View in PDF

Illegal phoenix activity has recently come under intense scrutiny from ASIC, with directors being exposed to expanded liabilities and harsh penalties.

What is Illegal Phoenix Activity?

From time to time, businesses fail purely out of bad luck, despite being responsibly managed. After liquidation, directors are within their rights to continue in business using another corporate entity. What is not acceptable, however, is acting against the interests of the failing company, including using or moving its assets – e.g. goodwill, branding, phone and website, as well as cash or physical assets – to help ‘breathe life’ into a new company, leaving the failed company unable to satisfy the debts owed to employees, creditors and the tax office.

Illegal phoenix activity commonly involves the following characteristics:

• A company is unable to pay its debts or otherwise satisfy its obligations;

• A new company commences, usually within 12 months, with the same or similar management and business;

• Some or all of the assets from the failing company transfer to the new company and unsecured creditors are denied access to the assets;

• The new company employs staff that had previously been terminated from the failed company.

The role of ASIC

ASIC may take administrative action to wind up abandoned companies and it has a surveillance campaign and funding to investigate illegal phoenix activity. Where phoenix activity is detected, ASIC may take action against parties involved, including legal, accounting or other advisors involved in facilitating the illegal activities.

Consequences for Directors

In small to medium enterprises, it is common to find directors with little understanding of the obligations imposed by the law vis-à-vis “their” company. As usual, ignorance of the law is no excuse. The company is a distinctly separate legal entity from the director, and the director owes duties to act in its interest, distinct from his/her own interests. Where the company is ‘flirting’ with insolvency, the interests of creditors cannot be disregarded. If directors disadvantage a failing company to benefit a new company or themselves they may be disqualified from managing corporations for an extended period of time.

Consequences for Advisors

Advisors who, with knowledge of the relevant facts, advise on or recommend a transaction which contravenes the Corporations Act 2001 may be held to have aided and abetted the transaction, thereby breaching their statutory duties.

There are lawful and effective ways to restructure, however, many advisors do not have the expertise to step a client (and themselves) through this ‘mine-field’ unscathed. We do.

For further information about solvency issues, structuring for asset protection, or director duties, please contact:

Ben Warren – Director

M: 0402 003 364
E: bwarren@ellemwarren.com.au

View in PDF

With housing affordability at historic lows, high-density residential and mixed-use developments are an increasingly common investment vehicle for home buyers, and individual and corporate investors alike.

With the complexity of laws governing the ‘community titles schemes’, it is important that buyers understand their rights and obligations.

In particular, working out who should pay for maintenance or repairs is a common source of dispute, and may fall on the body corporate or an individual owner.

As the body corporate is comprised of all current lot owners, this is essentially a question of whether costs are borne by one owner or all the owners.

Body Corporate Duty: Maintenance and Repairs

Among other obligations, the body corporate is responsible for the administration of common property. This includes a duty to keep common property in ‘good condition’.

What is ‘Common Property’?

Land and facilities, which are part of the scheme but not part of any individual lot is referred to as ‘common property’. Common property is owned by all the lot owners together.

Facilities like gardens, lawns, walkways, parking areas, and pools are normally common property. In the case of subdivided buildings, such as apartment complexes, the body corporate is also responsible for external walls, railings, windows, and roofing membranes (waterproofing).

As the body corporate is only responsible for maintaining common property, determining whether something is part of the common property or an individual lot determines who is responsible for maintenance or repairs.

This is not always obvious. It can be an involved process and usually requires examination of the scheme plan held on record by the Titles Registry.

Nature of the Obligation

Bodies corporate must maintain common property in ‘good condition’ or, for structural elements (foundations, load-bearing walls, and roofs), in ‘structurally sound condition’. This is not optional: a body corporate does not have discretion to ‘opt out’ of its obligations.

Although the term ‘maintain’ is used, courts consider this to include repairs and, in some circumstances, replacement of damaged property.

There are situations where a failure to perform necessary repairs to common property results in damage to individual lots. Common examples include water damage caused by leaking roofs or insufficient drainage. Depending on the circumstances, bodies corporate may be accountable for damage to individual lots, which would likely exceed the cost of initial repairs.

Water, Electricity and Other Services

Water and electricity supplies, telephone services and drainage are considered part of the common property. Responsibility to maintain or replace damaged infrastructure would normally fall to the body corporate.

However, it is important to note some utilities installed for the occupier’s sole benefit do not form part of the common property; the body corporate will not be responsible for infrastructure that:
• supplies a utility service to only one lot;
• is within the boundaries of a lot; and
• is not within a boundary structure for the lot.

