The Information Commissioner Bill 2010 (IC Bill) and the Freedom of Information Amendment (Reform) Bill 2010 (FOI Bill) were recently introduced by Parliament. These proposed changes to freedom of information laws are aimed at better public access to Government information.

The IC Bill proposes that the Information Commissioner should have broad discretionary powers when assessing the merit of decisions taken by Ministers and other Government agencies. The Privacy Commissioner needs approval from the Information Commissioner before issuing any privacy rules.

Another important purpose of the FOI Bill is to create more transparency in the Government. This is at the heart of these reforms. These initiatives are also focused at engaging and empowering citizens. It is endeavored that these Bills will improve the relationship between the private and public sectors – mutually benefitting both.

The current Commonwealth Ombudsman, Professor John McMillan AO has been appointed as the new Information Commissioner in February 2010. The two Bills received Royal Assent in May 2010. The Bills are now officially the Australian Information Commissioner Act 2010 (AIC Act) and the Freedom of Information Amendment (Reform) Act 2010 (FOI Reform Act).

It remains to be seen how far these Bills will deliver as promised. However, these reforms will test the government’s commitment to sharing public sector information and will also depend on the use we make of it.

The recent case of SSET Construction Pty Ltd (in liq), Re; Sims v Khattar (2010) NSWSC 102 has reinforced the duties placed on directors to avoid insolvency. The case also encourages the importance of preserving and updating financial records.

QUICK FACTS:

LIQUIDATOR’S RESPONSE:

The liquidator filed proceedings against the defendants claiming firstly that they had breached the insolvent trading provisions under section 588G of the Corporations Act, 2001 (the Act). This breach had further caused them to accrue a huge debt on behalf of the company.

Secondly, under sections 588G and 588 M (2), the liquidator is empowered to recover such debts from defaulting directors, where the company and its creditors suffer a loss. The liquidator needs to show that:

FINANCIAL RECORDS:

The liquidator further relied on section 588E (4) of the Act. This provision states that a company is required to maintain financial records for a specific period as per section 286 of the  Act, failing which, it can be presumed that the company is insolvent for that period.

COURT’S FINDINGS:

It was held by Austin J that SSET had failed to retain adequate financial records, thus breaching section 286 of the Act. This was applicable for all accounting periods till January 2006. The presumption of insolvency arose only from May 2005 as SSET’s solicitor was in possession of the financial records prior to May 2005 and had refused to return them.

The presumption of insolvency did not stop here. The directors were guilty in manipulating cash payments paid out to creditors from August until November 2005.
Relying on section 588E(3), the company was insolvent from August 2005 until the relation-back day – 30 January 2006. The presumptions of insolvency were strong in this case but were eventually outweighed by the liquidator’s proof of the company’s insolvency on 30 June 2005.

His Honor also found that sections 588G and 588M (2) were violated by the defendants. Consequently, the directors were ordered to pay the outstanding debt to the liquidator.

LESSONS TO BE LEARNED:

Directors, like lawyers, trustees and accountants, owe a stringent duty of care and diligence to the company. In theory, this makes one feel honored. In practice, worringly, quite a few directors fall into the trap of dishonoring their duties.

This decision emphasises directors should keep written financial records that correctly record and reflect the company’s transactions and financial and performance. A failure to do so may lead to the presumption of insolvency arising against the company, for the period of time that adequate records were not maintained, as was the case with SSET.

The New South Wales Supreme Court although relieved to deliver judgment in ASIC v Rich, was not happy about enduring a trial for almost four years, with 232 hearing days and a 3000 page judgment.

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 (ASIC v Rich) reflected important outcomes:

• Directors’ duty of care and diligence;
• The business judgment rule and;
• ASIC’s case management

 
QUICK FACTS:

• ASIC brought an action against Rich, a director at One.Tel, the collapsed company in this case, under Section 180 of the Corporations Act 2001 (the Act).
• This Section imposes a duty on directors to take reasonable care when executing a business decision.
• ASIC also claimed that Rich had not disclosed vital information from One.Tel's board about its true financial position.

