Supplement 6: Recent Developments in Case Law

Joshua Easton

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Recent Developments in Case Law

Bauen Constructions Pty Ltd v Sky General Services Pty Ltd (2012) NSWSC 1123

Here the Supreme Court of New South Wales had to determine the time of receipt of an email of an adjudication response under the Security of Payment Act. The adjudication response was sent by email on 21 June 2012. However, the receiver was unaware of the email until 12 September 2012, when it discovered the email was caught in its spam filter.

The Court decided that the word “lodged” in section 20 of the BCISPA meant “presented” and relied on the rules in the Electronic Transactions Act to establish that receipt was when the email was capable of being retrieved by the recipient, meaning it was not necessary for it to be opened or read. Accordingly, Adjudicate Today had received it and was able to access it on 21 June 2012 which meant Bauen had lodged the adjudication response in time.

Luckily for the sender, the recipient of the email disclosed evidence that the email was caught in its spam filter and, therefore, had been received by the recipient’s email server. Had the recipient not done so, the sender may not have been able to prove that it had been sent in time.

August v Commissioner of Taxation (2013) FCAFC

This Full Court decision reminds property investors to not only seek good advice at the time of acquiring a property, but also to be clear about their intentions and keep their house in order if they wish to stay on ‘capital account’ and within the CGT regime.

This was an interlocutory application to adduce further evidence prior to hearing of a further Appeal to the Full Federal Court following the decision of Nicholas J in August v Commissioner of Taxation [2012] FCA 682. In rejecting the application Siopis, Besanko and Mckerracher JJ have set out in detail the Nicholas J findings and firmly rejected the challenge to the conclusions “of the trial judge” on evidentiary issues.

This effectively confirmed the earlier decision and the ATO view that the sale of the relevant properties were not on capital account and formed part of ordinary income under Section 6-5. At stake was the 50% discount that would have been available if it fell under the CGT provisions.

Also refer to Finn J in R & D Holdings Pty Ltd v FCT [2006] FCA 981 (‘R & D Holdings’) where the relevant property was found to be trading stock that was held “at the relevant time for the dual profit making purposes of sale or lease of subdivided lots.”

New Rules to work out the tax components of a superannuation death benefit from a non-reversionary pension

Self-managed superannuation fund administrators, planners and accountants should be aware that the rules to calculate the components of a superannuation death benefit where a person receiving a non-reversionary pension dies have been amended by the Income Tax

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Assessment Amendment (Superannuation Measures No 1) Regulation 2013. The new rules are effective from 3 June 2013.

The new rules (‘method statement’) apply to work out the tax-free and taxable components where:

  • The deceased member was receiving a non-reversionary pension (income stream)
  • No amounts other than investment earnings or an anti-detriment increase; (compensation for tax paid on contributions) have been added to the superannuation interest on or after the deceased member’s death; and
  • A death benefit is paid as a lump sum from that superannuation interest; or
  • A new pension (income stream) is commenced using the amount from that superannuation interest.

The tax-free and taxable components using the method statement

The effect of the method statement calculation is that the anti-detriment increase or insurance proceeds count towards the taxable component of the death benefit (and could form an untaxed element), whereas before the regulation the components could have reflected the existing taxable and tax-free components of the interest. This means the tax payable in relation to the insurance or anti-detriment increase could be significantly higher than before the amendment.

Where there is life insurance through superannuation and the member is drawing a pension, it may be more tax effective for the pension to be reversionary (where this is possible) as insurance added to a reversionary pension after the death of the member will generally take on the existing components of the pension.

Robinson, in the Matter of ACN 069 895 585 Pty Ltd

The recent Federal Court of Australia decision is an example of a case where an unsecured creditor secured a better financial return by taking an active role in the liquidation process, assisting the liquidator with a number of claims.

The case involved the liquidation of Waterman Collections Pty Ltd (Waterman). In the liquidation an unsecured creditor, Insurance Australia Limited (IAL), was owed approximately $600,000.

