A recent NSWSC decision, In the matter of Sails Corp Pty Ltd [2021], confirmed the problematic task of rebutting a presumption of insolvency. In this matter, the defendant’s presumed insolvency arose from an unsatisfied Creditor’s Statutory Demand. Therefore, the defendant bore the onus of rebutting this presumption and establishing solvency.
Establishing Solvency:
Establishing solvency requires more than a bald assertion.
Instead, under s 95A of the Corporations Act 2001 (Cth), solvency only arises where a company is able to pay its debts as and when they fall due. This requires leading the ‘fullest and best’ evidence.
In theory, this seems simple enough. However, in practice, it can prove more complex.
The Defendant’s Arguments:
The defendant alleged that the company was solvent as it did not trade and had over $1 million in its bank account. Further, the defendant personally pledged to provide additional funding if needed.
However, the fundamental problem with the defendant’s case was the evidence, which, by any account, was inadequate:
Unsurprisingly, the defendant failed to establish solvency.
Key Takeaways:
This case demonstrates a common pitfall that companies presumed insolvent fall into. They avoid the short-term costs of hiring professional accountants and instead lead piecemeal evidence, including one-page bank statements to establish solvency.
This is ill-advised.
Solvency is a forensic inquiry in which the courts are discerning and, therefore, unlikely to be persuaded by incomplete financial statements and illusive director promises of funding. Accordingly, it may be wiser to incur the short-term costs of procuring comprehensive financial analysis than risk the long-term repercussions of being wound-up.
**Assisted by: Kayla Cook***
[1] See Barrett J in TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011].
[2] Quin v Vlahos [2021]
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
It goes without saying that the law is a complex language. Indeed, it is so complex, and at times, so incoherent, that the Merriam Webster Dictionary has a specific term for it: ‘legalese’. As the law of insolvency is no exception, this article has compiled some of the most frequently used (and ambiguous) insolvency terms.
Bankruptcy notice
A bankruptcy notice is a formal demand for payment arising from a final judgement or order. This notice is only available where the debt amounts to $10,000 or more and has existed for no more than six years.
Deed of company arrangement (‘DOCA’):
A DOCA is a legally binding agreement between a company and its creditors. These Deeds typically arise where a company enters voluntary administration and outlines the use of the company’s and management of its affairs.
Declaration of Indemnities:
This is a declaration provided to creditors by either a voluntary administrator (or liquidator) detailing any indemnities the company has provided to the administrator/liquidator to cover any fees or debts they may incur in discharging their duties. Creditors can use this declaration to determine whether they wish to replace the administrator/liquidator.
Pari Passu:
Translated from Latin, this phrase means ‘with an equal step’. [1] Put simply, this means that once secured creditors have been paid, the remaining unsecured creditors are entitled to an equal and proportionate share of a company’s liquidated assets. This principle is codified in s 555 of the Corporations Act 2001 (Cth).
Phoenixing:
Is an illegal practice of creating a new company to continue the business of a liquidated/abandoned company, typically to avoid paying debts. This practice often amounts to a breach of directors’ duties under the Corporations Act 2001 (Cth) and carries severe penalties, including significant fines and imprisonment of up to 15 years.
‘Winding up’ vs ‘liquidation’
These terms are synonymous [2] and refer to the process of an insolvent company being externally administered. Practically, this involves realising the company’s assets, assessing creditor’s claims, and distributing net proceeds to those entitled. [3] This process can be voluntary (initiated by the company’s members or creditors) or involuntary (instigated by a court order).
Concluding Thoughts:
The above terms are merely a few out of the plethora of legal terms that can often require some deciphering. Whilst this guide is unlikely to result in fluency with ‘legalese’, it is a starting point. Fortunately, for clients, only lawyers need master fluency.
***Assisted by: Kayla Cook***
[1] Goode, Principles of Corporate Insolvency Law, 4th ed, Sweet & Maxwell, 2011.
[2] Mier v FN Management Pty Ltd [2006] 1 Qd R 339.
