Corporate & Business Litigation

What tax risks do I take on when I become a company director? (updated)

This is a question often asked of lawyers. There are many risks a person is exposed to when they agree to become a company director. 

Below is an extract from a paper I presented at a Legalwise Seminar "Business Clients: 20 Answers To Their Most Asked Questions" in Perth on 21 November 2019. 

1. Risk of breaching directors duties if taxes are not paid

Directors have an obligation to act in good faith and in the best interests of the Company and to act with reasonable care and diligence. This includes ensuring the company’s tax affairs and tax compliance matters are managed diligently.

Accordingly, a director must ensure that a company of which he or she is a director complies with its tax payment obligations. Failure to do so can result in the director being in breach of his or her legal duties as a director, which may attract penalties under the Corporations Act 2001. This could include civil penalties, compensation proceedings and criminal charges. Seek our advice as needed.

2. Risk of personal liability under Director Penalty Notices

Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA) sets out the Director Penalty Notice (DPN) regime. Under Division 269 directors are required to ensure that the company complies with its Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations. If a director fails to ensure compliance, the Commissioner of Taxation can recover personally from the director a penalty equal to the company’s outstanding PAYG and SGC obligations. 

What is PAYG withholding? 

By law a company must withhold tax from salary, wages, commission, bonuses or other allowances the company pays to an individual as an employee.  Tax legislation also requires a company to withhold tax in other scenarios, including:

• payments to company directors and officer holders;
• payments to workers under a labour-hire agreement; 
• payments under certain voluntary agreements; and
• payments to suppliers where an ABN has not been quoted in relation to a supply.

Broadly, these laws are known as the PAYG withholding regime. Withheld tax amounts must be paid to the ATO.

What are SGC obligations?

By law a company must also pay compulsory superannuation guarantee amounts to its employees. The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires that employers pay a fixed percentage of an employee’s earnings into the employee’s superannuation fund. This is the superannuation guarantee (SG) amount. A Superannuation Guarantee Charge (SGC) is imposed on employers who fail to pay the required SG amount i.e. the SGC is the shortfall plus interest (usually 10% per annum) and administration costs (usually $20 per employee per period). The SGC must be paid by the employer to the ATO each quarter. 

Personal liability under Director Penalty Notices 

The DPN regime allows the ATO to impose a personal penalty on directors who fail to ensure a company complies with its PAYG withholding and SGC obligations.

In summary, if a company has an outstanding PAYG withholding or SGC debt then the ATO can send a DPN to a director giving that director 21 days to:

• cause the company to pay the debt; or
• put the company into liquidation; or
• put the company into voluntary administration; or
• come to a payment arrangement with the ATO.  

Requirements for a valid DPN

Section 269-25 of the TAA sets out the requirements for a DPN to be valid. The DPN must:

• set out what the ATO thinks is the unpaid amount of the company’s PAYG withholding or SGC liability; 
• state that the director is liable to pay to the ATO, by way of penalty, an amount equal to that unpaid amount because of an obligation the director has or had under Division 269 of Schedule 1 of the TAA; and
• explain the main circumstances in which the penalty will be remitted.

Notably, the DPN does not have to be physically received by a director for it to be valid, as long as there was effective delivery as defined in the TAA.

Avoiding personal liability under a DPN

After a DPN is issued, the ability of the director to avoid paying the penalty personally is relatively limited. If the unpaid PAYG withholding or SGC amount was reported to the ATO within three months of the due date, then the personal penalty can be remitted (cancelled) if: 

• the company pays the outstanding debts; 
• an administrator is appointed; or 
• the company commenced being wound up,

within 21 days of the DPN being given.

Importantly, the penalty on the director may not be remitted if instead a payment arrangement is agreed with the ATO (as referred to above). The ATO can commence proceedings against the director at the end of the 21 day period.  

So, a DPN cannot be ignored and must be dealt with promptly. To be clear, the 21 days runs from the date of issue, not the date of receipt.

Prior to 2012 it was sometimes possible to wind up a company at any time to avoid paying the penalty in a DPN. Amendments to the TAA in 2012 removed this ability. Essentially, the 2012 amendments make directors automatically personally liable for PAYG withholding and SGC amounts that remain unpaid and unreported three months after the due date for lodging a tax return. A DPN issued in relation to such debts is a so-called “Lock down DPN”. A director who receives a Lock down DPN cannot cause the DPN penalties to be remitted by placing the company into voluntary administration or liquidation.

So, directors must be diligent in ensuring a company keeps it tax returns up to date and lodged. Adopting a tactic of failing to lodge returns will not work. Even if the company cannot pay a PAYG withholding or SGC debt, directors must still lodge the return anyway. If they do not do so, automatic personal liability will be imposed and that liability will not be able to be remitted if a Lock down DPN is issued.

