When a company is experiencing a shortage of business opportunities, overwhelming tax or superannuation liability, or unmeetable loan or bill payments, that company may be nearing insolvency. Insolvency is defined as being unable to pay one’s debts as and when they fall due, and in situations like these company directors have an obligation to avoid the company trading whilst insolvent. Entering voluntary administration is one of the most effective strategies directors can use to fulfill this duty.
Director Duties
The Corporations Act 2001 (Cth) (the Act) confers numerous powers and responsibilities on directors of Australian companies. Among these responsibilities is the duty to prevent insolvent trading of their company under s588G. A director that allows his or her company to incur a debt either:
• That causes the company to become insolvent; or
• When the company is insolvent or likely to become insolvent;
at a time when there are reasonable grounds to suspect insolvency, can become personally liable to repay that debt and may be banned from being a company director. If that failure to prevent insolvency was done dishonestly, then the director may also incur criminal penalties or even jail time.
Directors have a clear obligation under corporations law to prevent insolvent trading and it is undoubtedly within their personal interest to do so to avoid civil and criminal penalties.
What Is Voluntary Administration and How Does It Work
Voluntary administration involves the appointment of one or more insolvency practitioners who will take responsibility for the operations and finances of the company and investigate the affairs in order to report to creditors on a view in relation to the future of the company.
Within 8 business days of the administrators’ appointment they must hold a meeting of creditors, who will vote to either ratify the appointment or replace with a different administrator. The administrators will then conduct their investigation and within 28 days a second meeting is held, where the administrators will provide a report and a recommendation to creditors, to put the company into liquidation, to return control to the directors, or enter into a Deed of Company Arrangement (DOCA).
What Are the Benefits of Voluntary Administration?
The benefits of entering voluntary administration are numerous, including:
• Providing temporary protection from legal actions and creditor demands;
• Potentially improving the efficiency of the company and possibly improving profitability;
• Preventing insolvent trading;
• Potentially salvaging the business to allow it to continue trading after administration; and
• Directors may avoid claims against them for breaches such as the duty to prevent insolvent trading.
Many of these benefits will not apply if the company goes into liquidation.
Option or Obligation?
While entering voluntary administration is strictly speaking optional, the consequences for failing to do so could prove disastrous for directors. Given the statutory duties placed on directors and the consequences for failing to meet them, the voluntary administration scheme becomes more of a must than a maybe for most directors of near insolvent companies. Despite directors usually having to indemnify administrators for their costs, which could be thousands of dollars, it is difficult for directors to justify not entering voluntary administration when there is clear evidence of insolvency.
While voluntary administration should always be investigated as an option for a company nearing insolvency it may not always be the most effective strategy. Clients facing insolvency should seek advice from an insolvency practitioner about their best options, as well as legal advice on the legal risks associated, and then consider how to proceed. Attempting to reach informal arrangements with creditors or obtaining finance to consolidate and manage debt might prove useful alternatives in less severe cases of financial distress. Conversely, companies that are so far gone in terms of insolvency that they have no feasible chance of being able to enter a DOCA or continue trading might opt for skipping voluntary administration and going straight to the inevitable outcome. This can save time and avoid further depleting the company resources available to creditors but may leave directors vulnerable to incurring personal liability.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
It is no secret that insolvency processes such as liquidation and external administration can be financially burdensome and extremely stressful for all those involved. What can often be neglected is how these processes might have a greater detrimental impact on small and family businesses when compared to large, sophisticated corporate conglomerates. In an attempt to level the playing field, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell announced yesterday an inquiry into insolvency practices.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has today announced an inquiry into the insolvency system, to investigate if current insolvency practices achieve the best possible outcome for small and family businesses in financial trouble.
“This inquiry will shine a light on the insolvency system and uncover if it encourages practitioners, in the first instance, to restructure the small or family business to turn it around.
“Unfortunately the Banking Royal Commission wasn’t asked to look at the role of insolvency practitioners and that was a missed opportunity.
