Elliott May Lawyers Blog

A warning to all SMSFs and private companies investing in unrelated trusts

2010-10-26T05:51:50+00:00

The ATO has released a media warning to all self managed super funds (SMSFs) and private companies attempting to use their funds to invest in unrelated trusts with the intention of providing financial assistance to their members or shareholders, such as making those funds available to on-lend back to their members or shareholders.

They have warned that such arrangements will be penalised heavily, as this is essentially attempting to access funds to members or shareholders by way of channeling it through unrelated trusts, to which they would ordinarily not have access to, or would have to pay a heavy price if they wish to do so.

SMSFs

Trustees of SMSFs who attempt this face penalties of up to $220,000 and/or jail terms of up to five years for individuals, whereas corporate trustees face fines of up to $1.1M. Not only this, but this may also put the super fund at risk of being made a non-complying super fund for tax purposes resulting it to be subject to a 45% tax rate.

Private Companies

Private companies will face penalties of either $550,000 for individuals or $2.7M for body corporates, or twice the amount the scheme would receive, whichever is greater. Not only this, but this will also attract the provisions deeming the on-lent funds as deemed dividends.

For further information on this topic or for any information on SMSFs, please do not hesitate to contact James Hickey of our office on (07) 3512 5050 or James.Hickey@elliottmay.com.au.

Case Reviews - October Issue

2010-10-13T23:38:36+00:00

Mortgage Fraud

Perpetual Trustees Victoria v English & Anor [2010] NSWCA 32

In the recent matter of Perpetual Trustees Victoria v English & Anor [2010] NSWCA 32, the Supreme Court of New South Wales was once again required to consider the enforceability of a registered mortgage that had been fraudulently executed by a co-owner.

The Facts

The registered mortgagee, Perpetual Trustees Victoria (Perpetual), applied for an order for possession of land registered jointly to Mr. and Mrs. English. The application relied on a default in repayment of amounts said to be secured by the registered mortgage (Mortgage) in favour of Perpetual. The estranged wife, Mrs. English, denied any liability on the basis that her husband had forged her signature on the mortgage.

There was no dispute between the parties that the registered mortgage conferred an indefeasible title in favour of Perpetual. However, the extent of the interest created by the mortgage was in issue. In order to determine the extent of the interest, the court was required to consider the construction of the mortgage documents.

The Judgment

Claim against Mrs. English

The Mortgage contained an “All Moneys” clause which referred to all amounts payable under a “Secured Agreement”. In interpreting the definition of “Secured Agreement”, the Court of Appeal held that the Mortgage did not secure any monies due by Mrs. English as there was no valid “Secured Agreement” due to the fact that the loan agreement required the signature of all persons to whom the offer was made.

Claim against Mr. English?

Despite the findings in relation to Mrs. English, the Court of Appeal held that it would be unfair for Mr. English as the perpetrator of a forgery to escape liability on the basis that his forgery rendered the documents void. Consequently, Perpetual was able to access Mr. English’s equity in the mortgage property.

This decision is a further reminder to all legal advisors and financiers of the perils associated with relying on “All Moneys” clauses in a mortgage.

Changes to the Standard REIQ Contract

2010-10-01T06:42:29+00:00

Changes to the standard REIQ House and Residential Land Contract (new 7th edition)

The REIQ and the Queensland Law Society have agreed to amendments to the standard House and Residential Land contract (the Contract) as a result of amendments to the Trade Practices Act 1974 (Cth). The amendments were aimed at prohibiting unfair contract terms in consumer contracts from 1 July 2010, and the new Contract has been amended to reflect this.

There have been several minor changes made to the Contract purely to clarify certain clauses and ensure that they are updated so as to refer to the correct current legislation, however this update will focus on the changes which can potentially affect the rights and obligations of both Buyers and Sellers.

Buyer’s Notification - Finance

Prior to the amendment, a Buyer simply needed to notify the Seller if their finance had not been approved by the Finance Date, resulting in the Contract being terminated. Now, the Buyer must specifically state in that notification that they, as “the Buyer”, “terminate the contract”. Failure to do so gives the Seller a right to terminate the Contract, so long as they do this by notice.

Buyer’s Notification - Building and pest report

Similar to the notification of Finance, the Buyer must, in relation to the building and pest inspection report (the Report):

a. notify the Seller of the failure of satisfactory Report by the Inspection Date along with the specific words that “the Buyer terminates this contract”, if they wish to exercise their right to terminate; OR

b. notify the Seller of whether they have satisfied their obligation of obtaining a satisfactory Report, or altogether waived their right to terminate under this section.

