fbpx

Modern Slavery – Should your entity be reporting?

Modern Slavery – Should your entity be reporting?

Modern slavery is used to describe situations where coercion, threats or deception are used to exploit victims and undermine or deprive them of their freedom. It is a pertinent issue that has recently gained traction in Australia with the introduction of the Modern Slavery Act 2018 (Cth) (“Act”). Under that Act reporting is now mandatory for entities who fulfil a specific criteria.

Does your entity need to report?

Under section 5 of the Act, there are two limbs to determine if an entity is required to report.

First Limb

The first limb is an Australian entity or an entity that is carrying on business in Australia. While it may seem clear whether or not an entity is an “Australian entity” (i.e. registered in Australia), thought needs to be given as to whether entities which operate in other countries could be considered to be carrying on business in Australia. This is due to the fact there may be circumstances where an Australia entity is not required to report, but their parent entity which carries on business in Australia is required.

The general test to determine whether an entity carries on business in Australia is contained in section 20 and 21 of the Corporations Act 2001 (Cth) which outlines that an entity will be considered to be carrying on business in Australia, if that body corporate:

  1. has a place of business in Australia; and
  2. carries on business in Australia.

Carrying on business includes:

  • Establishing or using a share transfer office or share registration office in Australia; and/ or
  • Administering, managing or otherwise dealing with property situated in Australia .

Second Limb

The second limb is that the entity has a consolidated revenue of at least $100 million AUD for the reporting period in question.

Consolidated revenue is defined in section 4 of the Act as being the total revenue of the entity in question for the entity’s reporting period (this could be financial year or annual accounting period) or if the entity is in control of other entities – the total revenue of the entity plus all of the controlled entities considered as a group.

Determining whether an entity controls other entities, for the purposes of this Act, can be tricky given the Act makes reference to the accounting standards. As a result, making a determination regarding whether you are required to report may require both legal and accounting advice.

The reporting period is defined by section 4 of the Act as being the financial year or any other annual accounting period applicable to the entity after the commencement of that section of the Act. For instance, the Act commenced on 1 January 2019. As a result, an entity’s reporting period will be the first full accounting period after 1 January 2019. If an entity operates under a calendar year reporting period (January to December), the first reporting period would be January 2020 to December 2020 (assuming they fulfil the other criterion above).

Under section 13(2)(e) and 14(2)(f)(i) of the Act, a modern slavery statement must be provided to the Minister within 6 months after the end of the reporting period for the entity. Utilising the example above, a modern slavery statement would be due on 30 June 2021.

What are the consequences if you fail to report?

We should note, if an entity who is required to report fails to report within 6 months after the end of the reporting period, the Minister may give written request to that entity to do either or both of the following:

  1. Provide an explanation for failure to comply within a specified period of 28 day or longer after the request is given (“Specified Period”);
  2. Undertake specified remedial action in relation to that requirement in accordance with the request within a Specified Period.

Can you report even if you do not meet the eligibility criteria?

There is provision in the Act for voluntary reporting, however note that if you do so, you are subject to the same regulatory requirements as an entity that is required to report as well as consequences if you do not comply.

Takeaway

Modern slavery is an issue that the Australian government is not taking lightly. With further legislation in the works presently, it is important that both Australian entities and entities that carry on business in Australia consider whether they should be reporting under the Act.

How we can help

At JHK Legal we have assisted various entities in determining whether they are required to report under the Act, have conducted reviews of any existing international statements to determine if they are appropriate for the purposes of the Act and have prepared statements. If you think your entity might be required to report (now or in the future), please do not hesitate to reach out.

DOWNLOAD THIS ARTICLE

Written by, Georgia-Rae Swain, Lawyer

The Abolishment of the Peak Indebtedness Rule

On 10 May 2021, in a historical Australian decision, the Full Federal Court handed down a decision which abolished the peak indebtedness rule and found that a liquidator cannot apply the peak indebtedness rule in unfair preference claims involving running accounts.

The Full Court held that if there is a continuing business relationship involving multiple transactions from a company to a creditor (during the relation back period), in assessing whether the transactions (considered a single transaction) are preferential, a liquidator cannot select the highest point of indebtedness in that period. Ultimately, a liquidator must take into account all supplies provided by a company to the creditor, and all payments made by the creditor to the company during the relation-back period. This follows the Timberworld Ltd v Levin decision made in the New Zealand Court of Appeal in 2015 which also abolished the long-standing rule.[1]

Continuing business relationship

Pursuant to section 588FA of the Corporations Act 2001 (Cth) (the Act), an unfair preference is a transaction to which a company and the creditor/s are parties and which results in the creditor receiving in respect of the debt that the company owes to the creditor, more than the creditor would receive in respect of that debt if the transaction had been set aside and the creditor had to prove for the debt in the winding up of the company.

