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VOIDABLE PREFERENCES: THE LATEST ON LIQUIDATORS’ CLAW BACK ON PAYMENTS MADE DURING A DEED OF COMPANY ARRANGEMENT

VOIDABLE PREFERENCES: THE LATEST ON LIQUIDATORS’ CLAW BACK ON PAYMENTS MADE DURING A DEED OF COMPANY ARRANGEMENT

The Supreme Court of New South Wales judgment of Re Western Port Holdings Pty Ltd (receivers and managers appointed)(in Liq) [2021] NSWSC 232 (“Western Port”) has provided liquidators with more comfort to pursue an unfair preference claims against recipients of third party payments and payments made during the course and operation of a Deed of Company Arrangement (“DOCA”).

What is an unfair Preference Payment?

An unfair preference payment is a voidable transaction pursuant to section 588FA(1) of the Corporations Act 2001 (“the Act”) and it is a transaction which may be able to be clawed back by a liquidator of a company if the preference payment made by the company to a creditor was made within 6 months prior to the company being placed into liquidation and provided that:

  1. the company and the creditor are parties to the transaction (even if someone else is also a party); and
  2. the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company.


Why is the case of Western Port Important in respect of unfair preference payments?

It is important to note that while section 588FA (1) of the Act sets out a clear criteria for what constitutes as a voidable transaction comprising of an unfair preference payment claimable by a liquidator, the case of Western Port considers when and how the operation of section

588FE(2B)(d)(i) of the Act might apply rendering a potential voidable transaction such as an “unfair preference payment” as not voidable at all. In this regard, Section 588FE(2B)(d)(i) of the Act provides that  that a transaction is not considered voidable if it was entered into under the authority of the administrator of the deed or the administrator of a company.

The relevance of section 588FE(2B)(d)(i) of the Act to the case of Western Port is as follows:

  1. Western Port was placed into a DOCA and then was later placed into liquidation.
  2. Upon the company entering liquidation, the liquidators claimed that Western Port made various voidable unfair preference payments to the ATO under section 588FA (1) of the Act during the DOCA.
  3. The ATO defended the allegation that it received unfair preference payments on the basis that it relied upon section 588FE(2B)(d)(i) of the Act by submitting that the payments were not voidable transactions as they were made with the “authority” of the deed administrator of the DOCA.
  4. Questions considered by the Court relevant to section 588FE(2B)(d)(i) of the Act were as follows:
  5. Were all of the alleged unfair preference payments made by the company to the ATO by or under the authority of the deed administrator of the DOCA within the definition of section 588FE(2B)(d)(i) of the Act; and
  6. What constitutes as “authority” of the deed administrators?

It was noted in the Western Port case that the deed administrators played an active role in ensuring the company made payments to the ATO and that it was common that deed administrators would take an active role in ensuring a company is adhering to its obligations under a DOCA. However, the extent of activity of the deed administrators’ role in this case consisted of:

  1. the deed administrators seeking details as to the company’s outstanding tax liability from the company directors;
  2. the deed administrators seeking confirmation from the directors as to whether they had attended to their obligations in paying their tax debt and consistent follow up in respect of same;
  3. issuing the company with several notices of default requiring the company to attend to rectifying breaches of the DOCA for failing to pay its tax liabilities on time which had accrued during the process of the DOCA.

Despite the level of involvement and the consistent role the deed administrators took in ensuring the company was adhering to the DOCA, Rees J in her judgment of Western Port considered the authority case of In Yeo, in the matter of Ready Kit Cabinets Pty Ltd (in Liq) v Deputy Commissioner of Taxation [2020] FCA 632 in answering the noted questions above.

Rees J found that the unfair preference payments made by the company to the ATO were not considered “authorised” by the deed administrators because the control of the company was handed back to the directors pursuant to the DOCA and the directors made those payments to the ATO by exercising their control as directors of the company and not under the authority of the deed administrators. In this regard, while it might be considered that the deed administrators

provided the authority to the directors to make payments to the ATO, Rees J made specific note in respect of the construction of section 588FE(2B) of the Act that: “[t]here is no occasion in section 588FE(2B) to look behind the authority of the directors to ask how that authority came about.”[1]

Based on this finding and consideration made by Rees J, it was found that the ATO in these circumstances was unsuccessful in attempting to rely on the exemption under section 588FE(2B) of the Act and found the payments were voidable transactions and unfair preference payments under section 588FA(1) of the Act.