Again, failure to do so may result in the Seller terminating the Contract;

However, if the Seller decides to exercise their right to terminate, this will be their only remedy, and thus they will have to return the deposit to the Buyer; and
There will no longer be a ‘deemed’ satisfaction of building and pest report upon Buyer’s failure.

Parties’ Default – Introduction of Buyers’ rights and Seller’s Resale

The same rights the Seller has upon (i) affirmation of the Contract, (ii) termination for breach of an essential term, and (iii) damages, will now be available to the Buyer; and
If the Seller terminates the Contract and then on sells the Property, the Seller will no longer have the right to claim the expenses connected with the Contract (i.e agent’s commission and legal fees associated with the initial sale).

Should you have any queries about the changes to the standard REIQ House and Residential Land Contract, please don’t hesitate to contact Russell Sparke of our office.

Liability limited under a scheme approved by Professional Standards Legislation

Case Review - September Issue

2010-09-14T06:26:36+00:00

Securities Law Case Reviews

Balanced Securities Limited v David Thomas [2010] QDC 337

In the matter of Balanced Securities Limited v David Thomas [2010] QDC 337, Elliott May was successful in securing judgment on behalf of its financier client against a guarantor for the costs incurred in defending an unsuccessful action brought by a borrower after the loan had been repaid in full.

The Facts

The plaintiff, Balanced Securities, advanced $7,200,000 to Joelco Pty Ltd (Joelco). The loan was guaranteed (Guarantee) by David Thomas, the sole director of the borrower.

After the loan had been repaid in full, the borrower commenced proceedings against Balanced Securities to recover monies it alleged were not due to Balanced Securities when the loan was discharged. Chief Justice de Jersey dismissed the proceedings after a 2 day trial and ordered the borrower to pay Balanced Securities’ costs on the indemnity basis.

After Balanced Securities’ costs were assessed in the sum of $113,515.37 it commenced proceedings to recover the debt against David Thomas pursuant to the Guarantee.

David Thomas defended the claim on the following grounds:

1. That upon a proper construction of the Guarantee, it terms did not extend to the monies claimed by Balanced Securities as its costs incurred in defending Joelco’s action were not monies secured under the facility agreement;

2. That his obligations under the Guarantee were discharged upon Joelco repaying the loan in full.

The Judgement

Justice Dorney QC rejected Mr. Thomas’ defence and entered judgment against him in the sum of $113,515.37 stating:

“But to make things clear, I do not accept that, applying the proper interpretation principles that apply to guarantees, taking into account the interpretation clauses in the Facility Agreement itself and then applying both those generally to the objective theory of contract, the guarantee would be limited to the fixed time when principal, interest, damages and other moneys were asserted to have been first paid, especially where there existed later disputation about whether that payment of principal, interest, damages and other moneys was “in full”

The facts in this case are highly unusual and the judgment makes it clear that a guarantor’s obligations may continue on well after the loan has been repaid and the facility discharged.

Property Law Case Reviews

Fletcher V Kakemoto [2010] Qld Conveyancing Reports

The Supreme Court of Queensland recently had to decide upon whether a prospective purchaser is required to sign a new warning statement or re-sign the original warning statement on each occasion that changes are made to a proposed contract before it is submitted to a vendor.

Facts

The purchaser expressed interest in making an offer on an apartment to the marketing agent of the property. The purchaser was told by the agent that the cooling off period would have to be waived when making the offer. The agent prepared the necessary documentation so that the purchaser could make an offer and then explained the relevant parts before the purchaser firstly signed the warning statement and then the contract. Subsequently the vendor required some amendments to the special conditions of the contract. These changes were explained to the purchaser by the agent wherein the purchaser’s attention was again drawn to the warning statement however it was not re-signed by the purchaser. The purchaser provided the certificate from the purchaser’s lawyer waiving the cooling off period at this time. Further changes to the special conditions were requested by the vendor. These were inserted into the contract and were initialled by the purchaser. The Vendor then signed the contract for the first time.

The purchaser subsequently purported to terminate the contract asserting amongst other things that they had not re-signed the warning statement when the amendments were made to the contract and thus the relevant provisions of the Property Agents and Motor Dealers Act 2000 had not been complied with. Namely, sections 366B(4) and 366D (3). The purchaser submitted that the alterations made were such that it was in fact a new contract. The vendor argued that the purchaser was not entitled to terminate the contract because the amended contract was in all relevant respects, the document originally signed by the purchaser.