IAL had carried out examinations into the affairs of the company and had discovered matters that indicated grounds to commence recovery proceedings for uncommercial transactions under sections 588 and 588FF of the Corporations Act 2001 (cth). There were also some unresolved issues with the amount claimed for remuneration and disbursements by a prior liquidator. Another former employee had allegedly misappropriated money from Waterman in the order of $1 million, giving ‘rise to a’ possible claim.

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The liquidator had insufficient funds to either commence or contest proceedings relating to the various claims with Waterman having less than $1,000 in its bank account at the relevant time.

IAL entered into a series of funding agreements with the liquidator to assist the liquidator pursue or contest the claims. Ultimately the amount of funding provided was $240,542.

This funding enabled the liquidator to add $716,455 to the company’s property pool, through a number of commercial settlements regarding the various claims.

The liquidator and IAL applied to the Court for orders relating to the distribution of this property.

The Court ordered, pursuant to section 564 of the Corporations Act 2001 (cth), that IAL should have priority over other unsecured creditors both in terms of the funding provided to the liquidator and the amount it was owed.

In deciding the order that should be made the Court considered factors that included the following:

  • All creditors were given the opportunity to assist with funding with only IAL agreeing to assist;
  • The risk taken by IAL that the claims would not yield any results and the funding would be lost;
  • The actual outcome of the exercise – that the amounts recovered were more than the funds contributed and that the expenditure incurred was reasonable.
  • The significant assistance provided by IAL to the liquidator.
  • The higher value of the debt owing to IAL compared to the total creditor pool;
  • The amount of time that IAL remained out of pocket in relation to its funds;
  • That without the assistance of IAL, there would have been no assets to distribute to creditors as the liquidator had no funds to either pursue or contest the claims;
  • The public interest consideration of encouraging creditors to provide indemnities and funding to enable a liquidator to pursue remedies that would result in recovery of company property; and
  • That there was no adverse response to the proposed distribution from any of the unsecured creditors.

We note that while unsecured creditors are often disinterested parties, in some cases it does pay to take an active role in the liquidation process.

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Directors and Officers Liability Insurance

In 2012 there were a number of key decisions on director liabilities, Australia’s biggest class action settlement and further legislative reform. We touch on some of those highlights below.

In November 2012, the New South Wales Court of Appeal handed down its penalty decision against former non-executive directors, the former company secretary and general counsel of James Hardie Industries (James Hardie) for their breach of duties by approving James Hardie’s release of a misleading statement to the Australian Securities Exchange.

Australian Wheat Board (AWB)

Another case that has given some guidance as to the range of penalties courts will impose on directors was the penalty cases against former directors of AWB.

Forrest v ASIC; Fortescue Metals Group Limited v ASIC

Also in 2012, the High Court handed down the long-awaited (and unanimous) decision in Forrest v ASIC; Fortescue Metals Group Limited v ASIC [2012] HCA 39. It found that announcements that Fortescue had signed “binding contracts” with Chinese entities to build and finance an iron ore mine, railway and port in the Pilbara were not misleading or deceptive.

Legislative Reform

Two key pieces of legislative reform that impact directors and are part of the Council of Australian Government’s (COAG’s) Schedule of Reforms progressed further in 2012. They are the harmonisation of occupational health and safety laws, and reforms around personal criminal liability on directors for corporate fault.

COAG has reported that both these reforms are at risk because either not all Australian governments have passed required reforms on schedule, or reforms are not being passed in a uniform manner.

In relation to personal liability on directors for corporate fault, a number of states have now passed laws to give effect to COAG’s agreed reforms to harmonise statutory offence provisions applying to directors and officers.

COAG has agreed a number of principles for director liabilities, which aim to create a system whereby directors and officers are no longer strictly and criminally held liable for offences by a corporation unless they acted as an accessory, for example by aiding and abetting in that particular offence.

This is a positive development for directors and their insurers, but any benefits of COAG’s reforms will be diluted by an inconsistent application of the agreed principles across Australia.

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Statutory Demands

They are a quick and convenient way to prove a debtor company’s insolvency. They sometimes fall over and there seems to be an endless list of potential defects to make the demand challenge-worthy.