“We know there is a very low success rate in restructuring Australian businesses under external administration and the impact of the insolvency process is often devastating for the small business owner.
“Few small businesses that enter formal insolvency administration are able to navigate their way through the process to reach a restructuring agreement.
“The latest data reveals more than 8,000 businesses entered external administration in 2018/19. Of those, small and family businesses in rural and regional Australia have been among the hardest hit.”
The Insolvency Practices Inquiry will examine:
As part of the inquiry, the Ombudsman has established a reference group, chaired by former Senator John Williams, to act as a forum for input and discussion on the challenges faced by small and family businesses facing insolvency.
Mr Williams took a lead role in the 2010 Senate Inquiry into the regulation, registration and remuneration of liquidators.
“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Mr Williams says.
“This inquiry is essential to see if any systemic improvements can be made.”
“Our Small Business Loans Inquiry identified a lack of transparency for the small business owner when a creditor commenced debt recovery action,” Ms Carnell adds.
“The small business owners felt they had lost control of their business and in cases where the business was wound up, they felt the process was poorly managed.
“This inquiry will identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved.”
Small and family businesses that have faced financial difficulties and restructured or wound up their business can share their stories by completing this survey.
An interim report will be released in December with a final report to be handed down in February 2020.
One of the key objectives in any external administration is to attempt to restructure and salvage the business in hopes of returning it to its owners to continue trading. A system that is prejudicial towards small businesses could ultimately discourage future entrepreneurs and impact local economies. Hopefully, this inquiry can lead to a productive dialogue about the best way to achieve this objective in the context of small businesses, and possible reforms stemming from these discussions. It will be interesting to see the findings of this inquiry and what impact they could have on the insolvency regime.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
EXECUTIVE SUMMARY
Lendlease Engineering Pty Ltd v Timecon Pty Ltd [2019] NSWSC 685 breaks new ground with respect to the definition of an “other arrangement” under the Building & Construction Industry Security of Payment Act 1999 (NSW) (the Act). The decision of Ball J confirms that in order to have standing to bring a payment claim under the Act, parties must necessarily be engaged in an arrangement that is legally binding in nature, however, that arrangement need not be contractual as such.
FACTS
The plaintiffs, Lendlease Engineering Pty Ltd and Bouygues Construction Australia Pty Ltd, were party to an unincorporated joint venture (Joint Venture) which was the head contractor for the NorthConnex tunnel project, connecting the M1 motorway to Pennant Hills Road.
The Joint Venture was the respondent nominated in an adjudication application issued by Timecon Pty Ltd (Timecon), which claimed for costs arising from the receipt of spoil from the NorthConnex project tunnel at a location in Somersby (Somersby Site). The Somersby Site was owned by 40 Gindurra Road Somersby Pty Ltd, of whom the sole director thereof was also the sole director of Timecon.
Timecon asserted that the “other arrangement” was borne from select pre-contractual conversations and emails with the Joint Venture, and alleged that an agreement was struck to deliver spoil to the Somersby Site at $4.00 per tonne. The adjudicator, who was the second defendant to the proceedings, found in favour of Timecon in the amount of $887,532.80.
Whilst the Joint Venture agreed that a certain amount spoil from the NorthConnex project had been deposited at the Somersby Site, it maintained that this was pursuant to an agreement it had made with Laison Earthmoving Pty Ltd (Laison). It otherwise contended that if there was any agreement with Timecon, which was denied, then any such agreement did not fall within the meaning of construction work under the Act.
ISSUE
The matter came before Ball J, who was asked to consider whether there was a contract or other arrangement between the Joint Venture and Timecon within the meaning of the Act, or alternatively, if there was a contract or other arrangement, whether it was one under which Timecon would carry out construction work or to supply related goods or services within the meaning of the Act.
