Business Law in Practice - July 2010

In this edition:

• Feature Articles
• News
• Cases
• Upcoming Events

Feature Articles

1.  Proposed National Business Name Registration System

The Commonwealth Department of Innovation, Industry, Science and Research is in the final consultation stages for a proposed National Business Name Registration System that will streamline Business Name Registration across Australia.

The new system is a Council of Australian Governments initiative in which the States have agreed to refer their powers relating to ‘Business Names’ to the Federal Government, such that business names will become registered nationally, rather than in each State/Territory a business trades in.

The new system will be overseen by ASIC who will be responsible for registering, renewing and administering business names for all Australian businesses. Any person or company carrying on business or trade within Australian must register their business name under the national system unless trading under their own company or personal name exactly as it appears. For example, Company Pty Ltd cannot trade only as ‘Company’, it must include ‘Pty Ltd’ in every reference to its name.

National Online Database

Any business name currently registered under a State or Territory Business Name system will automatically be rolled into the new national system. Identical names that currently exist in different States or Territories will be placed on the register, but will have a geographical suffix or qualifier placed after the name on the register. The suffix or qualifier will not be an actual part of the name and this transitional arrangement will gradually be phased out upon the cessation of those businesses which stem from the old system.

Furthermore, those businesses that have two or more names registered in different States will be provided guidance by ASIC on how to transition these into one national Business Name.

The national online database will not only allow registration online with instant confirmation of registration, but will allow the public to gain access to certain contact details about a Business Name holder through a free Business Names register on the ASIC website and the Australian Business Register (ABR). The free register will provide details on a Business Name such as:

• business contact details
• address
• ownership.

This being the case, home-based businesses will only have their suburb displayed on the free register with the specific address only available upon payment of a fee of $20.00.

Business Name applicants will also be given a choice of renewals, being one year ($30.00) or three years ($70.00).

Registration requirements

All new Business Name applicants will be required to have an ABN, or be in the process of applying for an ABN, and not have been refused an ABN in the past. To aid business in complying with this requirement they will be able to register for a Business Name at the same time as ABN registration.

It must be noted however that those Business Names currently existing without an ABN will not be required to obtain one, however, without an ABN, businesses will not be able to register for “AUSkey”, which provides access to government online services.

Whether a Business Name is registrable will be determined by an automated online test. Certain Business Names will be incapable of registration, such as:

• the name contains unacceptable characters (E.g. Foreign language)
• the name contains restricted words (E.g. ANZAC)
• the name is deemed offensive
• the name suggests a connection with the Government
• the name is identical or nearly identical to one already existing.

Business Name’s that differ only by location will however be registrable, regardless of whether or not a relationship exists between the businesses. For example, both ‘Joe’s Plumbing’ and ‘Joe’s Plumbing Kingston’ would be registrable.

The online registration system will not prevent the registration of a protected title (E.g. pharmacist or doctor) or a licensed trade (E.g. plumber) but will display a warning to potential registrants that to use such terms in a Business Name they must have the appropriate Australian qualifications, memberships or approvals.

With respect to franchise names, unless the franchised business is trading under its own entity name, they will need to register the franchise name. This will normally include some sort or region or location differentiator in the title. Registration of a franchise name will not require the franchisee to provide written permission from the franchisor to ASIC, however, a business that applies to register a franchised name should ensure it has the authority to trade under that name through its franchise agreement.

For those applications that are rejected, these can be appealed to the Administrative Appeals Tribunal at a cost of $682.00. This amount will be refunded if the appeal is successful.

Developments

2.  Personal Property Securities – changing the landscape in 2011

With the Personal Properties Security Act (‘PPSA’) schedule to commence in May 2011, it is vital for all businesses to understand the effect of the new national register of personal securities and the updated security types and procedures.

Replacing more than 70 different pieces of Commonwealth, State and Territory law and more than 40 existing registers, the PPSA will enable registration of a security interest in all types of tangible and intangible personal property. Personal property will generally include any kind of property other than land and will therefore include tangible property such as motor vehicles, machinery, artworks, currency and livestock in addition to intangible property such as intellectual property rights, contract rights and shares.

The PPSA provides a new and unified Federal law for the taking, registration and enforcement of security over virtually all kinds of property except land. Currently there are more than 70 separate Act which regulate personal property securities in Australia giving rise to multiple registration requirements, inconsistent priority rules, and cross-border anomalies. The PPSA provides for a central national electronic register for collateral on which the security must be registered. It will therefore be necessary to ensure security of payment obligations to register the security interest on the national electronic register to gain priority over other secured interests.

When will a security interest be ‘secure’

A person granting a security interest is the ‘grantor’, the thing over which the security interest is taken is the ‘collateral’ and the ‘secured party’ is the person who takes the security interest from the grantor.

• the secured party possesses the collateral; or
• the secured party has perfected the security interest by control; or
• a security agreement is evidenced by writing that is:
  • signed by the grantor; or
  • adopted or accepted by the grantor by an act specified in the writing that is done with the intention of     adopting or accepting the writing,

and contains:

• a description of the particular collateral; or
• a statement that a security interest is taken in all of the grantor’s present and after-acquired property.