A recent decision of the WA Court of Appeal means there is one less way for a statutory demand to fail. This can only be good news for creditors.

Garuda Aviation is a WA firm that took a secured borrowing of $27 million from CBA to buy a plane. The loan was secured by a mortgage over the plane.

When Garuda defaulted on the loan in late 2010 a chunk of the loan had been paid off, and the appointed receiver sold the plane, leaving a substantial amount owing. A portion of the overall outstanding debt was in dispute. The bank served a statutory demand for the undisputed portion of $2 million.

Garuda applied to set aside the statutory demand on the basis that it was for only part of the total debt. It said a demand under the Corporations Act could only be made if it was for the whole debt.

The Court disagreed. There’s nothing wrong with a statutory demand for part of a debt. Where a portion of the debt is undisputed there is no reason why a creditor should not be able to serve a statutory demand for that portion, so long as it is described clearly.

Here, there was no uncertainty as to the amount demanded, so the demand survived.

Hiring a worker who is not an Australian citizen? Your responsibilities have now increased

It can be necessary for some employers to employ workers who are not citizens of Australia. There has always been an element of risk attached to this issue and in March the Federal Government increased the penalties on business for breaches of these responsibilities. Further, the legislation now makes company directors personally liable for breaches, clearly another disincentive to an individual to assume a role as a director of a business in Australia.

Unlawful Non Citizens

Individuals who are not Australian citizens and do not hold a visa are not allowed to work in Australia. The Amendment increases business and employer responsibility and liability for employing or contracting unlawful non citizens. Businesses bear responsibility if they allow unlawful non citizens to work for them unless they took reasonable steps to verify the person’s visa status.

Lawful Non Citizens

Individuals who are not Australian citizens but hold a visa may be either:

  • Not permitted to work, or
  • Permitted to work a restricted number of hours or
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  • Permitted to work only for a sponsoring employer

The Amendment has also increased businesses responsibility for employing or contracting with lawful non citizens and the allowing them to work in breach of the work restrictions that are contained in their visa unless reasonable steps to verify the workers’ visa status are taken.

Contravening the Act can result in a criminal offence if there is knowledge and or recklessness and carry a penalty of 2 years imprisonment for persons responsible.  A civil penalty of 90 penalty units, which currently equals $15,300, is also available for individuals and businesses.  There are aggravated offences if the person knows someone is working illegally and continues to employ them unless they took reasonable steps to verify the workers’ visa status.

Notice to Directors – privacy reforms extended

Data breaches in the private and Government sectors are presently the subject of a great deal of media attention. It is timely, therefore, that the Government is planning to ramp up its amendments to the Commonwealth Privacy legislation.

In May 2013, the Privacy Amendment (Privacy Alerts) Bill 2013 passed Parliament and is now awaiting royal assent. The Bill will take effect from March 2014 and will impose a notification obligation on companies where there is a serious data breach. A serious data breach could arise, for example, where there is theft of storage devices, laptops or paper records, the hacking of personal information databases or the incorrect disposal of personal information in a non-secure waste collection process.

Currently, where there is a ‘real risk of serious harm’ from a data breach, companies should notify the Office of the Australian Information Commissioner (OAIC). Many companies have been following this procedure for some time now. However, the reporting has always been voluntary. The proposed legislation will make notification mandatory, with potentially serious consequences for failing to do so.

The OAIC has been pushing for these changes for over 6 years now. It believes that notification has many advantages, including the regaining of control over personal information (for example, by changing passwords quickly after a breach) and the rebuilding of public trust (for example, by showing that the company will work to assist an individual in the event of a breach).

Notification would be mandatory where:

  • Personal, credit or tax file information has been subject to unauthorised access or disclosure, and
  • It is believed, on reasonable grounds, that the breach is serious because it will result in a real risk of serious harm to the individual (a real risk is defined as a risk that is not remote and harm includes psychological, physical, reputational, economic or financial).