[3] Longley v Chief Executive, Dept of Environment and Heritage Protection [2018] 3 Qd R 459.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
Amirbeaggi as trustee of the bankrupt estate of Hanna v Hanna [2021] FCA 988
Background:
This past week the Federal Court handed down an interesting bankruptcy decision concerning the late lodgement of cross-claims. The respondent in this matter on two separate occasions failed to serve a cross-claim within the allotted time. This was despite being granted an extension. The question for the court was whether should be granted to permit the applicant to serve the cross-claim notwithstanding these delays.
Resisting the cross-claim:
In opposing leave, it was argued that the respondent’s delays remained unexplained, unduly lengthened court proceedings and were contrary to the overarching purposes of ss 37N and 37M of the Federal Court of Australia Act 1976 (Cth) (to dispense with proceedings quickly, inexpensively and efficiently).
The court’s reasoning:
In determining whether to grant leave, the court acknowledged that the respondent’s unexplained delays were a relevant discretionary consideration. [1] However, the court was unconvinced that this reason, on its own, was sufficient to refuse leave. Instead, as the proposed cross-claim sought to raise issues central to the case, the court ultimately decided to grant leave.
Despite granting leave, the court was nonetheless displeased with the respondent’s ‘unsatisfactory conduct’ and ordered that he pay the other parties costs associated with the application for leave.
Concluding Thoughts:
This matter serves as a timely reminder to both applicants and practitioners that court deadlines are not simply procedural but are essential in conserving judicial time and minimising legal costs. Indeed, this matter emphasised that the courts do not look favourably upon those who unnecessarily prolong proceedings and will make cost orders against such parties.
***Assisted by: Kayla Cook***
[1] [30].
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
Last week the High Court of Australia handed down a decision in the long-running matter of Fairfax Media Publications Pty v Voller, Nationwide News Pty Ltd v Voller, Australian News Channel Pty Ltd v Voller [2021] HCA 27.
In 2016 alarming footage of a minor was broadcast in a television segment which exposed the mistreatment that individuals were facing in youth detention centres throughout the Northern Territory. Shortly after the segment was aired, the federal government announced that a royal commission into the abuse of incarcerated minors in juvenile centres would be established.
Dylan Voller, the subject of the footage, commenced proceedings against various media companies in 2017 on the basis that he had been defamed by comments made on their social media pages in response to the findings of the royal commission. In particular, Mr Voller claims that the comments carried various false and defamatory imputations, including that he physically assaulted a volunteer who visited him while incarcerated and that he is a perpetrator of sexual assault.
In the primary decision, Justice Rothman of the Supreme Court of New South Wales determined that the defendants, Fairfax Media Publications, Nationwide News and Australian News Channel, were liable as publishers of comments posted to their public Facebook pages by third party users. In doing so, his Honour affirmed that Mr Voller had established the publication element required in defamation claims.
The decision was then appealed to the New South Wales Court of Appeal which upheld Justice Rothman’s judgment.
Subsequently, the defendants sought special leave to appeal to the High Court.
On 8 September 2021 the High Court by a majority dismissed the appeal brought by the media company defendants. In a landmark decision, the High Court confirmed that the media companies are publishers of third-party comments made on their public social media pages and as such may be liable for the content the third-party users post.
In doing so, the High Court rejected the argument put forward by the media companies that the element of defamatory publication required an ‘intent to defame’. Instead, the High Court focused on the concept of ‘intent to publish’ by the media companies, finding that each media company effectively assisted in the publication of the comments by creating public-facing pages and posting content within said pages.
Now that the issue of publication liability has been resolved, the matter will return to the Supreme Court of New South Wales to determine if the third-party comments were indeed defamatory, i.e. whether the comments effectively damaged Mr Voller’s reputation in accordance with the Defamation Act (2005) NSW.
Following the Voller decision, we are likely to see a change in the ways that public-facing social media pages are operated in Australia. As individuals and businesses may be liable for comments made by third party users even if they don’t agree with those comments, the ability to engage with content and facilitate public discussion may be reduced in order to minimise this newfound risk.
