Personal Property Securities - It's time to act

The Personal Property Securities Act 2009 (PPSA) commenced on 30 January 2012.

There has been much discussion regarding the new legislation and how it applies to businesses. You may have already attended one of our seminars on the new legislation, but as a reminder we recap on the scheme below.

If you have not already done so, it is now critical that you consider how the PPSA may impact your business and take steps to protect yourself from any potential loss.

Click here to read the original article.

Partner: Mark Montes

Further review of dividend rules - time for greater clarity

In June 2010 amendments were made to the Corporations Act 2001 (the Act) by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (the Reform Act) with the objective of improving Australia's corporate reporting framework.  Most particularly, the Reform Act adopted a new test for the legal payment of dividends by a company (Current Dividend Test).

The Current Dividend Test (a 'balance sheet' test) allows a company to pay a dividend if the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient to pay for the dividend.  However, there have been calls by some stakeholders for changes to a number of the amendments made by the Reform Act.  In part, because of the confusion caused by the specific drafting of the legislative provision and the potential administrative burden of complying with the Current Dividend Test, particularly for SME businesses that may not otherwise have to comply with Accounting Standards.

On 28 November 2011, the Treasury released a discussion paper in relation to revising the terms of the dividend provisions and to address related amendments to the Corporations Act (Discussion Paper).

The Discussion Paper puts forward four alternative options for the test for payment of dividends, as well as further amendments to the Act.  You can read a more detailed overview of the provisions on our website.  In our opinion, 'Option 2' which suggests replacing the Current Dividend Test with a solvency based test is clearly the best - putting the key question of solvency at the heart of a Company's ability to pay dividends and somewhat simplifying the compliance costs for SME businesses.

Public comment on the proposals are open until 30 January 2011.  Please contact us if you'd like assistance on the application of the Current Dividend Test in the context of your business or to comment on the Discussion Paper.

Current Dividend Test

The Reform Act substituted a new section 254T to the Act, introducing the Current Dividend Test, which provides that a company must not pay a dividend unless:

• the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend (the 'balance sheet test'); and
• the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
• the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Criticisms of this test arise from the lack of clarity as to how this provision interacts with the requirements in the Act for the maintenance of capital by a company.  Other criticisms include the lack of relationship between the balance sheet test and solvency, internal inconsistencies within the Act between the nature of a dividend being 'declared' versus being 'determined' and, perhaps most relevantly for SME businesses, the potentially unreasonable compliance burden of having to have reference to accounting standards in assessing compliance with the balance sheet test.

Discussion Paper

The Discussion Paper suggests four alternatives to the Current Dividend Test.  These are:

• Option 1 - retaining the Current Dividend Test - In our view this is not the preferable approach.  Apart from the fundamental issue that the balance sheet test does not address the key question of a company's solvency before paying a dividend, there is significant potential for smaller entities that are not required to comply with accounting standards to have to incur additional professional costs in assessing compliance with the balance sheet test.  In addition, there are various technical issues that arise from the drafting of the current section that mean that professional advice from lawyers and accountants should always be sought from companies before declaring or paying a dividend;
• Option 2 - is based on the current provisions operating in New Zealand.  It would require the company to remain solvent following any distribution.  This is assessed by the company being able to pay its debts as they fall due (solvency test) and have assets that exceed known and contingent liabilities after payment of the dividend (balance sheet test).  In New Zealand, that is assessed by reference to the most recent financial statements and the directors assessment of other relevant factors impacting the company's assets and liabilities.
• Option 3 - is to reinstate the old 'profits test'.  While this test was generally well understood by companies and their advisers, there were a number of drawbacks.  In particular, there was no definition of profit in the Act and the case law had given rise to some unsatisfactory interpretations.  Profitability can also be impacted by various 'fair value' assessments under accounting standards, thereby making profit somewhat volatile.
• Option 4 - is a combination of a profits test (requiring dividends to only be paid out of profits) with the balance sheet and solvency tests (requiring that the company must have net assets before payment of the dividend and that the dividend is fair and reasonable to all shareholders and doesn't materially prejudice the company's ability to pay its creditors).  While seeking to combine some of the advantages of Option 2 above, this option would still retain a number of the significant disadvantages of the old profits test.