His Honour noted that the purpose of the Act was to “provide a mechanism by which contractors who do work in the construction industry, or provide related goods and services, and are entitled to be paid for that work are able to make progress claims and to have those claims paid promptly”, and noted that it was not the intention of the Act to “create an obligation to pay where one does not otherwise exist” (emphasis added). In this regard, His Honour considered the purposive impact of section 32 of the Act, which provides that any monies payable pursuant to an adjudication determination are returnable if, in the course of civil proceedings, it is established that the claimant had “no underlying right to be paid any amount at any time” by the recipient of the progress claim.
His Honour then considered authorities against which this section was not considered, but where similar facts arose, such as the decision of Nicholas J in Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45, where His Honour found that a contract or other arrangement pursuant to which a claim under the Act is made may not necessarily be an arrangement under which liability to pay for construction work is otherwise legally enforceable.
Similarly, Ball J cited the decision of McDougall J in Machkevitch v Andrew Building Constructions [2012] NSWSC 546, where His Honour, in considering Okaroo, said that what is required is that there be an engagement or agreement, though not necessarily legally enforceable, between two parties, for the Act to respond.
Ball J then referred to the decision of Stevenson J in IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439, who summarised the principles applied in the prior two cases and confirmed that an “arrangement” under the Act need not be legally enforceable.
Ultimately however, His Honour took the view that, although the Court in each case found that the “other arrangement” did not need to be legally binding, the facts suggested that they most likely were, be it equitably, contractually or otherwise. Returning to a purposive interpretation of section 32 of the Act, His Honour did not hold himself bound by these decisions.
JUDGMENT
In applying the reasoning above to the facts at hand, his Honour concluded that there simply wasn’t a legally enforceable contract or arrangement between the Joint Venture and Timecon regarding the delivery and receipt of spoil. Accordingly, the adjudication determination was declared void.
As to the question of whether the contract or other arrangement if established (which it wasn’t) was one to carry out construction work within the meaning of the Act, His Honour found that the receipt of spoil does not constitute construction work as provided by section 5(1)(a) to (d), as it was not an integral part of the construction work occurring on the NorthConnex tunnel project – the spoil could have been easily moved elsewhere. Further, it did not fall under the definition of related goods or services, as it was not a component of the works or used in connection with carrying out the works.
IMPACT OF DECISION
Parties engaged in pre-contractual negotiations should be wary of any representations they make which may give rise to legally binding obligations and responsibilities under Security of Payment legislation. However, merely engaging in negotiations that do not amount to representations or eventuate in concluded agreements will likely preclude the application of the Act.
We’re here to help
We at Chamberlains appreciate the difficulties builders, contractors and homeowners alike have been facing in recent times. Should you or your business need some assistance to navigate any legal issues which have arisen during these unprecedent times, please do not hesitate to contact our building and construction law team.
On 25 June 2019, Justice Moshinsky of the Federal Court of Australia heard an application in the matter of Brimson Pty Ltd (in liquidation) seeking that the liquidator be appointed as receiver and manager of the business and its trust assets.
Background
The application was made in relation to three related companies:
(a) Brimson Pty Ltd (in liquidation) (Brimson);
(b) The Kane Retail Group Pty Ltd (in liquidation) (Kane); and
(c) The Teal Retail Group Pty ltd (in liquidation) (Teal);
(together, the Companies).
Each Company was, or was formerly, the trustee of a trading trust as follows:
(a) The Brimson Family Trust (the Brimson Trust);
(b) The Kane Retail Group Family Trust (the Kane Trust);
(c) The Teal Retail Group Family Trust (the Teal Trust);
(together, the Trusts).
At or around the time of incorporation each Company was appointed trustee of its respective Trust pursuant to declarations of trust. Two of these declarations, for Brimson and Teal, contained ipso facto provisions which operated to remove Brimson and Teal as trustees upon the company going into liquidation.
All three Companies were owned and operated by a single director, Mr Neil Brimfield. Each Company, in its capacity as trustee of its respective Trust, operated separate retail businesses known as ‘Snooze” under a franchise agreement. On 22 May 2019, Snooze Sleep Well Pty Ltd issued breach notices against each Company in accordance with these franchise agreements, and a week later the three Companies were placed into liquidation.
