lawyer who fails to advise on and draft an enforceable clause may well be considered negligent. However, for a clause that has such a ubiquitous presence in employment contracts, it is remarkable that their enforceability is so uncertain in any given circumstance. This is particularly true in jurisdictions, such as the ACT and Victoria, where the common law restraint of trade doctrine has remained largely unaltered by statute.

    There are a number of reasons for this uncertainty, not the least of which is that a covenant in restraint of trade is considered to be ‘contrary to public policy’ and therefore presumed to be void unless the party seeking to rely on its protection can demonstrate that it is ‘reasonable’ in the circumstances to protect the party’s legitimate interests. Specifically, the clause must be ‘framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public’. This, in turn, touches upon the second key reason for the uncertainty surrounding the enforcement of restraint of trade clauses: the unenviable drafting exercise faced by a lawyer attempting to balance these competing imperatives. Failing to properly achieve this balance either means the employer’s legitimate interests are not adequately protected or the clause is rendered void on the grounds of unreasonableness.

    The task of drafting restraint of trade clauses is in no small way comparable to a high-stakes game of snakes and ladders. The lawyer tries to climb up the board to reach a point where all of the employer’s interests are adequately protected, but if the clause is drafted too ambitiously, the lawyer risks stepping on a snake and sliding back down into unenforceability. Unsurprisingly, resourceful lawyers have sought to craft a way around the pesky problem of balancing the need to adequately protect their employer client’s interests, whilst seeking to minimise the risk of leaving the client without the protection of a restraint of trade – ladder clauses.

    Ladder Clauses

    Many practitioners will be familiar with ladder clauses, also known as cascading clauses. I will therefore keep my description of their operation brief.

    Ladder clauses are a tool used to bypass the common law rule that courts cannot restate an unenforceable contractual clause in terms that would permit its continued operation. This is achieved by harnessing the operation of the doctrine of severance. In short, ladder clauses are drafted in such a way so that the offending portion of the term can easily be severed from the contract, thereby preventing that portion of the term impugning the operation of the entire clause. Whether or not any particular restraint of trade term can successfully be severed from the contract in the event it is found to be unenforceable depends on the application of the ‘blue pencil test’ (discussed further below).

    Broadly speaking, restraint of trade ladder clauses operate in two different ways.

    The first kind of ladder clause operates by creating a cascading series of reducing obligations. Each particular obligation is only triggered when the more onerous restraint preceding it is held by the court to be unreasonable. In other words, the obligations in the clauses cascade down with ever diminishing burdens on the restrained party until the court finds that one of the clauses is reasonable and, therefore, enforceable. For reasons that I discuss below, ladder clauses of this kind run a relatively high risk of being held to be void on the grounds of uncertainty.

    The second kind of ladder clause, although on one conception they are not truly ladder clauses at all, purports to create multiple individual restraints operating simultaneously, with each restraint providing for a varying degree of burden on the restrained party. For example, one clause may create one obligation on the restrained employee to not work for a competitor for a period of three months, while another clause operates simultaneously to create a separate obligation to not work for a competitor for a period of six months.

    Clauses of the second kind have a number of advantages over the first kind. Firstly, multiple clauses of this second kind operating separately are able to cast a net of obligations on the restrained party which is far wider than any individual term could achieve without a significant risk it would be found to be unreasonable. Secondly, separate clauses of this kind are more amenable to the ‘blue pencil test’ for severance, allowing for unreasonably broad restraints to be removed from the contract with less risk of the whole clause being held to be invalid. Thirdly, courts have been more reluctant to find these sorts of clauses to be void for uncertainty. This is because, properly drafted, clauses of this kind create multiple yet fundamentally distinct restraints that are, when viewed individually, ‘tolerably clear’ in each separate instance. However, some recent decisions suggest that this second kind of restraint clause may increasingly become the subject of more critical judicial scrutiny.

