Category Archives: Articles

IS THERE ANYTHING MORE UNFAIR THAN AN UNFAIR PREFERENCE?

Let’s start with the theory

The reason that the unfair preference provisions exist is to ensure that all unsecured creditors of an insolvent company are treated equally.

On that basis, any person who received a payment in the six months prior to the liquidation of a customer, must pay that money back to the liquidator. The liquidator then pays dividends to all creditors such that they all receive the same proportionate amount.

The main defence to an unfair preference claim is that the payment was made at a time when you did not know or suspect your customer was insolvent or no reasonable person in your position would have known or suspected.

And now the reality

The reality is that dividends from insolvent companies are rare and if paid, are not large. It is quite difficult to make out the defence about knowledge or suspicion of insolvency and the unfair preference provisions punish the diligent credit manager, who does everything they can to ensure that payment is made.

So, what steps can be taken to avoid an unfair preference if you have concerns a customer is insolvent?

If you have a personal guarantee of a customer’s debt – use it. Insist that payment be made by the guarantor – not from your potentially insolvent customer. You will then be able to argue that you did not receive a preference because you received payment from the guarantor. You should ensure that payment – and this part is very important – is made pursuant to the guarantor’s liability not the customer’s liability. There are several techniques you can undertake to ensure that you are protected in that regard.

Terms and conditions of your guarantee

If you obtain personal guarantees from directors of companies, it is vital that they are as effective as possible. This includes clauses allowing you to sue the guarantor for any amounts that you are obliged to pay a liquidator for an unfair preference.

Certain terms and conditions are a lot more effective than others in this regard.

If you receive a letter of demand

  1. Check that you have actually received an unfair preference. Liquidators often claim all payments that have been made in the prior six-month period are unfair preferences. You may be also able to reduce or eliminate the amount of the preference by the supplies that you have made during that time;
  2. Check whether your terms and conditions allow you to recover an unfair preference claim from a guarantor and if not, why don’t they?
  3. Unfair preferences only apply to payments from a customer whose debt is unsecured. I have seen a number of instances where clients assumed that they did not have a security because they had not realised their terms and conditions did provide a security. Alternatively, they assumed because they had not registered the security on the PPSR, that the security was of no value. In such situations, we have been able to write to the liquidator noting that the client was secured at all times and was therefore not liable to pay the unfair preference.

Careful review of your terms and conditions and your guarantee will provide protection from many, if not all unfair preference claims.

Need specialist insolvency advice? Contact Mark Harrick on (03) 9670 2266 or harrick@harricks.com.au

Enforceability of restraint of trade clauses – the three things every medical practitioner and practice must know

By Marcus Fogarty LLB (Hons) GradDipLegPrac 

A common feature of employment contracts is the restraint of trade clause, which if valid and enforceable will restrain a former practitioner from, depending on its terms, working with a former practice’s patients.

1. All restraints are void, unless…

Practices and practitioners should not presume that a restraint of trade clause is enforceable at law. A restraint of trade clause is, on its face, void. That is, unless the practice can show that it has a legitimate interest that requires protection and that the restraint affords no greater protection than is necessary to protect that legitimate interest.

Examples of legitimate interests capable of protection are goodwill, confidential information and customer and client bases.

A broader scope of restraint is more likely to be reasonable in the eyes of the Court in a sale of business context. The Courts have held that a restraint against medical practitioners in favour of a company to whom they had sold their practice, which restrained the practitioners from operating for one year within a 3 kilometre radius of the practice, was reasonable.

2. Reasonableness assessed at time of contract

Over time a practitioner’s role and responsibilities may change and so with it the reasonableness of a restraint against him or her. For example, a broad restraint is more likely to be reasonable as against a senior practitioner with higher levels of patient interaction and a greater knowledge of the business than a more junior practitioner commencing their career.

However, the reasonableness of a restraint of trade clauses is assessed at the time the contract is executed rather than when the employment comes to an end or when the practice is seeking to enforce the restraint.

To ensure that a restraint is reasonable, the scope of it should be drafted to afford only the protection that is necessary taking into account the practitioner’s position, responsibility, level of experience, and knowledge of the business, in their existing role rather than a role that they may have in the future.

As a practitioner’s career progresses the risk to the practice posed by that practitioner leaving employment increases with it, as does the reasonableness of a broader restraint. For these reasons, the scope of restraints should be updated throughout the development of the practitioner’s career.

3. Cascade clauses

Drafters of restraint of trade clauses will often use ‘cascade’ or ‘step-down’ clauses such that the scope of the restraint, in terms of the geographical and time boundary, is defined in decreasing stages. An example of a cascade clause, which was found to be enforceable by the New South Wales Court of Appeal in OAMPS Insurance Brokers Ltd, was;

“… during the Restraint Period and within the Restraint Area (referred to below), you will not … :

a) …
b) Canvass, solicit or deal with, or counsel, procure … any client of the Company with whom you have had dealings during the two year period prior to your employment ending.

Restraint Period means, from the date of termination of your employment:

a) 15 months;
b) 13 months;
c) 12 months.

Restraint Area means:

a) Australia;
b) The State or Territory in which you are employed at the date of termination of your employment;
c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment.”

Cascade clauses are used by drafters so that, should the Court decide that any one or more of the geographical or time boundaries is unreasonable they can be struck out, leaving only those boundaries which are reasonable.

A criticism of the cascade clause is that a practitioner cannot know which elements are reasonable and therefore the extent to which he or she will be restrained following the termination of their employment.