 
FINDINGS:
 
Statutory duty vs Business Judgment

• Justice Austin clarified the application of the duty by distinguishing it from the “business judgment rule” or simple innocent mistakes made by officers when  making decisions.
• Whilst the statutory obligation under Section 180 is crucial, it is not designed to suffocate a legitimate industrial spirit.
• The business judgment rule in section 180(2) is capable of providing a defence for directors whose conduct breaches section 180(1).
• If directors have not intentionally erred in making a legitimate judgment, for a proper purpose, or did not have a personal interest in the matter; and “rationally” believed that the decision was in the best interests of the company, then courts do not consider this to be a breach of their statutory duty.
• However, under Section 180 the concept of “rational belief” does not necessarily lead to the notion of “reasonableness”.
• It is but a balancing act - should a director fail to discharge his basic duties, he cannot claim refuge under this rule.
• On the other hand, where errors are made in judgments relating to planning and budgeting affairs, for instance, directors can seek protection under this rule.

 
ASIC

• Justice Austin was not won over by ASIC’s evidence against the defendants, which the court considered as weak and insufficient.
• The court was also not pleased about the lack of litigation funding for this enormous trial.
• ASIC’s approach and reasoning were also questioned, particularly when it failed to call key witnesses.

LESSONS:
 
The judgment in this case, although victorious for directors, should serve as a prudent lesson in knowing when one can avail of the business judgment rule and when one needs to strictly follow his or her statutory obligations.  

ASIC has agreed to use this decision as a guiding tool in picking its battles carefully in future. It needs to weigh the likelihood of success and serving justice against the value of resources, including the court’s time and the future of a director’s career.

In an ongoing ‘food fight’ between Food Channel Network Pty Ltd v Television Food Network GP [2010] FCAFC 58,  the Federal Court recently upheld Food Channel Network’s appeal over its trademark – ‘Food Channel’.

ISSUES AT THE TABLE

•    Ownership
•    Intention to use
•    Deceptive Similarity

WHO IS THE OWNER?

Channel Network’s name, prior to the dispute was ‘The Food Channel Pty Ltd’ (Channel) and Television submitted that Channel was therefore not the owner of the trademark, pursuant to Sec.58 of the Act.  

The issue of ownership came into picture as the trademark application was filed in the name of Channel in 2003 but was later allocated to Network. Paul Lawrence was the owner of both the Channel and Network units when the application was made and subsequently transferred.

The trial judge ruled that the burden of proof was upon Food Network to establish that Channel was the owner at the time of filling the trademark application, which it failed to satisfy.

However in an appeal by Network, the Federal Court held that it was incorrect to have shifted the burden of proof on Network. Without obtaining clarity, it was difficult to prove which entity was the first user.

Moreover Television had not demonstrated that there was a prior owner of the trademark, which would have defeated Network’s claim over the mark.

WAS THERE AN INTENTION TO USE THE TRADEMARK?

Another important issue that was set aside by the Court related to good faith or intention to use the Food Channel mark. The trial judge initially ruled that Channel lacked the bona fide intention to use the mark and Television was therefore successful in proving Sec. 59 of the Act.

Television argued that the evidence was submitted by Lawrence who was not an applicant in the matter – the fact that Network and Channel’s director was the same person did not tantamount to establishing intention to use.

However, after the Full Court stepped in, the reasoning of the trial judge was overruled. Lawrence’s evidence was considered – he controlled both entities and was able to prove use of the mark on recipe and menu cards.

SIMILARITY OF THE TWO MARKS

The Federal Court found that the trial judge had faltered in refusing to compare the two marks as a whole. This is the key exercise in resolving confusing similarities in most trademark disputes. It was found that the two marks were distinct from each other, visually, aurally and phonetically – the marks did not look the same and only had a common word element between them -‘FOOD’.