Defences to liability under a DPN

A director may avoid personal liability under a DPN if a statutory defence is applicable.  Broadly, a director may avoid personal liability if the director can show that:

• because of illness or some other good reason, the director did not take part in the management of the company at the time when the company incurred the PAYG withholding or SGC or obligation;  or
• the director took all reasonable steps to ensure the company complied with its PAYG withholding or SGC obligation, by ensuring one of the following things happened:
  • the company paid the amount outstanding;
  • an administrator was appointed to the company; 
  • the directors began winding up the company; or
  • in the case of an unpaid SGC liability – the company treated the SGAA as applying in a way that could be reasonably argued was in accordance with the law, and took reasonable care in applying that Act. 

The TAA allows for defences to be raised within 60 days from notification – that is, 60 days from when the DPN is issued.  Again, a DPN cannot be ignored and must be dealt with promptly.

A DPN defence must be submitted to the ATO in writing, clearly articulating which defence the director is seeking to rely on. It should provide all the necessary information and supporting documentation to substantiate the defence. We can assist in this regard.

Illness defence

The illness defence mentioned above has a number of limbs that must be satisfied. These are discussed in the case of Deputy Commissioner of Taxation v Snell [2019] NSWDC 159. A detailed discussion is beyond the scope of this article. For present purposes, it is sufficient to observe that it can be difficult to substantiate the defence, as there must not be any evidence that the director took part in any aspect of the management of the company at any time during the relevant period. It is not enough to show that the director did not take part in managing the tax affairs of the company.

Also, medical evidence will be required in support of the proposition that the director could not have reasonably been expected to take part in the management of the company due to the illness.

Reasonable Steps Defence

Section 269-35(2) of the TAA provides that a director is not liable for the penalty in a DPN if the director took all reasonable steps to ensure that one of the outcomes referred to above happened.

In determining what reasonable steps could have been taken, regard must be had to when, and for how long, the director took part in the management of the company as well as all other relevant circumstances.  The ATO will consider what a reasonable director in that position during the time the director was subject to the obligation would have done. The assessment is an objective one.  Directors who are “too busy” or simply devote their attention elsewhere will not be able to rely on the defence. A lack of attention to details or ignorance of the company’s financial position will also not be enough to establish the defence.

Liability of new directors versus previous directors under a DPN

Directors recently appointed to the position are given a grace period to comply with their obligations under section 269-15 of the TAA. A director who is appointed after the due date for a PAYG withholding or SGC liability can become personally liable for the amount if after 30 days the liabilities remain unpaid.

This means that as soon as a director is appointed, they should review the company’s PAYG withholding and SGC liabilities, and ensure any amounts which remain unpaid are paid within the 30 day period. They should also check to ensure all outstanding tax returns have been lodged. If they find outstanding PAYG withholding or SGC liabilities or returns, they should seriously consider resigning.

A retired or former director can also be given a DPN. Resigning as a director does not allow a director to escape liability. The courts have confirmed that the ATO can impose liability on persons who were directors at the relevant time when the PAYG withholding or SGC obligation accrued.  There is a continuing obligation on directors to ensure the company complies with withholding tax obligations, and this obligation can persist despite the director ceasing to act in the role.  Specialist tax advice should be sought by directors in such situations.

3. Risk of personal liability for unpaid GST

Updated: 10 February 2020

New legislation recently passed exposes directors to personal liability for unpaid GST.  The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was passed by both Houses of Parliament on 5 February 2020. Once Royal Assent is given- which should take a few weeks, at most - the ATO will be able to collect estimates of anticipated GST liabilities from company directors personally via DPN's, in certain circumstances.  The new law will allow the ATO to collect unpaid GST from directors in the same way as PAYG withholding and SGC can be recovered via DPN's, as discussed above. The new law is expected to take effect from 1 April 2020. 

4. Risk of personal liability for tax debts incurred while insolvent

Directors can be personally liable for debts incurred by a company where the company trades while insolvent. This is because one of the fundamental duties of a director is to ensure that the company does not trade while it is insolvent.  If a company is unable to pay its debts as and when they fall due the company is insolvent.

Common signs of insolvency include:

• suppliers refusing to extend credit to the company;
• minimal or insufficient cash flow;
• problems paying suppliers and other creditors on time; 
• difficulty in meeting loan repayments on time; 
• difficulty in keeping within bank overdraft limits; and
• legal action being taken, or threatened, by creditors over money owed to them.

In certain circumstances, directors may be liable for debts incurred by a company when it is insolvent. This could include tax liabilities incurred by the company while trading insolvent. There are various penalties and consequences of insolvent trading, including civil penalties, compensation proceedings and criminal charges. A detailed consideration of these issues is beyond the scope of this article. Seek specialist advice from us as needed.

5. Risk of personal liability as a Public Officer

A company carrying on business in Australia is obliged to appoint a “public officer” to act as the company’s representative and official point of contact for the ATO.

