What are the Duties of a Company Director?

Directors are responsible for the management and control of a Company.  They are the controlling minds of the Company.

Under common law principles the fiduciary duties of a director can be summarised as follows:

  • To act in good faith and for a proper purpose;
  • To exercise care, skill and diligence;
  • To exercise the powers for the purpose for which they were conferred; and
  • Avoid conflicts of interest.

In addition to the fiduciary duties owed by directors at common law as outlined above, the Corporations Act imposes extra statutory duties which to a large extent restate and reinforce the common law duties imposed on directors.  What is not widely known is the existence in our law of the so-called “business judgment rule” which is contained in section 180(2) of the Corporations Act.  The business judgment rule states, as a general rule, that if a director acts with care and diligence which is reasonably expected of a person with their knowledge and experience and if they act in good faith and for the benefit of the Company, then they will be exercising their duties and obligations to the Company correctly.

More to the point, a director of a Company will have met the requirements under the business judgment rule if they:

  • Make the particular business judgment in good faith and for a proper purpose;
  • Do not have a material personal interest in the subject matter of that judgment;
  • Inform themselves about the subject matter of the judgment to extent they reasonably believe to be appropriate; and
  • Rationally believe that the judgment is in the best interest of the Company.

While the purpose of the business judgment rule is to provide directors with an indemnity from personal liability for breaches of their statutory and general law duties of care and diligence, this defence will only apply if the decision making process is not flawed.  However, if a director departs from the principles of the business judgement rule, he or she will not have the protection afforded by the legislation and could be exposed to personal liability via litigation where it is alleged there has been a failure in the decision making process and the Company has suffered loss or damage as a result.

The potential ramifications that result from a director not meeting their obligations to their Company can be dire.  If the Company enters into a business transaction which sours or fails and the director did not conduct a proper and careful due diligence, that director may be held liable for damages sustained by the Company due to the imprudence of that director.

Caution should therefore always be exercised by a director of a Company before exercising their business judgment or embarking on a transaction which may affect the Company.

PLEASE CONTACT

If you would like advice in this area please contact David Vilensky at [email protected] or Alana Stallard  at [email protected] of our corporate advisory team.

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The Sham Of It All!

Surely I can save money by terminating the employment of a worker and then re-engage them as an independent contractor?

Not so fast….

Recently the Federal Court of Australia imposed a significant financial penalty against a company after that company was found to have breached the sham contracting provisions of the Fair Work Act 2009 (Cth) (“the Act”).

Section 357 of the Act protects genuine employees from “sham” arrangements in which they are portrayed as being independent contractors whereas in reality they are genuine employees.

Genuine employees are entitled to a range of rights and benefits (including sick leave, holiday pay and superannuation) whereas independent contractors do not enjoy these same benefits.

A sham self-employment contract arises in circumstances where a person is engaged to undertake certain work and/or provide certain services ostensibly as an independent contractor when the true situation is that they are not actually an independent contractor at all but an employee.

Cases where employers have misrepresented employees as being independent contractors have become more prevalent primarily because there is a financial benefit in doing so.   It is often less expensive to engage an independent contractor than to engage the services of an employee and, further, very often there are not the same risks associated with terminating an independent contract as there are in terminating the services of an employee.

On 2 December 2015 the High Court of Australia handed down its decision in the matter of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) HCA 45, which was a case in which in 2009 Quest South Perth Holdings Pty Ltd, through the services of an independent  staffing agency, terminated the employment of two housekeepers and then immediately re-hired them but allegedly as independent contractors to perform the same duties.  The Fair Work Ombudsman commence legal proceedings against Quest South Perth Holdings Pty Ltd alleging that this arrangement was in breach of the sham contracting laws set out in Section 357 of the Act.

Initially the proceeding commenced by the Fair Work Ombudsman in the Federal Court of Australia was unsuccessful. However, in a subsequent Appeal to the High Court of Australia, the Court held that Quest South Perth Holdings Pty Ltd had breached the sham contracting provisions of the Act by misrepresenting an employment relationship with the the two housekeepers as that of independent contracting. The High Court of Australia said that the two housekeepers continued to perform precisely the same work for Quest South Perth Holdings Pty Ltd in precisely the same manner as they had always done. The Court said that in law, the two housekeepers had never become independent contractors.

