In this edition
CAMAC’s report on Sons of Gwalia
On 29 January, 2009, the Corporations and Markets Advisory Committee (CAMAC) issued its report into shareholders’ claims against insolvent companies (the Report). The Report reviewed the implications of the High Court’s controversial Sons of Gwalia decision of 2007. That decision overturned the longstanding notion that the shareholders of an insolvent company would receive nothing, until claims by the company’s ordinary creditors had been fully satisfied. In its report, CAMAC has upheld the High Court’s decision thereby cementing the new found rights of aggrieved shareholders of insolvent companies, to try and recover their losses, on an equal footing, with other ordinary creditors.
CAMAC had received several high profile submissions including from the Australian Bankers Association, the Law Council of Australia and also by the Insolvency Practitioners Association, seeking immediate legislative relief from the High Court’s decision. However, despite those submissions CAMAC asserted that:
“any move to curtail the rights of recourse of aggrieved shareholders, where a company is financially distressed, could be seen as undermining the apparent legislative intent to empower investors”
The Report has been criticised for its unnecessary realignment of the traditional debt/equity balance which has, for years, favoured the rights of ordinary creditors. Moreover, the Report has also been criticised for opening the door to greater litigation in administrations and therefore, additional legal costs and delays in recoveries.
On a different front, the banking and finance sector has expressed concerns that the Report will lead to more restricted lending practices by companies, which will ultimately affect capital flows. It appears, however, that CAMAC had given due consideration to the reaction that the banking and finance sector would give to the Report stating that:
“Lenders can be expected to factor into their assessment of the risk of lending to Australian companies, particularly listed public companies, the possibility that aggrieved shareholders may compete with conventional unsecured creditors, in the event that the company goes into external administration.”
From an insolvency perspective, the Report will probably lead to greater delays in future administrations, if those administrations are subject to class actions by shareholders and greater litigation in general. The Report comes at a time when the Australian Securities and Investments Commission is taking greater action in its enforcement of insolvency laws, which are intended to ensure that directors take appropriate actions, if and when, their companies become insolvent.
Federal Government has not yet made any substantial comments on the Report and it is unclear whether all of the Report’s findings will be accepted. A copy of the Report can be obtained from CAMAC’s website being
http://www.camac.gov.au/
Masi Zaki, Graduate
Final Report on the Review of the Code of Banking Practice
The final report on the review of the Code of Banking Practice (COBP), conducted by Jan McClelland (Reviewer), was released on 16 December 2008. Some of her recommendations are discussed below.
Responsible Lending – Clause 25.1
The Reviewer stated that this was the most contentious issue for the report. Consumer groups advocated the expansion of clause 25.1 to strengthen the obligations and requirements of banks in assessing the capacity of borrowers to meet their repayments. Subscriber banks, on the other hand, argued that this would place subscriber banks at a competitive disadvantage with non-bank credit providers and non – COBP banks.
Recommendations of the Reviewer in respect of clause 25.1 included the following:
-
A general principle on responsible lending to be included in clause 2 of the COBP.
-
A separate clause on the provision of credit be included in the COBP, building on clause 25.1 but expanded to include two parts, one on the approval of an application for a credit facility and the other on offers of credit card limit increases (unsolicited or otherwise).
-
With regards to the provision of credit, before a bank approves an application for a credit facility or an increase to a credit facility, it has to exercise the care and skill of a diligent and prudent banker in selecting and applying appropriate assessment methods to the customer’s circumstances and financial position in forming an opinion on the customer’s ability to repay the facility. As part of this process the bank must take into account the following factors:
- information provided by the customer on his or her income and financial commitments;
- how the customer has handled his or her finances in the past;
- the bank’s internal credit scoring techniques; and
- information from credit reference agencies.
The separate clause proposed by the Reviewer also contained a list of factors to be taken into account by a bank when offering increases to credit limits.
Financial Hardship – Clause 25.2
As it stands, clause 25.2 provides that a bank will try and assist a customer to overcome financial difficulties arising from credit facilities that he or she have with the bank. This clause was another significant issue for the review. Subscriber banks argued in their submissions that they needed flexibility in this area and cautioned against a “one size fits all approach”.