    Ladder clauses are somewhat analogous to their counterparts in the game snakes and ladders. They permit a lawyer to climb quickly to the top of the board, ensuring that their client’s interests are entirely covered by the restraint of trade obligations while skipping untouched over the pitfalls of unreasonableness and unenforceability. Just like ladders in the board game, ladder clauses have becomes a legitimate and integral part of restraints of trade. However, unlike the game, the use of ladder clauses in restraint of trade provisions in employment contracts gives rise to policy questions about whether their operation is entirely fair on the restrained party.

    Continue reading…

    First published in Ethos. Written by John Wilson, Managing Legal Director, and Robert Allen.

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  • Affordable housing in the ACT: How the Suburban Land Agency's new Affordable Housing Action Plan will affect developers and purchasers

    Affordable housing in the ACT: How the Suburban Land Agency's new Affordable Housing Action Plan will affect developers and purchasers

    Australia has long been a country where owning a home has been an achievable reality. In recent years, however, falling home ownership rates nationwide has seen this become merely a dream for many. To counteract this, the ACT Government released a new Affordable Housing Action Plan earlier this year. The new Action Plan includes changes for those providing and purchasing affordable housing in the ACT. In particular it adds a significant degree of administrative obligations on Developers. But what do you need to know?

    The requirements imposed on Developers

    Developers purchasing multi-unit sites directly from the ACT Government will now find additional obligations regarding affordable housing in the Project Delivery Agreement (PDA). In addition to a requirement to provide a minimum number of affordable homes, the PDA requires Developers to provide the Suburban Land Agency (SLA) with a copy of the development application (including a plan showing the location of the affordable homes) upon lodging the DA and again once upon the DA being approved by ACTPLA.

    The SLA must also approve the DA and provide the Developer with a list of eligible affordable home buyers. If the SLA does not approve the DA, the Developer must within seven working days amend the DA and provide the amended DA to the SLA for review before the SLA will provide a list of buyers to the Developer.

    The Developer is then required to make reasonable efforts to sell the affordable homes to the Buyers on the list provided by the SLA. This includes contacting buyers and providing a Contract for Sale in the form required by the PDA (which must be substantially consistent with the ACT Law Society Contract for Sale, allow part payment of the deposit with the sum of 1% or $5,000 to be provided on exchange and include the Scheduled of Finishes mandated by the SLA).

    What if a Buyer refuses to exchange?

    Should any buyer not exchange a Contract within the mandated timeframe despite the reasonable efforts of the Developer, the Developer may withdraw from negotiations. In these circumstances, the Developer must request the details of another eligible buyer from the SLA and begin the negotiation process with any new buyer once such details are provided. While providing a list of eligible buyers may speed up the process of exchange, if buyers are not agreeable to exchange occurring within the timeframes or if there are delays with buyers being found, the Developer may find it difficult to sell affordable housing stock as it will be unable to put such stock on the market until all eligible buyers have been exhausted or the date 60 days after a certificate of occupancy and use has issued for the complex.

    What if a Developer does not comply?

    To secure a Developer’s obligations under the PDA, the Developer is required to provide a security deposit directly to the SLA. This will be released following compliance with the Developer’s obligations under the PDA (including providing evidence of completed sales of affordable homes to the SLA). Developers must also be aware of the right of the SLA to restrict the Developer (or any associated entity) from participating in any future release of Land in the ACT if the Developer does not comply with its affordable housing obligations. Accordingly, Developers must ensure compliance with the new obligations of the PDA or be exposed to these risks.

    Those looking to purchase affordable housing

    The process of applying to purchase an affordable home has also changed. Those who meet the eligibility criteria must now register their interest directly with the SLA. The SLA will then contact Buyers once a Developer has submitted the DA to request a formal application be submitted. This application must be submitted within 14 days of being contacted by the SLA and any further information required must be provided within 30 days of request.

    Those who have an application to become an eligible buyer accepted will enter into a ballot to purchase affordable housing and, if successful, their details will be provided to the Developer to commence negotiations to enter into a Contract for Sale.

