“Nobody wins when the family feuds” – Taking action for oppression in the context of a family run business

10 August, 2020

The Federal Government has progressed a number of legislative initiatives that will impact on directors and are likely to come into effect in 2019 if they go ahead. The proposed new laws include significantly increasing civil and criminal penalties for breaches of the Corporations Act 2001 (Cth),  introducing a new Director Identification Number regime and making directors personally liable for the unpaid GST debts of their companies.

Proposed new legislation will see some changes for directors that are likely to happen in 2019 if the legislation is introduced and passed. These include:

  1. significantly increasing civil and criminal penalties for breaches of the Corporations Act 2001 (Cth) (Corporations Act) through the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Penalties Bill);
  2. introducing a new objective test for ‘dishonesty’ in respect of whether someone has acted dishonestly under the Corporations Act;
  3. introducing a new Director Identification Number (DIN) regime that will assign unique identifier to every registered Australian director;1
  4. making directors personally liable for the unpaid GST debts of their companies by expanding the Directors’ Penalty Notice regime;
  5. prohibiting dispositions of company property to defeat creditors, penalising those directors involved and allowing liquidators and the Australian Securities and Investment Commission (ASIC) to recover the property; and
  6. improving the accountability of resigning directors.

So, what do these proposed changes mean for directors?

Increased penalties under the Corporations Act

The introduction of the Penalties Bill is a clear response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), with a significant change to penalties.

The Commonwealth Treasury warns that the Penalties Bill “… would double maximum imprisonment penalties for some of the most serious ‘white-collar’ criminal offences bringing Australia’s penalties in closer alignment with leading international jurisdictions”.2

The Penalties Bill proposes to significantly increase the civil and criminal penalties for breaches of the Corporations Act 2001 (Cth) from the current penalties, as summarised below, and also introduces new formulae to calculate the maximum penalties for civil and criminal contraventions as summarised below:

<p>The Penalties Bill also proposes to increase the imprisonment terms from 5 to 10 years for certain contraventions, such as section 184 of the Corporations Act in respect of reckless and dishonest breach of duty by directors.</p>
<h4><strong>New objective test for dishonesty under the Corporations Act</strong></h4>
<p>The Penalties Bill also proposes to insert a definition of <em>“dishonest”</em> into the Corporations Act that means <em>“dishonest according to the standards of ordinary people”.</em> The effect of this new definition (and consequential amendments to ensure consistency) is to:</p>
<li>establish a consistent meaning of the word throughout the Corporations Act;</li>
<li>require an objective assessment of the dishonest act. This means that it will not be necessary to prove whether the defendant knew that the relevant conduct was dishonest or intended to act dishonestly; and</li>
<li>lower the threshold test of whether someone acted dishonestly under the Corporations Act as it is often difficult to prove an offender’s intention or knowledge.</li>
<p>Section 184(1) of the Corporations Act is one example which will be amended to ensure consistency with the deletion of the word ‘intentionally’ before the word dishonest. Section 184(1) currently provides that:</p>
<p style=(1)  A director or other officer of a corporation commits an offence if they:
                     (a)  are reckless; or
                     (b)  are intentionally dishonest;
and fail to exercise their powers and discharge their duties:
                     (c)  in good faith in the best interests of the corporation; or
                     (d)  for a proper purpose.

The amendment will erase the requirement to prove the director (and other officers) intentionally acted dishonestly and failed to discharge his/her duties in acting in the best interests of the corporation.

The impact of the proposed changes and the introduction of an objective test for dishonesty is that directors who consider their conduct as honest or may not have intended or known that their conduct was dishonest may still be found to have contravened the Corporations Act such as liability under subsections 184(2) and 184(3) for dishonest use of position or information, and section 588G for dishonestly trading while insolvent.

Introduction of a Director Identification Number regime

Under the draft Legislative Package,3 it is proposed to introduce a requirement that each registered director applies for and obtains a unique Director Identification Number (DIN) under a newly inserted Part 9.1A of the Corporations Act and Part 6-7A of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).

In addition to the DIN requirement, the draft Legislative Package proposes to consolidate Australia’s thirty-five business registries administered by ASIC and the Australian Business Registry (ABR) (New Register). Operating alongside the DIN requirement, both changes should improve the traceability of directors’ relationships between entities and to better track illegal phoenix activities.

The following table summarises the proposed new obligations directors will have in respect of DINs and the maximum penalties for breaches of those obligations:

