We’re open for business – just a little differently
For the foreseeable future, the way we live and work has changed. We wanted to let you know the steps Mahoneys has taken to protect our people and ensure continuity of service for our valued clients. Our ethos is client focus. That ethos has guided us through our almost 20-year existence and is responsible for our success. COVID-19 has changed many things. It will not change our client focus.
Covid-19: our checklist for businesses to navigate the uncertainty
Here at Mahoneys, our Commercial Law experts have come up with a list of key tasks that businesses can and should be concentrating on right now. Direct your energy into our COVID-19 ‘To Do List’ for businesses.
We have put together some insights on legal issues that are affecting our clients’ businesses.
As with all things in law, these insights are general only and should not be relied on as legal advice. If any of these issues are affecting your specific business, contact your Mahoneys relationship partner to get timely and practical legal advice that you can count on.
In this publication, we cover:
Safe harbour in a (global pandemic) storm
Safe harbour is a statutory process which, if correctly implemented, permits directors to avoid personal liability from insolvent trading. In essence, it is an alternative to the appointment of administrators. It allows company directors to implement a turnaround or restructure without the risk of personal liability should the company fail.
The Commonwealth government has announced temporary relief for directors from insolvent trading civil liability. However, egregious cases of deliberate or dishonest insolvent trading would still attract criminal liability. The general director duties (ss 180 to 183) are not relaxed. Sections 180, 181 and 182 can be breached by continuing to trade whilst insolvent.
Stable market conditions since safe harbour’s enactment in 2017 have meant that safe harbour has not been tested. However, that has all changed. The market volatility and losses prompted by the novel coronavirus will be an acid test for safe harbour.
There are eligibility conditions on safe harbour. The conditions include the payment of all employee entitlements (on time) and compliance with taxation lodgement obligations.
Safe harbour is about the plan – not the outcome
Safe harbour is not tied to the result. Instead, safe harbour concerns itself with planning, implementation and monitoring of a strategy that is reasonably likely to lead to a better outcome than the company immediately appointing a voluntary administrator or liquidator.
Safe harbour implementation
Safe harbour necessarily operates in challenging and uncertain environments. Notwithstanding the temporary insolvent trading relief, safe harbour plans are essential to a successful turnaround strategy.
Some considerations that must factor into the safe harbour plan are:
- The directors need to obtain a clear understanding of solvency and what drivers are affecting it. Solvency is primarily driven by cash flow position and working capital. The case law distinguishes between temporary illiquidity and inherent or systemic financial weakness.
- Is the turnaround plan reasonably likely to lead to a better outcome than the immediate appointment of a liquidator? What confidence does the director have in the outcome? Is that confidence reasonable and evidence-based?
- Advice from an appropriately qualified advisor. The appropriately qualified advisor is experienced and, most importantly, objective. They can advise what is probable and what is not and can challenge internal assumptions and practices. Their role also involves monitoring the implementation plan to ensure that the plan, once struck, is on track. The advice team will usually comprise a commercial/accounting advisor and a lawyer.
Invariably, early intervention has the best prospects of success. Early interventions tend to benefit from having more options, more time and more money or other capital (and less debt).
Notwithstanding the temporary insolvent trading relief, safe harbour plans are essential to a successful turnaround strategy.
Duties applicable to directors of financially struggling companies
As mentioned earlier, the Commonwealth government announced temporary relief for directors from civil liability for insolvent trading. Legislation has passed both houses and is awaiting assent.
Let us very clear: the government has not given permission for directors trade whilst insolvent.
Directors must still:
- exercise their powers with reasonable care;
- exercise their powers in good faith and for a purpose propose;
- act in the best interests of the company;
- not misuse their powers to cause a detriment to the company or earn a benefit to the director or any third party.
The law is clear that when a company is approaching insolvency, the director’s duties require him or her to have regard to the interests of creditors and other stakeholders who are affected by the director’s decisions.
None of this is affected by the temporary relief from civil liability of insolvent trading. Moreover, deliberate and fraudulent insolvent trading can still attract criminal prosecution.
Desperate business owners are vulnerable to charlatans who masquerade as insolvency advisors and sell solutions that are too good to be true. That is because they often are – not true, not lawful and in no one’s best interests. Only a qualified, regulated professional can be trusted to give lawful and ethical advice. A professional member of ARITA, such as our Mitchell Downes, is a safe choice.
Commercial contracts in the menace of COVID-19
Commerce axiomatically relies upon confidence. Confidence in this commercial context takes many forms. It is knowing that one’s creditors can pay tomorrow what one sells to them today. It is signing a multi-year lease and employing staff. It is investing in new technology. The crux of confidence is being able to predict the future with reasonable certainty.