What does ‘Perfection’ mean and what is its impact?

Perfection refers to the action that secured parties are obliged to take in order to best protect their security interests against third parties.

While a perfected security interest is not impenetrable to these, perfection means that the secured party has done all that may be done for protection. While perfection is not strictly required for enforceability against third parties, it gives the secured party priority over other claimants in accordance with the PPSA’s first-in-time priority regime.

A security interest will generally be perfected in relation to collateral if it has attached and:

• for any collateral, it is effectively registered or the secured party has possession of the collateral (other than possession as a result of seizure or repossession)
• for certain kinds of collateral, the secured party has control of the collateral.

Perfection by control will be particularly relevant for security interests in ADI accounts, investment instruments and investment entitlements.

What are the priority rules?

The following general priority rules will apply:

• a perfected security interest has priority over an unperfected security interest (This will be the case even where the party with the unperfected security interest has title to the relevant collateral
• perfection by control will ensure priority over perfection by other means. If two interests are perfected by control, priority is determined by the order of perfection if the perfection by control has been continuous
• if two interests are perfected other than by control, the first party to perfect will have priority
• if there are two unperfected interests, then priority is determined by the order of attachment.

The major exception to the default priority rules is for purchase money security interests (PMSIs) which have a super priority. A PMSI is:

• a security interest taken in collateral to the extent that it secures all or part of its purchase price
• a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral to the extent the value is applied to acquire those rights
• the interests of a lessor or bailor of goods under a PPS lease
• the interest of a consignor who delivers goods to a consignee under a commercial consignment.

A registration in respect of a security interest which is, or is to be, to any extent a PMSI, must indicate this to obtain the super priority benefit. Also, the registration must be made within a prescribed timeframe to obtain the PMSI super priority.

Another exception to the default priority rules will occur where secured parties use subordination agreements to alter the default priority outcome among themselves. This allows secured parties flexibility in arranging their affairs in a manner which suits their particular circumstances.

How will the PPSA affect retention of title arrangements?

Unlike existing rules, the PPSA defines retention of title (‘ROT’) rights as a security interest.

ROT arrangements are one of the major exceptions to the default priority rules. Under the PPSA, a registered ROT arrangement will generally become known as a PMSI. PMSI priority can be achieved where finance is given to acquire a new asset. Taking a functional approach, a PMSI can also arise in the supply of goods pursuant to a ROT clause in a conditional sale agreement.

ROT arrangements would ordinarily be perfected by registration. Registration of ROT arrangement on the PPS register will not be compulsory, however, an unperfected ROT arrangement will not enjoy the benefits of PMSI super priority and is at risk of being defeated by a general security interest. In particular, an unperfected ROT arrangement will be defeated upon the grantor’s insolvency. A creditor’s failure to perfect its ROT security interest will result in the creditor losing its secured status in the insolvency and its goods supplied becoming part of the pool of assets available for distribution to unsecured creditors.

Under the transitional provisions in the PPSA, ROT arrangements in place before the PPS register commences operation will continue to be enforceable. However, after the 24-month transitional period, a pre-PPSA ROT arrangement will not be enforceable against a grantor unless the collateral is covered by an effective registration or is otherwise perfected under the PPSA.

Security interests in inventory supplied under a perfected ROT arrangement will survive insolvency and will not fall within the pool of assets to be divided among unsecured creditors. Secured interests that are unperfected at winding up, administration or bankruptcy will vest in the grantor and be subject to distribution under insolvency laws.

The PPSA aims to overcome many difficulties encountered by inventory suppliers when enforcing a ROT arrangement, particularly in an insolvency context. A simple and timely search of the PPS register will make it possible to identify personal property that is available for unsecured creditors and potentially subject to claim by secured creditors.

How will security interests be enforced under the PPSA?

Enforcement would entail two steps, the taking of possession of the collateral and the subsequent disposal of the collateral.

Chapter 4 of the PPSA includes enforcement provisions dealing with seizure, disposal and retention of collateral. These provisions apply to most security interests other than Deemed Security Interests. Many of these provisions can be excluded by agreement between the parties when the collateral is not used predominantly for personal, domestic or household purposes.

The enforcement provisions will operate in conjunction with the enforcement provisions in the Uniform Consumer Credit Code and the security agreement between the parties. Similarly, Part 5.2 of the Corporations Act 2001 will be preserved.

The secured party will be entitled to dispose of the property through sale or lease and will be able to purchase or retain the collateral in satisfaction of the outstanding obligation. Where disposal occurs by sale, the secured party will have an additional duty to obtain at least the market value of the good or otherwise the best price reasonably obtainable in the circumstances and the security interest is extinguished at the time of disposal or collection.

All remedies are subject to a duty on the enforcing party to act in a commercially reasonable manner.

What are the transitional provisions regarding agreements in place prior to the date of commencement?