A public officer must be appointed by the company within three months of the company commencing business in Australia or deriving income from property in Australia.  It is an offence to fail to appoint a Public Officer. There must always be a person who holds the position of public officer.

Generally, the board of directors will choose who is appointed as a public officer. The power will normally be contained in the company’s constitution. 

The public officer must ensure that the company meets its obligations under the ITAA, and they can be held liable for penalties which are imposed on the company for failing to comply with the ITAA.  Similar provisions are found in the SGAA.

As can be seen from the above, there are many tax risk involved when accepting an appointment as a company director. Diligence on the part of the director is required if personal liability is to be avoided.

For further information and advice please contact me, Damian Quail.  

Thank you to Michelle Hankey and Cassandra Bailey for their assistance in preparing the original paper I presented.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Clarifying the ability of trustees to expand their powers: the decision in Re Application of Country Road Services Pty Ltd

In this article (published in the December 2019 edition of the Law Society Brief magazine) Jonathan Haeusler, Special Counsel, and Michelle Hankey, Solicitor, discuss the court’s decision in Re Application of Country Road Services Pty Ltd [2019] NSWSC 779 regarding a trustee’s role and their ability to expand their powers as trustee. 

The trust instrument that created a trust is the primary source of the trustee’s duties, obligations and powers.  A trustee’s primary duty is to administer the trust in accordance with the terms of the trust instrument.  If a trustee acts outside the terms of the trust instrument, the trustee’s acts will be "ultra vires" i.e. invalid.  In certain circumstances, a trustee may apply to the court for, among other things, an order conferring additional powers on the trustee where it would be “expedient in the management and administration” of the trust property to do so.

However, a trustee cannot seek additional and new powers so that it might administer the trust in a different way from that contemplated in the trust instrument. The trustee should not seek to question the terms of the trust or seek to improve them.

The court’s decision in Re Application of Country Road Services Pty Ltd serves to remind us of the trustee’s function in making applications to the court for orders conferring additional powers on trustees.  In particular, the court’s observations remind us that the trustee’s role is to administer the trust in accordance with the terms of the trust instrument, not to seek to change the trust instrument.  Further, that the usual role of a trustee should be one of neutrality.  

The key take-aways from the court’s decision are set out in Jonathan’s article, which is available here.  

If you have any queries regarding trust administration, please contact Jonathan Haeusler or Michelle Hankey of our office. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Superannuation guarantee amnesty: one last chance to pay compulsory superannuation for non-complying employers who employ "contractors"

Employee versus contractor? Are you sure?

Over the past decade many Australian companies have retained the services of people who claim they are "contractors" not employees. Usually the "contractor" wants to be paid a gross fee/remuneration, stating that they will take care of income tax, superannuation and other payments. 

The attraction for the employer is a lower total cost of retaining the person as compared to bringing them on as an employee, as well as perceived flexibility in options for ending the relationship as compared to traditional employment (the thinking is that no redundancy or leave entitlements need to be paid and no notice period applies).

Such practices were common in the IT, marketing, construction and other industries, particularly so called “digital industries”. The “gig economy” has seen the practice gain pace.

The legal reality is that many "contractors" are actually employees, particularly where they turn up to work at the same place each day, take their instructions from "a boss" at the company, are paid by the hour rather than for delivering an end product, and don't have to redo their work at their cost if the deliverable is not done to the required standard.

In such cases, income tax and compulsory superannuation guarantee payments must be paid by the employer for "contractors" who are, legally, employees. If the payments are not made, significant penalties accrue over time and must be paid to the Australian Tax Office (ATO).

Often this superannuation liability only hits home when the employer tries to sell their company and the buyer's due diligence experts point out the problem. Significant superannuation shortfall payments and ATO penalties loom large for the seller, as well as a reduction in the sale price, or at least a significant escrow sum demanded by the buyer.

A superannuation guarantee amnesty is potentially available.

Legislation has been reintroduced to Parliament providing an amnesty for employers who have not paid superannuation guarantee (SG) payments. The proposed amnesty will allow fines to be avoided, provided the SG payments are made.

The Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill) was re-introduced into the House of Representatives on 18 September 2019. The Bill was then referred to the Economics Legislation Committee for further inquiry. The Committee released its report recently - available here.

The Bill provides employers who have previously failed to pay SG contributions and failed to disclose the shortfall to the ATO with a “second chance” to self-correct any historical non-compliance. 

This amnesty operates as a way for the ATO to encourage employers to disclose unpaid SG amounts for the period during which the amnesty applies - without fear that they will be liable for fines typically associated with non-compliance. 

What are my SG obligations generally?

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires that employers pay a certain percentage of an employee’s earning into the employee’s superannuation fund. A Superannuation Guarantee Charge (SGC) is imposed on employers who fail to pay the required SG amount i.e. the SGC is the shortfall plus interest and administration costs, and this is payable by the employer to the ATO each quarter. 

