The Personal Property Securities Act (PPSA) is expected to come into force on 11 May 2011. In anticipation, the government has advised ‘an early bird and worm’ strategy - the sooner businesses start restructuring and reorganizing, the easier it will be on commencement of the legislation in 2011.

Who will the PPSA impact?

Businesses and professional advisors such as financers and insurers, suppliers, manufacturers and lessors as well as insolvency practitioners will need to ensure they become PPSA compliant.

Key changes

• Stakeholders will be served by one national Act.
• This uniformity will be supported by a national online register of securities.
• Securities such as company charges and chattel mortgages will be registered in the new PPS register, no longer with ASIC.
• Conditional sale agreements, retention of title provisions, certain leases, interests in motor vehicles and boats will also be registerable interests in the PPS register.   
• On the other hand, some Registers will be discontinued and land and statutory licenses will not fall under the new register.

How should businesses respond?

Businesses should firstly become proactive, right away. Complacency should be fought even if May 2011 seems far away. The PPSA will demand significant transformation to the daily running of businesses. This time should be used to fully prepare for these changes, educate staff and customers and get ready to do business, differently. 

 In summary:

• Learn how your business can become PPSA compliant.
• Understand the impact the new regime will have on your business dealings whether you are a financial institution or a manufacturer.
• A comprehensive review of business security registers falling under the PPSA will be needed.  
• Work closely with professional advisors in restructuring business documentation, operating models and trading terms.
• Familiarize yourself with the consequences for failure to comply. This becomes particularly important if the security provider becomes insolvent where an unperfected security is involved.  
• Manufacturers will no longer remain owner of goods but become holders of security interests instead.

Australian Securities and Investments Commission v Citrofresh International Ltd (No 2) [2010] FCA 27 will serve as a wake up call to directors of Australian companies.  Or will it?

Earlier this year, ASIC was successful in obtaining judgment against the former Managing Director and CEO of Citrofresh International Limited. The former Director of Citrofresh, now Paragon Care Limited, was pulled up on three counts:

•    Misleading and Deceptive conduct
•  Breach of Duty of Care and Diligence
•   Wrongful reliance on third party consultants

The Director was involved in drafting and approving an ASX announcement in connection with his Company’s products. Under section 1041H of the Corporations Act, the Federal Court found that the announcement was misleading and deceptive. The Court held that this announcement was linked to a financial product or service, although remote, it was enough to invoke s.1041H.    

Duty of Care and Diligence

Following a breach of the above section, holding the Director liable for dishonoring the duty of care and diligence was inevitable. Goldberg J was very clear when explaining what this duty entailed. His Honor stated that under section 180 of the Act, the test of a reasonable man was used - directors and officers are expected to demonstrate the same level of care and diligence that a reasonable person would, in the same position.

Wrongful reliance on third party consultants

The Director in defending himself argued that he relied on two consultants hired by the Company. These consultants advised and assisted with the drafting of the announcement. According to the Director, the liability here should have been reduced or removed.

The Court did not accept this argument. Both consultants lacked the technical and scientific expertise required in this matter. This logic raises the operation of section 189 of the Act. Under this section, directors cannot release themselves from their statutory duties by relying on third parties who lack the required know-how or skills.

Australian companies have recently witnessed a spate of similar cases involving misleading and deceptive conduct and breach of the duty of care. Directors, managers and officers occupying fiduciary positions must familiarize themselves with their statutory duties and the repercussions for a breach.   

January 2010 has marked the start of exciting times for researchers, entrepreneurs and innovative companies - all thanks to an initiative launched by the Department of Innovation, Industry, Science and Research (DIISR).

This initiative is known as ‘COMMERCIALISATION AUSTRALIA’. The inspiration has come from the Australian Government’s effort to offer grants up to $50,000 to eligible candidates to help them gain expert business advice.

HOW DOES THE GRANT WORK?

IP Australia together with the DISSR is keen to encourage the conversion of ideas into thriving marketable business enterprises. This overlap of innovation will allow businesses to work closely with researchers and entrepreneurs.   

This grant includes fees for the cost of searching and filing a patent application together with examination and maintenance fees.  The grant also covers services such as intellectual property management.

This is a highly competitive program and is purely merit based. Commercialization Australia helps boost the skills and knowledge needed to better market and sell new ideas. The grant of $50,000 will go a long way in realising this idea in the business communities.

The focus, as the name suggests, is on commercialisation. The program provides individualised and focused assistance. The Case Manager understands the needs of each applicant and carefully guides them throughout the different stages in the commercialisation process.         