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Failure to notify could result in the entity being required to apologise, pay compensation or take (or refrain from taking) certain action. Repeated serious data breaches will attract civil penalty provisions.

Directors’ Liability in NSW

In November 2012, the New South Wales Legislative Council passed the Miscellaneous Acts Amendment (Directors’ Liability) Bill 2012 (Bill) which introduced a nationally consistent reform of legislation regulating the criminal responsibility of directors and officers for corporate offences.

The Bill amends various Acts so that directors and officers are no longer automatically liable for offences committed by a corporation unless they acted as an accessory, e.g. by aiding and abetting, in that particular offence.  This is recognition of the fact that legislative provisions have imposed criminal liability on directors and officers for corporate offences for years which have been applied inconsistently and without clear jurisdiction.

This is a significant change from the current regimes and is in line with normal principles of accessorial liability.  Currently, personal criminal liability for corporate offences in most cases is imposed on directors and officers, requiring them to then argue their innocence.

The proposed amendments remove this reverse onus of proof, except particular environmental and safety offences where reverse onus provisions are justified for public policy reasons. Prosecutors will now have the responsibility under the amendments of proving such criminal responsibility.

Changes to liability of directors and officers – Victorian Legislation passed

When a company or corporate organisation commits a crime, its directors and managers may be liable. The various States and Territories have had different legislation governing the liability of a director or manager. To streamline this process the Council of Australian Governments (COAG) has agreed for all Australian jurisdictions to apply common principles in determining the circumstances in which personal criminal liability should be imposed on directors and managers. As a result of this initiative, the Commonwealth and each State and Territory have passed or are in the process of passing legislation to implement the COAG agreement. More recently in Victoria the Statute Law Amendment (Directors’ Liability) Act 2013 (Vic) was enacted and commenced operation on 14 March 2013.

Directors and managers will need to be aware of the changes made by the Act, and review their company’s compliance and due diligence programs for their own benefit.

The Victorian Act amends 18 existing Acts which all contain directors’ liability provisions.  These provisions generally make directors liable without regard to the nature of each specific offence or whether it is appropriate to make a director liable personally for a specific offence.  The Act replaces the directors’ liability provisions in these Acts with three different types of new provisions plus accessorial liability provisions under which directors and managers will be personally liable.

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These provisions all apply to officers.  “Officer” means a person who is an officer (as defined in section 9 of the Corporations Act 2001 (cth)) of the organisation, or a person who is concerned in, or takes part in, the management of the organisation.  A person who does not make or participate in making decisions that affect the whole or a substantial part of the business of an organisation may nevertheless be concerned in the management of an organisation and thereby considered to be an “officer.”

Directors’ Liability:  Accessorial liability under the Fair Work Act

Since the “nationalization” of Australia’s employment laws, prosecutions of employers for contraventions in the workplace have become a prominent feature of the business law landscape.

It is critical for company directors and others who run businesses to not only ensure that their enterprises avoid contraventions, but also that they personally avoid becoming involved in contraventions.  Legal proceedings can be brought not only against the principal corporate offender, but also personally against anyone who has been in any way “knowingly concerned” in a contravention.

The key areas that often present compliance problems for employers:

  • Safety net contraventions
  • Adverse action
  • Sham contracting arrangements
  • Other general protections

It is essential that you always seek legal advice.

The Dangers of Outstanding Tax Obligations for Incoming Directors

In 2012 the government amended the rules which apply to the timeframes under which incoming directors must act to avoid personal liability with respect to Pay As You Go (PAYG) Withholding Tax and Superannuation Guarantee Charge (SGC) liabilities that existed before they took office.

This aims to avoid imposing penalties on new directors for the company’s existing non-compliance, however making them accountable once they have had adequate time to take action to remedy any outstanding obligations of the company.

Under the new legislation, an incoming director has 30 days (as opposed to the previous 14 days) after accepting an appointment before becoming personally liable for:

  • Any and all unpaid PAYG amounts owing by the company, regardless of their age and whether the ATO has been notified of the liability; and
  • Any SGC liabilities which have been incurred in the first SGC quarter post-29 June 2012 (ie. the June 2012 quarter SGC liabilities) and which remain unpaid.