The Reviewer has recommended that clause 25.2 be strengthened to include key principles for dealing with customers facing financial difficulty. Some of the proposed amendments require a bank to:
-
provide information about its process for dealing with customers in financial difficulty;
-
respond promptly and courteously to requests for assistance by a customer;
-
inform a customer in writing of the bank’s decision whether or not to provide assistance and the reasons for their decision. If the bank agrees to provide assistance it must confirm in writing the agreed arrangements; and
-
while considering a customer’s application for financial assistance, the bank will not commence enforcement proceedings, and if proceedings have already commenced, the bank will not proceed to judgement whilst considering the customer’s situation.
Debt Collection – Clause 29
The Reviewer has recommended that clause 29 be amended to make it clear that:
-
a bank will comply with the Australian Competition and Consumer Commission and Australian Securities Investment Commission (ASIC) “Debt Collection Guideline for Collectors and Creditors, October 2005” as amended and restated (ACCC and ASIC Debt Collection Guideline) and will ensure that its debt collection agents do likewise; and
-
when a bank sells a debt to a third party debt collector, it will:
-
choose a third party debt collector who: [sub clause] will observe the ACCC and ASIC Debt Collection Guideline; and
-
is a member of an ASIC approved external dispute resolution scheme.
Guarantees – Clause 28
The Reviewer stated that she understands that the Guarantee provisions as they stand have been developed after considerable debate during the last COBP review. Given that the provisions are well regarded, the Reviewer proposed only two minimal changes.
The two recommendations that were made are:
- that the definition of ‘Asset Financing Guarantor’ in clause 40 be expanded to include owners who contribute capital to the business and managers who are directly involved in decision making for the business; and
- that clause 28.14 be amended to provide that enforcement of a judgement against the guarantor or any security provided by the guarantor will only be taken after attempts have been made to enforce the judgement against the debtor and/or enforce any security against the debtor.
Joint Debtors – Clause 26
Concerns were raised that clause 26.1 was being used by some banks to avoid the Guarantee provisions in clause 28. Clause 26.1 as it stands states that a bank will not accept a person as a co-debtor under a credit facility if it is clear that the person will not receive a direct benefit under the facility.
The Reviewer recommended that the word “direct” be removed from the clause so as to allow a more objective assessment to be made without regard to the nature and quantum of the benefit received.
Exception Fees – new provision
Also of particular concern to many groups were exception fees (default / penalty fees) applied by banks for late payment, default, dishonoured cheques or exceeding credit limits. The Reviewer was persuaded by the views of consumer groups that this issue was so significant that it warranted a separate clause.
The Reviewer has recommended that the new clause commits banks to:
- disclosure of exception fees in relation to products to which such fees apply;
- publication of facts sheets on exception fees on the Australian Banking Association’s (ABA) website;
- provision of information on how customers can avoid exception fees; and
- provision of information on accounts or facilities which have minimal or no exception fees.
Now that this report has been published, the ABA will publish its response to the recommendations. The COBP will then be re-written and then released for further comment prior to finalisation.
Maria Andreou, Lawyer
Unfair Contract Terms
The Federal Government has brought forward plans to implement new powers for consumers to challenge unfair contract terms so they are in place by 1 January 2010.
Under the proposed legislation the government would extend powers to the ACCC and relevant state regulators. It would allow them to take action against companies it considers are imposing unfair contract terms with fines, court action and even disqualify company directors responsible for unfair contracts.
The proposed legislation will also allow consumers to take action to release them from the obligations under the contract that are deemed unfair, being where there is a significant imbalance in each parties’ rights and obligations under the contract. It may not release the consumer from the whole of the contract.
The proposed legislation will only apply to standard forms of contract that are offered to consumers with no option to vary terms. Standard forms of contract include those used for utilities, mobile phones and bank accounts. The proposed legislation will not cover contracts negotiated on even terms between two equal parties.