Moreover, the two marks were associated with different trades - Network applied under Class 16 and Television applied under Class 41. The trial judge had overlooked this significant difference as well.

FINDINGS

In light of the above reasoning and finding that the trial judge had incorrectly ruled on the matter, Network’s appeal was allowed and the opposition was set aside.

The new proposal to the business name registration system is likely to reform the registration of state based business entities.  The system is proposed to start in April 2011. Presently, every business name has to be registered in each state or territory in which that particular business operates. However, with the new proposal, the states have agreed to submit their business name registration powers to the National Government.

The goal behind the new reform is to have a uniform registration process for business names as well as ABNs, lessening the trouble on different business dealers. Moreover, the current system has different fee arrangements. Also, the registration periods are different for each state the business operates in. The proposed reform replaces the current fragmented system and hopes to provide a standardized registration system for businesses regardless of the different states the businesses operate within.

Key Characteristics

The new system is likely to have the following features:

1. Business or company names shall be registered nationally, unlike in each state where a business trades in;
2. Business names presently registered under the state business names shall be automatically rolled over into the new proposed federal system;
3. Businesses will only need to register their names once and not have to submit multiple applications for each state they hold their affairs in;
4. ASIC will be responsible for the registration and will be supported by ABR and IP Australia;
5. Businesses will be able to apply online and receive immediate confirmation of registration; and
6. Businesses will need to have an ABN for registering a new business name, but can register for a name at the same time as ABN registration.

Fees

Under the present system, the registration fee and time period varies with each state. The proposed system has a uniform fee for registering or renewing a business name -. businesses will have a choice of registration either for a one or three year period. The fee for registering and renewing the business name is the same i.e., $30 for 1 year and $70 for 3 years.

Currently, different companies with the same name can be registered in their respective trading states. When the proposed national system comes into place, to avoid duplicity, a suffix indicating the state in which the business trades will be added to each business name and such a business can also operate in any state of its choice.

The road ahead

The government will facilitate an online test whereby businesses can assess the likelihood of registrable names. This means that if a name is similar to a registered business or company name, misleading or offensive, it will be denied registration.  

Trademark searches will also be permitted during the application stage. However, the onus will still remain with the proprietor to ensure that any IP violation does not occur. Registration of a company name alone does not give the owner protection in terms of trademarks.

Franchisees will also need to register their desired franchise name in order to trade. However, the franchisee, under the proposed new system, will not need to submit a written consent to ASIC from the franchisor, although they must ensure they have to prove they can use the trade name.  

PARK & ANOR V. LANRAY INDUSTRIES PTY LTD & ORS [2010] QSC 82

QUICK FACTS

• The plaintiffs who were the liquidators of the company in liquidation brought an action in their own name rather than as “the liquidators for the company” against the defendants.
• Their claims were based on unjust enrichment, uncommercial and voidable transactions.
• The defendants challenged the capacity in which the plaintiffs brought the proceedings in their own name and also contended that the amended statement of claim filed by the plaintiffs should be struck out.

KEY ISSUE

The key issue in this case was the capacity under which liquidators can bring an action against the defendants – either in their own name or in the name of the company?

SUBMISSIONS AND FINDINGS

CONCLUSION

The Court gave leave to the plaintiffs to make necessary amendments to the claim to reflect the several capacities in which they could sue the defendants.

LESSON

The Act entitles the liquidator of a company to bring legal actions in the name of and on behalf of a company. Therefore if the liquidators wish to sue on behalf of the company then they have to bring an action in the name of the company, the liquidators as individuals are incompetent to sue on behalf of the company.

In this case, the court offered the plaintiffs an opportunity to rectify the defect. However, it is not clear whether this opportunity will be afforded on all such occasions. Plaintiffs therefore should be careful about bringing claims in the right legal capacity as recognized by the law.