It is understandable that parties who operate Facebook pages may now be concerned about their liability in relation to third party users. However, it is important to note that the findings of the High Court are not restricted to Facebook users. Individuals and companies using all social media platforms to share content and facilitate engagement by others may need to consider how they moderate and operate their pages moving forward.
We’ve all heard Benjamin Franklin’s famous adage: ‘failing to prepare is preparing to fail‘; asset protection is no exception.
There are two common misconceptions that people have about asset protection. First, that only the exorbitantly wealthy need asset protection. Second, that only people who engage in risky business transactions should be concerned with protecting their assets.
Both misconceptions are categorically untrue.
The truth is that any business can fail, any individual can be bankrupted, and anyone can be sued. In fact, according to the AFSA, 417 people entered personal insolvency between 23 August and 5 September alone. One would hope that these individuals had the foresight to protect their assets.
What is asset protection?
Put simply; asset protection is the process of protecting one’s assets from lawsuits, creditor claims or other unexpected events. There are many strategies to protect your assets.
Strategy 1: Acquiring Assets
The first strategy is to avoid acquiring the asset in the first place and instead have someone else acquire the asset. Practically, this means that creditors may have difficulty accessing assets not registered in your name.
However, this strategy has its limitations, including Bankruptcy Laws allowing debtors to access assets you have helped someone else acquire.
Strategy 2: Transferring Assets
Similarly, to avoid creditor claims, assets can be transferred to someone else. Although simple in theory, this strategy does present risks.
The most salient risk is that the individual to whom you have transferred your asset either disappears with the asset or loses the asset.
Note that this strategy is also limited by creditor ‘claw back’ provisions in Insolvency and Bankruptcy Laws.
Strategy 3: Establishing a Trust
This is among the most popular asset protection strategies. A trust is a legally recognised relationship between the trustee and the trust’s beneficiaries. There are several types of trusts, each with its own benefits and respective weaknesses.
Discretionary trusts are a popular trust type, favoured for their flexibility. Under this arrangement, assets are protected from creditor claims that the trustee, not the beneficiary, legally owns the asset.
Whilst this seems like a perfect solution, there are two essential things to consider. First, the beneficiary no longer has legal ownership, and this rests with the trustee. Second, transferring assets into a trust may result in considerable stamp duty costs and capital gains tax.
Strategy 4: Restructuring
Having your business registered in your name carries several risks, including being personally liable for financial or tax-related debts. This also means that creditors can use their personal assets to settle the debt.
One strategy to avoid this is to structure your business as a company. However, this carries its own set of legal obligations.
Key Takeaways:
Asset protection is one of those things that you don’t need until you actually need it. Although your assets may not currently be at risk, the COVID-19 pandemic has revealed that the future is incredibly unpredictable, and things can change dramatically overnight. Therefore, have the foresight to think ahead and plan for the future. You’ll be glad you did.
**Assisted by: Kayla Cook**
If you have any legal questions about commercial and corporate law, reach out to our specialists at Chamberlains Law Firm!
A trust is a legal arrangement whereby one person (known as the “trustee”) holds assets on behalf of another person (known as the “beneficiary”). Trusts are commonly used for asset protection and tax planning and generally have their own special rules established by a written instrument (known as the “trust deed”).
A trust will need to be terminated or “wound up” when it naturally reaches the end of its life and “vests”. However, there are several circumstances that may arise where the trustee and beneficiaries want to bring the relationship to an end and seek to wind up the trust early, including where the:
Most trusts have an expiry date (known as the “vesting date”). In most states and territories in Australia a trust is required to “vest” or be “wound up” within a specific time period (known as the “perpetuity period”). In most Australian states and territories (to the exclusion of South Australia which abolished the rule against perpetuities), the perpetuity period is 80 years after the establishment of the trust.
