Liability of Company Directors

Director Guarantees and Company Administration

When clients come to us and ask us to set up their new business, the first step is to advise on which type of business structure best suits their needs. One option we advise is incorporating a company to run their business. The benefit of running a business through a company is that companies have separate legal identity, much like individuals. The result of having separate legal identity is that the company and it’s obligations, liabilities, and debts are separate from the people who own and/or run the company (shareholders and directors). This forms a layer of protection for the directors, who run the company, from having to meet the company’s debts out of their own pocket.

Banks and other lenders will rarely lend money to a new company without some sort of guarantee that they’ll be paid in the event of default. The way the banks minimise their risk of not being repaid by the company is to require the directors of the company to personally guarantee the company’s debts. This is very common for new companies which don’t have enough credit history or income to acquire loans and overdrafts.

In the event a company is struggling or verging on insolvency, the directors may place the company into external administration. This involves a third party Administrator taking control of the company. While under external administration, directors are protected from having a lender (or anyone else) call in their guarantees.[1]

The amnesty only applies if the creditor (the bank, company or person who gets the benefit of the guarantee) hasn’t taken action to enforce the guarantee before the director places the company into external administration.[2]

Guarantees are an example of how the Corporations Law can leave directors personally vulnerable, despite the directors usually incorporating a company for their own protection. If you are unsure of your rights or obligations as a director or shareholder, or you need assistance protecting yourself from claims against you personally, make an appointment with one of our experts.

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[1] Section 440J Corporations Act 2001 (Cth)

[2] Mizuho Bank Ltd v Mark Anthony Ackroyd [2016] NSWSC 1148.

When Builders Go Bust

The flow-on effect of building companies declaring insolvency

Insolvency can be thought of as bankruptcy for companies (though there are obviously differences).  The legal definition is an inability to pay the company’s debts as and when they fall due (insolvency).

In recent years there has been a string of insolvent building companies. Collier Homes late last year is a recent example. When building companies go under, they take the expectations of home buyers, finance companies, subcontractors, professionals (such as real estate agents and solicitors), insurance companies and the community at large down with them. The flow-on effect can be enormous.

Following a builder’s insolvency, the company is usually placed into external administration (administration, receivership, or liquidation; same people different titles, rules and outcomes), where a third party Administrator, Receiver or Liquidator takes control of the company.

Often the company will continue trading under this new control format, and may finish building the homes to try to minimise the loss to the company’s creditors. While this might sound like good news for the home buyer, in reality they can be left to claim hundreds of thousands of dollars from insurers when the homes aren’t built to specification. Further, home buyers are often forced to deal with colossal delays in receiving the home they bargained for while the Administrator, Receiver or Liquidator takes stock and works out how best to proceed.

Subcontractors are worse off than home buyers, often being left significantly out of pocket as well as out of work.

The effect on the home building industry includes unprecedented rises in home indemnity premiums as insurers try to make up their losses.

The economic cost of delayed building projects along with the social cost of incomplete buildings littering suburbs makes for more bad news.

If you know a home buyer or subcontractor that would rather be protected against builder insolvency, make an appointment to speak to one of our experts about how to amend your contracts to address the issue.

Underbelly: housing schemes- Vendor finance and rent-to-buy housing schemes called a ‘black market’

Underbelly: housing schemes

 

Vendor finance and rent-to-buy housing schemes called a ‘black market’

 

 

The seemingly unstoppable rise in housing prices over the last decade has caused many Australians to feel ‘locked out’ of the dream of owning their own home.

 

Perhaps in response to this, a string of new businesses (called ‘equity providers’) have opened shop and now offer purchasers the ability to take a loan to pay the deposit on their home. The purchaser then makes their usual mortgage repayments to a bank in addition to paying back the equity provider for the deposit, usually over a period of 5 to 10 years. Assuming the purchaser has met their instalment payments, each year the equity provider transfers a small portion of ownership to the purchaser.

 

While this might appear to be great news for young people entering the property market, a recent investigation has revealed that people who enter into these arrangements are sometimes left worse off or even financially ruined.

 

The way the equity provider often charges what they call ‘option fees’. These fees are paid in exchange for the right to purchase the property from the equity provider at an agreed value when the instalments for the deposit are paid. The option fees don’t go towards paying off the debt.

 

The reason these arrangements can be risky is because the value of the property, and therefore the price the purchaser pays the equity provider at the end of the agreement, is agreed at the beginning of the agreement and not updated at any time before the purchaser purchases the property from the equity provider. Just some of the issues this creates for the purchaser include;

 

·        Some equity providers have over-inflated the worth of the property and set very high final purchase prices;

·        The purchaser ends up paying exorbitant option fees as well as funding two mortgages, and is  far worse off than before the agreement; and

·        Even if the purchaser is able to meet the repayments, there is then an over-inflated price for the property to be paid at the end of the agreement.