Decision

The court found that the purchaser was not entitled to terminate the contract. The court noted that the circumstances which played out at the meeting where the amendments were signed by the purchaser, were such that they should be categorised as, in the main, a “tidying up” of the proposed relevant contract in a form which could be put to the vendor. Even though the document was prepared by the vendor’s real estate agent (and then subject to some further changes), it still amounted to an offer being made by the purchaser.

The court concluded that a prospective purchaser is not required to sign a new warning statement or re-sign the original warning statement on each occasion that the purchaser makes any changes to a proposed contract before it is submitted to the vendor for signing.

The National Consumer Credit Protection Act 2009

2010-08-31T05:45:00+00:00

Is your business suffering the consequences of missing the registration deadline under the National Consumer Credit Protection Act 2009 (the "Act")?

If you run an existing credit business and have missed the deadline for registration of 30 June 2010, you are required to cease the operation of that business until licensed. The licensing period closes 31 December 2010 and it may be the case that you will not be in a position to apply for your license until closer to this date. To complete a license application to ASIC, the credit business must have, amongst other things, registered with ASIC prior to June 30^th 2010 as a credit business, generated numerous policies and procedures as outlined in the regulatory guidelines, in addition to minimum qualification requirements to satisfy ASIC's requirements under the Act. Depending on the size of your credit business, you may be working towards the 31 December 2010 deadline, however not meet all of the relevant requirements to license in the immediate future.

You may not be aware, but should you wish to continue to operate a credit business, but do not have time to license as yet, you can still apply to ASIC for late registration if you failed to do so prior to June 30^th 2010. Despite the fact you may have missed the required registration date, ASIC have advised that they may permit an extension of the period to submit your registration application. This is potentially a quicker process than waiting for the opportunity to apply for a license later this year if it is available to you, although you will still need to apply for a licence post December 2010. ASIC will consider extending the registration period to allow late registration on a case-by-case basis. That is, an application to extend the registration period will not automatically be approved and any application to request an extension to the registration period will be judged on it’s individual merits.

The ASIC guidelines on how to apply for late registration are set out below.

How to apply for late registration

The process for an application for late registration is not a complicated one, however there are various issues that will need to be dealt with in such an application. The first step in making such an application is to write to ASIC responding to the following queries:

an explanation for the delay in applying for registration (ASIC need to consider whether the explanation is reasonable in the circumstances).
the length of the delay in applying for registration
the type and size of your credit business (e.g. whether you are a credit provider or credit intermediary/broker and how much credit you have lent or helped people to obtain in the last year)
the cost to your credit business of suspending operations while a licence application is prepared and assessed
the cost to your credit business of preparing a licence application (see Regulatory Guide 204 Applying for and varying a credit licence)
the likelihood and extent of any consumer detriment resulting from the proposed extension of the registration period
the likelihood and extent of any detriment to consumers resulting from the suspension of your credit business while a licence application is prepared and assessed
whether you are a member of an external dispute resolution (EDR) scheme (you must be a member of an EDR scheme to be registered).

Any application for late registration should also look at Regulatory Guide 51 Applications for relief for more guidance about making this application. ASIC also charge a nominal fee of $100 when making the application.

You may choose to attach the completed application to your letter to ASIC requesting consent to late registration. The Regulatory Guidelines provided by ASIC, most notably Regulatory Guide 202 provide information about the questions you will be asked in the registration form, and the obligations you will have as a registered person.

For more information on how to make an application to register post June 30^th 2010, please contact James Hickey of our office. James will provide an initial free consultation on the details of the process required.

The importance of directors informing themselves of their company's financial position

2010-04-27T05:01:28+00:00

The case of Cooper v Commissioner of Taxation [2009] NSWSC 880, is a useful illustration of the importance of directors ensuring that their company maintains proper financial records and that they inform themselves as to their company’s financial position.

The liquidator of Butler Blackberry Pty Ltd (the Company) sought orders that amounts paid by the Company to the Commissioner of Taxation (the Commissioner) amounted to an unfair preference and were therefore voidable transactions under section 588FE of the Corporations Act 2001 (Cth).

Commissioner of Taxation's statutory indemnity from directors

The Commissioner did not dispute that if the Company was insolvent, the payments made to it amounted to an unfair preference. However, the Commissioner sought a statutory indemnity from the director of the Company under section 588FGA as the amounts paid had been applied to the Company’s tax obligations. There are certain defences available to directors found in section 588FGB. They are similar to the insolvent trading defences found in section 588H.

