Search This Blog

Thursday, 16 March 2017

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.

[1] Section 440J Corporations Act 2001 (Cth)
[2] Mizuho Bank Ltd v Mark Anthony Ackroyd [2016] NSWSC 1148.

Thursday, 2 March 2017

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.

Thursday, 23 February 2017

Developer barred from terminating under Sunset Clause

The New South Wales law provides that a developer cannot terminate under a sunset clause in an off-the-plan contract unless the Court grants them permission to do so.

Property values have soared over the last few years. Developers who entered off-the-plan contracts to sell a property for, say,  $400,000.00 in 2014, which by 2016 is worth $550,000.00, may feel unhappy at having to sell the property for less than its’ current market value. Some unscrupulous developers began using the sunset clause in the contract to terminate it by intentionally delaying the completion of projects until the sunset date arrived. At that point they were terminating the off-the-plan contracts, quickly completing the projects and then selling the properties.

In response the New South Wales law now protects buyers from developers looking to take advantage of the sunset clause in off-the-plan contracts by forcing developers to get Court approval before terminating the contract.

That legislation was tested recently in a case involving a developer and a purchaser.

The Court will consider the developer’s reasons for the delay in creating the Lot, whether the reasons for the delay are reasonable, whether the developer has acted in bad faith, what effect the termination will have on the purchaser and whether it is fair and equitable that the developer be allowed to terminate.

In the recent case of Jobema Developments Pty Limited v Zhu & Ors the developer selectively extended the sunset dates on some contracts in the development and not others, and offered no explanation as to why some contracts were extended where others weren’t.  It will come as no surprise that the Court refused the developer’s application.

It will be interesting to see how this protection is extended or redacted as more cases under these laws are brought before the Courts.

Search This Blog