The case of Q.B.I. CORPORATION P/L V PLANTATION RISE P/L [2010] QSC 102 focused on certain issues surrounding a Deed of Company Arrangement (DOCA).


BACKGROUND

• QBI was owed in excess of $300,000 by Plantation Rise and following legal action for recovery, QBI appointed voluntary administrators.
• There was little doubt Plantation Rise was insolvent however it held sufficient assets, in excess of $5million, which would see a full return to all unsecured   creditors.
• As a result, the Company entered into a DOCA.
• The issue that arose in this case was whether the effect of the DOCA was to extinguish the debt owed by Plantation Rise to QBI, such that even if Plantation Rise were wound up, QBI would no longer be a creditor capable of claiming in liquidation.
• Given the DOCA had been effectuated, and QBI’s debt extinguished the issue arose as to whether QBI had standing to bring the application at all.

QUICK FACTS

• Plantation Rise received a DOCA but the administrator advised against this - it would have resulted in a lower return to unsecured creditors than in a winding up action.
• Unsecured creditors stood to gain no return from the DOCA, as contrary to the possibility of a return under insolvency. 
• The creditor who voted against the DOCA, being the applicant in this case, commenced proceedings to set aside the resolution and DOCA, and sought a declaration that the creditors' claims had not been extinguished and applied for an order to wind up the Company. 
  

SUMMARY

The applicant under sec.447A of the Corporations Act 2001 (the Act), applied to the court for the DOCA to be set aside however, sec.600A can also be considered in setting aside a DOCA.


THE DOCA

The Act governs the making, execution, performance, variation and termination of a deed. That said, the Act leaves it to the parties as to what their deed contains and they are mostly free to draft a deed to suit their particular circumstances.

However, this does not suggest that all deeds will be fairly and justly executed to favour all those involved. In the case at hand, the applicant believed the contrary.

HOW IS A DOCA INITIATED?

A DOCA must be accepted by the required majority of the company's creditors at a meeting held during voluntary administration of the company. Agreements not formed under this process are not DOCAs. A DOCA itself will come into force once it has been executed by all of the parties to the deed. This must be done within 21 days after it has been accepted at the meeting.

DECISION

In Wilson J’s view, it was in the best interest of the creditors, for the company to be wound up, as the company was already insolvent. Moreover, the proposal for the Deed showed that creditors would receive a lower return if potential recoveries for voidable transactions and insolvent trading were to be litigated under liquidation.

The court therefore held that the Deed as well as the resolution passing the Deed was to be set aside and the company was to be wound up. 

LESSONS TO BE LEARNED

It is prudent advice for all creditors to carefully review the DOCA before passing a resolution at the creditor’s meeting. If a creditor is unhappy with any aspect of the arrangement, it is important to invoke the protection provided by these sections in a timely and appropriate fashion, such as calling for a casting vote or making sure that you are present at the time of the resolution.

The purpose of entering into a DOCA is that the creditor feels secure knowing it is a better arrangement than the prospect of liquidation. However there are times when commerciality will not be the deciding factor. If a director has been dishonest or caused creditors significant grief, creditors may decide not to accept a proposal.

One of the many roles of a liquidator is to try and recover payments made by creditors to the insolvent company, particularly those which can be considered to be either unfair or voidable.

However, the Corporations Act 2001 may require the creditor to recompense monies or assets in certain circumstances. One such circumstance occurred in Cunningham v Commissioner of Taxation [2010] QDC.

FACTS

This case involved a claim regarding payments of money received by the Commissioner of Taxation, the defendant, totaling $143,173 for a discharge of tax liabilities, on behalf of the company in liquidation.

In the liquidator’s attempt to recover the above sum, he relied on:

·         section 588FF of the Act claiming an unfair preference and;

·         section 588FE claiming voidable transaction

THE LAW

What is an unfair preference?

According to section 588FF an unfair preference occurs when a creditor has received more from a debtor before liquidation than that creditor would otherwise have received during the process of winding up.