The Federal Court of Australia when it initially rejected the argument of the Fair Work Ombudsman found that the sham contracting provisions of the Act had not been breached because the arrangements had been made through the services of a third party (an independent labour hire firm) and not directly between Quest South Perth Holdings Pty Ltd and the two housekeepers. However this finding was rejected by the High Court of Australia and the fact that the arrangement was conducted through the services of the labour hire firm did not mean that the sham contracting provisions of the Act had been circumvented and not breached. Indeed the High Court of Australia went on to say that the misrepresentation by Quest South Perth Holdings Pty Ltd was exactly the type of activity which was intended to be caught by Section 357 of the Act.

The High Court of Australia referred the matter back to the Federal Court of Australia for it to impose appropriate penalties.  The Federal Court of Australia has recently dealt with the issue of penalty and imposed  a fine of  $59,000 against the company for breaching the sham contracting provisions of the Act.

This case highlights the difficulties faced by those who engage the services of workers and those workers themselves in determining whether a particular relationship is one of employer and employee or, alternatively, one of principal and contractor. This distinction can have significant financial and other consequences for all involved.  The Courts have developed a series of key indicators to assist in determining whether a particular relationship is one of employer and employee or, alternatively, one of principal and contractor.   None of these indicators is alone determined in a true and ultimately it is for the Court to decide based on all of the evidence before it.

Perhaps the more significant feature of this decision is that it highlights that the sham contracting provisions of the Actcannot be avoided by utilising a labour hire firm through which to engage the worker.

In order to minimise the risk of being caught in a sham contracting situation, employers should:

  1. ensure that the relationship with their workers is what they have assumed them to be.   If in doubt, they should seek competent legal advice;
  2. ensure that they do not misrepresent the nature of relationship to workers otherwise they will face prosecution and potentially significant penalties, for breaching the Act;
  3.  if engaging workers through a third party such as a labour hire firm, continually examine the relationship and implement risk management strategies.   If an employment relationship is later found to exist instead of one of contractor, the employer can be liable for significant back payment of entitlements in addition to any penalties that may be imposed for breaching the Act.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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What’s to Know About a Commercial Lease?

When first entering into a lease of commercial premises the task may seem daunting as well as confusing.

A lease is a legally binding contract (carrying significant legal consequences if its terms are breached) which creates certain rights and obligations between a landlord and a tenant in respect of a particular property. A commercial lease is used where the main use of the property is for business purposes.

It is critically important for prospective tenants to be aware of, and to fully understand, all of the important terms and conditions of the proposed lease. Entering into a lease without doing so can lead to significant and potentially fatal financial consequences.

Most, if not all, commercial leases contain several key terms which must be well understood before any prospective tenant finally commits to entering into the lease. These include:

Rent
What is the rent that you will be expected to pay? When will it fall due and payable (i.e. each month or each fortnight)?

Generally rent is calculated based on the area (per square metre) of the premises being leased. Sometimes reaching agreement as to the area that is being leased and for which rent is payable is not a straight forward exercise.

Rent Increase
Equally as important as ascertaining what is the actual rent payable, is understanding when rent increases are due and how they are to be calculated. Rent usually increases annually during the term of the lease determined either by a fixed percentage, market-value or possibly with respect to the Consumer Price Index (CPI). In the event that the lease provides for a market value review (as opposed to fixed increases) a market value review is required to take place at the expiry of the initial term and at expiry of any option to renew the lease.

Security/Bank Guarantees
In some instances, a landlord may ask for some form of security from the tenant or proposed tenant in order to cover a situation where the tenant fails one of the key obligations under the lease, such as failing to pay the rent. Sometimes the security required is a payment equal to 3 or 6 months’ rent and in some instances this is sought to be further guaranteed by some form of a bank guarantee. If such a security is sought in the lease, then the lease should also set out clearly the terms as to when the security payment will be returned back to the tenant. Similarly, if the tenant is a company then it is common for a landlord to require one or more of the company directors to provide a personal guarantee that the company will meet all of its obligations under the lease, including the obligation to pay rent.