Common examples include hot water systems or air conditioning units installed by the owner. If this is the case, the owner of that lot is liable for its maintenance and repair.

Shared Obligations

Under a community titles scheme, lot owners are in an unusual situation where the body corporate may be obliged to organise and remit payment for repairs, but with each lot owner liable to foot a proportion of the repair cost.

Calculation of payment will be determined by reference to the interest schedule lot entitlement, which determines a lot owner’s share of amount levied by the body corporate. By comparison, any long-term replacements or renovations like painting or carpeting are financed by the Sinking Fund.

It should be noted that individual lot owners also have an obligation to contact the body corporate upon becoming aware of the need for repairs.

Failure to Act: Enforcing Obligations

If a body corporate repeatedly fails to look after common property or owners’ interests and assets, owners can enforce the obligation, if necessary, with assistance of the Office of the Commissioner.

If the matter proceeds to litigation, bodies corporate may be liable to lot owners for any expenditure incurred as a result of the body corporate ignoring its statutory duty to maintain the common property. Lot owners may also be able to obtain damages resulting from economic loss, costs of repair and legal costs, under common law.

Conclusion

It is vital that bodies corporate are aware, and understand the gravity, of their statutory obligations to repair and maintain common property. Damage caused as a result of a failure to fulfil these obligations will incur serious liability.

Bodies corporate should employ strict strategies to avoid preventable liability, particularly by regular distribution of information to all lot owners and investors, including details such as the following:
• Identification of the difference between common property and individual lots;
• Body corporate obligations; and
• Lot owners’ responsibilities.
It is also important to obtain a copy of the registered plan from the Department of Natural Resources and Mines to properly understand the boundaries of common property and individual lots within the community title scheme.

For further information about community titles schemes, and the obligations of bodies corporate and lot owners, please contact:

Ben Warren – Director

M: 0402 003364
E: bwarren@ellemwarren.com.au

Richard Ellem – Director

M: 0403 464 875
E: rellem@ellemwarren.com.au

© October 2014

View in PDF

All employers should have a clear and accessible ‘action plan’ in the event of workplace injuries. The plan ought to address practical issues, like first aid and emergency response, counselling and potential media enquiries, as well as the many and onerous legal duties and risks.

This short article is not intended as a comprehensive list of legal duties and risks but provides some general guidance in regard to handling injured workers.

Employers’ Responsibilities

It is important to be aware that criminal prosecution may be pursued if employees are permitted to perform hazardous work. Post-injury safety assessment and investigations are vital and we recommend initiating this only after seeking legal advice so that, potentially, the results are subject to legal professional privilege.

Employers must proceed with caution. In Queensland, WorkCover must be notified immediately of any injury for which compensation may be payable. It is advisable to encourage the employee to obtain a medical assessment from an independent medical practitioner, and not to assume the cause of injury, to avoid subsequent claims of bias.

Once the immediate injury and safety issues are contained, in preparation for defending against possible discrimination or unlawful dismissal complaints, an employer should also collect and retain all records of attempts to find alternative or modified duties for an injured worker.

Legislation

• The Fair Work Act 2009 prohibits employers from taking adverse action, including terminating the employment, because of a temporary absence from work due to illness or injury. Contravention gives rise to a potential ‘general protections’ claim for compensation and penalties, including against individual directors or managers ‘knowingly involved’.

• The Workers’ Compensation and Rehabilitation Act (WorkCover) extends the prohibition against termination to one year of a compensable injury if the termination arises “solely or mainly” because the employee is not fit for work. Contravention attracts a max. fine of 40 p.u. (i.e. currently $4,400).

• Also, anti-discrimination legislation in most States prohibits discrimination on the basis of impairment. Naturally, a court is likely to take a particularly harsh view of discrimination by an employer where the impairment arose from a workplace accident.

Courses of Action

Employers should also consider guarding against stress, anxiety or depression related illnesses in the workplace.  These are particularly difficult to defend against, they are becoming increasingly common, and damages can be as much or more than any physical injury.  Take all reasonable steps to assist an injured employee in returning to work, including considering the potential for other duties. Termination can only be considered as a last resort, and must follow a complete inquiry, including a functional capacity assessment and safety risk analysis.

Having a clear plan before an injury occurs is infinitely better than trying to address these issues ‘on the fly’.