Key takeaways of the case of Western Port with respect to deed administrators appointed to a company are as follows:

  1. Western Port highlighted the integral and involved role that a deed administrator can conduct themselves in when a company is in a DOCA.
  2. A deed administrator’s role is to ensure that directors are carrying out and fulfilling the company’s obligations under a DOCA.
  3. When a company is handed back to the control of the directors under a DOCA, despite the deed administrators being appointed, it is ultimately the directors who are carrying out an authoritative role on behalf of the company.
  4. The construction of Section 588FE(2B) does not suggest by way of provision that the court ought to “look behind” where the “authority” has come from.


How we can help you

JHK Legal regularly act for administrators, liquidators, and recipients of unfair preference payments. If you require any advice or assistance in relation to voidable transactions, please please reach out.

Written by Hayley Tibbie, Senior Associate.

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[1] Re Western Port Holdings Pty Ltd (receivers and managers appointed)(in Liq) [2021] NSWSC 232 at [157]

An Important Reminder for Property Purchases through your Self-Managed Superannuation Fund

If you are considering purchasing a property through your self-managed superannuation fund (‘SMSF’), it is essential that prior to entering into any contract of sale you determine whether you need to put in place a custodian arrangement. In this article we provide a brief overview of the Limited Recourse Borrowing Arrangements for SMSFs contained in the Superannuation Industry (Supervision) Act 1993 (‘the Act’).

If you are considering acquiring real property in your SMSF, we urge you to contact us to discuss the purchase terms before you take any steps.

What constitutes a Limited Recourse Borrowing Arrangement?

As a general rule, trustees of a SMSF are prohibited from borrowing money. Pursuant to section 67A of the Act trustees of a SMSF may only borrow money from a lender to fund the acquisition of an asset in certain circumstances.

In order to comply with the Act, the acquisition of an asset by a regulated superannuation fund via a borrowing must comply with the following criteria:

  1. the loan proceeds are used to acquire a single asset only which the trustee of the SMSF is not otherwise prohibited from acquiring.

This not only includes the purchase price under the contract of sale but also the expenses incurred in connection with the acquisition (such as loan establishment costs, legal costs and stamp duty) and expenses incurred in maintaining or repairing the asset to ensure its financial value is not diminished.

  1. the loan proceeds are not applied to improving the acquired asset.

This means that a trustee of a SMSF cannot enter into a Limited Recourse Borrowing Arrangement to purchase a single asset if that asset is:

a.   vacant land and you intend to use part of the loan proceeds to build a residential property on the land;

b.   vacant land and you intend to use money accumulated in the SMSF to build a residential property on the land;

c.   a property made up of a dwelling and land and you intend to use part of the loan proceeds to demolish the existing dwelling and build a new dwelling on the land;

d.   a property made up of a dwelling and land and you intend to use money accumulated in the SMSF to demolish the existing dwelling and build a new dwelling on the land.

If the trustee of a SMSF wishes to improve the property (i.e. through developing, demolishing, rezoning or building) then the loan must be repaid in full prior to the improvements being commenced.

  1. the acquired asset must be held on trust for the trustee of the SMSF by a separate entity, so that the trustee of the SMSF holds the beneficial entitlement to the asset.

This is where the trustee of the SMSF will need to ensure that it has a separate entity which agrees to enter into a custodian arrangement. The crux of the arrangement is that the separate entity will hold the legal title to the asset but the trustee of the SMSF will hold the full beneficial interest to the asset.

The separate entity is often referred to as a ‘custodian trustee’ or a ‘bare trustee’. To ensure that the requirements of section 67A of the Act are met, it is crucial to ensure that all relevant documents to evidence the custodian arrangement have been prepared correctly and duly executed. These documents can include:

a.    a resolution of the trustee of the SMSF;

b.    a resolution of the custodian trustee; and

c.    a Custodian Trust Deed (or Bare Trust Deed).