<h4><strong>Proposed measures to combat illegal phoenix activities</strong></h4>
<p>The draft Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 (<strong>Combatting Illegal Phoenixing Bill</strong>) is focused on stopping illegal ‘phoenix’ activities and proposes a number of measures that will impact on directors as set out below.</p>
<p>A ‘phoenix’ activity or ‘phoenixing’ is when a new company emerges from the collapse of another, with the intention of avoiding payment of the failed company’s liabilities and transferring its assets to the new company. A 2018 report prepared for the Pheonix Taskforce estimated that illegal phoenix activities cost the Australian economy about $2.9 billion to $5.1 billion annually.</p>
<h4>Directors’ liability for unpaid GST</h4>
<p>The Directors’ Penalty Notice (<strong>DPN</strong>) regime currently allows the Commissioner to personally penalise directors for a company’s failure to meet its superannuation guarantee charge (<strong>SGC</strong>) and PAYG withholding obligations within 21 days of being served with a DPN notice if it is not paid.<sup>4</sup> The penalty is equal to the amount unpaid or an estimate of the unpaid amount.</p>
<p>The Federal Government is proposing to extend the DPN regime so that it also includes a company’s unpaid GST under Combating Illegal Phoenixing Bill. Like the current penalty for failing to pay the SGC and PAYG withholding by the due date, the Combatting Illegal Phoenixing Bill will make directors personally liable for the amount unpaid or the estimate of the unpaid amount, of GST after receiving a DPN and failing to comply with it.</p>
<p>In anticipation of the bill becoming law, directors should reflect on their companies’ GST balances and consider how to ensure compliance in the future to avoid potential personal liability.</p>
<h4>Prohibiting creditor-defeating property dispositions</h4>
<p>The Corporations Act does not currently contain provisions that specifically concern creditor-defeating property disposition. Instead, broader provisions that protect creditors are contained in the duties owed by directors such as sections 181, 184 and 588G, which oblige directors to act in good faith, for a proper purpose and to prevent trading while insolvent. Although breaches of those sections can result in serious civil and/or criminal liabilities, these sections are considered to be inadequate in preventing the creditor-defeating property dispositions or allowing for the speedy recovery of those assets.</p>
<p>The proposed new laws in the Combatting Illegal Phoenixing Bill aim to expand the director duties by aiming to prevent, deter and recover company property that is disposed to either prevent or significantly delay creditors’ access to the company’s assets.</p>
<p>Subject to safeguards that protect legitimate business transactions, the proposed new provisions to the Corporations Act will make directors (and other company officers) face criminal and/or civil liabilities if they:</p>
<li>facilitate creditor-defeating dispositions; and/or</li>
<li>fail to prevent the company from making creditor-defeating dispositions.</li>
<p>The proposed amendments to the Corporations Act also propose to:</p>
<li>make creditor-defeating dispositions voidable if the disposition is made while the company is insolvent or becomes insolvent due to the disposition within the following 12 months;</li>
<li>allow liquidators to seek recovery of assets by application to the courts; and</li>
<li>provide ASIC with powers to make orders for the benefit of creditors, for the recovery of assets of voidable.</li>
<p>The purpose of the credit-defeating disposition provisions is clear, and directors should be conscious of the serious civil and criminal penalties for the proposed offences with the penalties for individuals who fail to prevent creditor-defeating dispositions or procure creditor-defeating dispositions, being imprisonment for 10 years or a fine of the greater of the following:</p>
<li>$945,000 (4,500 penalty units);</li>
<li>the value of the benefit obtained by one or more persons and are reasonably attributed to the commission of the offence, multiplied by three; or</li>
<h4>Improving accountability of resigning directors</h4>
<p>The draft Combatting Illegal Phoenixing Bill also aims to prevent directors from resigning or improperly backdating resignations to avoid personal liability for phoenixing by preventing a sole director from resigning from a company without appointing a new director.</p>
<p>Often directors involved in ‘phoenixing’ resign and deliberately shift accountability to other directors such as a ‘straw director’. ‘Straw directors’ have no actual involvement in a company and have limited assets to frustrate recovery purposes, or may be a deceased or fictitious person.</p>
<p>Under the current provisions of the Corporations Act, companies must have at least one director. However, the current laws allow:</p>
<li>directors to resign at any time in writing subject to the company’s constitution, with the company or former director to notify ASIC within 28 days of the resignation;</li>
<li>former directors to backdate the effective date of resignation to shift accountability to a new director in accordance with the company’s constitution; and</li>
<li>sole directors to abandon a company by resigning without the company appointing another director. In these situations, the company is left without the director or secretary to notify ASIC of the director’s resignation or appointment of a new director, and the company remains registered leaving creditors unpaid for some time until the company is wound up. This occurs despite the current law requiring the resigning director to notify ASIC.</li>
<p>The proposed changes seek to ensure that:</p>
<li>directors cannot backdate their resignation in breach of the 28 day rule. If ASIC receives notice of resignation more than 28 days after the purported resignation, the effective date of resignation is the date that ASIC receives notice of the resignation;</li>
<li>the date of resignation can only be backdated by application to ASIC or the Court. The change to the effective date of registration by notification to ASIC will increase scrutiny on companies left with ‘straw directors’; and</li>
<li>directors cannot resign from a company or be removed by a resolution of members if it would leave a company with no director (except in the winding up of a company). The ‘end of day test’ will be applied, which will deem a director’s purported resignation ineffective unless a replacement director is appointed by the company by the end of the same day.</li>
<p>These changes will impact all directors and will need to be complied with to avoid investigation by ASIC and potential harsh penalties. For example, a company’s failure to notify ASIC within 28 days of an appointment or resignation of a director may be liable to $12,600 (60 penalty units), imprisonment for 1 year, or both.</p>
<h4><strong>What next?</strong></h4>
<p>Introduced in the backdrop of the Royal Commission, the proposed changes serve an expected reminder that corporate and financial misconduct will not be tolerated.</p>
<p>Company directors need to be aware of the proposed changes as they will impact on directors and will require directors to take positive steps to ensure compliance with the proposed changes to the Corporations Act, the Taxation Administration Act, and a new <em>Commonwealth Registers Act 2018</em> (Cth).</p>
<p>It is anticipated that the proposed legislative changes will likely come into effect in 2019 if they are all introduced – so watch this space.</p>
<hr />
<p><sup>1</sup> Via a legislative package containing three draft bills (<strong>Legislative Package</strong>)</p>
<p><sup><span style=2 Treasurer of the Commonwealth of Australia, ‘Government consults on stronger penalties for corporate and financial sector misconduct’ (Joint Media Release, 26 September 2018) 3.

3 The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018 proposes to amend the Corporations Act and the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

4 Set out in Division 269 in Schedule 1 of the Taxation Administration Act 1953 (Cth) (Taxation Administration Act).

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Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract.   Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship.   Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest.   What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan
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Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). 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The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty.  The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes
18 August, 2023
Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.

Published by Justin Pennay
10 August, 2023