Employers can also be liable for penalties for failing or refusing to provide a statement or information as required under the SGAA, which can be up to 200% of the amount of the underlying SG amount (known as Part 7 Penalties). 

How will the proposed amnesty work?

The first step is disclosing unpaid SG to the ATO. An employer who discloses SG non-compliance and pays an employee’s full SG entitlements plus any interest (which may incude nominal interest and a general interest charge (GIC)) will be entitled to the amnesty, and will avoid liability for penalties normally associated with late payment and non-compliance.  

The employer with an outstanding SG liability can either: 

• pay the unpaid SG amounts, GIC and nominal interest directly to the ATO; or 
• pay the unpaid SG and the nominal interest to the employee's superannuation fund, and then elect to offset these amounts against their liability for SGC and GIC (if any).

However, if employers have an existing SGC assessment for a quarter, or are otherwise unable to contribute directly into their employee’s superannuation fund, they will be required to pay the SGC to the Commissioner directly.

If the employer makes a disclosure under the amnesty, the administration charge component of the SGC will be waived (see example 1.1 in the Explanatory Memorandum). 

The amnesty is proposed to extend to all reporting quarters from the quarter commencing 1 July 1992 to the quarter commencing 1 January 2018. 

The disclosure to the ATO must be made in the correct form, and the employer must pay the amount of the disclosed SG to the employee or the SGC to the ATO (see above) within the required period. Failure to pay will mean the employer will not be able to rely on the amnesty and will be subject to the normal penalties imposed. 

It is expected that employers will be given from 24 May 2018 to 6 months after the date the Bill receives Royal Assent to make disclosure and pay the shortfall and interest (the Amnesty Period).  

In summary, in order to benefit from the amnesty the unpaid SGC must: 

• Not have been previously disclosed to the ATO; 
• Have been incurred between 1 July 1992 and 31 March 2018; and 
• Not be under examination by the ATO previously.

The employer must also:

• disclose the shortfall to the ATO within the Amnesty Period; and
• pay the shortfall plus interest within the Amnesty Period. 

If the employer does the above things for eligible SG shortfalls, they will not be liable for Part 7 Penalties. SG amounts paid during the Amnesty Period will be tax deductable. 

If the Bill is passed, employers who have failed to comply with their SG obligations in the past should take advantage of this opportunity to avoid liability for such penalties.

Employers who fail to disclose during the Amnesty Period 

Employers who do not disclose and pay unpaid SG and interest within the Amnesty Period will be subject to higher penalties. Generally, the Commissioner has discretion to remit Part 7 Penalties. However, from the day after the Amnesty Period ends the Commissioner’s ability to remit Part 7 Penalties will be limited. According to the Explanatory Memorandum, the Commissioner will not be able to remit penalties below 100% of the amount of SGC owing by the employer for a quarter covered by the amnesty. The penalty will include interest and an administration fee. 

What does this mean for my business?

The amnesty is a one-off second chance for employers to reduce their exposure to penalites for unpaid SG. Employers who are aware that they have failed to comply with their SGC obligations, or are unsure whether they have fully complied since 1 July 1992, should ensure that they keep informed of the progress of the Bill. 

In particular, employers who have utilised the services of “contractors” who look-and-feel like employees should consider taking advice on whether the persons involved were legally employees for the purposes of tax, superannuation and other legislation.

If you would like further information regarding the new laws or any other issue please contact Damian Quail or Cassandra Bailey.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Disclose the full upfront price or risk breaking the law: new upfront pricing laws apply

It is not uncommon for businesses to advertise a headline price for goods and services to their customers, and to only disclose optional costs in the fine print or in a manner that is not necessarily clear to customers. This is no longer permitted. Some businessess will need to change their pricing practices, particularly businesses selling goods online.

The Treasury Laws Amendment (Australian Consumer Law Review) Bill 2018 amends the Australian Consumer Law contained within the Competition and Consumer Act 2010, and imposes an obligation on businesses operating in Australia to ensure transparent pricing for consumers. As of 26 October 2019, businesses must display the total price for the goods and services including all pre-selected optional items. In other words, if optional components are pre-selected or automatically applied by the seller, these options must be included in the headline price. The customer then has the option to remove the pre-selected options selected in order to pay a lower price.

These new laws will especially affect businesses who sell goods and services online. The Explanatory Memorandum to the new legislation provides some helpful examples in relation to airlines. For example, if an airline fare is $500 and a website pre-selects an optional carbon offset fee of $5, then the headline price must be $505, not $500. However, if the carbon offset fee is not pre-selected or automatically applied, then the ticket can be advertised at $500.  

The same approach is applicable for promotions which display only a portion of the total price. Businesses must ensure that the total price is displayed just as clearly as the fractional price. Essentially, the new laws aim to avoid the situation where headline prices are advertised initially, but once the customer clicks through the website the price is increased to include pre-selected options and charges. 

