Summary of Changes

The reforms introduce a ?debtor in possession? model for companies with liabilities of less than $1 million.

The directors of the business, assisted by a small business restructuring practitioner (?SBRP?) (working for a low fixed fee), will have an option where they have twenty (20) business days to develop a restructuring plan; non-related creditors will then have fifteen (15) business days to vote on the plan (such vote being based on a majority in value) and if the creditors accept the plan, the SBRP will then administer the plan and be entitled to further remuneration. At all times, the directors will remain in control of the company.

This is purportedly intended to be a simplified, faster and lower cost pathway for small businesses to obtain debt relief and to keep trading.

Criticisms

• It is not clear as to when creditors will be notified that a proposed ?business plan? is being developed. In the meantime, creditors may be unwittingly exposed to insolvency risk and a SBRP will not be liable for the debts;

• Eligibility will be restricted to those businesses whom have paid up any and all employee entitlements which are due and payable. They will also need to have lodged all tax returns. In practice, this will mean that most small businesses will not be eligible;

• If the small business is advised that they are not eligible or cannot satisfy the eligibility test, they are likely to simply keep on trading ? continuing to put creditors at risk;

• It is often difficult to determine the exact liabilities of a distressed business. As it stands there is minimal guidance as to exactly how the $1 million liability threshold will be calculated.

For these reasons and more, the industry is awaiting ?the finer details?. Gavin Parsons and Associates will dispatch an updated article at that time.

Contact us

Are you interested in how these reforms might affect your situation? Contact Gavin Parsons and Associates on (02) 9262 4471 for a free no-obligation consultation today.

Lenders in the unregulated credit market are not immune from typical consumer credit typeclaims, including but not limited to statutory unconscionable conduct.

This article provides a summary of the cases referred to in the heading above and the lessons learned therefrom. Accountants, Financial Advisors, Lenders and Borrowers should take note.

Background

A borrower, Mr Stubbings, found a property in Fingal on the Mornington Peninsula. He attempted to procure a loan from a financial institution. However, his application for finance from that first tier lender was declined.

Mr Stubbings was then introduced to Mr Zourkas, an introducer or referrer to Ajzensztat Jeruzalski & Co (AJ Lawyers) or its lender clients.

AJ Lawyers offered, on behalf of three (3) of its clients, to provide finance to a company owned by Mr Stubbings ? the loan purpose was purportedly to enable the company to set up and expand the business. However, the true purpose of the loan was to enable Mr Stubbings to purchase a residential property in his own name.

The loan was secured by a first mortgage over the residential property, with the three (3) mortgagees being co-tenants of the mortgage in the proportions that they provided the loan moneys. Mr Stubbings also provided a guarantee which was secured with mortgages over two (2) other properties he already owned.

When things took a turn for the worst, Mr Stubbings alleged (amongst other things) that the mortgages and loans should be voided on the basis of unconscionable conduct.

Mr Stubbings was successful against AJ Lawyers at first instance and orders were made to the effect that the mortgage and the loans be voided on the condition that Mr Stubbings was not unjustly enriched.

• Mr Stubbings also succeeded at first instance against a third party accountant engaged to provide ?independent? financial advice to him (but who would only be paid in the event that the loan proceeded and clearly had not properly provided any independent advice); and against Mr Zourkas on the basis that he acted unconscionably in procuring Mr Stubbings to borrow through AJ Lawyers.

• However, in terms of the ?success? against the accountant and Mr Zourkas, due to the fact that the mortgage and loans having been set aside, Mr Stubbings had not suffered any loss or damage attributable to the conduct of the accountant or the introducer, Mr Zourkas, and as such the Court did not make any orders in favour of Mr Stubbings against the accountant or Mr Zourkas.

• Mr Stubbings settled his claim as against another solicitor who provided him with ?independent legal advice?.

Reasons for the first instance decision against AJ Lawyers

In terms of the findings of unconscionability, his Honour Robson J held at paragraph 316:

?..Mr Jeruzalski’s behaviour constituted unconscionable conduct. Mr Jeruzalski knowingly and deliberately shut his eyes to Mr Stubbings’ circumstances. Mr Jeruzalski shut his eyes to ensure that the loans would go through and that he would earn his fees. Asset-based lending coupled with the system of conduct adopted by AJ Lawyers, leads me to conclude that AJ Lawyers must be treated as knowing of Mr Stubbings’ personal and financial circumstances.?