We commonly also see trust deeds which provide that the vesting date will be the date upon which an event takes place, such as the date of death of a particular family member, or “the date that is 21 years following the death of the last living descendant of King George V who was alive at the time the trust was established”.
As mentioned above, there are several reasons why the trustee and beneficiaries may wish to wind up the trust prior to the vesting date.
Whether the trustee has the power to vest the trust early will depend on the rules and powers of the trustee set out in the trust deed. The trust deed may provide that the trustee needs the consent of the appointer or the beneficiaries. In some cases, the trustee may have the unilateral right to wind up the trust.
If the trustee does not have the power to change the vesting date you should speak to a lawyer to discuss whether variation of the trust is possible.
Winding up a trust involves planning and paperwork. The standard steps the trustee is required to complete includes:
If the vesting date is approaching, you must contact your lawyer to take the necessary steps to validly wind up the trust. Missing the vesting date has significant taxation consequences.
Often the winding up process may result in new liabilities, such as CGT or GST. Where there are insufficient funds in the trust to pay those liabilities, the trustee may be legally and personally liable for those debts of the trust.
Even in circumstances where the trust deed may indemnity the trustee for any liabilities of the trust out of the trust assets, there may no longer be any assets left in the trust to pay those liabilities leaving the trustee personally liable and responsible to pay those debts.
It is important to be vigilant and remain mindful of the trust’s vesting date and the trustee’s powers to vest the trust early. If your trust’s vesting date is approaching or you wish to vest your trust early, it is important you contact a lawyer to assist you with the process.
Contact the Workplace Law Team at Chamberlains Law Firm for any questions and concerns.
If you have ever read any business documentation before, it is likely that you have come across the terms ‘Australian Business Numbers’ (‘ABN’) and Australian Company Number (‘ACN’).
Although these terms appear similar, they are distinct identification numbers and reveal different legal obligations.
What is an ABN?
An ABN is a 11-digit number issued to all entities registered in the Australian Business Register. Issued by the ATO, all businesses, irrespective of size or corporate structure, are required to have a registered ABN. This includes sole traders, companies, trusts, and partnerships.
The benefit of having an ABN is that an ABN is unique to each business and therefore serves as a useful identification tool. This is particularly so since ABNs must be displayed on all business correspondence. An ABN also reveals a business’s status, with ABNs listed as either ‘active’ or ‘cancelled’. A cancelled status indicates that the business has ceased trading.
What is an ACN?
An ACN is a 9-digit number issued to all companies. ASIC issues an ACN when a body becomes registered as a company under Corporations Law. As with an ABN, a company’s ACN must be displayed on all business correspondence.
A company is different to a business. A company is a legally separate entity, distinct from its owners (shareholders) and managed by directors. Importantly, a company which conducts business activities will have both an ACN and ABN.
Like an ABN, an ACN is a useful identification tool which allows shareholders, suppliers and consumers identify a particular company.
Key Takeaways:
Although they appear similar, ABNs and ACNs are two distinct identification numbers carrying vastly different obligations.
An awareness of the difference between theses two acronyms will serve useful in understanding business documentations but also, in ensuring that businesses and companies fulfil their respective legal obligations.
If you have any legal questions about commercial and corporate law, reach out to our specialists at Chamberlains Law Firm!
Financial constraints and business restructures often result in services or roles no longer being required by your business. In such circumstances, you may seek to dismiss an employee or team that is no longer required by making them “redundant”.
There are several important factors to consider to ensure that a redundancy is “genuine” and, if so, correct calculation of the redundancy pay that the employee is entitled to, as getting it wrong may expose your business to unnecessary and costly claims.
What is a genuine redundancy?
Job no longer required
As set out in section 389 of the Fair Work Act 2009 (Cth), a genuine redundancy occurs where an employee is dismissed because their position no longer needs to be filled anymore. This generally arises for two main reasons:
Consultation obligations
Irrespective of the reason, a redundancy is only genuine if you fulfil the consultation obligations in accordance with the terms of any workplace agreements i.e. applicable modern awards or enterprise agreements. In circumstances where no workplace agreements exist, it is incumbent on you to consult with the potential redundant employee to avoid a claim that the dismissal was harsh, unjust or unreasonable.