Businesses should ensure that their pricing strategies conform with the new laws. 

If you would like further information regarding the new laws please contact Damian Quail. 
 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Modern slavery legislation: the clock is ticking for Australian companies to prepare their first Modern Slavery Statement

Modern slavery legislation has been enacted in Australia. Many larger companies are now legally obliged to prepare Modern Slavery Statements and submit these statements to the Australian Federal Government. The Statements will be published on a publicly accessible register.

At its broadest, the term "modern slavery" refers to any situations of exploitation where a person cannot refuse or leave work because of threats, violence, coercion, abuse of power or deception. It encompasses slavery, servitude, deprivation of liberty, the worst forms of child labour, forced labour, human trafficking, debt bondage, slavery like practices, forced marriage and deceptive recruiting for labour or services. Indicators of modern slavery practices may incude unlawful withholding of wages and identity/travel documents through to excessive work hours and restrictions on movement. Other indicators include recruitment agencies deducting excessive fees from worker remuneration, loans to workers with astronomical interest, and similar practices. 

The Walk Free Foundation, which publishes the annual Global Slavery Index, estimates that 30.4 million people are victims of modern slavery in the Asia Pacific region, including within Australia (Walk Free Foundation, Global Slavery Index 2016, www.globalslaveryindex.org). Many Australian companies source workers, products and services from the Asia Pacific region. 

For many of these larger companies, reports will need to be lodged between 1 July 2020 and 31 December 2020. It is crucial that affected companies begin reviewing their internal processes and supply chains and begin collecting data to comply with the new reporting obligations.

What does the Federal legislation require?

The Federal legislation is the Modern Slavery Act 2018 (Cth). It commenced on 1 January 2019.

Key aspects of the Federal legislation are as follows:

• companies incorporated in or operating in Australia are required to submit a report - a Modern Slavery Statement - to the Federal Government if the business in Australia (of the company and its subsidiaries) has a minimum annual consolidated revenue of $100 million. Other entities may report voluntarily.
• Modern Slavery Statements must be lodged with the Home Affairs Minister (currently Peter Dutton).
• the Modern Slavery Statement must report on the risks of modern slavery in the company's operations and supply chains, and actions the company has taken to address those risks. Part 2 of the Commonwealth Act sets out in detail mandatory criteria that Modern Slavery Statements must address. It includes:
  1. the company's structure, operations and supply chains
  2. modern slavery risks in those operations and supply chains
  3. actions taken by the company to assess and address those modern slavery risks, including due diligence and remediation processes
  4. how the company assesses the effectiveness of actions taken
  5. the process of consultation with its subsidiaries in preparing the Modern Slavery Statement
  6. any other relevant information.
• the Act defines modern slavery to incorporate conduct that would constitute an offence under existing human trafficking, slavery and slavery-like offence provisions set out in Divisions 270 and 271 of the Commonwealth Criminal Code, as well as conduct covered under international conventions dealing with child labour and other slavery like practices. The definition encompasses slavery, servitude, deprivation of liberty, the worst forms of child labour, forced labour, human trafficking, debt bondage, slavery like practices, forced marriage and deceptive recruiting for labour or services.
• the first reporting period will be FY2019-2020, and the first report will be due within 6 months of the company's financial year end. For most Australian companies this means that the first Modern Slavery Statement must be given to the Home Affairs Minister between 1 July 2020 and 31 December 2020. Companies with an international financial year may have to report earlier, depending upon the timing of their end of financial year. For example, companies with a 31 March 2020 end of financial year will need to report by 30 September 2020.
• Modern Slavery Statements will be published on a freely accessible public register on the internet - the Modern Slavery Statements Register.
• Joint Modern Slavery Statements are permitted for corporate groups. 
• Modern Slavery Statements must be approved by the Board of Directors of a company. This ensures senior level accountability, leadership and responsibility for modern slavery.
• If a company fails to comply with a reporting requirement, the Minister may seek an explanation from the company and require the company to undertake remedial action in relation to that requirement. If a company fails to comply with the Minister’s request, the Minister may publish information regarding the company’s failure to comply, including the company's name i.e. this failure will become public knowledge. 

No penalties exist in the legislation for not complying with the Act. However, the Government has indicated that if compliance rates are low, the need for penalties will be considered as part of a three year review of the legislation.

Many prominent Australian companies such as Wesfarmers, South 32, Qantas and Fortescue Metals have already published Modern Slavery Statements.

What does the New South Wales legislation require?

The NSW legislation - the Modern Slavery Act 2018 (NSW) - is not yet in force.  It was assented to on 27 June 2018, but it has not yet commenced operation. On 6 August 2019 the NSW Legislative Council Standing Committee on Social Issues announced an inquiry into the NSW Act. The Committee's recommendations are due on 14 February 2020.