The Company's director attempted to rely on the statutory defences that:

he had reasonable grounds to expect and did expect that the Company was solvent and would remain solvent even if it made the payment; and/or
he had reasonable grounds to believe and did believe that competent and reliable persons, in the form of two internal employees responsible for keeping the finances of the Company and also an external accountant for the Company, were responsible for providing him with adequate financial information about whether the Company was solvent and that those persons were fulfilling that responsibility.

Financial records

The Company did not produce financial statements for the 2005, 2006 and 2007 years until November 2007. The Company originally used MYOB/Excel software but due to being unable to generate accurate staffing reports the Company changed to Work Desk. After this change, the director would request reports regarding the profit and loss, superannuation and workers' compensation. However, even with the new software, the Company was still not able to access this information effectively.
The director had been concentrating on existing clients, getting new clients and developing income streams for the Company and he claimed that he thought others were looking after the financial side of things.

Director unable to establish defence

The Commissioner succeeded in recovering over $70,000 from the director. The NSW Supreme Court held that the “financial records of the company were in an unacceptable state", and that because of this no reasonable grounds were established on which the director could reasonably expect that the Company was solvent.

As to whether the director had reasonable grounds to rely on information from others the judge said the evidence established that other people were not providing the director with adequate information about whether the Company was solvent because the Company's financial record keeping was not operating, or at least not operating adequately. However, the director’s conduct must be judged not only on what he knew but on what he ought to have known. The director took no steps to inform himself as to the Company’s financial position.

Concluding comment

It is important that:

good financial records be maintained so that a company and its directors are able to monitor the company’s solvency; and
directors take steps to read, understand and inform themselves as to the company’s financial position.

If these standards are not met, company directors will be unable to take advantage of the "safe harbour" defences to the Commissioner's statutory indemnity in section 588FGB or to a claim of insolvent trading in section 588H.

ASIC National Credit Roadshow

2010-03-24T04:03:21+00:00

As we act for a large number of lenders and brokers, several members of our firm attended the national credit road show held by the ASIC at the Gold Coast International Hotel on 23 February 2010.

Our primary aim in attending the seminar was to ensure that our interpretation of the national credit legislation was correct and that there were no unanticipated issues to be considered by our clients prior to applying for credit licenses. We were also interested to learn whether there were any issues of concern raised directly by participants in the credit industry that either we or our clients had not foreseen.

Whilst our understanding of the operation of the new regime was confirmed during the course of the seminar, one of the seminar participants queried whether finance provided for the purpose of developing a residential block of land into residential units/apartments would be caught by the code. Surprisingly, given the frequency with which finance is lent for this very purpose, the ASIC members present were not able to provide a definitive answer at the time.

As it is vital that both we and our clients understand how the ASIC proposes to interpret and enforce the new rules, we subsequently approached the ASIC for clarification in relation to the issue referred to above. Relevant portions of the ASIC’s response are reproduced below for your information.

"Thank you for attending the Gold Coast session of ASIC's roadshow. I refer to your email of 3 March, requesting further information in relation to finance provided for the purpose of residential development.

The starting point in deciding whether a particular entity needs to be licensed and whether a contract is captured under the new credit regime, is to bear in mind that the new legislation only applies where specific criteria have been met. Credit activities will only be captured where the relevant credit business involves transactions with consumers, and for certain purposes. A guarantee will be regulated by the National Credit Code only where it guarantees obligations under a credit contract which itself is covered by the Code.

Whilst credit for the purchase, renovation or improvement of residential property for investment purposes is captured by the new regime, business lending is not. For example, lending money to a company and having the Director sign on as guarantor for the purposes of funding the building of residential investment units is not consumer credit for the purposes of the new legislation and would not be captured. In this scenario, the company (developer) is seeking the funds to assist with business operations (i.e. building units).

I trust this response will assist you. However, you may also wish to visit ASIC's website to access our regulatory guides, dealing with various aspects of the new regime.”"

Based on this response it appears clear that credit provided in the example put to the ASIC will not be caught by the code provided the borrower is in the property development business. Consequently, when funds are advanced for the purchase, renovation or improvement of residential property for investment purposes, it is imperative that lenders wishing to remain outside the scope of the NCCP ensure that the relevant borrower is in the business of purchasing, renovating or improving residential property for investment purposes and is not a consumer undertaking these activities as an aside to some other business activity or form of employment.