Security interests taken after the commencement date for the PPSA will need be registered on the PPSR in order to be perfected by registration. It is anticipated that existing security registration will be electronically migrated to the PPSR where possible. In addition, secured parties with existing registrations will have two years in which to re-register on the PPSR security interests that cannot be electronically migrated and to register interests that have not previously required any registration. Secured parties will need to consider the priority issues surrounding the proposed transitional arrangements.

3.  New Credit Laws and book up: what you need to know

The Australian Securities and Investment Commission (ASIC) will regulate consumer credit under the National Consumer Credit Protection Act 2009 (National Credit Act) from 1 July 2010. It is important that store owners and other traders offering ‘book up’ are aware of whether the National Credit Act applies to them.

The term book up applies to a practice where traders offer a form of consumer credit by allowing consumers to buy goods or services and pay at a later date.

The National Credit Act will generally apply if the business offers book up arrangements, allows consumers to buy now and pay later or run a tab. Specific factors indicating book up are:

• the provision of credit exceeds 62 days and a charge is made for providing the credit

• The provision of credit does not exceed 62 days but you charge a fee that exceeds 5% of the amount booked up, or charge interest at an annual percentage rate in excess of 24%.

From 1 July 2010, businesses that book up credit regulated under the National Credit Act need to be registered with ASIC, or licensed to undertake such an activity. If they are not registered or licensed they must be authorised as a representative of another registered person or licensee. Businesses which do not adhere to these guidelines will be subject to penalty under the Act. An application for a credit licence can be obtained online and registered persons must do this before 31 December 2010 or registration will be cancelled.

Businesses must provide customers with written records before the book up is provided and ongoing account statements during the book up. These documents ensure that the customer is aware of the terms and conditions. The Act prevents businesses from providing credit if the consumer is only able to repay with substantial hardship by including responsible lending provisions.

Businesses need to be aware of the other legislation that can apply if book up is offered, such as the ASIC Act which covers misleading conduct, unfair contract terms and conscionable conduct. Businesses also need to be aware of the guidelines under the Act which provide for ‘consumer friendly’ book up service.

RECENT NEWS

ACCC seeks legal action for Optus “unlimited” ads yet still told to get tougher on Telco’s

The ACCC began legal proceedings in the Federal Court in Melbourne against Optus for violating the provisions against misleading and deceptive conduct under the Trade Practices Act by advertising ‘unlimited’ calls on Optus products since both services may be scrutinized due to their limitations and restrictions. Whilst the ACCC is seeking declarations that Optus violated the TPA, injunctions against the advertisements and costs, the Chief Executive of Australian Communications Consumer Action Network said that the ACCC should be seeking an order to compensate any consumer who suffered loss or damage as a result of the misleading conduct.

The Australian Communications Consumer Action Network (ACCAN), whilst acknowledging the aforementioned ACCC proceedings against Optus and the court enforceable undertakings from all three major telcos to avoid using marketing hooks with the potential to mislead consumers, have called on the ACCC to stamp out what it says is ‘out of control wall-to-wall deception that seems to pass as marketing.’ Offers of ‘free’ calls and texts that are unobtainable by the average consumer and the use of words like ‘unlimited’ where lengthy exclusions and qualifications are hidden in finer print have been submitted by ACCAN who argue the telco’s seem incapable of meeting their promises to the regulators.

Primo punished for ‘Product of Australia’ porkies

On June 9 2010 Primo was fined $233,625 and order to pay $200,000 in legal costs after pleading guilty to 45 charges of misleading conduct and 18 breaches relating to its failure to keep proper records. After a surprise inspection of Primo’s Chullora premises in January 2008 following an anonymous complaint that Danish and Canadian bacon was being labeled Australian meat, it was discovered that foreign pig products were being placed into packaging also labeled ‘100% Australian Made’ and ‘Meat Content 100% Australian’.

RECENT CASES

Insufficient stock of an advertised product in one store not considered misleading

In the recent case of Specsavers Pty Ltd v Optical Superstore Pty Ltd (No 2) [2010] FCA 566, the Federal Court held that the failure of one of a chain of Optical Superstores to have sufficient stock to meet the demands of consumers did not render a representation that Optical Superstores were selling that product at an advertised price false or misleading.

Silence considered misleading?

In the case of Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622, Western Export Services were not held to have engaged in misleading or deceptive conduct after the Court found that a critical conversation regarding the binding nature of the contract had in fact taken place. If it were not proven that this conversation had occurred, the Court stated that the consequential silence regarding whether the contract was to be non-binding until further agreement on commissioners had taken place would have been considered misleading or deceptive conduct even if there was no duty to reveal relevant facts.

UPCOMING EVENTS

DibbsBarker Lunchtime Seminar in conjunction with Australian Corporate Lawyers Association (ACLA)

Speakers: Alicia Hill, DibbsBarker, Susan Carr, ACCC, Ken Bell, ATO, and a special guest from ASIC

When: 19 August 2010

Time: 12.30pm- 2:00pm

Where: Level 14, 120 Edward Street, Brisbane, QLD 4000