The custodian documents need to pre-date any contract of sale as the Buyer entity must be the custodian trustee.

  1. the trustee of the SMSF must have the right to acquire legal ownership of the asset from the separate entity by making one or more payments after obtaining the beneficial entitlement to the asset.

If the custodian arrangement is correctly recorded, the custodian trustee will act on the direction of the trustee of the SMSF at all times and will also transfer the legal title to the trustee of the SMSF on request.

Once the loan proceeds have been repaid in full, the trustee of the SMSF can be recorded on title of the property as the legal owner.

  1. the loan to the trustee of the SMSF must be limited recourse in nature, so that the lender’s rights to recourse on default of the loan are limited to rights to the asset being acquired.

This is to ensure that the lender only has a right of recourse against the property purchased and not any other asset of the SMSF. This limitation promotes the overall principle that superannuation funds are for retirement purposes and must be reasonably protected.

It is important to ensure that any loan documents are to the trustee of the SMSF as that is the entity that is borrowing the funds from the lender.

  1. the asset is not subject to a charge other than as provided in respect of the borrowing by the trustee of the SMSF

What is the purpose of the Limited Recourse Borrowing Arrangements?

The superannuation legislation was amended in respect of limited recourse borrowing arrangements so that:

  • superannuation fund assets are better protected in the event of a default on a borrowing;
  • the asset within the arrangement can only be replaced by a different asset in very limited circumstances specified in the Act;
  • superannuation fund trustees cannot borrow to improve an asset;
  • the borrowing is permitted only over a single asset or a collection of identical assets that have the same market value; and
  • the recourse of the lender or of any other person against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset.

What are the repercussions of not complying?

If the required conditions of the limited recourse borrowing arrangements are not satisfied, borrowing money under the arrangement will result in a contravention of one or more of the superannuation rules under the Act. A contravention may have civil or criminal consequences.

Practically, a lender may not agree to provide the trustee of the SMSF with a loan which would likely result in any contract of sale being terminated and the consequences of such termination will need to be dealt with. Alternatively, a trustee of the SMSF may be required to sell the acquired asset which could result in a substantial loss.

How can JHK Legal help?

Please contact us as soon as possible if you are considering a purchase through your SMSF. We can provide advice as to the limited recourse borrowing arrangements rules and all other requirements under the Act and also prepare the necessary custodian documentation.

We also assist clients with establishing their self-managed superannuation funds so please reach out if you are wanting to set up your own SMSF.

In addition, our conveyancing subsidiary MKP Property Lawyers, can provide their excellent services to act in the purchase of the property from the initial contract review up until settlement has been effected. Please do not hesitate to give us a call to discuss further!

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Written by, Simone Wilson, Senior Associate

Supplier Alert: New Consumer Disclosure Obligations Business Owners Ought to Know

Consumer law is susceptible to constant change and business owners should continuously and actively keep up to date with these amendments to ensure the fulfilment of their obligations and mostly importantly, to avoid any punitive penalties. This article raises some awareness concerning new disclosure requirements indorsed within the Fair-Trading Act 1987 (NSW) as of 1 January 2021.

Do these new consumer disclosure obligations apply to me?

The consumer disclosure obligations will apply to a business that engages in the following conduct:

  1. The business supplies goods and/or services in New South Wales that:
  2. Does not exceed $40,000; or
  3. Does exceed $40,000 but the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption (for example a motor vehicle purchased by a family).
  4. The conduct is in connection to goods and/or services supplied in New South Wales or that affects a consumer in New South Wales or results in loss or damage in New South Wales (regardless of whether the business is from another state).

It is important to keep in mind that the monetary threshold of $40,000 will be increased to $100,000 from 1 July 2021. This means that more business will be captured by the consumer law warranties, guarantees and contractual obligations.

What disclosures do you need to make to consumers prior to completing a sale?