In addition to the illness and death consequences of COVID-19, the pandemic has wreaked havoc on the commercial world in a way that no one could have seen coming.
How does the law respond?
Force majeure translates from French as superior force. It is the name given to a species of contractual clauses that allocate the risk that the continued performance of commercial contracts may be delayed or prevented by factors outside the control of the parties.
The first thing to understand is that force majeure is not a doctrine applicable to all contracts. It only applies if the contract contains a term to that effect. In the absence of a force majeure clause, the general law position is that the defaulting party is liable for all breaches, even if it is beyond the party’s control unless the event causing the default amounts to frustration. We deal with frustration below.
The scope and effect of a force majeure clause depend on its terms, which are construed per the text, context and purpose of the contract as a whole.
Generally speaking, the force majeure clause has the following characteristics.
First, the clause defines the circumstances in which it will respond.
Second, the clause specifies the consequences on the contract in the defined circumstances.
Third, the clause creates a causal nexus between the defined circumstances and the specified consequences.
The causal nexus warrants further discussion. Generally, proof of a causal nexus requires proof of the causal nexus itself, but also the elimination of any alternative method of performance. By way of example, say a retailer sourced a widget from its supplier in China at $1 and sold them to its customers for $5. The Chinese supplier could not supply the widget, but a local supplier could, but at $100. Force majeure would not respond because the retailer can perform the customer contract by sourcing the widget from the local supplier. The fact that it is unprofitable to do so is irrelevant.
Frustration is a doctrine applicable to all contracts, subject to the terms of the contract itself.
It occurs when, without the default of either party, an obligation has become incapable of being performed because the circumstances are such it would render performance radically different from that which could have been contemplated at the time of contract.
Hardship, inconvenience or material loss is insufficient to found frustration. Radical difference is an exceptionally high threshold. However, COVID-19 is exceptional. By analogy to history, contracts were frustrated because of the Great Depression and World War Two.
There is no uniform answer to frustration. Each contract and the circumstances affecting it must be assessed on a case by case basis. The following inquiries are necessary.
First, does the contract provide for the circumstances? Parties will be bound to their agreement on the consequences should certain circumstances come to pass.
Second, is the default caused by either of the parties? Frustration requires the circumstances to arise without the default of either party.
Third, what is the effect of the circumstances? Is performance impossible or merely more difficult? If it is possible but difficult, how much more difficult is it? In other words, how radically different are the circumstances?
The effect of frustration on the contract is that the contract is automatically terminated from the date of the frustrating event. Accrued rights and obligations survive termination.
It is important to understand that frustration brings an automatic end of the contract. This must be considered before asserting that a contract is frustrated.
The circumstances of COVID-19 are complex and evolving. So are the legal consequences. The parliament may yet pass legislation to deal with some of those legal consequences.
Expert legal advice allows business owners and operators to make informed decisions and increases their prospect of safely navigating the consequences of COVID-10.
Bank guarantees – strict requirements
A bank guarantee is, in the words of the High Court, “as a good as cash”.
Typically, a bank guarantee obliges the bank to pay on (compliant) demand without reference to, and over any objection of, the bank customer. As a result, the bank need only pay – must only pay – if the demand is strictly per the terms and conditions of the bank guarantee. The same principle applies to deposit bonds and other security instruments.
The severe consequences for want of strict compliance are illustrated in Santos Limited v BNP Paribas  3 Qd R 286.
There, BNP issued a bank guarantee for (including amendments) $55M expiring on 31 December 2015. On 18 December 2015, Santos purported to make demand on a bank guarantee for $55M. The terms of the bank guarantee required that the demand inter alia to be purported “signed by an authorised representative of” Santos.
Santos made demand. However, Santos’s demand was signed: Santos Ltd, NAME, General Manager Development
The court held that the demand was inefficacious because it contained no representation of authority. As a result, BNP Paribas was not obliged to pay $55M.
Do not fall into the same trap. Pay careful attention to the requirements of the bank guarantee. If in doubt, get legal advice before demanding on the bank guarantee.
Will business insurance policies response to COVID-19?
A typical lawyer answer: it depends. Every policy must be construed on its terms.
But at a level of generality, most insurance policies contain exclusions. The exact scope of the exclusion clauses differs between policies. Generally speaking, in terms of business interruption insurance those clauses tend to exclude indemnity for damage caused by certain all-encompassing causes, such as pandemics.
