Amends to the Insolvency Law Reform Act

Amends to the Insolvency Law Reform Act

On 1 March 2017 the Insolvency Law Reform Act 2016 (ILRA), came into effect, significantly changing the rights of creditors to access information from Trustees and Liquidators.

The Insolvency Law Reform Act amended the Bankruptcy Act 1996 (Cth) and the Corporations Act 2001 (Cth) by adding what have been called the “Insolvency Practice Schedules” (IPS).

Creditor’s rights to request information

Pursuant to the IPS, creditors of a company are able to request the external administrator provide information, produce a document or provide a report in respect of a matter relating to the external administration.  This power can be exercised by an individual creditor or by creditors as a whole.  Generally speaking the external administrator will be required to comply with such a request unless:

  1. The information, document or report is not relevant to the external administration;
  2. In complying with the request the administrator would breach his or her duties in the external administration; or
  3. It would be otherwise unreasonable for the external administrator to comply with the requests.

The Insolvency Practice Rules (Corporations) 2016 also provide further guidelines as to what constitutes an unreasonable request for information, the provision of a report or the production of a document.  These include where the external administrator is acting in good faith and is of the opinion that:

complying would substantially prejudice the interest of one or more creditors or a third party and that prejudice would outweigh the benefits of complying with the request;

the information, report or document would be privileged from production in legal proceedings on the grounds of legal professional privilege;

disclosure of the information, report or document would found an action by a person for a breach of confidence;

the request is vexatious.

What happens if the administrator does not comply?

If an external administrator refuses a request made pursuant to the IPS, and ASIC is satisfied that the request ought to have been complied with, ASIC may make a direction that the external administrator provide the relevant material within 5 business days of notice.  If the external administrator does not comply with the direction made by ASIC, the person making the request may apply to the court for an order that the external administrator provide the information, or alternatively ASIC may apply to the court for an order in response to non-compliance with it directions.  The new legislation places a formal obligation on external administrators to promptly respond to reasonable requests for information by creditors. Of course, while what is reasonable remains subjective, administrators should be mindful that when they receive a request from a creditor or creditors for information, that failure to act and respond promptly may see them breach their obligations and risk being tapped on the shoulder by ASIC or dragged off to court by those creditors to ensure their compliance.

If you have any questions about the Insolvency Law Reform Act or any insolvency concerns contact the team at Aitken Lawyers on 02 8987 0000.

This article contains general information and is prepared without taking into account your specific objectives.  Before acting on the contents, you should obtain the specific legal advice in relation to your own circumstances.

Litigation Funding and the Australian Class Action Regime

Litigation Funding and the Australian Class Action Regime

Over the past two decades litigation funding has become an increasingly critical component of the class action regime in Australia, so it’s no surprise that its regulation (or lack thereof) has garnered increasing attention.  We recently touched on this issue in an earlier blog, and now seek to expand on the issues raised therein and look at what is currently being done to reform the current state of play.

In late 2017 the Australian Law Reform Commission (ALRC), announced it was commencing an inquiry into litigation funding and the fees charged by lawyers in funded class actions, with a focus on access to justice and ensuring that litigants are not exposed to unfair risks and disproportionate costs.

In mid April, the ALRC chair, Justice Sarah Derrington, announced some of the Commission’s preliminary ideas and proposals which included:

  • increased regulation of the litigation funding market

 

  • the requirement that litigation funders obtain and maintain a licence from ASIC, the preconditions of which will include sufficient financial, technological and human resources, and the holding of adequate arrangements to manage conflicts of interest together with annual audits

 

  • the introduction of contingency fees for class actions, subject to a number of limitations, including that the law firm acting on contingency must also indemnify the funded party against adverse costs orders

 

  • increased judicial oversight of fees including giving the Federal Court an express statutory power to reject or amend the rate or percentage of fees charged by funders and introducing statutory caps preventing contingency fees and other costs exceeding 50% of the proceeds available to class members

 

  • ending the practice of funding “closed class” actions and instead initiating all class as open classes

 

  • addressing the issue of multiple class action proceedings by requiring that competing open class actions be resolved early by a court in an expedited case management process during which the court will determine “the most appropriate representative plaintiff, plaintiff law firm, and funder (if any) and which funder (if any) provides the best value for the class”.  In addition to this, a no “mover advantage” to be given to the first law firm / funder to file, although the court will be able set a cut-off date by which all competing matters must be filed.