ASIC releases update relating to short position reporting

2010-03-08T04:05:50+00:00

On Friday, 5 March 2010 ASIC announced decisions made in relation to the following provisions introduced in the Corporations Amendment Regulations 2009 (No 8) (SR No 327 of 2009) (Short Selling Regulations):

to delay the commencement of short seller obligations to lodge short position reports from 1 April 2010 to 1 June 2010; and
to reschedule the commencement of ASIC obligations to publish aggregated short position reports from 1 April 2010 to 21 June 2010.

The change in the commencement of the short seller’s obligation to report its short positions will allow short sellers more time to ensure they have the appropriate systems in place to meet their reporting obligations.

ASIC will facilitate an industry-wide pilot test to allow short sellers access to the new reporting infrastructure from 10 May 2010.

Additional information

To assist short sellers and systems developers adequately prepare for the new reporting requirements, ASIC has also revised Information Sheet 98, now titled Short selling: Short position reporting (INFO 98).

INFO 98 includes key tasks and practical information which stakeholders must be aware of prior to the revised start date for the reporting requirements. INFO 98 also contains details relating to the threshold for short position reporting and other technical amendments, as well as information about the FIX Rules of Engagement. In the period leading up to implementation, ASIC will regularly update INFO 98.

ASIC will shortly publish a revised Regulatory Guide 196 Short selling (RG 196). This document will contain more details about the decisions described above. Other updates in this document will reflect recent changes in the law, some exemptions provided to allow for certain naked short selling and guidance in relation to the disclosure and reporting requirements that apply.

ASIC release guidance for credit licensees about responsible lending obligations

2010-03-03T04:09:26+00:00

ASIC has this week released regulatory guidance for credit licensees about the responsible lending obligations in the National Consumer Credit Protection Act (National Credit Act). ASIC's Regulatory Guide 209 Credit licensing: Responsible lending conduct obligations (RG 209) has been developed to help industry understand ASIC’s expectations in relation to their responsible lending obligations as credit licensees.

The release of this regulatory guide is part of ASIC’s effort to provide early guidance to assist credit licensees to comply with their responsible lending obligations on the commencement of the National Consumer Credit regime in July 2010. The responsible lending conduct obligations will apply to brokers and some lenders from 1 July 2010.

The responsible lending obligations are key new requirements under the National Credit Act. RG 209 takes into account feedback from individual industry participants, industry organisations and consumer representatives following the release of a consultation paper on responsible lending last year (Consultation Paper 115 Responsible lending)

'The responsible lending obligations are important obligations under the National Consumer Credit regime and are new to industry', ASIC Commissioner, Dr Peter Boxall said.

'This guidance will assist industry and consumer groups understand our expectations about meeting the responsible lending obligations. We will continue to work with industry organisations and consumer representatives to provide further clarity and guidance if and where necessary', Dr Boxall said.

RG 209 is designed to help credit licensees and credit licence applicants to:

develop arrangements and systems to meet their responsible lending obligations; and
understand what ASIC expects when assessing whether licensees are complying with their responsible lending obligations.

RG 209 recognises that the responsible lending conduct obligations in the Credit Act are designed to work in a flexible way and that it is the credit licensee’s responsibility to put in place arrangements to comply with the responsible lending conduct obligations. RG 209 is principles based guidance that is designed to apply to a wide range of scenarios. ASIC will continue to assess the need for further guidance following the commencement of the regime.

ASIC has also released a feedback report on the consultation process: see Report 191 Response to submissions on CP 115 Responsible lending (REP 191).

National Credit Roadshow

2010-02-08T04:27:26+00:00

The proposed changes to the UCCC – soon to be the NCCC – have been touted for some time, and based on ASIC's recent release of roadshows (detailed below) it appears they do not plan on making any further amendments or changes to the proposed legislation to be introduced over a rolling time table commencing in April this year when the first registrations are required.

Roadshow Timetable

The Roadshow will visit every state and territory capital and 24 regional centres from 15 February 2010 through to the beginning of April 2010 as per the attached Timetable.

Who should attend?

The information sessions will help credit providers and people involved in assisting consumers obtain credit understand their requirements under the new National Consumer Credit Protection Act.

Each information session will:

Provide a face-to-face opportunity for industry to hear how the legal requirements have changed and how people can best prepare;

Explain the necessary steps that need to be taken to initially register for an Australian Credit Licence, one of the main components of the new regime, prior to the commencement of the new National Consumer Credit Regime;

Outline the steps people must take in advance of registering for a licence;

Run through when people are required to act;

Answer common questions such as who needs to be licensed and what credit activities the new regime will encompass;

Provide an opportunity to ask senior ASIC representatives questions.