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Notwithstanding that an incoming director becomes personally liable for any outstanding PAYG and SGC obligations upon the expiration of 30 days after their appointment, the ATO is still required to issue a DPN before they can proceed with recovery proceedings against the director personally.

Where the company’s outstanding PAYG and SGC tax obligations have been reported within 3 months of their due date (even if they have not been paid), the legislation requires the ATO to issue a standard DPN which will grant a director the 3 admission options to avoid personal liability, ie. payment of a debt, placing a company into administration and/or liquidation within a 21 day notice period.

However, pursuant to the new provisions which came into effect on 29 June 2012, where the company’s outstanding PAYG and SGC liabilities remain unreported and unpaid for more than 3 months after their due date, then the new “lockdown” provisions apply. What this means for a new director is that 3 months after the appointment, if the PAYG and SGC liabilities still remain unreported and unpaid, the DPN issued by the ATO in those circumstances will not include any ability for the penalty to be remitted by placing a company into administration or liquidation. In other words, the DPN will simply require payment.

One of the due diligence measures an incoming director may rely upon is an examination of the company’s ATO running balance account for confirmation that no amounts remain outstanding with respect to PAYG withholding or SGC liabilities. Unfortunately, an incoming director can inherit a personal liability with respect to PAYG and SGC liabilities that pre-date their appointment, regardless of whether those withheld amounts have been notified to the ATO.

If you are an incoming director, you must make yourself aware of the potential liability which you may be inheriting where the company has outstanding PAYG and SGC liabilities. These liabilities will not always be listed on the ATO statements, as they relate to debts that have not been reported. Some of the ways in which you may seek to mitigate (but not totally eliminate) potential unforeseen risks, inheriting such personal liability.  The following steps are recommended:

  • Conduct a thorough due diligence of any existing unreported and unpaid PAYG and SGC liabilities before you consent to be appointed as a director of the company; and
  • Ensure proper governance procedures are in place to ensure that a company complies with its reporting obligations for all taxes, but especially amounts withheld under PAYG and SGC withholding regimes.

There is no substitute for good legal advice.

Carson, in the matter of Hastie Group Limited (No 3) (2012) FCA 719

The Administrators of this company found they had 3,684 items of unclaimed equipment incurring weekly storage costs of $61, 134.26 and 995 insufficiently detailed Security Interests registered on the PPSR.

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Attempts had been made to locate potential claimants, including by email to all creditors with a PPSR interest recorded against the Hastie Group.  However, 20% of potential claimants responded, with many responses being inadequate.

On 5 July 2012, Yates J gave directions that the Administrators may sell equipment potentially owned by third parties and possibly subject to PPSA registration, and to distribute the proceeds in the ordinary course after three months.

This decision was based on the “genuine and substantial difficulties” of identifying potential claimants for specific items of equipment subject to a Security Interest brought about by insufficient detail on the PPSR, and the lack of response when creditors were contacted on the registered email addresses.


When registering a Security Interest on the PPSR, you must:

  • Ensure a sufficiently detailed description to clearly identify the asset;
  • Register an email address that will be monitored; and
  • Implement processes to bring any communications regarding the asset to the attention of an officer able to quickly to respond.

In circumstances where high stock turnover makes PPSR registration impractical, suppliers must continually monitor the solvency of debtors and not allow any debtors to incur too much debt or accumulate too much unpaid stock.  Intense event control is very important in the new environment.

Wow Audio Visual Superstores Pty Ltd trading as Wow Sight and Sound

In March 2012, the receivers of Wow Sight and Sound declared they would only recognise retention of title interests over unpaid stock if registered on the PPSR.

Approximately $25 to $30 million worth of stock received but not paid for was sold by the receivers at a discount.  The proceeds of sale were first used to pay the secured (and registered) bank loans of Wow Sight and Sound.

The unpaid suppliers (who had not registered their Security Interest) were entitled only to share in the remaining funds as unsecured creditors.