Term (Duration)
Another key term of the lease is the duration of the lease itself. The lease document should set out clearly the length of the lease as well as any further options to renew the lease and any particular terms or preconditions that may be required relating to the renewal of the lease. Where a lease provides for one or more options for the tenant to renew the lease, it is essential that the tenant be aware of both when each option must be exercised and how it must be exercised (i.e. what form of written notice is required to validly exercise that option to renew the lease). Failing to exercise each option by the prescribed date and/or in the prescribed manner will (unless otherwise agreed) result in the lease ending and either no further lease being offered to the tenant or a new lease being offered but potentially on less favourable terms. This, of course, can be financially disastrous to a small business.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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Leasing Incentives – the Disincentive is in the Detail!

A recent survey by  Property Council of Australia found that the Perth office vacancy rate rose from 19.6 percent to 21.8 percent in the six months leading up to July.  This high vacancy rate has resulted in an increase in lease incentives being offered by landlords to prospective new tenants and to existing tenants whose leases are due to expire.

In a significant turn around to the recent past, the commercial rental market today is very tenant friendly and we are seeing (among other things) a resulting drop in effective rents.

Incentives

A lease is a legally binding contract which sets out the respective rights and obligations to both the landlord and the tenant in respect of the use by that tenant of a property owned by the landlord. The terms of a lease are negotiated between the landlord and the prospective new tenant and there are sound reasons why leasing incentives are offered.

Landlord’s reasons to offer incentives

 

  • Landlords can choose between their premises becoming or remaining vacant or accepting a lower rent or offering other incentives
  • Landlords can achieve a rent that provides some or all of the cash flow to pay for ongoing holding and operating costs (and possibly pay off development costs)
  • Landlords can encourage tenants to take up longer lease terms (the longer the term, the higher the incentive)

 

Tenant’s reasons to accept incentives

 

  • Tenants will seek to maximise the benefits that can be obtained when entering into a lease;
  • Tenants may have the choice as to whether to pay a higher rent and receive an incentive or pay a lower rent and receive no incentive
  • Landlords may offer an incentive to fund some or all of the fit-out costs or (in some other way) free up the tenant’s finances to enable the tenant to meet those fit-out costs.

 

Lease incentives can take one, or a combination, of the following forms:

 

  • Rent free period or reduced rent period;
  • A cash payment to the tenants or other in kind payments;
  • A free office or other fit-out, whether paid directly by the landlord or by way of reimbursement to the tenant for fit out expenses; and
  • The landlord assuming the tenant’s liabilities under an existing lease (i.e. lease legacy or lease tail).

 

So, What’s the Disincentive?

Negotiating the terms of a lease and any incentives to be offered or gained is often an extensive and robust process. At the conclusion of this process it is vitally important that both parties have a very clear common understanding as to the agreed key terms of the lease  and  exactly what incentives have been agreed to by the parties. Failure to achieve this will almost certainly result in misunderstandings, disputes and ultimately expensive protracted litigation.

Settling the wording of a lease is also a critical step in the process of securing a viable long-term tenancy for any property. This includes ensuring that all agreed incentives offered by the landlord are carefully and accurately recorded in the lease document. This is as much for the protection of the landlord as well as the tenant.

In addition, careful consideration must also be given to what other implications of the agreed incentives may exist.  For example:

 

  • Are there any tax implications?
  • Are there any government approvals that must be first obtained?
  • Has an agreement been reached as to what is to happen to any of the assets from which the tenant has benefited and for which the landlord has paid once the lease comes to an end?

 

Sometimes, where a tenant accepts certain incentives offered or agreed to by the landlord, the effective rent payable by the tenant is significantly reduced  and the Landlord may wish to keep this information confidential in order to preserve other tenancy arrangements with other tenants and/or to preserve the value of a building’s capital value. Such a confidentiality requirement can be recorded in the lease itself or, alternatively, as a separate Deed.

Whilst there are many incentives on offer to prospective tenants which are very attractive, it is essential that prospective tenants fully explore and understand the incentive being offered, whether it is a real benefit to the tenant’s business and what are all of the implications and obligations in accepting such an incentive. It is also essential to both the landlord and the tenant that the incentive agreement be fully and properly recorded in writing as part of the lease so that both parties have a clear understanding of the nature and full extent of the agreed incentives.

It is strongly recommend that all lease agreements be carefully reviewed by a lawyer before being signed by either the landlord or the tenant to ensure that it appropriately records all of the required terms and conditions including any incentives that may have been agreed to by the parties during the negotiation process.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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Slap on a Caveat!