To RSVP

If you wish to attend you will need to register by following the link below, selecting the session you wish to attend and then emailing the following information to DIAC:

Name;
Organisation;
Email;
Telephone.

http://www.asic.gov.au/asic/asic.nsf/byheadline/Roadshows?openDocument

Attendance is free and we recommend that all participants in the broking and financing industries attend.

Draft legislation to abolish the CGT Trust Cloning Exception

2010-01-28T04:34:38+00:00

On 25 November 2009 the government introduced draft legislation to remove the capital gains tax (CGT) concession on what is known as "trust cloning exception".

In October 2008, the Government announced it would abolish the capital gains tax (CGT) trust cloning tax concession and then, following public consultation, in May 2009 announced it would provide a limited CGT roll-over for the transfer of assets between 'fixed' trusts. The Government has now announced that the proposed CGT Trust Cloning Exception will be removed and the CGT roll-over for fixed trusts combined into one set of amendments.

Normally CGT is triggered when an asset is transferred into a trust, however under current legislation CGT is not triggered if an asset is transferred between trusts where the beneficiaries and terms of both trusts are the same – known as trust cloning.

Removing the trust cloning exception is consistent with the principle of taxing capital gains that arise where there is a change in ownership of an asset, as typically occurs on the creation of a trust and on transferring an asset to an existing trust.

A CGT exception will, however, be retained where the taxpayer is the sole beneficiary of a trust that is not a unit trust and the taxpayer is entitled to the asset and where there has merely been a change of trustee of a single trust. Under this scenario this will continue to not trigger a CGT taxing point.

The ATO considers that these amendments will resolve uncertainty surrounding the application of the exception, which it stated has created significant compliance and administrative costs for taxpayers and the Tax Office, and considers that these amendments will help to ensure equity and the integrity of the tax system.

The ATO has advised that taxpayers affected by the announcement that are self-assessing before the proposed change becomes law, should apply the existing law and then when the law is enacted seek an amendment to their assessment. Alternatively, if a taxpayer chooses to self-assess by anticipating the announcement they will need to review the assessment when the law is enacted.

Details of this draft legislation is contained in the “Taxation Laws Amendment (2009 Measures No. 6) Bill 2009”. The Government has advised that legislation giving effect to these measures will be introduced as soon as practicable and that an exposure draft of the legislation will be released for consultation in the coming weeks on the Treasury website.

At Elliott May, we work to give our clients options, to inform them on the judicial, legislative and regulatory guidelines they face, their rights and obligations, and to advise them on the full scope of possible solutions to ensure our clients are fully equipped to make the best business decisions for protecting their investment and commercial interests.

Regardless of your current position, Elliott May can benefit your procedures to ensure your business and investment is further secured by practical and precise legal representation.

Directors duty to prevent insolvent trading - ASIC releases consultation paper outlining proposed changes and guidance

2009-12-14T04:38:49+00:00

To ensure that directors, particularly those in small-to-medium enterprises in financial difficulty, fully understand their positive duty to prevent insolvent trading ASIC has this month released Consultation Paper 124 Directors' duty to prevent insolvent trading: Guide for directors (CP 124). In short, the guide sets out the relevant legal background to the duty to prevent insolvent trading and the key principles that ASIC considers directors need to take into account in performing their duty to prevent insolvent trading.

'Those principles are that a director:

· must keep him or herself informed about the financial affairs of the company and regularly assess the company’s solvency;

· immediately on identifying concerns about the company’s viability, should take positive steps to confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties;

· should obtain appropriate advice from a suitably qualified person; and

· should consider and act appropriately on the advice received in a timely manner.

The guidance includes information about ASIC’s approach to insolvent trading and describes some of the factors ASIC will take into account, and the evidentiary material it will look at, in assessing whether there has been a breach of the insolvent trading provisions.'

ASIC is seeking feedback on the proposals by 22 January 2010.

ASIC guildelines to credit regime

2009-12-11T05:19:20+00:00

On 1 December 2009, ASIC released further information with respect to the long awaited National Consumer Credit regime. Many lenders will already be aware of the proposed reforms, however currently it is difficult to prepare whilst the reforms continue to undergo changes. Elliott May will provide updates and and advice to clients as the reforms solidify closer to the implementation date next year. A copy of the ASIC release is below for your information.

09-239AD ASIC guidance assists industry get ready for credit

Tuesday 1 December 2009

ASIC today released its first package of regulatory guidance to help entities and individuals prepare for the proposed National Consumer Credit regime.