Key aspects of the proposed NSW Act are as follows:

• it will apply to companies that have employees in NSW that supply goods and services and have a total annual turnover of not less than $50 million
• financial penalties may be imposed under the Act for failure to comply with the Act. A maximum penalty of $1.1 million is proposed to apply where a company fails to prepare a Modern Slavery Statement, fails to make its Modern Slavery Statement public or provides false or misleading information.
• appointment of an Anti-Slavery Commissioner. The Commissioner’s role will be focused on public awareness, advocacy and advice.

It is not yet certain whether the NSW legislation will operate in addition to the Federal legislation, or whether it will only operate when the Federal legislation does not apply to a particular company.  The proposed NSW Act states that the reporting requirements under the NSW Act will not apply if the organisation is subject to obligations under a law of the Commonwealth or another State or a Territory. So, a possilbe outcome is that companies that file a Modern Slavery Statement under the Federal legislation will not need to report under the NSW Act as well.  However, companies operating in NSW with revenue between $50 and $100 million may need to comply with the NSW Act once it commences operation, as they will be caught by the NSW Act but not the Federal Act.

What does the Western Australian legislation require?

Nothing yet- Western Australia has not yet enacted its own Modern Slavery legislation. However, it seems inevitable that Western Australian legislation will arrive at some point. 

Next steps

It is crucial that companies required to report under the Modern Slavery Legislation begin reviewing their internal processes and supply chains and begin collecting data to comply with the new reporting obligations. This could include: 

• mapping supply chains and undertaking a risk based assessment of where modern slavery risks may arise in those supply chains
• identifying potential modern slavery risks in their internal operations
• reviewing policies and procedures in relation to modern slavery, including supplier codes of conduct and human rights policies
• revise procurement terms and conditions to cover the new obligations
• revise employee codes of conduct and policies to address modern slavery issues
• train employees on modern slavery risks and compliance requirements
• implement procedures to monitor modern slavery risks internally and within supply chains, as well as procedures to look for indicators of potential modern slavery
• make sure supply chain participants are aware of the new obligations
• appointing a senior internal person to take ownership and responsibility for compliance.

For further information on managing your risk and compliance obligations, please contact Damian Quail.  

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Vying for social media engagement: More risk than reward?

The recent Court decision in Voller v Nationwide News Pty Ltd [2019] NSWSC 766 (the Voller case) highlights a danger inherent in using social media - social media publications invite comments from a wide variety of users, with a very real risk that some of those comments may convey a defamatory meaning. Following the decision in Voller, businesses are at risk of being held liable for defamatory comments posted by third party users who engage with social media content.  

Background

In Voller, the Supreme Court of New South Wales (NSWSC) considered a defamation claim commenced by Dylan Voller, a former detainee at the Don Dale Youth Detention Centre. Mr Voller alleged that Fairfax Media Publications Pty Ltd, Nationwide News Pty Ltd and Australian News Channel Pty Ltd (the publishers of the Sydney Morning Herald, The Australian and Sky News Australia/The Bolt Report, respectively) (the Defendants) were responsible for defamatory comments posted by third-party Facebook users on stories published by those Defendants to their Facebook pages.

Liability for Defamation and the issue of “Publication” 

Under Australian law, a person is liable for defamation if the material is published to one or more third parties, the material identifies a person and the material conveys a defamatory meaning.

The NSWSC was principally concerned as to whether the Defendants were the "publishers" of third party comments in response to the Defendant's news stories. 

Decision

The NSWSC found that the Defendants were not mere conduits of the Facebook comments, but rather had encouraged Facebook users to make comments in order to further the Defendant's own commercial interests.  The first time each defamatory comment was published in comprehensible form was as a comment attached to each Defendant’s relevant news story.  Given that the publication carrying the defamatory meaning (being the Facebook comment) was viewed by the public in relation to that news publication, it was the Defendants that were the first and primary publishers of the defamatory comment. 

Reason for Decision

In reaching the decision, Justice Rothman took account of the ability of each Defendant’s Facebook administrator to forbid, filter or hide comments, thereby giving the Defendants the power to control the content of the articles and the comments being published.  The Court found that the administrators held the “final right of approval” before comments were made public. That element of control over the publication demonstrated that the Defendants participated in the broadcast of the defamatory material, in failing to exercise their administrative controls and filter the comments appearing under their publications.  His Honour held that by operating their Facebook pages for a commercial purpose, and inviting user participation without exercising the appropriate controls, the Defendants had promoted the defamatory material by ratifying its presence and publication.  For this reason, the defence of innocent dissemination could not apply.

His Honour also attached importance to the fact that the Defendants could delay publication of user comments and monitor whether any were defamatory before releasing them to the general public. This was considered more important than the counter argument that there was a significant time cost in doing so.  

It was considered irrelevant that social media is used to engage third party users and to invite comment and interaction with posts, rather that to simply disseminate information. It was also no defence that it would be difficult to monitor numerous comments being published by third party users over long periods of time (for example, third party users often comment on posts days after the initial post is published).