WHO IS ELIGIBLE?

Eligible applicants include companies, individuals looking to form a company, researchers in the private sector as well as universities and individuals. 

There are four components of funding. Applicants need to decide which component applies to them. This is a flexible program and applicants can submit single or multiple applications. The first stage assesses a Pre Application Form. If this is successful, the next stage involves assessment of the project itself. 

The time is now ripe for eligible stakeholders to make the most from this government initiative. This is also a great opportunity for companies to reflect on their potential and overcome any apprehensions.

It has been said that ‘An asset can be valued, invested in, sold and licensed. An idea cannot.’

Companies, no matter their size, may have excellent ideas. Implementing these ideas is where they take a beating. A lack of skills, resources, knowledge and ability to respond quickly enough, holds these companies back. 

This IP initiative in Australia will take businesses beyond the realm of just thinking – it will generate profitable and meaningful opportunities by helping to turn ideas into products and services.  

2010 has already witnessed several key legislative changes in various areas of the law. One of these, related to insolvency law and The Corporations Act 2001, is worth writing about. The High Court’s decision in Sons of Gwalia v Margaretic [2007] HCA 1 is being overturned.  

Quick facts

The High Court in 2007 delivered judgment in favour of shareholders after investors bought shares from a West Australian mining company before it slipped into liquidation.

In the winding up order, the company’s shareholders looking for compensation were treated on par with other creditors.

Why is the decision being reversed?

·         Critics believe that the case seemed unfair in ranking shareholders equally with lenders in securing compensation in insolvency cases.

·         Chris Bowen, Federal Minister for Financial Services also believes that the decision blurred the boundaries between debt and equity.

·         The ruling provided an adverse effect on a company’s access to debt financing.

·         The decision attracted uncertainty, delay and high costs associated with external administration.

·         This case raised serious concerns that some directors liquidate companies that could be saved in order to avoid prosecution.

What good will come from a reversal?

·         Regulatory certainty and greater equity will be promoted, as per the government’s prediction. This in turn will assist better governance.

·         Funders, banks and creditors, often small businesses, will no longer be disadvantaged by the earlier ruling.

• Brett Bondfield, law professor at Sydney University states that a “more standard expectation” and a balance of risks will be re introduced in insolvency regimes.

·         John Colvin, chief executive of Australian Institute of Company Directors says that the old principle that lenders to companies rank ahead of the owners of companies will return.

·         The reform will considerably lower administration costs of insolvent companies for the benefit of all creditors, whether secured or unsecured. 

·         It will propel a move towards successful and less complex restructuring.

·         Insolvency practitioners believe that a reversal in decision will align Australian law with those of other key foreign jurisdictions.

What are the key changes?

·         'Informal work-outs’ will be encouraged, allowing companies to work out their own internal affairs. It is suggested that conventional insolvency procedures are not always the best solution.

• The reforms will also remove irregularities in respect of 'relation-back' and 'commencement' dates for liquidations.
• The hope is also to reduce the potential for abuse of corporate insolvency law by introducing new business judgment rules, for example.

• Creditor meeting procedures will be simplified and some proposals to be voted on without a creditor's meeting being held will be permitted.

However, all practitioners and experts are not yet convinced. Critics suspect that the proposed reforms will weaken the protection of shareholders. Others believe that the government’s agenda lacks enough evidence. In fact, the confidence of some investors and creditors might suffer.

It is never easy to secure the interests of all stakeholders, especially in complex insolvency structures. It is too early to comment on these theoretical changes. Their true impact remains to be seen. 

In an ideal world and a new decade, everyone would win the lottery and in this financial slowdown, all your money problems would disappear. While there isn’t much Sajen Legal can do about the first one, we can certainly offer you advice to help you protect your personal and professional financial portfolio, banishing those economic woes.

Individuals as well as companies, big and small, were hit by the Global Financial Crisis. Some have emerged stronger from the slowdown, substituting cynicism with a new hope. Others are still struggling. Bankruptcy, although no new phenomenon, became commonplace at the end of the previous decade. 2008-09 alone witnessed 32,909 insolvency activities as reported by the Insolvency and Trustee Service. Of course, it was one of the key factors which resulted in the global credit crunch but Global Crisis or not, bankruptcy can hit anyone, anytime, anywhere.