    Once the details of the buyer have been provided to the Developer, the buyer will be required to exchange contracts within 15 working days (unless the developer is acting unreasonably). While there are restrictions on the form of Contract for Sale provided by the Developer and the Contract must include the mandated inclusions list provided by the SLA, there is a risk buyers will be pressured into exchanging a Contract in a form that is not in their best interests.

    Conclusion

    There are risks involved for both Developers and Buyers of affordable homes under the new Action Plan. We suggest that you contact our Real Estate team to discuss your particular circumstances.

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  • Changes To The Corporations Act Invalidity Of Ipso Facto Clauses

    Towards More Effective Restructuring: Changes To The Corporations Act | Invalidity Of Ipso Facto Clauses

    For many suppliers, creditors and landlords, the threat of their counterparty’s insolvency is mitigated by a right to terminate or vary their contracts if there is an ‘insolvency event’. From July 1 2018 changes to the Corporation Act 2001 (Cth) may, however, limit those rights. The amendments which make ipso facto clauses in contracts unenforceable during certain insolvency-related processes, comes as a package of two major reforms, the other part of the packing being the ‘safe harbour’ provisions for company directors in periods of financial distress which took effect in September 2017.

    These changes arose from an acknowledgment by the Australian Government that our insolvency laws disproportionately stigmatise and penalise company failure, at the expense of entrepreneurship and innovation.[1] It is hoped that these reforms will reduce instances of the premature resort to formal insolvency processes, resulting in better prospects of turnaround for companies and the preservation of value for creditors and shareholders. In turn, the Government hopes to see a cultural shift away from the stigmatisation of failure and towards reasonable risk-taking for the ultimate benefit of the companies and people involved.

    So what are the changes?

    Ipso facto clauses

    Ipso facto clauses create a contractual right to modify or terminate a contract upon the occurrence of a ‘specific event’. Relevant here is the right to terminate a contract if the company enters administration, is wound up in insolvency or a manager controller is appointed. Ipso facto clauses have been long viewed as an important self-protection mechanism for suppliers, credit providers and landlords, but they do have the effect of inhibiting the successful turnaround of struggling companies.

    By cutting off vital contractual relationships, businesses in financial distress are deprived of their capacity to continue trading while they restructure, destroying its enterprise value and potentially deterring potential investors who may have otherwise bought out the business and attempted to turn it around. This may defeat the very purpose of entering into administration or schemes of compromise or arrangement, and may prejudice creditors should the company be wound up.

    From 1 July 2018 new provisions in the Corporations Act[2] prevent a party from enforcing an ipso facto clause during a ‘stay period’. While a party can apply to have the stay lifted ‘in the interests of justice’ [3] or to seek an order that the ipso facto clause is enforceable[4], the stay period will usually end only if the company exits administration or if the compromise or arrangement period ends, otherwise it will continue until the liquidation has been completed.

    When are ipso facto clauses enforceable?

    Ipso facto clauses in contracts that were entered into prior to 30 June 2018 are still enforceable. Further, ipso facto clauses that:

    1. modify rates of interest in finance arrangements (loans, guarantees, indemnities, security);
    2. allow a party to enforce an indemnity for enforcement expenses;
    3. can terminate a forbearance arrangement;
    4. change the priority or order in which amounts are to be paid;
    5. allow a set-off or combination of accounts;
    6. allow an assignment, transfer or novation of rights; or
    7. allow circulating security interests (floating charges) to become non-circulating security interests (fixed charges)

    are also still enforceable[5].

    Despite the amendments to the Corporations Act, counterparties to a contract may still terminate or amend the contract on other grounds, such as breach. As a trade-off, the company that benefits from the ‘stay’ of the counterparty’s rights to terminate will not be able to exercise their own rights to seek further advances of money or credit under the contract, therefore minimising risk of ongoing exposure for the counterparties.

    Practical challenges

    The aim of these changes is to provide a struggling company some breathing space, allowing the company to continue operating while directors attempt to restructure the business. Not only does this improving its bargaining position when attempting to negotiate restructure options with creditors, it may preserve the value of the business for the benefit of the company, its employees and its creditors.