A reoccurring issue that I deal with relates to people or businesses that are looking to register a caveat against the Certificate of Title (“Title”) to land. A caveat when registered against the Title to the land will generally prevent ownership of the land from being transferred into another person’s or entities name. More often than not, such people are looking to register the caveat against the Title because the registered owner of the property owes them money and they are trying to stop the land  from being sold so as to secure payment of the debt owing to them.

Unfortunately, a caveat cannot be registered against a Title simply because the registered owner of the land owes money to the person or entity seeking to register the caveat or for some other reason that person wishes to prevent the transfer of ownership of the land into the name of a third party.

In order to be entitled at law to register a caveat against the Title of land owned by another person or entity you must have what is referred to as a ‘caveatable interest’ in the land.

So, What Exactly is a Caveat?

As I mentioned above, a caveat is a document registered on a Title to land, that prevents dealings (such as buying, selling or mortgaging the land) with the land. A person who registers a caveat is known as a “caveator”. The caveat itself does not create an interest in the land or give the caveator the power to sell the land. Rather what it does do is to act as a:

  • warning that the caveator has some form of interest in the land; and
  • an  injunction to prevent any dealings in relation to the land.

Importantly, in Western Australia a person who registers a caveat against a Title to land without having a valid a ‘caveatable’  interest in the land  becomes  liable to pay compensation to any person who suffers financial  loss as a consequence of the caveat being registered against the Title to that land. Such compensation may amount in some cases to many thousands of dollars, such as where a sale of land is lost because the caveat is registered against the Title unlawfully.

Therefore, whilst the actual process of registering a caveat against the Title to land is a relatively straight forward one, the consequences of doing so if you do not have a clear caveatable interest in that land can be very significant and sometimes financially fatal.

When do I have a caveatable interest?

There are different kinds of interest in land that will satisfy the requirements of a “caveatable interest’ in the land. The following kinds of interest in land have been accepted by the Courts as caveatable interests:

  • as purchaser under a contract to acquire the land;
  • as grantee of an option to acquire the land;
  • as tenant of the land;
  • as the holder of an equitable mortgage in relation to the land; and
  • as chargee of the land;

A caveatable interest in land can arise in several different ways including by agreement. The latter is very important in commercial transactions because it is possible in many circumstances for parties to a contract to agree to the creation of a caveatable interest in one or more nominated pieces of land to secure a debt thereby providing the creditor or potential creditor with the ability to secure debt against tat land by way of a valid caveat

Is there More Than One Kind of Caveat?

There are different kinds of caveats and so it is important that if you are intending to register a caveat against the Title to land  that you also ensure that the correct kind of  caveat is lodged in the circumstances. There are 3  kinds of caveats that can be registered against the Title to land  in Western Australia. These are caveats that prevent dealings relating to the land:

  1. absolutely (absolute caveat);
  2. until after notice is given to the caveator that the caveat has been registered against the Title to the land (notice caveat); and
  3. unless the caveat registered is expressed to be subject to the claim of the caveator (subject to claim caveat).

Each of these kinds of caveats have different characteristics and benefits depending on the situation at hand. Care needs to be taken in selecting the most approprate caveat for the situation at hand.

Conclusion

Registering a caveat against a Title to land can often provide a swift and cost effective way of securing an existing or anticipated future debt. However, unless there is a valid caveatable interest in the land and  the correct kind of caveat is selected the exercise can quickly turn into a financial disaster. If the validity of the caveat is challenged then the caveator must either withdraw the Caveat voluntarily (thereby losing the security for the debt) or take a potentially significant financial risk in maintaining the caveat registered against the Title to the land and hope that he/she/it is found to have a valid caveatable interest in the land in question.

It is highly recommended that competent legal advice be obtained before proceeding to register or attempt to register a caveat against the Title to land to ensure that a valid caveatable interest exists and that the correct kind of caveat is selected to register against the Title to the land. It is also highly recommended that competent legal advice be obtained before entering into any significant commercial transactions to ensure that either:

  1. you  are aware of, and agree to, the creation of a caveatable interest in a Title to land registered in your name or one of your business entities; or
  2. a valid caveatable  interest is in fact created in Title to land if as a creditor or potential creditor you wish to secure debt against Title to land.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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Business Succession – My New Business Partner

When starting a business the last thing that many new business owners give consideration to, or sufficient consideration to, is what will happen in the future when the new business owner or an existing joint business owner either wants to exit the business or, through death, illness or disablement, is forced to exit the business.