The Federal Government is expected to release draft legislation by the middle of this year and have it passed by parliament before the end of the year.
We will provide further information once draft legislation is released. Please contact either of the writers if you are interested in making a submission.
David Carter, Partner & Adam Mazzaferro, Lawyer
Is a controller or trustee in bankruptcy liable for GST?
The recent Federal Court decision of Deputy Commissioner of Taxation v PM Developments Pty Limited [2008] FCA 1886 (PM Developments) has caused quite a stir in recent weeks, evoking both a press release from the Assistant Treasurer and a Decision Impact Statement from the Australian Taxation Office (ATO).
The Decision
PM Developments involved a collapsed property developer, PM Developments Pty Limited (PMD), which had been the developer of a residential project at the time it was wound up. PMD’s liquidator entered into and completed the sale of a residential unit after PMD had been wound up. The liquidator sought a declaration that it was not liable for GST on the sale of the unit on the basis that it was merely acting as PMD’s agent in its capacity as liquidator.
The Federal Court held that the liability for GST on the sale rested with PMD as it was the vendor. The liquidator was not personally liable to the Commissioner of Taxation for the GST or any related interest charge on the sale of the unit as the GST, being a post liquidation debt of PMD is subject to the payment priority regime set out in section 556(1)(a) of the Corporations Act and becomes one of a number of equal post ranking debts. Logan J stated:
“As the GST Act presently stands, the effect of requiring a liquidator of a corporation to register will be that any supplies which the liquidator makes in that “representative” capacity in the event that any property of the corporation is ordered to be vested in him will become a “taxable supply” by him in that capacity; otherwise the disposal of the property of a corporation, insofar as that constitutes a supply for the purposes of the GST Act will remain a taxable supply by the corporation and have to be accounted for and paid by it accordingly.”
In this case, he said, the GST became “but one of a number of equal ranking post liquidation debts” which was subject to a number of prior raking debts of the company, including the discharging mortgagee’s debt.
The Assistant Treasurer’s Press Release
On 6 February 2009 the Assistant Treasurer issued a press release entitled GST and Incapacitated Entities announcing that, due to the PM Developments decision, the GST Act would be amended to restore the original policy intention that controllers of incapacitated entities (in this case, the liquidator) would be personally liable for GST on taxable supplies made in the course of an administration. It is expected that once the amendments are enacted, they will operate retrospectively from 1 July 2000.
The Decision Impact Statement
On 9 February 2009, the ATO released a Decision Impact Statement regarding PM Developments and the subsequent press release by the Assistant Treasurer.
The ATO said it has accepted that in the period before the legislation foreshadowed by the Assistant Treasurer is passed, the PM Developments decision will prevail and the controlled entity or bankrupt will be liable to pay GST. However, the ATO has also noted that, in light of the proposed retrospective amendment of the GST Act, it is recommended that practitioners act as if they were liable for GST on taxable supplies, as they will be liable once the legislative amendments are passed anyway.
Consequences for Creditors and Insolvency Practitioners
Ultimately, while the PM Developments decision found that a controller or trustee in bankruptcy is not personally liable for GST payable on a sale by the controlled entity or bankrupt, the Assistant Treasurer has foreshadowed that retrospective legislation will be passed to reflect the original intention of the GST Act that appointees are liable to pay GST on taxable supplies.
Given the ATO’s position on the situation, practitioners would be wise to maintain the status quo, that is, pay GST on taxable supplies when due.
Ross Rydge, Senior Associate & Marcus Suliman, Lawyer
Counterfeit Certificates of Title and Mortgage Fraud
Land registries are urging mortgage brokers and banks to exercise extreme caution when assessing the authenticity of certificates of title to real property. This warning follows recent instances of fraudsters using forged certificates of title to grant mortgages as security for loans. If there is any doubt about the authenticity of a certificate of title, land registries are urging persons to seek confirmation from the relevant land registry well before settlement and the release of any monies.
Jeff Baker, Senior Associate & Joshua Khoo, Lawyer
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