 

  • Courts to approve costs agreements and funding agreements so that they are legally enforceable as a common fund

 

  • The introduction of specified settlement criteria for judges to take into account in approving a settlement

The above proposals are the first steps in the inquiry which is expected to progress to the formal submission stage in June / July of this year followed by the preparation of a final report in December.

The extent to which the above proposals will be incorporated into the current regulatory framework remains to be seen.  We will keep you updated on what are sure to be exciting developments in the regulation of litigation funding and the class action framework.

If you need assistance with litigation funding or other agreements do not hesitate to contact Aitken Lawyers on 02 8987 0000.

This article contains general information and is prepared without taking into account your specific objectives.  Before acting on the contents, you should obtain the specific legal advice in relation to your own circumstances.

Employers Take Note – Employment Key Changes from 1 July 2018

Employers Take Note – Employment Key Changes from 1 July 2018

In line with the regular annual reviews and changes, there are some key changes to workplace entitlements and laws, effective from 1 July 2018.  They are:

  1. Minimum wage increased

Effective in the first full pay period after 1 July 2018, minimum rates of pay for adults who are full-time employees covered by Modern Awards increases by 3.5% and for award free adult full-time employees, the minimum wage increases to $719.20 per week or $18.93 per hour.

There are also allowance and expense amounts in modern awards that have been impacted as a consequence of this decision.

  1. Penalty rates reduced

As you no doubt heard in the media, on Sunday, 1 July 2018, penalty rates under numerous Awards and in particular, the hospitality and retail Awards, have been reduced by 10%, and 15% in other awards.  Ironically, this was also the same day that Federal politicians received a 3% pay rise!

  1. High income threshold increased

The high income threshold for the 2018/2019 financial year has been increased to $145,400.  This means that award and enterprise agreement free employees who earn over the income threshold aren’t eligible to make a claim for unfair dismissal.  As a consequence, the maximum amount of compensation payable for an unfair dismissal claim is 50% of the high income threshold, and has thereby been increased to $72,700.

  1. Tax-free threshold for genuine redundancy payments increased

In some good news for employees made redundant, in the 2018/2019 financial year redundancy payments are tax free to the extent that the first $10,399 is tax-free and thereafter, $5,200 for each completed year of service is also tax free.  For example then, an employee made redundant on 1 July 2018 who has completed 3 years of service with their employer would have approximately $26,000 worth of redundancy payments free of tax.

  1. Superannuation guarantee amnesty

Remember the 12 month amnesty to correct superannuation guarantee payment anomalies or errors commenced on 24 May 2018.  This is an important window of opportunity for employers in circumstances where the Minister for Revenue and Financial Service, Kelly O’Dwyer, has threatened twelve months in jail for those employers who don’t pay the compulsory superannuation when they should.  This amnesty represent a last chance for employers to get their affairs in order.

If you have any questions relating to employment, please don’t hesitate to contact Walter MacCallum, Director on 02 8987 0000. Or email WMaccallum@aitkenlawyers.com.au

Directors – Is Your Financial Literacy Good Enough?

Directors – Is Your Financial Literacy Good Enough?

The obligations on directors and officers to exercise due care, skill and diligence in the performance of their duties lies at the heart of the regulatory scheme of corporate governance.  Indeed over the past two decades there have been a number of decisions in Australia where the courts have assessed and commented on the adequacy of the conduct and decision making of directors and officers.  Of the most notable of these decisions was Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 (the Centro case),  which established the principle that it is part of a director’s duty to acquire a degree of financial literacy, including a knowledge of accounting practices and accounting standards, so that they are able to review financial statements and monitor the progress of the company.