 

Some consumer advocates have called for these schemes to be banned, or at the very least provide protection under the National Credit Code.

Vicarious liability – ‘Am I liable for damage caused by my employees?’

The relevant question to ask is whether the worker is an employee or an independent contractor. This involves consideration of a range of factors.

Not every factor will be relevant in every case, nor will all be given the same weight.  Control (that the employer has over the worker) remains the central element. 

Other relevant factors include:

1. Mode of remuneration;

2. Provision and maintenance of equipment;

3. Obligation to work;

4. Hours of work;

5. Provision of holidays;

6. Deduction of income tax;

7. Delegation of work by the employee;

8. Whether uniform provided;

9. Provision of training.

An employer is liable for the conduct of an employee committed in the course of employment.

If the person who committed the liability was an independent contractor and not an employee, then the employer will not be vicariously liable for that conduct unless a non-delegable duty exists.

Independent contractors

The person who employs an independent contractor will only be liable for that contractor’s conduct if the employer owed a personal duty of care to the victim and that duty was a non-delegable duty of care. A non-delegable duty is a duty of care which the court regards as being unable to be discharged or ‘outsourced’.

Example: An employer company hires an independent contractor to operate a forklift, taking pallets from a warehouse to an awaiting truck. The forklift driver, desperate to get home decides to speed things up. Manoeuvring at twice the usual speed, the contractor hits an employee of the company. The employee may bring an action against;

• The independent contractor for negligent forklift operation,
• The employer company for negligently failing to provide a safe working environment, notwithstanding that the employer is seemingly faultless.

Where there is no non-delegable duty, an employer is not liable for the conduct of an independent contractor, even if that party was undertaking duties for the employer.

The words used to describe the relationship are not definitive of the legal nature of the relationship (just because they name themselves principal and contractor does not mean the law sees it as such), it is a matter for the courts to decide objectively.

Where an employee is lent by one employer to another employer, the company who retains control will be vicariously liable. It is not sufficient that the new employer is in control of payment, if all other forms of control remain with the original employer.

Was the conduct committed during the course of employment?

If it is established that the person who committed the act was an employee then the next question to be addressed is whether the act was committed in the course of his/her employment.

An act or omission is still considered to be in the course of employment if it is either a wrongful mode of committing an authorised act or a wrongful act actually authorised by the employer

If an employee takes an opportunity during employment to use time or resources for personal purposes the employer is not liable. This is referred to as the “frolic” doctrine   If it is argued that the employee was on a frolic, both the purpose and extent of the deviation must be considered (for example, where a driver deviated slightly off route to get refreshment from a hotel, the employer was still held liable). If the employee is engaged on employer business and on personal business at the same time, the employer may still be liable.

An express prohibition by the employer of a wrongful act will not necessarily be a defence to the employer if the employee’s act was still a mode of doing what the employee was employed to do.

An employer may be vicariously liable for both intentional and unintentional acts committed by an employee.

For a more thorough consideration of this complex area of law, or if you would like to know whether you are an employee or an independent contractor, make an appointment to speak with one of our experts about your position and rights.

CONTRACT NEGOTIATION – TACTICS & STRATEGY

Your approach to the contract negotiation process will depend upon a range of variables, some of which will be beyond your control.

The most obvious example of this is the attitude of the buyer who may employ a range of different approaches, and will have priorities and processes which will probably only be partially known to you.

Obviously, the buyer’s attitude approach and priorities, will have a major effect on how the negotiation proceeds, how far it gets, which contract variables are altered or conceded, and ultimately whether you get a deal at all.

There are several important things to remember when stepping into this process:-

1.             BEGIN WITH THE END IN MIND

As the seller, by setting the initial parameters for negotiation, you have some control over where the process begins.  Your broker (if you have chosen the broker well), should have been conditioning the buyer, and attempting to set expectations, throughout the purchase introduction process.  The broker (and you if there have been face to face negotiations), should have given a fairly clear indication of the variables in the contract which are important and/or non negotiable.  Having said that, most things are negotiable to some degree. Your initial approach and parameters, should be set up to allow some room for negotiation by the buyer, and give a reasonable expectation to the buyer of what you will and won’t accept, whilst at the same time being somewhere near reasonable.

You and your broker should have discussed this, and have a strategy in place.

2.             DECIDE WHAT’S IMPORTANT

It is exceedingly rare for the buyer of anything, let alone a business, to step up and immediately agree to every variable of the deal.  It is important for you to decide which variables are important and which ones are not.