A debtor may become bankrupt voluntarily or involuntarily. The former occurs when an Official Receiver accepts a bankruptcy petition presented by the debtor himself. The latter occurs when the court upon the petition of a creditor, makes a sequestration order against the debtor’s estate.

Bankruptcy is usually synonymous with an individual, whereas, insolvency applies to a company. However, in both situations, control of property owned by the indebted person or company is vested with either a liquidator or trustee in Bankruptcy. While some are still awaiting their discharge, a combination of sound financial planning for your future, right choices and invaluable advice could help you not only avoid bankruptcy but also encourage you, your business and household to flourish this year and others to come.

Common financial questions posed in the New Year include, ‘Should I buy a car or a house?’ Global markets are improving, albeit sluggishly, but is it advisable to secure a loan for buying an asset which depreciates eventually or would it be wiser to invest in property?

Investment goals play an important role here. If the purpose is to gain returns on the appreciation of the value of the assets, then it is practical to invest in assets such as stocks, unit trusts, mutual funds or property. A car, on the other hand is a depreciating asset and unless it is being used as a minicab or transportation service, it is not going to attract any income.

Other questions include, ‘Can I start a business without any capital’? The new era injects fresh inspiration into entrepreneurs and enthusiasts but some worry about a lack of capital and their ability to secure loans. Accompanied with this worry is the bigger apprehension of failing to make repayments and the dreaded option of bankruptcy.

Of course these are a few of the many important questions when making new plans. However, a secure plan needs to cover all avenues, not just the obvious ones. Where does one start? How can a business revive itself?

Apart from cost cutting, lay offs, outsourcing, reduced luxury holidays or spa memberships, businesses and individuals in order to financially revive themselves at the office or home could adopt the following simple but prudent tips:

• Set personal and professional goals and then zero in on what matters
• Use a budget and stick to it
• Create an emergency fund
• Reconsider unaffordable assets
• Resist taking out too many loans
• Settle, manage or consolidate your debts
• Understand your target audience
• Exploit your competitive gaps
• Think beyond pricing
• Acquire new skills

These are a few simple ways in which an individual or company can consciously avoid bankruptcy. For instance, proper planning and continually revisiting your business plan can help maximize opportunities in an evolving marketplace. Flexibility is also the key here, both in planning and in your approach. Of course your financial and legal advisors will offer you more structured and detailed advice but relying on your own resources and judgment will go a long way in saving you several pennies. Hiring good people is one example. Investing in the right people can define the difference between success and failure. Better customer relationships will also be built if internal relations are healthy.

At Sajen Legal, we offer our clients advice in times of difficulty, when faced with a serious order such as bankruptcy. We also strive to offer advice in preempting and avoiding such situations. Looking ahead, there is no shortage of good ideas and good people, opportunities and challenges. Implementing, attracting and boldly facing them will mark the beginning of a new era for individuals, families and companies.

Forrest Gump was right. ‘Life is like a box of chocolates – you never know what you’re going to get!’ In the intellectual property game this is especially true for the chocolate industry and big brand names such as Mars, Cadbury and Sweet Rewards.

Mars Australia, in Mars Australia Pty Ltd v Sweet Rewards Pty Ltd [2009] FCA 606 has recently filed an infringement suit alleging Sweet Reward’s packaging of its chocolate malt balls are confusing and misleading consumers. Mars has also claimed a passing off suit against Sweet Rewards. It also alleges infringement of two registered packaging trade marks for Maltesers.

The claim was dismissed by both the Federal Court at first instance and soon after by the Full Federal Court.

Perram J. of the Federal Court of Australia echoed a simple test, placing reliance upon consumer perception that it was”unlikely that an ordinary consumer of chocolate confectionary could mistake something which is not called a Malteser for a Malteser. In that sense, Mars is a victim of its own success.”

The Full Federal Court, in dismissing the appeal brought by Mars, held that using similar packaging and pictures in the same industry was commonplace. However, this decision has been criticized for its simplicity in overseeing the efforts and resources which are invested by brand owners in creating their brand image.

Rhonda Steele, Marketing Property Manager of MARS Bars, for Asia and Australia shares some wisdom with competitors. She states that, ‘to adequately protect your intellectual property rights it's very important to do your thinking early and to conduct thorough searches - both of the trade marks register and the market place - so that you can be confident of launching your new product without fear of infringing someone else's rights.'

Rhonda further asserts that this might be more problematic for small companies. Prior to registering a mark and securing your intellectual rights, a substantial sum of money is invested in product development and package design. If it is found that a new product violates prior rights, these resources are then unfortunately wasted.