Section 588FA (3) of the Act treats a series of transactions entered into during the relation-back period as part of a continuous business relationship, as a “single transaction”.

Pursuant to the section:

transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

in the course of the relationship, the level of the company‘s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then: all the transactions forming part of the relationship [must be considered together] as if they together constituted a single transaction.

Put simply; in determining whether there is an unfair preference pursuant to section 588FA(3) of the Act, the “single transaction” will be considered a preference if the payments made by the company to the creditor ultimately exceed the value of the goods or services it received, in a way that the payments caused a reduction in the balance of the running account.[2]

What is the peak indebtedness rule?

Traditionally, the peak indebtedness rule enables the liquidator to choose the “highest point” of indebtedness in the running account during the relation-back period as the point at which the net reduction indebtedness is to be measured. Ultimately, the liquidator can calculate the value of the preference by subtracting the debt owing to the creditor from the debt owing at the point of “peak indebtedness”.

The peak indebtedness rule first came about in the decision of Barwick CJ in Rees v Bank of New South Wales, where his Honour said:

“In my opinion the liquidator can choose any point during the statutory period [i.e. the 6 month relation-back period] in his endeavour to show that from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of peak indebtedness of the account during the six months period.”[3]

Background to the first Gunns Decision

Gunns Limited (Gunns) was placed into liquidation in 2013 at which time, it owed over $780 million to creditors. The liquidators of Gunns commenced various proceedings against creditors, including Badenoch Integrated Logging Pty Ltd (Badenoch). The liquidators claimed that 11 payments made by Gunns to Badenoch during the relation-back period were insolvent transactions and voidable under the Act. It was submitted by the liquidators that the peak indebtedness rule was the correct starting point to determine the quantum of the preferences.

Davies J held that the peak indebtedness rule was consistent with earlier authorities and that Badenoch was to repay over $2 million of the payments received from Gunns in the relation-back period.

Appeal of the Gunns Decision

An appeal was lodged on the basis that that the 11 payments should have been found to form part of the running account and the trial judge erred in applying the peak indebtedness rule.

The main issues to be considered were:

whether any of the payments were part of a ‘continuing business relationship’ within the meaning of section 588FA(3) of the Act; and

whether the liquidators were entitled to apply the peak indebtedness rule by choosing any point of the Gunns’ indebtedness within the relation-back period as the starting point for the single transaction.

The Full Court held that the peak indebtedness rule ought to be abolished and that it did not apply under the Act. The Court found that creditors should be provided with the benefit of earlier dealings with the continuing business relationship to be considered in determining whether or not an unfair preference exists.

Further, the Court found that section 588FA(3) should be applied so that a running account is taken as a “single transaction” encompassing “all transactions forming part of the relationship”.[4]

Takeaway

It goes without saying this decision will have a significant impact on liquidators and unsecured creditors moving forward.

Some argue that the abolishment of the peak indebtedness rule will ensure fairness between unsecured creditors, which is one of the main focuses of Part 5.7B of the Act. Further, the decision is likely to be viewed unfavourably by liquidators as the quantum of preferences recoverable in running account relationships is likely to be significantly limited.

How we can help you

At JHK Legal we regularly act for administrators, liquidators, and recipients of unfair preference payments. If you require any advice or assistance in relation to voidable transactions, or any other insolvency matters, please do not hesitate to contact us.

DOWNLOAD THIS ARTICLE

Written by, Anna Hendriks, Associate

 

[1] (2015) 3 NZLR 365 (Timberworld)

[2] Airservices Australia v Ferrier (1996) 185 CLR 483, 501-2 per Dawson, Gaudron and McHugh JJ and Bryant, in the matter of Gunns Ltd (In Liq) (Recs and Mgrs Apptd) v Edenborn Pty Ltd (2020) 381 ALR 190 at 233 [171] per Davies J.

[3] [1964] HCA 47.

[4] Badenoch [2021] FCAFC 64 at [82] and [112] per Middleton, Charlesworth and Jackson JJ) quoting Timberworld [2015] 3 NZLR 365 at [68].