The guidance has been released prior to the commencement of the legislation to ensure those likely to be impacted by the reforms can determine whether they will need to be registered or licensed, and to help them prepare their businesses in readiness for the new requirements when they come into effect.

ASIC has released:

Information Sheet 96 Getting ready for credit (INFO 96), which explains how the national credit regime applies and what people can do to start getting ready for credit;
Regulatory Guide 203 Do I need a credit licence? (RG 203), which is designed to help people who engage in credit activities understand whether they need to be licensed; and
Regulatory Guide 202 Credit registration and transition (RG 202), which outlines the process for registering with ASIC and the transition from registration to licensing.

A summary of the content of the guides follows at the end of this advisory.

ASIC Commissioner, Dr Peter Boxall, said many entities and individuals would be exposed to specific licensing requirements, and associated conduct, dispute resolution and training obligations for the first time. He said it was important for these people to prepare themselves at the earliest opportunity to ensure a smooth transition to the new regime.

Registration is the first step in the transition process. Persons who engage in credit activities can apply to ASIC to be registered from 1 April 2010 until 30 June 2010. Registered persons will then have six months to apply for an Australian Credit Licence, between 1 July 2010 and 31 December 2010.

'ASIC encourages prospective licensees to review today's regulatory guidance as a package and confirm the extent to which the new regime impacts on their business. ASIC will be releasing further guidance in the coming weeks to assist licensees understand and comply with the new obligations, which will begin to take effect from 1 July 2010,' Dr Boxall said.

Further information

ASIC will continue to publish information on its website about the new regulatory framework including the legislation, licensing process, general obligations and the timeframe in which the changes will take effect.

To receive information from ASIC about the National Consumer Credit Protection reforms, and be informed about relevant policy announcements or regulatory guidance, subscribe to the ASIC Credit Reform Update available at www.asic.gov.au/credit-update.

Where to start?

Step 1: Read Information Sheet 96 Getting ready for credit (INFO 96)

INFO 96 contains some general information to help alert people who are currently providing credit or credit services about when the new National Consumer Credit regime will start, and what they can do to start getting ready.

INFO 96:

suggests that people think about whether they will need to be registered and licensed under the new regime;
sets out some things people can start doing to make the process of registering with ASIC quicker and easier; and
provides a timeline that sets out the important dates for when new requirements start, and what needs to be done by those dates if persons are going to continue to provide credit or credit services.

Step 2: Read Regulatory Guide 203 Do I need a credit licence? (RG 203)

RG 203 will help anyone who engages in a credit activity determine whether they need to be licensed (and therefore register with ASIC).

RG 203 contains guidance to:

help people who engage in credit activities understand whether they need to be licensed;
explain some key concepts such as ‘credit’, ‘credit activity’, ‘credit provider’ and ‘credit assistance’; and
explains which people are exempt from the licensing requirements.

Step 3: Read Regulatory Guide 202 Credit Registration and transition (RG 202)

RG 202:

explains how to apply to register with ASIC to engage in credit activities;
gives an overview of the obligations that registered persons will have under the new credit legislation; and
explains how persons who are registered with ASIC from 1 April 2010 will move to the new licensing regime after 1 July 2010.

Mortgagees beware!

2009-11-17T05:47:36+00:00

Mortgagees beware - the recent High Court decision in Bofinger v Kingsway Group Limited [2009] HCA 44 allowed guarantors to claim equitable compensation from the first mortgagee and in so doing placed them ahead of the second and third mortgagees.

Facts

B & B Holdings Pty Ltd (Borrower) carried on business as a real estate developer. The Borrower obtained finance from three lenders, all of whom took mortgages over the same lots owned by the Borrower. A first ranking mortgage was granted to Kingsway Group Pty Ltd (Kingsway), a second ranking mortgage to Reckley Pty Ltd (Reckley) and a third ranking mortgage to John Skehan (Skehan).

Each of the three loans was guaranteed by Mr and Mrs Bofinger (the Bofingers), both of whom were directors of the Borrower. Each guarantee was in turn secured by first, second and third mortgages over the Bofinger's family home and an investment unit belonging to them.

After the Borrower defaulted, the Bofingers voluntarily sold their 2 lots and applied the net proceeds of sale of around 1,500,000 in reduction of the Kingsway debt. After settlement of the sale of the Bofinger's 2 lots, all three mortgagees still retained registered mortgages over lots registered in the name of the Borrower, B&B Holdings Pty Ltd.