Reasonable redeployment
As further provided in section 389 of the Fair Work Act 2009 (Cth), an employee’s redundancy will not be genuine if you fail to offer reasonable deployment of the employee within your business enterprise or the enterprise of an associated entity of your business. Whether it is reasonable to offer the employee redeployment is considered on the facts and circumstances that existed at the time of the employee’s dismissal, including:
Redundancy payments – who is entitled and who isn’t?
Not all employees are entitled to redundancy payments. Generally, the following employees will not be entitled to payment on redundancy:
How is redundancy pay calculated?
Put simply, the formula to calculate an employee’s redundancy pay is as follows:
The employee’s base rate of pay x The employee’s redundancy entitlement
An employee’s redundancy entitlement amount is dependent on their years of continuous service. Continuous service is the period during which the employee was employed with your business, less any unauthorised absence or unpaid leave.
In the absence of a workplace agreement which may provide more generous redundancy or severance benefits, the National Employment Standards set out the minimum redundancy entitlement as follows:
| Years of Continuous Service | Redundancy Entitlement |
| At least 1 year but less than 2 years | 4 weeks |
| At least 2 years but less than 3 years | 6 weeks |
| At least 3 years but less than 4 years | 7 weeks |
| At least 4 years but less than 5 years | 8 weeks |
| At least 5 years but less than 6 years | 10 weeks |
| At least 6 years but less than 7 years | 11 weeks |
| At least 7 years but less than 8 years | 13 weeks |
| At least 8 years but less than 9 years | 14 weeks |
| At least 9 years but less than 10 years | 16 weeks |
| At least 10 years | 12 weeks |
After 10 years continuous service, an employee’s redundancy entitlement does indeed decline as the employee will also be entitled to long service leave payments.
Key takeaways
When choosing to make an employee redundant, it is important to consult with the employee, review your business operations and available positions to consider if there is any positions accessible for redeployment of the employee and review the employee’s years of continuous service to correctly calculate their redundancy pay. Failure to do so may see an employee bring a claim of unfair dismissal or general protections claim against your business.
As blockchain technology continues to evolve, new and established coins are increasingly looking for ways to use this development to reward their current coin holders and provide incentives to new customers to adopt their coin. Proof of Stake (PoS) or ‘Staking’, has arisen as a result of the energy intensive and increasingly difficult requirements necessary to undertake Proof of Work protocols used to validate coins like Bitcoin. This is also used extensively in Decentralised Finance or DeFi.
Staking is a way of earning interest or ‘rewards’ just for holding certain types of cryptocurrency and placing them in a smart contract, like Tezos, Cosmos or even Ethereum 2.0 when it launches. Staking allows a crypto holder ‘stake’ their crypto currency into a pool of crypto and earn interest or rewards. Staking is similar to depositing currency to a bank account and accumulating interest. It is an easy way of letting your crypto work for you in order to earn more crypto.
Instead of solving complex algorithms to earn coins as you might when you mine Bitcoin, participants nominate coins they own to be used as validators to guarantee the legitimacy of new transactions on a block chain. These new transactions can then be officially added to a blockchain. Essentially, the coins you stake act to validate the legitimacy of a new block on the blockchain. In return for validating a new block, participants receive new coins. If your crypto validates a new block that is later found out to be invalid, you may lose some of the coins you staked in what is known as a slashing event. The reward and penalty process differs between blockchains.
Staking your crypto increases the blockchain’s resistance to attacks and the ability to process transactions quickly. By staking your crypto, you’re adding another layer of protection to the network.
A big downside to staking, is that your crypto is not under your control while in a staking pool. Some pools also have a vesting period where you are unable to make trades for a prescribed period of time. If you’re a regular trader or looking to make a quick profit, staking probably isn’t for you. Staking encourages token holders to hold their coins long-term and actively participate in the blockchain.