In addition to the question of the most appropriate test for the payment of dividends, the Discussion Paper also raises technical issues relating to the use of the term 'declared' in the provision, capital maintenance restrictions, the application of the dividend test in the context of group structures and various tax issues.

Alert - Best Execution: new market integrity rules for market participants and clients

The commencement of the new Chi-X financial market has brought with it a number of new regulatory and technical requirements for market participants.

Under the new rules, ASIC requires market participants to disclose their Best Execution policies to clients and provide periodic reports to ASIC and market operators on their Crossing Systems.

Even though ASIC has recognised that some market participants have had difficulty meeting the deadline of 31 October 2011, it nevertheless expects market participants to 'make all reasonable efforts' to comply with the requirements. Those who have not established their Best Execution arrangements need to take the appropriate steps to do so.

This post provides an overview of Best Execution and what it means for market participants and their clients.

Click here to read more of the article prepared by Bart Oude-Vrielink and Paul Washington.

Partner: Gerry Cawson

Small Business Commissioner Bill - a champion for small business, or a wolf in sheep's clothing?

The SA Government is pushing ahead with a controversial Small Business Commissioner Bill (Bill), which was passed by the Lower House last month and is currently being debated in the Upper House.

Josh Simons and Bronwyn Lee, our specialists advising on franchise law and associated commercial practice, have been closely following the Bill and advising our clients.  They've contributed the following.

The Bill is said to be modelled on the Victorian Small Business Commissioner Act, and was widely supported when first released as an Exposure Draft on 14 February 2011.  However, when the Bill was introduced into Parliament on 28 July 2011, it included a number of significant changes, which have led to the Law Council of Australia and the Law Society of South Australia withdrawing their support, and the Franchise Council of Australia mounting a strong campaign of opposition.

The Bill, if passed, will create a new position of Small Business Commissioner, which is embraced by many Australian States.  The Small Business Commissioner will have several functions, including;

• Monitoring the fair treatment of small businesses in their commercial dealings with other businesses in the workplace
• Receiving and investigating complaints by small businesses regarding unfair market practices
• Mediating between parties
• Mediating retail tenancy disputes between small businesses and landlords

These functions are all consistent with the role of Small Business Commissioners in other Australian states, and are generally supported.  The controversial aspects of the Bill are the provisions relating to industry codes, which were made to the Bill after the Exposure Draft and before the Bill was introduced to Parliament.

There are two ways in which the Bill applies to industry codes: 

The first is in relation to a new penalties regime to be introduced to the South Australian Fair Trading Act, which provides for civil penalties to be imposed for non-compliance with any industry code that is prescribed under the Fair Trading Act.  This can happen in two ways:

* The Small Business Commissioner can issue Expiation Notices for breaches of a prescribed industry code (a sort of 'on the spot fine').  These fines can be up to $6,000 per event.  If they are paid, then this is not regarded as an admission of guilt, and should be the end of the matter.

* Alternatively, the Small Business Commissioner can initiate proceedings in the Magistrates Court, seeking the imposition of a civil penalty order.  If found guilty in such an action, the accused will be liable of an offence, and can face fines of up to $40,000 per offence.

The Law Society of South Australia has criticised this aspect of the Bill, because it will effectively enable the government to introduce new law, punishable as an offence and with significant financial penalties, by simply prescribing an industry code, rather than having to do so through legislation that is scrutinised by the parliament.  While this concept is not new (the Commonwealth has prescribed industry codes under the Competition and Consumer Act 2010 which are enforceable by the ACCC in this way), it is new for South Australia.  There are also concerns amongst some in the business community about exactly what industry codes the government intends to prescribe.