By way of summary, his Honour, Justice Middleton held that:

  1. There is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor the company.

 

  1. Whether a director has taken “all reasonable steps” will depend on the circumstances of the case and will differ depending upon the company, the complexity of the company’s business, the internal reporting procedures within the company and the nature of the task the director is obliged to undertake.

 

  1. The standard of “all reasonable steps” is determined objectively by reference to the particular circumstances of the case. It requires, at a minimum, that directors take a diligent and intelligent interest in the information either available to them or which they might appropriately demand from the executives or other employees and agents of the company.

 

  1. All directors must carefully read, understand and focus upon the contents of financial reports, consider whether the financial statements are consistent with his or her knowledge of the company’s financial position, consider the statutory requirements, apply the knowledge he or she has of the affairs of the company, and if necessary, make further inquiries if matters revealed in the financial statements call for such inquiries.

 

  1. The objective duty of competence requires that the directors have the ability to read and understand financial statements. A director must, at least, understand the terminology used in the financial statements and understand that financial statements.

 

  1. Directors are entitled to seek assistance in carrying out their responsibilities, and may rely on others to assist them in fulfilling a requirement even where it is one directly imposed upon them by the Act. It is reasonable for the directors to delegate various tasks to others, such as the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. To a degree, the directors can rely upon the processes they have put in place. … However, this does not discharge the entire obligation upon the directors. A further step is required for all reasonable steps to have been taken. This involves the directors taking upon themselves the responsibility of reading and understanding the financial statements.

 

More recently the Federal Court handed down its decision in Australian Securities and Investments Commission v Godfrey [2017] FCA 1569 with the judgment providing a cautionary tale for directors that they must ensure they have sufficient financial literacy, and should not rely solely on management or external auditors to ensure that their company meets its financial reporting requirements.

In Godfrey, the plaintiff, the Australian Securities and Investments Commission (ASIC), alleged that Mr Godfrey had contravened section 344 of the Corporations Act 2001 (Cth) (the Act) which provides that a director of a company contravenes that section if they fail to take all reasonable steps to comply with, or secure compliance with, Pt 2M.3 which deals with financial reporting.

The defendant, Patrick John Godfrey (Mr Godfrey), was the managing director of Banksia Securities Ltd (BSL). BSL’s business involved raising money from the public through the issue of debentures, and loaning the funds raised to third party borrowers for property investment and development. BSL’s main asset was its loan portfolio.  In his position at BSL, Godfrey had primary responsibility for making recommendations to the board about bad or doubtful debts. He therefore had a key role to play in ensuring that the company complied with Part 2M.3 of the Act.

The alleged conduct resulting in contraventions of the Act by Godfrey concerned inadequate provisioning for bad and doubtful debts. ASIC sought declarations of the contraventions, the payment of a pecuniary penalty, and an order disqualifying Godfrey from managing corporations.

Both ASIC and the court accepted that there was no dishonesty on the part of Godfrey in the way in which he carried out his responsibilities as managing director.  Rather the breach of the Act arose because Godfrey did not realise that BSL’s policies for determining impairment of loans were not appropriate and not consistent with AASB 139. This stemmed from Godfrey’s lack of understanding and an inadequate knowledge of the relevant financial matters.

As a result of such lack of understanding and inadequate knowledge, Godfrey failed to ensure that BSL’s policies relating to the assessment of impaired loans were consistent with the relevant accounting standard (AASB 139), resulting in significant misstatements in the financial reports prepared by BSL in the relevant period.

The penalty applied to Mr Godfrey was disqualification from managing corporations for a period of five years, and a pecuniary penalty of $25,000.

Lessons to be learnt from Centro, ASIC v Godfrey and related cases

Directors have an objective duty of skill, competence and diligence in discharging their financial responsibilities which requires a degree of financial literacy and familiarity with accounting standards relevant to the circumstances.  While directors are entitled to seek assistance in carrying out their responsibilities, they should be cautious to rely solely on management or external auditors to ensure the company meets its financial reporting requirements, and they properly discharge their duties.