What does this mean for public publishers on social media? 

This decision highlights for administrators of public social media pages the implications of inviting public comment on their posts.

Media companies and other businesses that utilise social media to promote their commercial interests should pause to consider how they can limit their liability for third party defamatory comments.

Businesses should also consider implementing moderating procedures, such as reviewing comments for factual accuracy or malicious content before the comments are displayed as a comment under the primary publication.

If preventative strategies are to be implemented, the strategies should account for any content posted within the prior 12 months, given the Limitation Act 2005 (WA) permits a person to commence a defamation action within 12 months of publication of the defamatory material.

Reviewing third party comments on existing publications, as well as monitoring, hiding and blocking defamatory comments on future publications, will be necessary for any businesses with a social media presence, at least pending an appeal of the decision in Voller. 

For further information on defamation and managing your risk, please contract Damian Dinelli on 9481 2040 or at damian.dinelli@whlaw.com.au. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Board Spills - Getting the notice right

The interaction between section 249D and section 203D of the Corporations Act 2001. 

There has been a significant rise in shareholder activism over the last couple of years.  Often this is driven by shareholders with financial capacity and vision for the company, wanting to turn around the company’s stagnant fortunes and share price.  A common mechanism for shareholders to replace the board of a public company is a section 249D notice under the Corporations Act 2001.  A section 249D notice allows a shareholder or shareholders with at least 5% of a company’s share capital to force the company to call a general meeting to vote on resolutions proposed in the notice. 

There are a number of formal requirements, and many tricks and traps for shareholders, in utilising the section 249D notice provisions.

The section 249D notice must be in writing, state any resolution to be proposed at the meeting, be signed by the members making the request, and be given to the company.

On receipt by the company of a valid section 249D notice:

• its directors have 21 days to call a general meeting;
• if the meeting is to remove a director,  at least 21 days’ notice of the meeting must be given to shareholders; and
• the meeting must be held within 2 months of the company receiving the section 249D notice.

If the section 249D notice proposes resolutions for the removal of all or certain directors, the requirements of section 203D Corporations Act 2001 also need to be kept in mind. Section 203D(2) requires shareholders who want to remove a director at a general meeting, to give notice of their intention at least 2 months before the meeting is to be held.  The second part of section 203D(2) provides that if the company calls a meeting after that notice of intention is given, the director can be removed at the meeting even if the meeting is held less than 2 months after the notice of intention is given.

It is the structure of section 203D and the interplay between sections 203D and 249D that tends to cause grief for requisitioning shareholders.

Common mistakes

Because section 249D does not explicitly refer to section 203D it is sometimes overlooked.  If a section 203D notice has not been given,  or it is given after the section 249D notice, a proposed resolution in the section 249D notice to remove a director is ineffective and there would be a question whether the company had to call the meeting at all.

Other issues we sometimes see are the two notices being combined into one, or being issued on the same day. 

The two notices cannot be combined.  That is, the section 249D notice cannot also serve as the shareholder giving notice of their intention under section 203D.  There are at least a couple of reasons for this.

• Firstly, the legislation is drafted in a way that contemplates two separate notices being given.  They have different functions, different formal requirements, and can be given in different ways.  In drafting sections 203D and 249D, Parliament could have but did not expressly dispense with the need for notice under section 203D when a section 249D notice is being given.
• Secondly, it is not conceptually possible for a shareholder to give notice of their intention to remove a director at a meeting to be held in at least 2 months’ time, if the shareholder is on the same day by a section 249D notice compelling the company to call that meeting in no more than 2 months’ time.  The shareholder cannot have the required ‘intention’ at the time of giving the section 203D notice. 

As well as being separate notices, the section 203D notice should be given to the company before the section 249D notice is delivered; not on the same day.  That is the only way sections 203D and 249D can operate harmoniously and with full effect.

The section 203D notice can and should be given in such a way that it is possible for the meeting to be held after the 2 month period required by section 203D (although the company may then make its own decision to bring the meeting forward as foreshadowed by the second part of section 203D).   This can only happen if the section 249D notice is given to the company at least a day after the section 203D notice is given; preferably longer (out of an abundance of caution).   The exact timing will depend on the circumstances in each case.

We recommend that shareholders intending to use section 249D to remove directors from the board of a public company get legal advice on the process, and assistance to ensure each step is properly planned and executed.  Conversely, directors receiving such notices should seek prompt advice about how to manage their obligations under the Corporations Act 2001 and what steps can be taken to defend themselves and the company against the attack.

For advice to prepare for or defend an attempted board spill, please contact Dominique Engelter on +61 9481 2040 or dominique.engelter@whlaw.com.au.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

THE ACCC CONTINUES ITS CRACK DOWN ON THE USE OF UNFAIR CONTRACT TERMS

Uber Eats agreed this week to amend its contracts with restaurants following an investigation by the ACCC.