The Issues
The main issues here were, due to the operation of the ipso facto clauses of the trust declarations, both Brimson and Teal were removed as trustees of their respective Trusts, resulting in them holding trust assets as bare trustees. As such, the Liquidator did not have the power to dispose of the trust assets to help settle the Companies’ outstanding liabilities and wind up both Companies and Trusts.
In addition to this, the trust deeds for each of the Trusts did not appear to give their trustees the power to sell the trust assets, save for the purpose of applying the proceeds of sale of the property for the benefit of the Trust beneficiaries. The Court also considered if the creditors of the Companies were equivalent to trust creditors in this instance.
Relevant Law
It is a general principle that a company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. This right of indemnity has been found to endure in the event of liquidation, even when the company is removed as trustee (Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in Liq) [2018] FCAFC 40) (Jones v Matrix).
It was recently settled that the liquidator of an insolvent (former) corporate trustee cannot sell the trust’s property without order of the Court, or without appointing a receiver over the trust assets. This is because the trust assets are not “property of the company” but are instead trust property in which the corporate trustee has a proprietary interest in. The Courts are willing to permit a liquidator to sell trust assets or grant the liquidator the power of sale, however the more common course is to be appointed as receiver for the purposes of selling assets to distribute proceeds to trust creditors (Jones v Matrix).
This case also applied a recent High Court decision in the case of Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Amerind). It was determined that in circumstances where a company has only ever acted as a trustee of one trust, and that has been the totality of its affairs, no issue arises as to the application of trust assets to company creditors because all the company’s creditors are considered trust creditors. In such situations, the proceeds from the exercise of the corporate trustee’s right of exoneration against the trust are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act 2001, and may only be applied in satisfaction of the trust liabilities to which that right relates.
The Decision
It was found that each Company acted solely as trustee of the relevant Trust, and thus, due to their right of indemnity, all creditors of the Companies were therefore creditors of the Trusts. In these circumstances, His Honour found it appropriate to make orders to facilitate the sale of the trust assets and the application of the proceeds in favour of the trust creditors.
An order was made granting the liquidator the same powers that a receiver can use to deal with the business and property of a company in respect of the business and assets of each trust under s420 of the Corporations Act, and furthermore the liquidator was granted relief from all liability in dealing with the trust assets prior to being appointed receiver.
This case is one of the first to apply the decision in Amerind. You can read more about this decision here.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
The recent decision of the High Court of Australia in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Re Amerind) marks the end of a saga with significant implications for businesses operating as trading trusts.
In the context of many cases with diverse findings on the issue, Re Amerind serves to create nationwide certainty for whether the statutory priority regime applies to insolvent trading trusts. The High Court found that it does applies, holding that trust assets, to which the trustee’s right of indemnity from trust debts applies, are property of the trustee and not property of the trust.
Background
Amerind Pty Ltd (Amerind) traded solely as the trustee of a decorative timber products business which had been placed into administration and then receivership. Upon completion of the receivership, the receivers had gained a surplus amount of $1.7 million from realising the trust assets.
The issue was, of course, how this surplus should be distributed.
The Commonwealth, as a priority creditor, argued that the assets were property of the trust rather than the trustee. It argued that it should be preferred in distribution of the surplus because of the unpaid obligations to employees outstanding under the Fair Entitlements Guarantee Scheme (FEGS) and the application of section 433 of the Corporations Act 2001 (Cth) (the Act).
The primary judge, Robson J, held that:
1. The assets were indeed property of the trust;
2. The right of indemnity is not property of the trust for the purposes of section 433 of the Act;
3. The priority regime does not apply to trust property; and as a result
4. The trust assets should be distributed pari passu rather than as priority assets.
The Court of Appeal of the Supreme Court of Victoria, applying previous Victorian jurisprudence, disagreed. The Court of Appeal instead found that the right of indemnity was indeed property of the company, relying upon the right of indemnity that a trustee company must use trust assets for its own benefit and exonerate itself from its liability to trust creditors.