Section 588FE considers such transactions as voidable when the company is insolvent.

What happens next?

The liquidator, also the plaintiff of the company in liquidation, will request the court to unwind the transaction in such cases, even if it includes the Commissioner of Taxation. In turn, the Commissioner may demand an indemnity from the directors of the company in respect of loss and damages it will suffer, should the liquidator’s claim succeed. The underlying principle for unwinding a preference is to uphold the equality of distribution among creditors. This is the classic ‘pari passu’ principle.

ORDERS THAT CAN BE GRANTED

Under section 588FF the courts may grant certain orders if satisfied that a transaction is voidable because of section 588FE. It can direct the amount to be paid back to the company, either in its entirety or partially. This also applies to company property that has been transferred under such transactions.

WHAT TO LOOK OUT FOR

In this case, although the defendant denied that the transaction was voidable and an unfair preference, he did not extend any defense under the Act. The liquidator was able to prove that the company was insolvent at the time the payments were made to the defendant.

The court, based on the facts, decided to grant an order for the return of the entire sum.

The Act sets out defenses that are available to creditors who have received an unfair preference. In order to rely on the defense, a creditor must prove that valuable consideration was given; he acted in good faith and; there was no reason to suspect insolvency. If creditors cannot prove any one of these, then the defense fails. The burden of proving these defenses lie with the creditor but the liquidator has the right to challenge any defense.

Often when a company is in financial distress, creditors and other third parties get a chance to exercise their legal rights by becoming the shadow directors of the company. If a company acts according to the wishes of a lender or a third party then such a person may be considered as a shadow director of the company.

A recent decision in Buzzle Operations Pty Ltd (In Liquidation) v Apple Computer Australia Pty Ltd2010] NSWSC 233 provides useful guidance to lenders as well as third parties on liabilities arising whilst acting as a shadow director of a financially distressed company.

This case assures creditors that by being closely associated with the distressed company, does not necessarily mean that they are acting in the capacity of a shadow director of the company.

WHAT IS A SHADOW DIRECTOR?

When a company or its director is used to acting according to the terms or wishes of a third party then such a third party may be called a ‘shadow director’.

This case involved six Apple resellers who merged their business to form a new entity named Buzzle. Eventually the merged entity failed and Buzzle was placed into liquidation.

Buzzle and its directors brought an action against Apple alleging that Apple had played a major role in directing the merger and in decisions taken at Buzzle’s board - thus acting as “shadow director” of Buzzle and subsequently becoming involved in the insolvent trading.

The liquidator also argued that Apple had its own reason for permitting the merger to advance, including the prospects of recovering the debts that were due to it by the resellers before the merger proceeded.

The liquidator also claimed the charge to be void as Apple’s involvement had made them an “officer” of Buzzle or “a person associated.

FINDINGS

The Court found that though majority of business decisions were taken in the presence of Apple and although Apple had supported Buzzle financially this did not clearly deem that Apple was the “officer” of Buzzle.

There was no evidence to prove that Apple was working as an “associate” with the director’s of Buzzle. Also, Apple was not involved in the company’s corporate decision making. It merely put conditions on its commercial dealings with Buzzle. Apple acted as an observer and attended meetings conducted by Buzzle.

In dismissing the claim it was found by the Court that Apple was not the shadow director of the Buzzle.

SUMMARY

This case throws light on the involvement of creditors with a debtor company. It demonstrates the importance of the liability of the creditor when getting involved with the distressed company. The case also suggests that a written statement that the creditors were not involved in the company’s corporate decision making would assist the creditors in proving that they had no intent to act as the shadow director of the company.

An entity or a person cannot be a shadow director just because they are present in all the board meetings or impose conditions on dealing with the company. An external company cannot be termed as a shadow director unless the directors are accustomed to act according to the wishes and conditions of such an external company and cannot exercise their own decision as to the corporate governance of the company.