The second is in relation to new investigation rights given to the Small Business Commissioner.  The Commissioner has significant powers to conduct investigations into suspected non-compliance with any prescribed South Australian or Commonwealth industry code.  It is the reference to investigating breach of Commonwealth prescribed industry codes that has concerned a lot of businesses and industry groups. There is no other State law that we know of that gives a State official the job of investigating compliance with a Commonwealth law in this way.

On one view, businesses shouldn't be concerned.  After all, this is just an investigation right, and (as mentioned) penalties only apply to industry codes prescribed under the Fair Trading Act. However, there are two major concerns with this:

* The first is that it is seen by many as signalling the government's intent to prescribe Commonwealth industry codes (or parts of them) under the Fair Trading Act, and thereby make them part of South Australian law.  The franchising industry, in particular, is concerned that the Franchising Code of Conduct will be prescribed in this way.  Minister Koutsantonis has been a long time critic of franchising, and the move has been described as 'franchise regulation by stealth'.

* The second is that the information gathering powers of the Small Business Commissioner are extremely wide, and the confidentiality applying to that information is extremely limited.  Unlike the Commonwealth Competition and Consumer Act, which gives the ACCC similar powers to compel production of information where they have a reasonable basis to suspect there has been a breach of the Act, the Small Business Commissioner just has to demonstrate that his investigation is required for the performance of his functions.  When you consider that his functions include 'facilitating and encouraging the fair treatment of small business in their commercial dealings with other business', you can see that this is a very low threshold indeed.  Then, once the Commissioner has the information, he can disclose it to (amongst others) any person concerned in the administration of another law relating to trade or commercial practices of the protection of consumers.

The Minister for Small Business, Tom Koutsantonis, has been a long time critic of the franchising industry and has been pushing for state-based regulation of franchising for some time.  The Bill is widely acknowledged to be a 'back door' means of introducing franchise regulation.  This could occur in a number of different ways:

* immediately following passage of the Bill, the Commissioner could use his investigative powers to gather evidence against a franchisor, and then pass this on to the ACCC to be used by it to take action under the Franchising Code;

* the government could prescribe the Franchising Code under the Fair Trading Act, which would then make it possible for the Commissioner to prosecute franchisors under the Code directly; or

* the government could look to develop and prescribe its own industry code applicable to franchises.

Whichever approach it looks to take, it seems clear that if the Bill passes, South Australia will be the first state to impose state-based franchising regulation. 

So, why does that matter? 

Well, for one thing, Australia has just gone through a process of harmonising national consumer protection laws, with the Australian Consumer Law introduced on 1 January 2011.  State-based regulation undermines that process, which is one of the main criticisms of the Bill that has been made by the Law Council of Australia. The Law Council has expressed concerns at the apparent lack of coordination with the Commonwealth over how the Bill could work in practice.

There have also been concerns expressed by some (including Federal Small Business Minister Nick Sherry), that the Bill may be unconstitutional.

Whatever the politics of the situation, it seems certain that South Australia will soon have a Small Business Commissioner and, one way or another, it will have the franchise industry in its sites.

Josh Simons can be contacted at josh.simons@minterellison.com

Director duties - time to close the expectation gap?

The recent decisions in the Centro and James Hardy cases have fuelled debate in the business community as to whether the law is reflective of the practical application of the role and responsibilities that directors undertake in company boardrooms.  The attention that this debate is drawing has manifested itself in a number of companies (particularly listed companies) closely considering the risks their own directors face.

One example of this was the recent amendment by Woodside Petroleum Ltd (Woodside or the Company), at its most recent annual general meeting, of Rule 88 of its Constitution.

Prior to the amendment of Woodside's Constitution, Rule 88 stated that "the management and control of the business and affairs of the Company are vested in the Board", who may exercise all the powers of the Company except any powers that are required to be exercised in general meeting under the Corporations Act 2001 (Cth) (Corporations Act) or Woodside's Constitution.