High Court Consideration
Carter Holt Harvey Woodproducts Australia appealed to the High Court on two grounds:
Firstly, it was argued that section 433 of the Act did not afford priority to the Commonwealth because Amerind’s right of indemnity was not “property comprised in or subject to a circulating security interest” within section 433(2)(a); and
Secondly, that the Court of Appeal erred by concluding that the funds held by the Receivers were proceeds of Amerind’s exercise of its right of indemnity and therefore available for distribution within section 433 of the Act.
The High Court dismissed the appeal and unanimously held that in the winding up of a corporate trustee, trust assets to which the company is entitled, through the exercise of its right of indemnity, is included in the “property of the company”. Such property can be applied in satisfaction of the claims of creditors, but only in satisfaction of trust liabilities to which that right relates. Furthermore, the Court also held that section 433(3) of the Act required the receivers to pay the debts in accordance with the statutory priorities in a winding up.
A majority came to this conclusion by reasoning that the right of indemnity itself was not “property of the company”, but the inventory to which the right related was. As such the receivers were entitled to apply the proceeds from realising these assets in satisfaction of the claims of trust creditors, just as Amerind would have been.
Conclusion
This decision provides much wanted certainty about the application of section 433 of the Act to trust assets in situations where an insolvent company acted solely as trustee for a single trading trust. Despite a clear ruling from the High Court, insolvency practitioners still need to exercise caution when handling trust assets in more complex corporate-trust structures, such as companies that trade only partially as trustee of a trust, or companies that trade as trustees of multiple trusts. Examples of these principles applying to more complex situations have been seen in decisions of the Federal Court in a post Re Amerind context.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
From 1 November 2019 new laws will come into force that place additional restrictions on gift cards that business can sell or supply to their customers. It is crucial that business owners understand their obligations under these new laws and have the opportunity to adjust any gift card systems that they have in place before the new laws take effect.
The Treasury Laws Amendment (Gift Cards) Act 2018 makes amendments to the Australian Consumer Law (ACL) in Schedule 2 of the Competition and Consumer Act 2010 (Cth). These changes unify the law relating to gift cards across all states and territories, with these requirements being already in place in South Australia and NSW.
A gift card is defined quite narrowly as something that acts as a voucher that is redeemable by itself for goods or services – under the associated regulations, credit/debit cards, loyalty cards, and other discount vouchers will not be affected.
Subject to some exceptions, the changes are as follows:
(a) Gift cards must now have a minimum expiry period of three years;
(b) The date that a gift card will expire must be physically displayed on the card (i.e. not in a separate terms and conditions document); and
(c) Post purchase fees (such as for activation, account keeping or inactivity fees, or any other fee that would effectively reduce the face value of the gift card) are banned.
Failing to observe the above requirements and selling non-compliant gift cards may result in fines of $6,000 for an unincorporated trader and a steep $30,000 if the business is run by a company. The Australian Competition and Consumer Commission may also launch legal action under the ACL to prevent anyone from supplying non-complying gift cards, and otherwise may serve infringement notices.
With the strong adverse consequences for businesses failing to meet the requirements of the new laws, businesses must be prepared to take on compliance costs by, among other things:
(a) changing their IT systems to extend expiry dates of gift cards in circulation;
(b) reprinting any existing cards in their stock;
(c) retraining of staff to sell and use gift cards; and
(d) seeking legal advice to ensure that any updated gift card scheme is compliant with the updated provisions of the ACL.
If you have any legal questions related to commercial and corporate law, contact our team of lawyers at Chamberlains Law Firm!
We are pleased to announce the launch of our weekly Podcast, Chamberlains Lawcast.
Our use of real-world understanding, nationally-recognised expertise, and straightforward advice, provides you with the information you need to know to keep updated on the latest legal news, events, issues and developments facing you or your business.
Available on all good Podcast providers now by clicking Subscribe below.