A recent Succession Report prepared by Pitcher Partners in conjunction with Swinburne University revealed that 51% of business owners do not have a business succession plan in place.

An important part of any business succession planning is putting in place as early as possible an agreement between the business owners setting out an agreed process for what is to happen when one of the business owners wishes (or is forced) to exit the business and, importantly, what is to happen to that business owner’s interests in the business.

Can’t I give my interest in a business to someone else in my Will?

Business owners are in many instances able to bequeath or gift their business interests to someone of their choice under a Will.

However, this method of business succession has a number of pitfalls, the most significant of which is that it may well leave the surviving business owners in a business arrangement with a person or persons with whom they are not familiar and with whom they may not wish to have an ongoing business relationship.

For this reason it is important for businesses to have an agreed business succession plan in place. A commonly used way of achieving this is through the use of a Buy/Sell Agreement.

A Buy/Sell Agreement will take precedence over the Will because the deceased’s business interests will be transferred in accordance with the Buy/Sell Agreement and will not form part of the deceased’s estate.

What is a Buy/Sell Agreement?

A Buy/Sell Agreement is in effect part of a business succession plan. It is a contract that provides for the future payout or sale of a business owner’s interests to his or her business partner(s) on the happening of certain events. Typically these events include such things as the disablement or death of one of the business owners. A Buy/Sell Agreement will also often set out an agreed mechanism for the succession of one business owner’s interest in the business to the remaining owners of the business or to a third party.

Buy/Sell Agreements are also frequently linked to insurance policies which are put in place where a trigger event will (or is likely to) have a significant financial impact on the business.

If you own a business and you’re concerned about how the death, disablement or retirement of one of your business partners may have on the operation of your business, then a Buy/Sell Agreement can assist you. Not only does it allow you to purchase your business partner’s share if any of these things trigger events were to happen, but it can also help you avoid your ex-business partner’s spouse or children moving into your business.

However, business owners must seek competent accounting advice in relation to any capital gains tax implications before entering into a Buy/Sell Agreement.

Are all Buy/Sell Agreements the same?

Standard-form legal documents written with generic terms and conditions often do not take into account the particular circumstances in a given case and therefore risk being ineffective in the particular circumstances and are often unclear and confusing.

In particular, the risk with standard-form Buy/Sell Agreements is that the document:

1.will not be prepared for your particular  business with all of its unique circumstances and your specific needs; and

  1. may in the end be found to be legally unenforceable making the whole exercise a waste of time and money.

Therefore, it is advisable, and makes commercial sense,  to have a Buy/Sell Agreement prepared specifically for your personal and business circumstances by a lawyer experienced in preparing such documents.

What are the main advantages of having a Buy/Sell Agreement?

Buy/Sell Agreements:

  1. provide certainty for the business owners by reducing the risk of succession disputes;
  2. reduce the risk of the transfer of an outgoing owner’s interest in the business being undervalued with devastating financial consequences;
  3. reduce the risk of the business suffering significant financial loss , or even having to be wound up, because no agreed mechanism is in place to deal with business succession thereby resulting in all the business owners suffering financial harm.

There are many good reasons to have a current business succession plan in place for your business and to include a carefully and properly prepared Buy/Sell Agreement as part of that business succession plan.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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Landlords – Back to Basics

The starting point for all Landlords should be ensuring that they have an appropriate and well drafted lease for their commercial premise. It is a crucial step for Landlords as a poor lease or a bad leasing decision can be a costly mistake. The lease is central to the goodwill, value and future sale of a business.  A well drafted lease can avoid or assist the Landlord in resolving disputes that they may have in the future with tenants.

In Western Australia, the Commercial Tenancy (Retail Shops) Agreements Act 1985regulates many retail shop leases. Landlords should understand their rights and obligations in relation to the lease and what procedures to follow in the event of any disputes.

In October 2015, the commercial leasing vacancy rate in the Perth CBD was 19.6%. This figure was expected to grow in early 2016 as final completions of new developments came onto the market and leasing space that was taken up during the boom, was handed back as businesses have downsized.