Appeal decision

In the appeal decision, Beach, Kyrou and Hargrave JJA, overturned the finding of unconscionability against AJ Lawyers. In doing so the Court of Appeal placed significant reliance on the certificates of independent financial and legal advice that had been provided to AJ Lawyers:

131 At the time Jeruzalski approved the loans on 19 September 2015, the matters known to Jeruzalski concerning the ability of Stubbings and the company to service the loans for between six and 12 months pending refinance following a sale of the Narre Warren properties were — putting the case at its highest for Stubbings— as follows:

(1) Jeruzalski assumed that Stubbings and the company had ?no income’, in the sense that they did not have sufficient income to service interest under the loans for between six and 12 months.

(2) Jeruzalski knew that Stubbings and the company had paid only a token deposit under the two contracts to purchase the Fingal property — $100 under the first contract (in force when the loan offers were made) and $5,100 under the second contract (in force when the loans were approved). This supported Jeruzalski’s assumption that Stubbings and the company had insufficient income to service the loans.

(3) Jeruzalski had been informed by Zourkas that the proceeds of the two loans would be used to both settle the purchase of the Fingal property and to pay out the existing CBA mortgage loans over the two Narre Warren properties; and that Stubbings’s plan was to then sell the two Narre Warren properties and then refinance the loans with a bank. Jeruzalski gave evidence that he treated Stubbings’s equity in these properties as his deposit on the Fingal property.

(4) From the disbursement authorities prepared by his office at the time the loans were approved, Jeruzalski knew that — after settlement of the Fingal property purchase, repayment of the mortgages over the Narre Warren properties, and the payment of all costs and expenses including loan procuration fees and commissions — the net proceeds of the loans available to Stubbings and the company for any business purposes would be very small in comparison to the amount borrowed.[197]

(5) Jeruzalski had been told by Zourkas that Stubbings and the company intended to conduct a ?business concerned with boat repairs’ at the Fingal property.[198]

(6) Jeruzalski knew that he, as agent of the mortgagees, had the right under conditions (y) and (z) of the letters of offer to demand that Stubbings and the company provide ?evidence of serviceability’ or evidence of ?proposed means of repayment of the loans’ but chose not to exercise that right before approving the loans.

132 If these were the only matters known to Jeruzalski at the time the loans were approved, they may have been sufficient to justify the serious finding that it was unconscionable for him to abstain from inquiry in all the circumstances. But they were not the only matters. Jeruzalski well knew and relied on the fact that, as part of the system of lending, the loan approvals were conditional on the company and Stubbings obtaining independent legal and accounting advice and for the two certificates he had prepared to be signed and returned before the loans were made. Signed certificates were in fact returned to him. In our view, Jeruzalski was entitled to rely on the certificates — both as evidence that Stubbings had consulted a solicitor and an accountant for advice and as to the truth of the matters stated in the certificate. On that basis, Jeruzalski should not be fixed with knowledge of Stubbings’ personal and financial circumstances such that default under the loans was inevitable, as the trial judge appears to have found.

133 We conclude that the certificates, especially the accountant’s certificate, made it reasonable for Jeruzalski to refrain from inquiry as to how the company and Stubbings intended to, or whether they could in fact, service the loans pending refinance following sale of the two Narre Warren properties. In reaching that conclusion, we have been mindful that the judge inferred that:

Mr Jeruzalski must have suspected that Mr Stubbings would be guided by Mr Zourkas as to which solicitor and accountant to approach. I see this conduct as part of the system of conduct adopted by AJ Lawyers to immunise the firm from knowledge that might threaten the enforceability of the loan. As far as Mr Jeruzalski was concerned, the accountant and the solicitor would only be paid if the loans went ahead. There was no incentive for them to withhold the certificates. If they withheld the certificates, then they would receive nothing for their services. To characterise them as independent is perhaps a bridge too far.[199]

134 In our view, those inferential findings, and the ?bridge too far’ comment are not supported by the evidence. No basis for the inferred suspicion is given. No basis is given for the inference that the suspected conduct was ?part of the system’. The disbursement authorities enclosed with the two approval letters made no mention of the fees due to Kiatos and Topalides coming from the loan proceeds, and their fees were not deducted at settlement. It was only after settlement that their fees were paid from the $16,360 remaining in the AJ Lawyers trust account ? after authorisation from Stubbings.

Conclusion

If there was evidence that AJ Lawyers had knowledge that the certificates of independent legal and financial advice where not truly independent, the outcome of the appeal may have been different.

The case therefore highlights the importance to any lenders operating in this area of the importance of requiring borrowers to obtain independent legal and financial advice and provide evidence that they have done so. The lender should avoid referring the borrower to any particular accountant or lawyer and the lender should not involve themselves in any payments for the advice. The borrower should attend to those matters themselves. Independence is paramount and no system should be implemented that causes even the appearance that the person providing the independent advice has any kind of loyalty to or reliance on anyone other than the borrower they are advising.