Kingsway subsequently exercised its power of sale over some of the lots mortgaged by the Borrower and applied the net proceeds towards discharging all of the Borrower's indebtedness to Kingsway. Kingsway then paid the surplus sale proceeds to Reckley as second mortgagee. Kingsway also delivered to Reckley the certificates of title to 2 unsold lots belonging to the Borrower along with a discharge of Kingsway's mortgage for both lots.

The guarantor's claim

The Bofingers claimed that Kingsway ought to have accounted to them rather than the second mortgagee in relation to the surplus sale proceeds so that they could recoup what they had previously paid to as guarantors in respect of the Borrower's indebtedness to Kingsway. The theory underlying the Bofinger's claim was that Kingsway has distributed the surplus in breach of a constructive trust by which the surplus was held for them.

The Bofingers, by reason of the fact that they had sold their own properties and applied the proceeds in reduction of Kingsway's debt, claimed to be entitled, as guarantors of that debt, to the benefit of the security (i.e. the surplus proceeds and unsold properties) held by Kingsway after its debt had been discharged in priority to Reckley (and Skehan) pursuant to the principles of subrogation in equity and s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW).

The High Court decision

On 2 November 2009, the High Court held that the surplus money was indeed held by Kingsway on constructive trust for the Bofingers. The High Court stated:

"On 8 February 2006 the first mortgagee was obliged in good conscience both to account to the appellants for surplus moneys and securities it held and not to undertake or perform any competing engagement in that respect without prior release by the appellants. These obligations were fiduciary in character. In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary."

Impact of the decision

In view of the decision:

Lenders will need to look at the drafting of their guarantee documents, particularly the no-competition clause, being the clause that is designed to stop guarantors claiming subrogation and other rights against the debtor in competition with the creditor;
Secured lenders who receive payments from guarantors will need to take care when distributing the proceeds of security or discharging security.

Please contact us should you wish us to review your loan facility documentation in light of the above decision of the High Court of Australia.

For more information or for assistance with reviewing your policies and procedures, please contact us on 1300 112 484.

Amendments to the Uniform Civil Procedure Rules 2005

2009-10-20T05:57:39+00:00

In October of this year, amendments were made to the Uniform Civil Procedure Rules 2005 (UCPR). Most notably, the following amendments are of particular relevance to Lenders as they effect the procedure undertaken in the enforcement of their registered and unregistered mortgages.

Rules Amended and a Brief Explanation of the Effect

Rule 10.15 of the UCPR addresses the requirements surrounding an application for substituted and informal service of an originating process in proceedings for possession of land.

The object of the amendment to rule 10.15 is to require an application for substituted and informal service of the originating process in relation to proceedings for possession of land to be supported by an affidavit that includes:
- a statement as to the applicant's knowledge of the defendant's whereabouts;
- a statement as to any communications that have taken place between the applicant and the
defendant since the cause in action arose.

Rule 16.4 of the UCPR addresses the requirements for default judgment on a claim for possession of land

Rule 39.3 of the UCPR addresses the requirements for an affidavit in support of application for writ of execution

Rule 39.3A is a new addition and was inserted into the UCPR. It addresses the requirement that the Sheriff be informed of persons in occupation of land

Rule 39.22 of the UCPR addresses the requirements in relation to the Judgment creditor�s application for sale

From 19 June 2009, s.71A of the Residential Tenancies Act 1987 requires mortgagees to give tenants a minimum of 30 days notice in writing, before taking possession of the property. Previously, mortgagees were only required to provide 10 days notice.

The object of the amendments to rules 16.4, 39.3 and 39.22 and new rule 39.3A is to require a mortgagee to advise:
- the court whether a property is subject to a residential tenancy when applying for default
judgment or a writ of possession
- the Sheriff if and when it has given the necessary notice to the tenant, if so requested.

Rule 36.16 of the UCPR addresses the further power to set aside or vary judgment or order

The object of this amendment to rule 36.16 is to limit the court's power to set aside a default judgment after it has been entered, if the default judgment is given in open court.

If the default judgment is given in open court then the defendant would have to appeal against the default judgment in the same way as he/she would have to appeal against another decision that is given in open court.

This is of particular interest to Lenders enforcing unregistered mortgages as unlike their registered counterparts, default judgement for claims involving unregistered mortgages are almost always given in open Court, rather than in chambers.

* A substantial portion of the information contained herein was provided by http://www.lawlink.nsw.gov.au/lawlink/spu/ll_ucpr.nsf/pages/ucpr_announce#2829(20/10/2009) and http://www.legislation.nsw.gov.au/maintop/epub ((20/10/2009).

For more information or for assistance with reviewing your policies and procedures, please contact us on 1300 112 484.