From at least 2016, Uber Eats’ contracts made restaurants responsible for the delivery of food orders despite the restaurants having no control over delivery. Under the contracts, if food became “substandard” (for example hot food became cold), Uber Eats could force restaurants to refund the costs of the food to customers, regardless of whether the issue was the restaurants fault. 

ACCC chair Rod Sims said that the ACCC considers these terms to be unfair “because they appear to cause a significant imbalance between restaurants and Uber Eats; the terms were not reasonably necessary to protect Uber Eats and could cause detriment to restaurants."

Uber Eats agreed to amend these terms to make it clear that restaurants will only be responsible for matters within their control, such as incorrect food items or incorrect and missing orders. Under the amended contracts, restaurants will also be given the ability to dispute responsibility for refunds to customers and Uber Eats will reasonably consider these disputes.

Mr Sims said that the case was a “great illustration” of why the Australian Consumer Law (ACL) needs to change. Under the current ACL, a court can declare unfair contract terms to be void and unenforceable, but they are not illegal and penalties cannot be imposed. Mr Sims said that if such contracts were illegal, “we’d be taking them to court for significant penalties.”

Red Rich Fruits

The agreement from Uber follows on from the case involving Red Rich Fruits, a fresh fruit trader, agreeing to amend its standard form contract with growers last month after the ACCC raised concerns that the contract contained an unfair contract term.

The contract term in question allowed Red Rich Fruits to seek credit from a grower in respect of produce which Red Rich Fruits had on-sold to a third party, but which was rejected by the third party. The ACCC considered it likely that this term was an unfair contract term in breach of the ACL. The ACCC also raised concerns that Red Rich Fruits’ standard form contract included terms that did not comply with the pricing formula and payment transparency terms set out in the Horticulture Code of Conduct, a mandatory industry code prescribed under the Competition and Consumer Act 2010.

Red Rich Fruits agreed to amend the pricing and payment clauses in its standard form contract in response to the ACCC’s concerns.

What does this mean for your business?

These cases demonstrate the ACCC’s willingness to crack down on the use of unfair contract terms by businesses across all industries.

The ACCC has also indicated that strengthening unfair contract term protections for small businesses remains one of its top priorities. The ACCC has called for legislative changes so that it can seek penalties and compensation for small businesses where large businesses impose unfair terms.

To avoid sanction by the ACCC and bad publicity (and possible penalties in the future), all businesses should review their standard form contracts to determine if any terms are unfair. 

For further information on unfair contract terms and how we can assist you please contact, please contact Damian Quail or Hanna Forrest on +61 8 9481 2040 or damian.quail@whlaw.com.au or hanna.forrest@whlaw.com.au. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Keeping your financials “off the record”: from 1 July 2019 fewer companies need to lodge their financial accounts with ASIC

Recent changes to the Corporations Act 2001 remove the need for many companies to lodge annual financial accounts with ASIC.

With effect from 1 July 2019, the criteria in the Corporations Act 2001 for classification as a “large proprietary company” have been changed. The revenue, asset and employee thresholds that determine whether a proprietary company is considered “large” will double.

Why is this important?

Large proprietary companies are required to prepare and lodge an annual financial report, a director’s report and an auditor’s report with ASIC each financial year. This can be both costly and time consuming.

In addition, reports that are lodged with ASIC become publicly available documents - so competitors and customers can easily access sensitive, private financial information about a company.

If a company is required to lodge the required reports but fails to do so, penaltieDamian Quails can be imposed on the company and its officers.

Avoiding the requirement to lodge financial reports with ASIC will not only save a company time, money and effort, but will also keep private financial information confidential. With some exceptions, small proprietary companies generally do not need to comply with these requirements to lodge (but are required to keep sufficient financial records).

So, it pays to be small!

What is the change?

The Corporations Amendment (Proprietary Company Thresholds) Regulations 2019, which will commence on 1 July 2019, amend the definition of “large proprietary company” by doubling the current revenue, assets and employee thresholds. A proprietary company will be “large” if it meets two of the three thresholds at the end of its financial year, as shown in the table below:

The doubling of the thresholds will relieve many proprietary companies from the ASIC reporting obligations. The Federal Government estimates the changes will reduce SME regulatory compliance costs by $81.3 million annually, with a third of proprietary companies currently classified as large expected to fall below the new mandatory reporting thresholds.

What should you do now?

If your company is currently classified as a large proprietary company you should closely consider the revenue, gross assets and employee thresholds to determine whether the company may fall below the increased thresholds from 1 July 2019. If so, your company may be relieved from the time and costs associated with the compliance obligations of a large proprietary company. And you can keep your private financial information out of the hands of your customers and competitors!

For further information on how these changes may impact on your business please contact Damian Quail on +61 8 9481 2040 or damian.quail@whlaw.com.au.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.