However, the Courts have held that cascade clauses will be valid and enforceable provided that;

–  it is clear that each of the variations is a separate clause (importantly, the contract in the OAMPS decision also contained a clause stating that each combination of the geographical and time boundaries was a separate and independent provision; and

–  the clause itself and each boundary are expressed in clear words, the separate boundaries are capable of simultaneous compliance, and the reasonableness of the boundaries does not require any inquiry or finding by the Court.

4. Conclusion

Practices must be mindful that any restraints upon practitioners must do no more than is necessary to protect the practice’s interests, or risk losing protection altogether. Also, cascade clauses must be drafted with caution to ensure they are not void for uncertainty.

Standard form contracts containing restraints should not be used, rather, the restraints should be adapted appropriately to the practitioner considering his/her position, responsibility, experience, and business knowledge, as at the time of entering into the contract. Such restraints should be updated on an annual basis.

If you have any queries in relation to the article or require any assistance with restraint of trade in any profession, please contact Harrick Lawyers on 03 9670 2266 or enquiries@harricks.com.au

The Personal Property Securities Act A Revolution in Australia’s Commercial Law System

What is the Personal Property Securities Act?

In general terms the Personal Property Securities Act, the PPSA in short, is a revolution in Australia’s commercial law system. It changes the way debts are secured over personal property (being any property other than an interest in land).

Specifically security taken to secure payment of a debt should be registered on the Personal Property Securities Register, the PPSR in short. The PPSR is an electronic register accessible 24 hours a day.

As the PPSA only involves personal property it does not affect any charges that may be taken over land and any caveats that are lodged over the land, to secure debts.

What else should be registered on the PPSR?

While the PPSA most commonly covers security taken over personal property, it also extends to some leases or bailments of personal property, even though the lease or bailment is not a security.

A bailment is a situation where items are delivered to another person for safekeeping or a specific purpose. An example of a bailment would be when a car is delivered to a mechanic to have the car serviced.

If the lease or bailment is one to which the PPSA applies, then the lease or bailment should be registered on the PPSR.

A retention of title clause provides that when goods are sold, even though possession of the goods is transferred to the purchaser, ownership does not pass until payment is made. It has been commonly used in Australia to help a seller of goods ensure that it receives payment. A retention of title clause is not a security, but it should also be registered on the PPSR.

Who should consider the PPSA?

Any person who sells goods or services on a credit basis and wants to secure the debt needs to carefully consider the PPSA.

How long do you have to register?

If the item to be secured is inventory, then registration of the security interest should take place before transfer of possession of the inventory.

If the item to be secured is not inventory, then registration should take place within 15 business days of transfer of possession.

What happens if you do not register within the specified time?

If you miss the time specified for registration it is possible to have a late registration, although there may be a loss of priority for the security interest.

The effect this has on Unfair Preferences

An unfair preference arises when a purchaser of an item, having paid a seller a debt due to the seller which is not secured, becomes insolvent. The insolvency practitioner is then entitled, under certain circumstances, to claim this money back from the seller.

Registration of a retention of title clause on the PPSR may assist the seller avoiding such unfair preferences if they were secured at the time of payment.

What happens if you fail to register?

The consequences of not registering are severe, potentially leading to a loss of priority for the security. Also in the cases of the leases, which are required to be registered under the PPSA, a failure to register may lead to a loss of ownership by the lessor of the assets.

How does this affect existing arrangements?

The PPSA commenced on 30 January 2012 however it still applies to all securities taken prior to that date. It also applies to certain leases and bailments taken prior 30 January 2012. The PPSA allowed a period of 2 years, expiring on 30 January 2014, where the existing arrangements were deemed to be registered. If the existing arrangements were registered before 30 January 2014, they were deemed to be registered from 30 January 2012 onwards without any loss of priority or rights.

If you have any queries or require any assistance with regards to the PPSA and PPSR please do not hesitate to contact Harrick Lawyers on (03) 9670 2266.

Mergers And Acquisitions

THINGS TO CONSIDER WHEN SELLING YOUR BUSINESS

The day has finally arrived when after years of hard work you are ready to sell your business. Or are you? Selling your business requires a lot of work to be done in advance.

Firstly you should have a reliable and accurate accounting system which can show at least 3 years of accounts. It is only from such accounts that a proper valuation can be obtained.

The second step is to ensure that your staff are on appropriate contracts with appropriate restraints on poaching your customers. Such restraints are regarded as void unless they can be shown to be fair and appropriate. This is important to protect the goodwill of your business . If as if such restraints are considered found to be excessive they can be struck out by the courts.

The third step is to ensure that you have appropriate contracts with your customers. A prospective purchaser will want to see that your customers will be likely to continue with the purchaser after the sale.

The fourth step is to ensure that you have time available on your lease with options for further terms. A purchaser of a business that relies upon a certain location will be reluctant to purchase a business if it does not have the ability to conduct the business from the premises for a reasonable period of time.

Having satisfied these steps the next step is to allow prospective purchasers to review the operations of the business, but only after the purchaser has signed a confidentiality agreement, so that your trade secrets and methods of operation are kept secret if the purchaser does not proceed.

The prospective purchaser should also agree that they will not approach any staff to work for them in the event that the sale does not proceed and that they will not employ any of those staff for a period in case they are approached by such staff.

Implementing these steps can make the sale process proceed smoothly and successfully.

For further information about things to consider when selling your business please contact us on (03) 9670 2266.