The revised Rule 88 reads "the business and affairs of the Company are to be managed by or under the direction of the Board", followed by the same limitation on directors' powers.  It is clear that Woodside has altered Rule 88 of its Constitution in order to align it with the replaceable rule in section 198A(1) of the Corporations Act.  It is debatable whether the scope of the newly worded Rule 88 is any narrower than the previous one.  One might speculate that Woodside has amended Rule 88 as such to preclude any argument against their directors that their Constitution vests them with responsibilities wider than those prescribed by section 198A(1) of the Corporations Act.

It is proposed that such a constitutional amendment does not properly address the disparity between the Australian community perception of the role and responsibilities of directors of a large listed company, and the company director's own perception of their role and responsibilities in the management of a large listed company.

Former New South Wales Supreme Court Judge, Robert Austin, now Senior Legal Consultant for Minter Ellison in Sydney, delivered a paper on this issue as part of the MacPherson Lectures at the University of Queensland in May 2010, arguing that as a whole, the current Australian law is closer to the community's perception than the director's self-perception, and this is because an unsatisfactory and ambiguous idea of corporate management is embedded in the law.  Austin claims that the directors' self-perception is closer than the law to a realistic recognition of the role and responsibilities that directors of large listed companies, acting as such, are capable of discharging.  He reasons that the best way to address this 'expectation gap' is to reformulate the role and responsibilities of directors in an authoritative way, a process that will inevitably require that the management function be expressly allocated to the company's executive directors and that the board of directors as a whole, acting in that capacity, be allocated an essentially supervisory function.

Austin proposes that for Australian public listed companies, the reallocation of functions that he advocates can be achieved by the adoption of constitutional amendments that are supported by amendments to the ASX Corporate Governance Council's Principles and Recommendations, without any need to change the statutory law.  He also acknowledges that the reallocation of functions will necessarily have implications for legal duties and responsibilities which will need to be explained.

While the debate continues, there appears to be little political appetite at present to address the increasingly vocal views of directors to more clearly recognise the practical realities of how larger listed companies are truly managed.

Alert – Government releases second tranche of draft FOFA legislation

On Wednesday 28 September, the federal government released the second tranche of draft legislation (including an Explanatory Memorandum) designed to give effect to its Future of Financial Advice (FOFA) reforms.  The draft Bill addresses conflicted remuneration (including product commissions, volume payments and 'soft dollar' payments).  Surprisingly, long-awaited provisions dealing with the 'grandfathering' of existing commission arrangements have been left out of the draft legislation.  For more information, take a look at our more detailed Alert.  Our earlier Alert on the FOFA reform agenda discusses the first tranche of the draft legislation.

The deadline for submissions to Treasury on the draft Bill is 19 October 2011.

AVCAL launches Code of Private Equity Governance

AVCAL (the representative body for the Private Equity and Venture Capital industry) has released their Code of Private Equity Governance.  The Code codifies many of the activities and governance mechanisms already being implemented by private equity industry participants.  In fact, in many respects the Code does no more than set out what most industry participants would already expect of sophisticated fund managers operating in the industry and what most investors in private equity funds are likely to require as part of their own investment approvals.

In launching the Code, Katherine Woodthorpe (AVCAL's CEO) noted "The new Governance Code has been drafted with reference to other corporate governance codes around the world, including the ASX Corporate Governance Principles and Recommendations, to provide assurance to stakeholders that private equity firms are responsible stewards of their investors’ capital and of the businesses they invest in.”

While the initiative is commendable, there will undoubtedly be some fund managers in the industry for whom full compliance with the Code may be seen to be unduly burdensome, potentially because of the size of their funds and the nature of the investments they pursue (generally smaller, earlier stage investments).  AVCAL have recognised this by requiring that its members that don't wish to comply with the Code are free to make such a decision, providing that they report to their investors that they aren't complying and explain why not.

If you'd like to understand how the Code may apply to you (whether you're an investor in a fund, fund manager or investee company), please get in touch.

Partner: Gerry Cawson