If your business meets the relevant criteria outlined above, you should ensure that you are taking reasonable steps to disclose the following information to your customers:

  1. The substance and effect of any terms which may “substantially prejudice” the interests of the consumer; and
  2. Any commission or referral arrangements with another supplier when they recommend that a consumer buys goods or services from that third party supplier.

Suppliers must make the required disclosures to consumers before supplying the goods and/or services. In practice, this should be done before the consumer signs the contract, makes a payment, or otherwise commits to the supply arrangement.

How can my business assess if the substance and effect of its terms may ‘substantially prejudice’ the interests of consumers?

Section 47A of the Fair Trading Act sheds light on various terms or conditions which may be substantially prejudice.  These terms include those that:

  1. Exclude liability on the part of the supplier; or
  2. Imposes liability for damage to the goods and/or services on the consumer; or
  3. Permits suppliers to provide data about consumers, use date provided by consumers, to a third party in a form that may enable the third party to identify the consumer; or
  4. Requires the consumer to pay a cancellation fee, balloon or similar payment.

These are just some examples that business should familarise themselves with, however, they do not represent an exhaustive list of terms and conditions which may entail the need for consumer disclosure.

Has your business taken ‘Reasonable steps’ to disclose its prejudicial terms?

Businesses need to ensure that they are taking reasonable steps to fulfill their consumer disclosures. Although the requirement to take reasonable steps will differ and depend on the circumstances of each case, Fair Trading has shed some light as to how your business should tackle these requirements.

In summary, your business should:

  1. Be clear, and not require consumers to actively seek out the information;
  2. Be upfront with consumers;
  3. Draw clear attention to consumers of the terms and conditions. Provide explanations about what these terms mean to ensure information is disclosed clearly and effectively;
  4. Explanations should be written in easy to read, plain English;
  5. Should be clearly marked on the front of contacts;
  6. If there is a large set of conditions which need to be accepted online, ensure short summaries are provided and can be easily accessed on payment pages;
  7. Ask consumers for verbal confirmation of their understanding;
  8. Initial the terms and conditions of the certain terms and conditions;
  9. Allow for tick-a-box option on websites.

What Disclosures are Required for Commission and Referral Arrangements?

Businesses must take reasonable steps to make consumers aware of any commission or referral arrangement in which the business receives a financial incentive from a third party supplier. Reasonable steps in this instance does not oblige the business to reveal the nature or value of the incentive, but merely requires the business to advise the customer that a financial incentive exists. Such disclosure must be made prior to the intermediary acting under the arrangement in which they receive the incentive fee. The requirement to disclose includes transactions that occur online where one of the parties to the arrangement is from interstate.

What Penalties Apply If I Fail to Disclose?

The applicable penalties for non-compliance with these new consumer disclosure obligations are rather substantial, so it is crucial that you continue to engage in conduct which is compliant.

The penal penalties include:

  1. $110,000 for corporations; and
  2. $22,000 for individuals.

Key Takeaways

There are presently new disclosure obligations introduced in New South Wales which entail heavy fines for non-compliance. As such, it is essential that you:

  1. Identify any terms in your contracts with NSW consumers which are likely to be significantly prejudicial to consumers and whether you have an arrangement where you receive a financial incentive for referring customers to another supplier of goods or services.
  2. Ensure that these terms are compliant with the unfair contract term regime prescribed by the Australian Consumer Law (ACL) so that they can be lawfully enforced against consumers, to the extent this regime applies to your contract. It is important to keep in mind that there are serious penalties available under the ACL for making false and misleading representations in trade or commerce, including misleading consumers as to their rights and obligations under the ACL.
  3. Update your disclosure processes to ensure that any terms which are significantly prejudicial to consumers, even if they are fair, are clearly explained to customers upfront as well as any financial incentive arrangements which mean you will receive a benefit from a referral.

How we can help you

JHK Legal has extensive experience in reviewing contractual terms, and can advise companies, individuals and third-parties on their consumer law obligations. Please do not hesitate to contact us today to discuss your concerns.

 

Written by, Rania Kassir

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