There are essentially three categories and variables for you to consider:-

a.             Central and not negotiable

b.             Central and negotiable

c.             Throwaways

a.         Central and not negotiable

Examples of this category might be an absolute requirement for a guarantee from a purchase of company, or the requirement for the buyer to obtain a new Lease rather than an assignment of the existing Lease. The purchase of a business with the assignment of an existing Lease renders you liable for rent to the landlord, for the balance of the rental term.   If this is a significant amount and you have concerns about this ongoing liability, a requirement for a new Lease will rid you of this liability.  Likewise, where you have a purchaser that is a company, and you are uncertain as to its asset base or solvency, a guarantee from the directors (and, these days, the spouse(s) of the director(s)), is really quite essential.

b.         Central but negotiable

The purchase price is the most obvious example of this situation.  The amount you receive as the sum of your business, it’s critical for your future, but you can certainly expect the buyer to want to reduce the price. It is quite common for contracts to be received which have several prices crossed out, one after the other, before a final figure was reached.

c.         Throwaways

A good example of this is the restraint clause.

The buyer might well be extremely keen to see you out of the industry for a significant period of time.  If you are leaving the industry entirely, and have no plans to return, this is something you might throw away, in exchange for, for example, keeping the purchase price higher.  All this will need to be negotiated during the contract completion phase.

3.             THE ROLE OF THE BROKER

The broker will earn significant permission on the sale of your business. The brokers role is to find and introduce a buyer who is ready willing and able to complete.

The broker should also be assisting you with:-

a.             Conditioning the buyer to the important parameters of the deal, upon which you will not compromise;

b.             Relaying important information to you about the buyer’s priorities and attitudes;

c.             Manoeuvring the buyer towards a contract which best suits you.

Many people, buyers particularly, make the mistake of assuming or believing that the broker is an unbiased mediator between the parties.  This is untrue.

The broker quite literally and legitimately, is your agent, and, if he or she wants a commission, must act in you interests to get a contract together.

The other side of this coin however, is that the broker cannot act in a false or misleading way.  The broker is your agent and you will be responsible for any improper conduct undertaken on your behalf.  It is not a sustainable approach from either you or the agent, to attempt to hoodwink the buyer into buying a business, as, at some stage either before or after settlement, the true facts will come to light and you will be held accountable for the acts of your agent.

Having said all of this, an enthusiastic and skilled broker can create appropriate deals where each party “wins”, where, in many other circumstances, a deal will not materialise.

The broker is also a worthwhile circuit breaker between you and the buyer.  It is very often extremely worthwhile to be able to deliver information through a third party, and avoid directly having to answer questions on the spot.  Having the broker relay information, allows the possibility of time for thinking, and ensures the provision of appropriate information.

The broker is also (or should be), a skilled negotiator, focused solely on the sale deal.  Remember, in these circumstances, you will still have the business to run, and this must remain a focus.

4.             NEGOTIATION STYLES

The character, personality and approach of the buyer is a major variable in the contract negotiation process.

There is a large number of types of approach and list below is by no means exhaustive.

Some of the styles of negotiation which are often seen are as follows:-

1)     Direct clear and simple

2)     “Soviet style”

3)     “Chinese Style”

4)     Pushy

5)     Round and round

1)         Simple Clear and Direct

This is the buyer who displays a “what you see is what you get” approach.  The buyer presents a contract with variables that are somewhere within the bounds of what you consider to be a deal, and is willing to respond to a counter offer that you might make.  Responses to your proposals are returned in a timely way and the negotiation proceeds at a reasonable pace.  These are the easiest buyers to deal with.

2)         Soviet Style

Soviet style negotiation (named for the cold war negotiating style brought to prominence in 60’s and 70’s), opens with assumingly impossibly low offer and then proceeds at snails pace with tiny concessions away form that original position.

An example of this approach would be that if you have indicated a purchase price of, say, 20 with an expectation that you might settle it around 16 or 17, the Soviet style negotiator’s first offer will be 4, and might then proceed very slowly to 5 or 6.

In the face of an extremely low offer, particularly initially, the best options are:-

a)     withdraw from the negotiations and brand the offer ridiculous;

b)     Refuse to make a counter offer until the serious proposal is put forward

c)      Feign insult and go silent.

3)         Chinese Style

This style of negotiation, much applied in South East Asia, involves running a negotiation over long time frames.  Each issue dealt with one by one, and, similar to Soviet Style, concessions are small and well spaced apart.  This style of negotiator is looking for somebody who is impatient or desperate, and will attempt to make a “big concession” to bring the matter to a close.  Patience is the key with this style of negotiation and you must walk the line between keeping the matter going at a reasonable speed, and, at the other extreme, appearing needy or anxious.

The best response to this style of approach is to attempt to meet the size of the concessions being made, with the size of your own concessions, and try to be patient.  Making large concessions to attempt to prompt similar large concessions from the buyer, will not work with this type of buyer.  This may be frustrating but trying to force the pace will be interpreted as desperation, and you may well end up with deal parameters well below your expectations.

4)         Silent approach –

Some buyers will make an offer and then go silent

Bennett Carroll Solicitors have offices located in Brisbane and the Sunshine Coast

Freecall: 1300 334 566
Fax: (07) 3343 8664

Email: info@bcglaw.com.au

Website: www.bcglaw.com.au