    That said, the amendments create further motivation on contracting parties to ensure that they are closely managing contract performance addressing underperformance early and often to minimise exposure to the other’s insolvency, and reserving their rights to terminate for breach if the default is not rectified. For more information on termination of contracts click here.

    If you have any questions about how these provisions may apply to you or your company, please get in touch with our Business team. For information on the safe harbour provisions click here.

    Written by Katie Innes with the help of Bryce Robinson.

    [1] https://www.legislation.gov.au/Details/C2017B00100/Explanatory%20Memorandum/Text, p 3

    [2] Sections 415D, 434J, 451E

    [3] Sections 415E, 434K, 451F

    [4] Sections 415F, 434L, 451G

    [5] Section 5 of Companies (Stay on Enforcing Certain Rights) Declaration 2018

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  • Towards More Effective Restructuring: Changes To The Corporations Act | Safe Harbour Provisons

    For company directors, the threat of personal liability for debts incurred in periods of actual or potential insolvency looms large. The creation of the ‘safe harbour’ provisions in the Corporation Act 2001 (Cth) that took effect in September 2017 may provide some welcome relief to company directors in periods of financial distress.

    These changes arose from an acknowledgement by the Australian Government that our insolvency laws disproportionately stigmatise and penalise company failure, at the expense of entrepreneurship and innovation.[1] It is hoped that these reforms will reduce instances of prematurely resorting to formal insolvency processes, resulting in better prospects of turnaround for companies and the preservation of value for creditors and shareholders. In turn, the Government hopes to see a cultural shift away from the stigmatisation of failure and towards reasonable risk-taking for the ultimate benefit of the companies and people involved.

    So what are the safe harbour provisions?

    Safe harbour

    Under the Corporations Act, a company director may be personally liable for debts incurred by the company if, at the time, they had reasonable grounds to suspect that the company was insolvent. The threat of personal liability can leads directors to liquidate companies that are in fact solvent or able to be turned around.

    From 19 September 2017 a new section 588GA allows company directors to be protected from such liability if it can be shown that they were developing or taking a course of action which was reasonably likely to lead to a better outcome for the company, rather than proceeding directly to administration or liquidation. Section 588GA(2) contains a list of considerations that may support such a finding, such as steps taken to prevent misconduct, whether appropriate financial records have been kept, whether the director is obtaining advice from qualified parties, and whether they are developing or implementing a restructuring plan to improve the financial position.

    The new provisions encourage directors to take reasonable risks aimed at turning their company around, without feeling pressure to leap straight into administration or liquidation. Whilst directors must still abide by all other duties owed to the company, the changes aim to encourage honest, diligent and competent directors to retain control of their companies and to be innovative in their recovery efforts.

    Practical challenges

    While this reform is certainly a step in the right direction, it contains some significant ambiguities and judicial interpretation will be a key determinant of its effectiveness. For example, the requirement to ‘start developing courses of action that are reasonably likely to lead to a better outcome for the company’ is riddled with uncertainties. What kinds of actions have to be taken? When is something ‘reasonably likely’ to lead to a better outcome?

    The failure to give directors specific steps they can pursue to feel confident in their protection may inhibit its effectiveness in preventing premature administration or winding up. Directors may not find out until several years down the track whether they made it into safe harbour. Coupled with the uncertainty of the provisions, these changes may do little to dissipate the spectre of personal liability hanging over the heads of company directors.

    Many of these issues may remain unresolved until directly contested in court. For now, it is crucial that directors who wish to take advantage of the safe harbour protections maintain a comprehensive record of evidence that demonstrates their compliance with the new obligations.

    If you have any questions about how these provisions may apply to you or your company, please get in touch with our Business team. For information on changes to the Corporations Act about ipso facto clauses click here.

    Written by Katie Innes with the help of Bryce Robinson.

    [1] https://www.legislation.gov.au/Details/C2017B00100/Explanatory%20Memorandum/Text, p 3

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