At its meeting today, the Reserve Bank of Australia’s Board decided to leave the cash rate unchanged at 2.0 per cent. The reasoning behind the decision was that recent information suggested the global economy is continuing to grow, though at a slightly lower pace than expected. This is the ninth month in a row that Australia’s official interest rate has remained unchanged at a record low 2 per cent.

The ramifications for Landlord’s entering into a bad or hastily drawn lease in this current climate is that they may find that they have an invalid lease or they may experience significant disputes and as well as potential litigation in later years as a result. When interest rates do start to rise in the coming years, we are likely to see a large number of disputes concerning rent reviews.

Legal and commercial advice should therefore be obtained before:

  • making any commitments to lease, take on an assignment or incur any other obligations;
  • signing an offer to lease or any other lease related document;
  • payment/receipt of any deposit or other monies; or
  • occupying the leased premises.

If you are a Landlord looking to lease in this competitive market, you should begin by considering your leasing requirements with the main goal to develop a profitable business. Once you have identified your leasing requirements (i.e. the lease term, annual rent, rent reviews, etc) you must then seek to include as many of these requirements as possible when negotiating the terms of a new lease or the renewal of a lease with the tenant.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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Insurance Checklist

by Leslie Buchbinder
Builders’ Choice Magazine, December 2014

Builders and building subcontractors are exposed to many risks which, if not properly managed, can lead to financial ruin.

Builders and building subcontractors are exposed to many risks which, if not properly managed, can lead to financial ruin. These include risks under the terms of building contracts or subcontract agreements, as well as exposure under various pieces of legislation such as under the Workers Compensation and Injury Management Act 1981 and the Occupational Safety and Health Act 1984. There is also potential exposure under general laws such as negligence and breach of contract.

One useful management tool to have in place is appropriate and adequate insurance cover. However, not every risk can be insured against; insured against adequately, or insured against for a price that is acceptable to the builder or building contractor.

It is important that the builder or building contractor clearly understands the extent of the insurance contract before the contractual terms are finalised in order to avoid circumstances where the wrong assumptions have been made as to what risk is covered by the insurance policy and which party must accept responsibility for that risk. In a climate where insurance premiums are increasing, and more and more exclusion clauses are being inserted into building contracts and insurance policies, this is even more so the case.

Insurance checklist

When deciding how best to deal with a particular risk, you may find it useful to consider the following:

  1. Is the risk concerned insurable? Can a policy of insurance be procured which will specifically cover this risk?

  2. Is the insurance cover adequate? If a policy is obtained will it respond to the risk that has been identified and will it do so to the fullest extent of that risk?

  3. Does the cost of obtaining the insurance outweigh the risk?

  4. What is the nature of the policy and for how long will that policy provide cover?

  5. Can the policy wording be amended to specifically provide for the risk at hand or is it to be generic in nature only?

  6. Is the insurer likely to remain in business for the duration of the construction project?

Insurance disputes

Having the appropriate insurance cover does not necessarily avoid disputes arising. Issues can arise in relation to the insurance cover itself and whether or not a builder or a building contractor is protected by that insurance cover in any given circumstance.

What happens if you need to submit a claim to an insurance company? In the case of smaller and more straightforward matters, the claim may be adequately submitted by the builder or building contractor directly.

However, for larger and more complex claims, or where issues arise as to whether or not the insurer will extend indemnity to the builder or building contractor, legal advice can make a significant difference as to whether or not the claim will be ultimately accepted. Sometimes the wording of the claim submitted becomes extremely important.

Claims may be declined by an insurer for a variety of reasons. For example, in the case of a claim for storm damage, an insurer may attempt to decline the claim on the basis that gutters were blocked by roof debris and argue that this is evidence that the building was poorly kept and not properly maintained as required under the terms of the policy of insurance.

Building claims are often denied by insurers because of issues associated with defects.They may be inherent defects or defects which develop in a building over the years and fail to be considered separately from any compulsory insurance requirements.

Being declined by an insurer is not the end of the road

That decision may be the subject of internal dispute resolution pursuant to the insurer’s nominated procedures and from there the matter can be escalated further and ultimately, if necessary, to litigation. However, prior to reaching the stage of litigation there are often opportunities to seek to resolve the dispute quickly and less expensively.