COVID-19 is a declared pandemic. Accordingly, a number of business insurance policies will not respond. However, please contact our team if you would like us to consider your specific insurance policies and cover.
Employment in a lockdown
Employers have the right to issue reasonable and lawful directions to their employees.
In a lockdown scenario, that would include a direction not to attend the workplace.
If an employee can work from home, he or she remains at work and will need to be paid.
However, if an employee cannot work from home, the employer may be able to stand down the employee. This is a very complex area of law. Specific and individual circumstances must be considered.
If you are in lockdown or are likely to subject to lockdown, we recommend that you contact our team.
PPS Leases – are your registrations correct?
Some leases and bailments are security interests pursuant to the Personal Property Securities Act 2009.
A lease or bailment is a security interest where:
- it effectively uses personal property to secure a payment or performance of an obligation. Examples may include a finance lease, hire purchase agreement or pledge. This is called an ‘in substance’ security interest.
- it is a PPS lease.
What is a PPS lease?
A PPS lease is a lease or bailment where the agreement to lease or bail the property is for:
- a term of more than two years including options; or
- an indefinite period but not until the lessee’s (or bailee’s) possession extends for more than two years.
There are some exceptions to that formula, namely:
- A lease or bailment will not be a PPS lease if the lessor or bailor is not regularly engaged in the business of leasing or bailing goods.
- In the case of bailments, a PPS lease will not arise if the bailee does not provide value, for example by way of payment, in exchange for possession of the property.
- A lease or bailment that is part of a pooling arrangement will not be a PPS lease. A pooling arrangement involves a lease/hire arrangement where fungible equipment is passed between multiple users with or without the owner’s consent before being returned to the owner. The paragon example of a pooling arrangement is warehouse pallets.
Historically, there were different rules for leases of serial numbered goods (such as motor vehicles, aircraft, and watercraft). However, generally speaking, serial numbered goods are now subject to the same formula.
Register to protect your interests
Registration on the PPSR is the most common and available method of “perfecting” security interests under the PPSA.
Registration provides notice to the world of your interest in the property. But more importantly, registration protects the true owners of property from the consequences of a lessee’s or bailee’s insolvency.
Where a security interest over a company is not perfected, and a corporate lessee or bailee is wound up, enters administration or executes a DOCA, the security interest vests in the corporate lessee or bailee. Similarly, an unperfected security interest vests in an individual lessee or bailee if he or she becomes bankrupt.
In other words, the lessee or bailee takes the assets free and clear of the security interest and can deal with them as such. The true owner (or former true owner) would then be an unsecured creditor.
Registrations must be made within the prescribed timeframes. Failure to register within these timeframes may cause true owners to lose certain rights against the lessee (or bailee) or against the property itself.
A $44M lesson involving failure to register equipment
The lessor of four gas turbine generators did not register its security interest over the equipment. The lessee appointed voluntary administrators and the security interest vested with the turbines becoming part of the lessee’s property. The lessor was a mere unsecured creditor.
Tardiness costs formwork supplier
Formwork equipment valued more than $1M was leased to the lessee by the true owner. A PPSR registration was made. However, this was more than 20 business days after the first equipment was provided. Less than six months later, the lessee went into liquidation.
Accordingly, the court held that, in respect of any equipment provided under leases commencing more than 20 business days before the PPSR registration, the security interest had vested.
Mistakes in registrations
The PPSA has rules governing the particulars of registrations. A failure to strictly follow the rules can invalidate the registration in toto.
One case involved $23 million worth of equipment provided under a lease. The true owner registered its interest in $23M worth of equipment on the PPSR. However, the registration was made against the ABN of the lessee. The rules require that the registration, in this case, should have been against the ACN. When the lessee was wound up, the equipment vested in the lessee. The true owner’s application to court to rectify the defective registration was refused. The true owner was left as a mere unsecured creditor
The PPSR can be a minefield. It is replete with strict rules, and there are severe consequences for not following them. Something as simple as a mistake in the registration can be very costly.
Any lessors or bailors must have appropriate PPSR registration procedures given the technical nature of the requirements of the PPSA. Those procedures ought to have regular reviews of all leases and bailments to ensure anything that ought to be registered is registered and that registrations are correct.
In the current economic climate where insolvencies are not just possible, but probable, we recommend legal advice be sought as quickly as possible if you think you might have a problem or are merely uncertain about a PPSR related issue.
Can you sign documents electronically?
Many employees of businesses are working from home. Can they sign contracts for the business electronically?
