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

You will no doubt have at least a passing familiarity with the broader effects of the Bankruptcy Act 1966 and the insolvency provisions of the Corporations Act 2001. 

You may also be familiar with the effect of bankruptcy or liquidation upon an individual’s right to hold a builders licence under the Queensland Building Services Authority Act. 

More than likely you have had a client or two that has had the unfortunate situation where they have fallen victim to insolvency (and seen the consequences for them and their families). 

In essence, any individual who holds a building licence that also becomes bankrupt or is a ‘person of influence’ in a company placed into liquidation will be deemed an ‘excluded individual’ by the QBSA. 

They will no longer be entitled to hold a builders licence or be director of a company with a building license. This naturally places an awful burden on those in the building trade. 

Most business people are able to avail themselves of the benefits of the various insolvency regimes and then carry on business in some modified form (often for the benefit of creditors). 

Many often reinvigorate their business and prospects through a Deed of Company Arrangement or a Part X Personal Insolvency Arrangement. 

However, subject to a few exceptions, builders are unable to effectively utilise these benefits of the statutory regime.

Their ability to ‘trade on’, often the most effective resolution of a cash flow crisis is severely limited by these provisions in the QBSA Act.

We have recently been involved in the Scheme of Arrangement approved by the creditors of Opes Prime Stockbroking Ltd. 

Of particular interest in that process is the decision of Justice Finkelstein in the Federal Court which gave final approval to the Scheme. 

The decision in effectvalidated arrangements between debtors and their creditors that had a bindingeffect on third parties. 

Previously there had been doubt over whether any such arrangements couldbind third parties – much court authority suggested it could not (basedprimarily on ‘privity of contract’ arguments). 

However the Court held in this case that the Scheme couldbind third parties to the arrangements.

The advantage of the decisionis that previously many arrangements between debtors and their creditors often fell down due to third party guarantees and the inability to bind third parties to the arrangements. 

This difficulty can now be overcome with a suitably drafted Deed of Arrangement.

At Sajen legal we have had recent good results with informal arrangements.  

These are designed specifically to assist those in the building trade and for whom the retention of their licence is vital to their business future is vital. 

In particular we have utilised a ‘creditors’ trust’ as a substitute for a Deed of Arrangement.

This has the benefit of all parties beingable to give effect to an agreement to permit the debtor company/individual to trade on.

It also helps ensure a return to creditors without the detrimental effect of the builder being classified an ‘excluded individual’ by the QBSA.

In simple terms these trusts operate as follows:

1. a registered liquidator is appointed as trustee of a unit trust established for the purposes of carrying out the debtor’s proposal;
2. the creditors swap their debt for units in thetrust which are issued on a pro rated basis;
3. the trustee can take security for the debtor’s obligations under the trust deed (a mortgage over real property, fixed and floating charge or both); and
4. the debtor enters into an agreement with the trustee in terms that permit the debtor to trade on while at the same time requires him or her to make ongoing contributions

(whether of capital or income or both as circumstances permit). 

Given that the debt previously existing is substituted for a fresh set of obligations it makes it easier to maintain capital requirements of the QBSA and even refinance. 

This strategy can, anddoes, result in a win win for builder and creditor alike. 

Often in circumstances this is the only alternative to a liquidation with no return to creditors and the debtor being prevented from any future business operation.

Naturally an agreement of this nature requires the goodwill of a builder’s creditors. 

In circumstances wherea builder has chosen to leave creditors in the dark, or refused to meet thereality of their situation until it is too late, it is unlikely creditors willbe able to be convinced of the merits of such an arrangement. 

However, where the builder takes the matter in hand and deals with issues promptly, with a view to the best outcome for all involved the use of a creditors trust can certainly be a very effective means to that end.

If you would like to know more, or have clients that may be able to utilise anarrangement of this nature please don’t hesitate to call me for a no obligation discussion.