Insurance is a key element of risk management – but policies must be properly considered, drafted and managed. Once any level of complexity is involved, taking legal advice is highly advisable, both in structuring insurance policies and when making claims. BC

PLEASE CONTACT

Bowen Buchbinder Vilensky Lawyers: (08) 9325 9644 or bbvlegal.com.au

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5 Things Everyone in the Building Industry Should Know about the Property Securities Register

– Builder’s Choice Magazine

 The Personal Property Securities Register (PPSR) is a national online database  which electronically manages and stores information regarding security interests over any personal property apart from real estate. On the register, anentity granting a security interest is the ‘grantor’, the entity getting the security interest is the ‘secured party’ and secured personal property is known as ‘collateral’.

5 Things Everyone in the Building Industry Should Know about the Personal Property Securities Register

By:Craig Hollett (Director, Bowen Buchbinder Vilensky) and Darryl Koh (Solicitor, Bowen Buchbinder Vilensky)

Introduction

The Personal Property Securities Register (PPSR) is a national online database  which electronically manages and stores information regarding security interests over any personal property apart from real estate. On the register, anentity granting a security interest is the ‘grantor’, the entity getting the security interest is the ‘secured party’ and secured personal property is known as ‘collateral’.

1. What is a security interest?

This is an interest in personal property provided for by an arrangement which secures payment or performance of an obligation. Alwaysconsider if a security interest should be registered on the PPSR. It may not be worthwhile if the personal property is below a certain value, or cannot be easily identified, for example, if it does not contain a serial number.

2.What are typical registrable security interests?

These can arise from a variety of arrangements: contained in commercial agreements such as in building or construction contracts e.g.:

(a) a principal  entitled to take possession of a contractor’s equipment to complete any outstanding work and sell the equipment to recover any amounts owing to the principal by the contractor;

(b) the supply of equipment whereby title is retained until the equipment is paid up. This is called a ‘purchase money security interest’ (or PMSI);

(c) where there is a ‘PPS lease’ (also a form of PMSI) of equipment –  an arrangement whereby you have possession of certain equipment for a defined period of time but do not actually own the equipment, e.g. a contractor leasing equipment from a supplier.  For a PPS lease, the lease period must be more than one year or indefinite. If the equipment is an aircraft, motor vehicle or a watercraft, the time period is 90 days.

3. Why is it important to register security interests?

The consequences of not protecting one’s security interests can be dire. For instance, if you lease equipment to a contractor but fail to register your security interest, and the contractor grants its bank an interest over all its assets and later becomes insolvent, then the bank may be entitled to claim those assets without having to consider your interests over those assets.Where there are two or more security interests registered over the same collateral, priority is determined by the timing of the registration, subject to the special priorities for PMSIs.

4. The special priorities for PMSIs

If registered in time, a PMSI has super-priority and leapfrogs ahead of any other existing registrations on the same collateral e.g. if a contractor has already granted a security interest to a bank over all of its existing and future assets, the lessor will still maintain priority over those assets that are being leased out to the contractor even though the lessor may have registered its security interests at a later time than the bank.

5. By when must a security interest be registered?

Generally, where the grantor is a company, the security interest has to be registered within 20 business days after the agreement giving rise to the security interest came into force.

The table below summarises when PMSIs should be registered otherwise a secured party will not benefit from the PMSI super-priority(although the default priority rules will still apply).The term ‘inventory’ refers to personal property used in the ordinary course of business eg. stock stored for the purposes of future sale or supply. ‘Goods’ refers to any tangible personal property.

Type of collateral

​When PMSI must be registered

Collateral is inventory

​If goods – before the grantor obtains possession of the goods 

If not goods – before the security interest attaches to the inventory 

​Collateral is personal property, other than inventory

​If goods – within 15 business days after the grantor obtains possession of the goods 

If not goods – within 15 business days after the security interest attaches to the personal property 

 Conclusion

When buying equipment, it is prudent to first do a PPSR search to check if there are any secured interests over it. When leasing out equipment to someone else, protect your interests in that equipment by way of PPSR registration bearing in mind the time limits for registration.

As always, if you are in doubt with regards to any aspects of the PPSRor the protection of your interests, you should seek competent legal advice as soon as possible.

PLEASE CONTACT

Bowen Buchbinder Vilensky Lawyers: (08) 9325 9644 or bbvlegal.com.au

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