It also highlights the significance of the duty incumbent on an accountant or lawyer providing independent financial or legal advice to a borrower. There are strong indications in the reasons of the Court of Appeal that if Mr Stubbings had cross-appealed against the decision not to award damages in his favour against the accountant or the introducer, Mr Zourkas, he would have been successful. Indeed that is the only conclusion which would have been available in circumstances in which the finding of unconscionability against AJ Lawyers had been overturned but the various findings against the accountant or the introducer, Mr Zourkas, had not been.

Contact us

Are you concerned about the compliance of a lending business? Gavin Parsons and Associates can assist you with any questions you have regarding lending and your business or that of your clients. Contact Gavin Parsons and Associates on (02) 9262 4471 for a free no-obligation consultation today.

What support is offered?

From 28 September 2020 to 3 January 2021, the level of fortnightly support will be decreased to $1,200 for those working 20+ hours per week, and $750 for those working less than 20 hours per week.

From 4 January 2021 to the currently scheduled end to the JobKeeper program on 28 March 2021, these rates will be decreased to $1,000 and $650 respectively.

What should you expect?

All companies seeking to continue their support under the JobKeeper program will have to re-apply for support, based on the decline in turnover test for the previous year’s respective quarter. This remains at 50% for large businesses, 30% for small businesses, and 15% for charities and other not-for-profits, barring education institutions.

These rates are calculated using actual GST turnover, rather than projected GST turnover. Alternatively, companies can also seek assessment on an alternative test, should they be able to establish that the actual GST turnover test is inappropriate for their business.

Which workers are covered?

In addition to those who qualified initially on 1 March 2020, those individuals who were employed on 1 July 2020 are now also covered by JobKeeper. This of course should cover many of those more recently employed since COVID-19 measures were introduced.

Conclusion

With this second round of the JobKeeper program, and re-qualification just around the corner, it’s important to ensure all of your records are ready for your application, and to check whether any recent hires can be added to your covered employees.

Should the COVID-19 pandemic continue until 2021, it is likely that the JobKeeper program would be extended further, however, at what level it can be expected to continue is uncertain. Given the recent decrease to the base rate, the level of financial support is very unlikely to rise, and may drop even further, as the Government seeks to encourage employees to get back to work and improve our COVID-19 damaged economy.

Need assistance understanding your obligations and how to access JobKeeper, or applying for an alternate test? Contact Gavin Parsons & Associates on 02 9262 4471 for a quick initial consultation and discussion of how we can assist in your application for JobKeeper.

The DIN scheme forms part of the Commonwealth Government’s ongoing attempts to investigate, deter, penalise and prosecute misconduct relating to directorship and illegal phoenix activity. Phoenix activity has been estimated to cost the Australian economy between approximately $2.9 billion and $5.1 billion annually (according to the Explanatory Memorandum to the Bill).

The mechanics are currently uncertain and it is unknown how effective DIN will work in practice to deter unlawful activity. Directors will be obliged to verify their identity and apply for a unique DIN to be recorded on a register. The new law relies on hefty civil and criminal penalties to motivate compliance, but it is likely that warnings will be issued at the first instance by the Registrar (of the regulatory body which is yet to be established/determined).

There is understandable doubt on whether the scheme will be effective in practice as shadow and de facto directors, who would not require a DIN, could continue to work outside the attention of the authorities and would likely continue to move between companies engaging in illegal practices.

Not only does this failure mean the scheme may not properly assist with the tracking of criminal actors through positions of directorship, but it may encourage those individuals who purposefully seek to undertake illegal activity to step further back into positions of obscurity to avoid attention under the new system.

The additional red tape of requiring new directors to obtain DIN prior to their appointment may reduce the speed between transitions of control at the helms of a company and at which a retiring director may be relieved of their director duties. This along with the other recent changes that prohibit a company from being left director-less may see ?director runs’ from faltering companies or may discourage individuals from accepting directorship for fear of being the last man or woman left on a sinking ship. With shrewd directors being the first to retire, a struggling company may be left with the least attentive or least capable director at the end of its life, which is unlikely to yield many benefits to the company’s creditors. As such, the recent legal reforms may not necessarily serve the intended purpose of encouraging accountability.

As for the usefulness of DIN from the perspective of a liquidator’s investigations, there are already tools in place to track directors using the ASIC database. It remains to be seen whether the directors of a company in liquidation would be required to apply for DIN during the transitional phase and whether the records of deregistered companies will be updated to reflect DIN.

Should you have any queries regarding the rollout of the DIN system or the implications for you, Gavin Parsons and Associates can assist you. Please contact us today on (02) 9262 4471.