A deposit under a contract for the sale and purchase of land is paid at the time of exchange of contracts and is a sign of intent by the purchaser to complete the contract. Generally, the deposit is paid into the trust account of the vendor’s Real Estate Agent or Solicitor and is released following settlement.
However, in recent times, we have seen an increase in release of deposit clauses included in contracts for the sale and purchase of land. A release of deposit clause allows the vendor to access the deposit paid by a purchaser following exchange and prior to settlement. Usually, this is to allow the vendor to pay a deposit or stamp duty on the purchase of a new property. For off-the-plan projects, the developer may request the early release to assist with project funding.
In most cases, the matter proceeds to settlement and the early release of deposit is not an issue but what happens when things go awry and the matter does not settle?
Recently, Ralan Group, one of the nation’s largest property developers went into voluntary administration. Prior to them going into administration, thousands of purchasers had agreed to release their deposits. Now, these purchasers, including many first-home buyers, are at risk of losing their entire deposits.
The release of deposit prior to settlement is generally discouraged as it becomes extremely difficult to recover when the matter is not completed. The purchaser would, in most cases, need to initiate legal proceedings against the vendor to recover their deposit – an extremely protracted and expensive exercise. Even then, chances of recovery are limited as the right to recover the deposit falls behind any secured creditors including the vendor’s mortgagee.
To avoid risking their deposit, purchasers should always seek to remove any release of deposit clause prior to exchange of contracts. If the vendor insists on a release of deposit clause being included in the contract for sale and purchase of land, it is prudent to assess the financial risk and ensure that the clause is carefully drafted to reduce the risk to the purchaser.
If you are seeking for legal advice, our Property Law specialists team can help you. Get in touch today!
Ms Kim Kardashian-West caused a stir last month for co-opting the use of the Japanese word ‘Kimono’ for her new brand of shapewear clothing. A kimono is a traditional Japanese dress that is somewhat of a cultural touchstone for Japanese people.
Despite the word being a play on her first name and the literal meaning of the word ‘kimono’ being a thing (‘mono’) to wear (‘ki’), there have been widespread concerns surrounding whether the trade mark is cultural appropriation and represents an undesirable exploitation of a foreign tradition for commercial gain.
This raises the interesting question: what elements of culture can be trade marked?
A trade mark may be rejected by IP Australia on the following grounds:
(a) The mark being too similar to a previously existing mark in a similar category of goods or services, that would deceive or cause confusion among consumers;
(b) The mark would be misleading or have deceptive connotations of the product – such as falsely indicating the origin of the product in its name (e.g. Yanx cigarettes from a country other than the United States);
(c) The mark being too generic and incapable of being distinguished – such as use of some foreign language words that would need to be used by other traders (e.g. “Oro” and “Cinque Stelle” to describe coffee), geographic names, or a common surname; and/or
(d) the mark being offensive/scandalous – though this is narrowly interpreted and is limited to racist slurs and offensive language.
In Australia, ‘Kimono’ is actually already a registered trade mark by Hasbro, for use with toys but not including doll’s clothing and dolls in Japanese national dress. This means that that word may be used exclusively in relation to certain items (toys) that have no relation to the actual dress itself. This trade mark, like Kardashian-West’s, would not prevent others from using the word ‘kimono’ in other contexts, and it would be highly unlikely that any Japanese dress makers or retailers would be restricted from selling their goods.
The above means that there is no express limitation on impugned culturally appropriative terms – theoretically, however, the discretion afforded to examiners of trade mark applications may be expanded to restrict registration of any marks that seek to capitalise on the goodwill of a culturally significant item on the basis of it being offensive or misleading. The scope to do so is there.
A Japanese delegation requested that Kardashian-West reconsider applying for the mark, with the Mayor of Kyoto, Mr Daisaku Kadokawa, explaining that Japan would be seeking to register the word ‘kimono’ on UNESCO’s Intangible Cultural Heritage List (a list that includes particular techniques for avalanche risk management by Swiss and Austrian alpine regions and the Irish sport of hurling).