However, this is not the end of the saga. Once a mark is registered, what follows identifies the survival and success of the company and its rights.

In contrast, interestingly enough, Cadbury and Darrell Lea, faced with a similar dispute over trade mark branding and imaging in a passing off case, have settled their differences over the colour purple.

No longer is a device, name, or actual product the only important considerations in this battleground. Colour too is involved. Cadbury has six colour trade marks registered. The realm of intellectual property rights are sophisticated enough to warrant such registrations. Where does it end?

These controversies show that the outcome is not always predictable. Mars has been marketing Maltesers since 1989 and Sweet Rewards has introduced Malt Balls in 2005. It is also not always the case that the earlier mark holder will receive more protection and patronage from its market.

Whilst it is safe to assume that every consumer loves chocolate, what goes on behind the scenes is not as lovable, calories aside. Consumers have the luxury of choice. It is their very choice and perception of these brands, along with statutory authorities and rules governing this area of the law, which make a difference at the end of these intellectual property disputes.

The regular tribulations of the Global Financial Crisis in the guise of unemployment and financial struggles have been dwarfed by a more sophisticated evil. Fraudulent activities and organized misbehavior disguised under a trend, known as ‘Phoenix activity’, although not a new trend, is gaining momentum in Australia in recent times. What is Phoenix activity? Phoenix, the largest city in the US, also known as the Valley of the Sun and the Phoenix activity in Australia, echo the same philosophy to the mythological creature. The emergence of a new entity through fire and difficult times resurfaces to live again and start afresh. These Phoenix companies are ‘revived’ by directors who transfer assets of an indebted company into a ‘new’ company, with a similar name and identical activities of the previous company, doing business incognito but essentially are run by the same directors.

Further, the directors place the initial company into administration or liquidation with no assets to pay creditors, whilst enjoying the fruit of the Phoenix or new company. However, ASIC has been quick to catch on to such fraudulent gimmicks. It has been successful in removing 40 directors from office who have intentionally avoided their responsibilities and have defrauded their creditors.

The Australian Taxation Office and Treasury fear annual costs to be around $700 million to $1.3 billion in resolving these cases. An enforcement program is in place, which is funded by the Assetless Administration Fund.

ASIC Chairman, Mr Jeffrey Lucy, explained that the purpose of the Fund was to assist liquidators to discharge their duties in conducting thorough investigations and compiling reports, which would enable ASIC to implement enforcement proceedings.

However, this is not enough. Bridging the regulatory gap, protecting creditors and discouraging Phoenix activity, needs more stringent strategies in place. Whilst the Fund and the Corporations Act, among other statutory sources, serve in achieving these objectives, the Treasury has proposed stricter changes, which if implemented, will significantly alter the personal liability of directors.

The proposed paper, "Action Against Fraudulent Phoenix Activity"^[1] , recommends several key changes. To cite a few, for instance, the current taxation rules entitle the Commissioner to preempt tax liabilities by requesting a bond from a director where he foresees or considers a risk of Phoenix activity. The new rules recommend widening this preemption by including other liabilities. Further, a high penalty is also to be imposed for failing to provide such a bond.

Other changes apply to payment of liabilities. For example, the Director Penalty Notice is to be replaced with an automatic penalty and personal liability on the director after 3 months from the due date for payment of statutory liabilities. Earlier, directors were liable for just PAYG. Under the new regime, directors will also be held personally labile for outstanding superannuation, GST, excise and income tax.

The ideal outcome would be for a reduced number of Phoenix activities and directors who are more honest and diligent in their conduct and duties. Until this positive change completely sets in, ASIC will continue intervening but earlier on this time with the help of the stricter proposed rules, the Assetless Administration Fund and the information provided by liquidators. Directors, instead of feeling scared and threatened should view these changes positively and seek to turn around their companies and avoid severe legal penalties.

ASIC’s surveillance initiative ensures that company officers barred from running their companies comply with their disqualification or else they will face the threat of criminal proceedings.

It has been a little over a year since the Global Financial Crisis. The Australian economy is emerging boldly. This should inject a new impetus to companies and directors who are struggling to provide opportunities for genuine growth and trade and to discourage any unwanted Phoenixes. On the one hand, strict rules will punish dishonest directors but the innocent ones along with their creditors may wrongfully and unfairly bear the brunt of such a strict regime.

^[1] http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=1647

Times like these are ripe for starting up a charity.