For further information on these topics, please contact:

Ben Warren – Director

M: 0402 003 364

E:  bwarren@ellemwarren.com.au

Richard Ellem – Director

M: 0403 464 875

E: rellem@ellemwarren.com.au
 

View in PDF

Shareholders agreements should always be read in conjunction with the constitution, notwithstanding the ‘inconsistency clause’

The Inconsistency Dilemma
The ‘inconsistency clause’ often found in shareholders agreements plays a key role in settling internal company disputes. Where an inconsistency exists between a shareholders agreement (“SA”) and a company constitution, an inconsistency clause within the SA will generally state that the SA prevails. Consequently, a common assumption exists that where an internal company dispute arises the SA will always prevail.

However, the decision of Cody v Live Board Holdings Ltd[1] by the NSW Supreme Court has highlighted a flaw in this assumption and has underlined the dangers of reading the SA to the exclusion of the constitution.

The Facts

Directors of the defendant company, Live Board Holdings Ltd (“LBH”) sought to raise capital by issuing preference shares to new shareholders. A dispute arose between an existing shareholder (the plaintiff) and the company regarding the validity of the share issue.  Both the SA and the LBH constitution contained provisions regarding the power of the directors to issue shares.

The Shareholders Agreement

The LBH shareholders agreement reserved for the shareholders the general power to issue shares. Where a decision by the Board was made the issue shares, the SA stated that the issue required approval by a simple majority of shareholders.

The Constitution

Consistent with the SA, the LBH constitution stated that the Board could cause the company to issue shares. However, the constitution further stated that where an issue of shares affected the rights of existing shareholders, it required approval by a special resolution.[2]

The Issue

The ultimate dispute related to whether or not the SA or constitution applied. Both parties acknowledged that the Board had the power to issue shares[1], however the arguments put forward by the plaintiff and defendant both sought to establish that different provisions of either the SA or LBH constitution prevailed regarding the issue of shares.

The defendants relied on the inconsistency clause to argue that the SA prevailed and permitted the issues of shares without the special resolution. The plaintiff submitted that the constitution clause was not superseded by the clauses in the SA.

As a result of s198A Corporations Act 2001 (the “Act”) and the SA, acknowledging that an issue of shares and variation of shareholder rights was a decision to be made by the board, the inconsistency regarded the type of majority required for a Board decision regarding shares to be approved. It was either to be a special majority (75% shareholder approval) as stated in the company constitution, or a simple majority (50%), allowed by the SA.

Inconsistency? What Inconsistency?

The Court held that no inconsistency existed, and the inconsistency provision in the SA was not enlivened.  The LBH constitution prevailed and a special majority was held to be required to issue preference shares.  In coming to its decision, the Court looked to the purpose for which each provision had been drafted.

Firstly, clause 6 of LBH constitution existed to protect the rights of its existing shareholders.  Brereton J held that by issuing preference shares only to new shareholders, LBH had indirectly varied the rights of existing shareholders by issuing shares that would rank ahead of their interest.  As such, clause 6 of the constitution directly applied – LBH could not validly issue preference shares unless passed by special majority.

The provision in SA existed simply to reserve the power to issue shares to the shareholders.  Brereton J held that the SA provision was therefore not inconsistent with clause 6 of the constitution and therefore, approval of the issuing of preference shares by special majority was consistent.

Brereton J ultimately held that the combined effect of the SA and constitution was that, in ordinary circumstances, shareholders had the power to approve the issue of shares by simple majority. However, where the issuing of shares would affect the rights of existing shareholders, a special majority would be required.

Implications for Directors

Company directors should be aware that the SA and company constitution should be read in conjunction, not in isolation. The judgment of the Court makes it clear that one instrument can serve as a guide for interpretation of the other and a purposive approach should be taken in resolving any potential inconsistencies.  The judgment highlights the pitfalls associated with relying too heavily on inconsistency provisions.

The Courts will preserve the power of directors to exercise control over business matters.  However, clauses designed to protect the interests of minority shareholders will prevail, particularly where the shareholder(s) interests are directly or indirectly affected by the proposed director resolution.  A company constitution creates a statutory contract between the company (and, by extension, it directors) and the shareholders, as per s140(1)(a) of the Act.

Conclusion

Shareholders agreements should be read in conjunction with the company constitution, even when an ‘inconsistency clause’ exists.  Directors should consider clauses aimed at protecting minority shareholder interests before making resolutions affecting shareholders, in both the constitution and any shareholders’ agreement, as these clauses are likely to prevail in the absence of clear contrary intent.

For further information about directors’ duties, corporate governance, shareholder agreements or similar topics, please contact:

Ben Warren – Director

M: 0402 003 364

E: bwarren@ellemwarren.com.au

Richard Ellem – Director

M: 0403 464 875

E: rellem@ellemwarren.com.au