Kardashian-West, for her part, withdrew the application for the trade mark and issued an apology – no doubt owing to the high profile nature of the controversy and the bad press generated.
Ultimately, while trade mark laws do not expressly prevent cultural appropriation, designers of trade marks and their businesses should be cautious with attempting to register a trade mark that holds significance to a foreign or indigenous culture, since it may lead to backlash that may be harmful to the business.
There has been similar controversy surrounding indigenous artwork being faked and otherwise misappropriated – stay tuned for a rundown of that case and its ramifications in Part 2, which addresses this issue within an Australian context.
If you have any legal questions related to commercial and corporate law, contact our team of lawyers at Chamberlains Law Firm!
Case Note – The Measure of Damage for a Hire Vehicle
Nguyen -v- Cassim [2019] NSWSC 1130
The Supreme Court of New South Wales has again been called upon to deal with the issue of damages as they relate to hire vehicles. It is an issue which continued to occupy Local Court’s time as there is very little Australian authority on the issue of damages when it comes to replacement vehicles. What is of particular concern for insurers and the Courts alike is the consideration of damages in the context of hire vehicles provided free of charge to “not at fault” drivers who have ben involved in a collision. The Supreme Court on 3 September 2019 provided further clarity on this point for lower Courts and insurers and has considered the issue of rates for hire vehicles along with the award of non-compensable costs often sought as part of a claim for damages.
The matter was one of three matters which were dealt with in one hearing before his Honour Basten J on 27 August 2019. The present matter related to a hire by Mr. Cassim of a Nissan Infinity Q50 motor vehicle. The Nissan was hired as a replacement vehicle by Mr. Cassim from Right2Drive when his BMW 535i was damaged in a collision on 1 April 2017. Mr. Cassim hired the Nissan for a period of 84 days whilst his BMW was being repaired. The Court was asked to consider two issues:
1. Whether the expense of obtaining a replacement vehicle of a similar value or prestige is recoverable where a cheaper alternative would overcome the inconvenience arising from temporary unavailability of the damaged vehicle.
2. If it was accepted that the expense of obtaining a replacement vehicle of a similar value or prestige is recoverable: is the whole of the rental charges billed by the accident hire company recoverable?
It was argued before his Honour by the solicitors for Mr. Cassim that once he had established a need for a replacement vehicle while his damaged vehicle was being repaired, he was entitled to reasonable costs of obtaining a replacement vehicle. Further, it was argued that the replacement vehicle should be as close as reasonably practicable to the damage vehicle. It was also submitted that whilst Mr. Cassim may have been able to make do with a cheaper vehicle, there was no basis to require him to use a cheaper vehicle than that which he owned as this would be akin to penalising an innocent party for their decision to own a luxury vehicle.
In response, it was submitted that there was no doubt that a liable party would be responsible for the reasonable costs of a replacement vehicle, however, this would always be subject to evidence as to the use of the vehicle prior to the collision and the reasonable costs of meeting the temporary inconvenience of the loss of the vehicle. The solicitors for Mr. Nguyen argued that whilst evidence may be provided to substantiate the need for a prestige vehicle, such a vehicle would not ordinarily be required to meet the inconvenience of the usual social and domestic needs for which a motor vehicle is used.
Ultimately, his Honour came to the view (having been guided by prior authority in the Supreme Court such as Anthanasopoulos -v- Mosley, Droga -v- Cannon and Wong -v- Maroubra Automotive Refinishers Pty Ltd) that the purpose of compensation for the cost of a replacement vehicle was “to provide an appropriate sum in compensation to alleviate, so far as reasonably possible, the inconvenience resulting from the loss of use of the damaged vehicle; not to replace the owner’s vehicle with…another vehicle of equivalent value or prestige. Reasonable expenditure for that purpose provides a mechanism for assessing general damages resulting from inconvenience.”
If you have any questions or concerns please contact Chamberlains and talk to one of our insurance law experts today.