If the document is a deed – then no (unless the Conveyancing Act 1919 (NSW) applies). There are reasonable arguments that the formalities required for a deed are not met by signing it electronically. We recommend the conservative approach in the absence of clear authority. The deed must be signed with wet ink on the paper.
If the document is an agreement then it depends.
If electronic execution is by a sole trader, or individuals of a partnership – then it’s valid.
If electronic execution is by a company:
- the other party cannot rely on the statutory presumptions about valid execution arising from s127-s129 of the Corporations Act; but
- execution may still be valid under common law
If execution occurs by an officer wet-ink signing the agreement, and emailing a copy of that signed agreement to another officer for wet ink signing, then the other party can rely on the statutory presumptions about valid execution arising from s127-s129 of the Corporations Act.
Documents which need to be registered, or which are required to be signed for legal proceedings should not be signed electronically.
A witness can electronically sign documents, but must be physically in the room when witnessing the execution.
Avoid deeds unless necessary.
If you receive an electronically signed document, have the electronic signee confirm they personally applied their electronic signature (say by email, or a file note recorded phone call).
Consider appointing an attorney while wet ink signatures are still practicable.
Provided there is no prohibition in the company’s constitution or shareholder’s agreement, have the directors resolve to permit electronic execution. You can provide that resolution to counter-parties.
The electronic execution of documents is a complex and unsettled area of law. Many different types of documents may deviate from the general rules above. We recommend you seek legal advice before signing, or relying on electronic execution of documents.
Estate planning during COVID-19
In our most recent podcast we discussed the importance of Estate Planning during COVID-19
Non-contact estate planning during COVID-19
In these uncertain times, more and more people are starting to think about drawing up a Will. But what does that look like when you add a lockdown and social distancing into the mix? If you’re ready to plan your estate, here’re how to safely do so during the COVID-19 outbreak.
Covid-19 – Residential Tenancies
We finally have some certainty in relation to the amended legislation for residential tenancies.
Management rights and the coronavirus – some guidance amongst the uncertainty
You will be unsurprised to learn that over the past few days we have fielded many questions from resident managers who and whose owners are suffering adverse impacts from the COVID19 crisis. As the crisis is evolving rapidly with regular policy announcements from local, state and federal governments it is impossible to provide clear and current advice on all questions raised.
Property Managers dealing with residential tenants during COVID-19 crisis
These comments must be considered in the light of regular changes to government policies and yet to be enacted legislation. The situation is changing on an almost daily basis.
Motels and coronavirus – tips and ideas
The last few days have seen an influx of questions from landlords and tenants alike as a result of the COVID19 crisis. This is a rapidly evolving crisis with regular policy announcements from local, state and federal governments and it really is impossible to provide clear and current advice on all questions raised.
Covid-19 guidance for bodies corporate
This document is intended to provide body corporate managers and committees with a concise guide to managing their bodies corporate during the coronavirus pandemic based on legislative compliance and best practice.
How to manage work orders during COVID-19
This guidance for bodies corporate and body corporate managers is to provide a way to manage risks in carrying out work orders onsite and comprises:
Closing facilities in a body corporate because of COVID-19
It has been well publicised that bodies corporate must close their swimming pools. However, how that is to take place has been a practical issue begging more questions than answers.
Levy recovery during COVID-19
Even though body corporate legislation has not changed with respect to levy recovery, the circumstances surrounding levy recovery and insolvency legislation has. This alters how a body corporate must now approach recovery of unpaid levies.
Body corporate cost cutting during COVID-19
Body corporate levies are one of the first items of expenditure owners don’t pay in tough times.
Body corporate spending limits
As finances become tight during COVID 19, it is important that bodies corporate and body corporate managers ensure costs are properly managed.
Liability for Building Defects
An issue that arises frequently in strata title buildings is building defects. Despite many laws being passed to help consumers with COVID-19 related issues, the responsibility (and time limits) for rectifying building defects have not changed.
Reopening pools in a body corporate because of COVID-19
Pools can now be reopened after 15 May 2020.
The Queensland Government has released its roadmap to easing restrictions. As part of that roadmap, the first stage includes a number of relaxations to take place from 11.59pm 15 May 2020, including gatherings of up to 10 people in pools.
Urgent changes to the Body Corporate and Community Management Act
On 19 May 2020 the Queensland Parliament has introduced the Justice and Other Legislation (COVID-19 Emergency Response) Amendment Bill 2020 which is intended to amend the Body Corporate and Community Management Act 1997 (BCCMA).
Management rights options and variations during COVID-19
Many things have changed for bodies corporate and resident managers and how they manage their affairs in light of the COVID-19 pandemic.