There is also a risk of a ‘rug pull’, where a smart contract has vulnerabilities and the creators of the pool or a third party removes your crypto from the smart contract. Due to the nature of blockchain, such transactions are irreversible. This one of the risks of participating in DeFi, and also why there is an increased reward and substantial returns can be generated from staking.
Staking isn’t available on all blockchains (Bitcoin doesn’t allow it) and generally requires you to possess a certain amount of coins or level of investment before you can qualify. Some exchanges, like Coinbase, will allow you to contribute an amount to a staking pool. This allows casual investors to earn without having to use their own validator hardware or have a significant asset pool. Staking pools have a lower barrier to entry and low or free membership and can be both private or open to the public.
Tax Considerations
The ATO views any token holders who receive additional coins through staking as receiving assessable ordinary income equal to the money value of the tokens they receive, at the time were derived. For example, if you received $100 AUD worth of tokens through staking, that $100 would have to be included in your tax return as assessable income. It is often much more complicated, where the value of the tokens change substantially even within a day. Specialist tax software is usually required to accurately determine the tax on staking.
Coins and tokens earnt through staking will acquire a market value cost base and attract CGT on their disposal. Working out the market value on each acquisition is complex, let alone the CGT on a disposal.
If you participate in staking, have been subject to a rug pull or are developing a new blockchain project with staking functionality, you should seek advice from our Cryptocurrency Law Team.
What is a Crypto Airdrop?
For new cryptocurrency, it can be difficult to convince consumers to use or purchase a coin in its early stages. With no publicity, followers, or trading volume, new projects need to find innovative ways to market the currency in order to reach the consumers. Airdrops is one common tool to do this.
One way to promote coins and increase uptake is through airdrops, where a consumer receives free coins or tokens ‘airdropped’ into their crypto wallet. Blockchain based projects like to use airdropping as a marketing tool to promote awareness and engage consumers, helping build the early value in their token and increasing the overall supply.
An airdrop involves sending a small amount of a new coin to targeted members of a selected blockchain platform. To qualify, the wallet holder may need to hold a minimum amount of a certain coin and they may even be given multiple Airdrops if their wallet remains above a minimum balance for a sustained period. Some Airdrops may require the receiver to perform a task, such as a social media post, to qualify for the crypto drop.
Airdrops have the potential to provide real value to a consumer. In 2020, Uniswap released a native coin, UNI, by dropping it into the accounts of all users on its platform that had made at least 1 trade prior to a certain date. The coin initially traded for between $2-$4 USD before rising to $30USD in April 2020, netting those who had received the airdropped tokens $12,000 USD.
Beware of Airdrop Scams
Airdrops are common practice, but they can be used to scam consumers. You should always be wary of Airdrops that require you to send funds to its project or require you to send personal information. Dusting is another type of well-known Airdrop-scam, where a hacker sends a small amount of coin to a large number of wallets, and the user doesn’t realise they have received any coins. The attackers aim is to link wallets to companies and individuals by following the transactions the wallet makes and tracking these transactions to the user. The overall aim being to carry out phishing or other cyber attacks directly on the user at a later date after they have linked the wallet to the consumer.
Tax Considerations
Although it may feel like a free coin, the ATO considers airdropped coins and tokens to be ordinary income. Anything you receive through an airdrop is required to be counted as ordinary income equal to its value at the time you received it. When it is sold, you will be required to pay capital gains tax on the difference between the value of the coin when you received it (cost base) and the value of the coin when it was sold. Often a token will have a very low market value when it was airdropped. Crypto investors and their advisors need to ascertain how all their existing coins were acquired to track whether there are any outstanding tax liabilities.
The ATO continues to track and closely monitor crypto related trading activity, looking to crackdown on taxpayers who fail to report their crypto-related capital gains and losses. If you have received tokens through an airdrop, or are considering airdrops for your current project, Chamberlains Cryptocurrency Law Team can help you better understand your tax obligations.