This is thebrighter side of a financial crisis where redundancy and not-so-voluntaryretirement are becoming commonplace and demands for charitable services areincreasing.

Establishing a charity can be quite straightforward as long as thedominant purpose of the charity is for the benefit of the community and ischaritable in nature.  Education,health, science, religion, environment, social and community welfare are someexamples of well-accepted charitable purposes.

Eligibility

How does an organisation qualify for formal recognition as a charity? Inaddition to showing a dominant charitable purpose, the other eligibilitycriteria include:

·       being an appropriately formed institution,fund, foundation, trust or association. The organisation’s rules can be ofvital importance.

·       being non-profit. If the charity ispermitted to pay or make available any portion of its property or fundraising forthe benefit of any trustee or member, it will not qualify.

·       obtaining an ABN.

·       fulfilling the criteria forobtaining Tax Concession, Income Tax Exempt or Deductible Gift Recipient statusfrom the Australian Taxation Office (ATO).

Benefits 

Obtaining Deductible Gift Recipient status is one of the most popularbenefits. This essentially means that a donation to the charity will entitlethe donor to an equivalent tax deduction. Clearly, this is a significantinducement for fundraising.  Once acharitable  organisation has IncomeTax Exempt status, it will be relieved of liability for tax or GST on theincome it raises and generates.

Additionally, reduced start-up fees are charged for companiesestablished for a charitable purpose. Charities can also take advantage ofexceptions to the company naming provisions under corporate laws.

Ultimately, it is up to the law to decide whether a charity is eligiblefor the benefits. Assessing what structure best suits the organisation’sobjectives, choosing trustees or directors, settling rules of engagement, fundraisingand other legal formalities all need to be addressed within the overarchingregulatory framework.  Reconcilingthe initial noble motivation for forming the charity with the laws that governcharities can often be a challenge.

Endorsement is the new approval process for charities that wish to gain or maintain income tax exempt status. Charitable institutions and charitable funds have different endorsement requirements. Among standard pre-requisites such as applying for an Australian Business Number and having a physical presence in Australia, one of the important requirements is the correct application of trust monies.

A charitable fund can only be endorsed if it is being used for the purposes for which it was established. If it is being used for other purposes it is not entitled to endorsement. In a recent case, it was found that the trustees ofthe Kalos Metron Charitable Trust Fund had willfully misapplied the trust monies. The trust funds were therefore not being correctly applied for the purposes for which the trust was initially established. This resulted in a loss of endorsement for the Fund.

Three years after the Fund was first established, the trustees had applied for an endorsement for income tax exemption. The basis of this endorsement was for public charitable purposes. This endorsement was short lived as the Tax Commissioner revoked the Fund’s endorsement.

He found that the trustees had deposited the Fund money into their personal accounts. The trustees had attempted to reduce their liability for a personal loan by doing so. Moreover, one of the trustees had paid money which was owed to the Fund, into the trust account of one of the trustees’ father’s accounting firm. The father of the trustee was subsequently entitled to the income from this account.

The matter reached the Administrative Appeals Tribunal (TACT v FCT[2008] AATA 275), which first ruled in favour of the trustees. However, on further appeal to the Federal Court, the Commissioner succeeded in his argument– namely, that the misapplication of the trust money failed to meet the endorsement requirement as the money was not applied for the purposes for which the Fund was established. 

Edmonds J overruled the Tribunal’s decision and found that the trustees had intentionally applied the Fund monies for a different purpose, thus having breached the trust. Additionally, the misapplication involved here was of a significant sum. The Tribunal on the other hand had found that ‘very small’ sums as well as a genuine transaction were involved between the trustees and the father.

His Honour emphasized that the opportunity of an endorsement for an income tax exemption was a privileged one. This in turn demanded ‘strict adherence’ which was not to be taken lightly. The severe approach here implied that the trustees could not be pardoned for a lack of their failure to notice that the monies were being misapplied. More so, compensation by the third party of the misapplied monies to the Fund was not enough to rectify the breaches or forgive the trustees.

Cases such as this have triggered the Commissioner’s closer scrutiny of such funds. Trustees have been warned that they need to follow the requirements of endorsement rules with due diligence and conscientiously apply the trust funds for the purposes for which they were established.

Courts will view each case based on its facts and circumstances but will pay close attention to isolated instances and breaches, particularly if the breach was intentional and significant. The ATO and legal practitioners are trying to play an instrumental role in cultivating awareness amongst trustees to realize the difference in the purposes of setting up a charitable trust fund and using its money for personal investment purposes.