I have previously linked to the excellent series of monthly blog posts by James Stewart on issues in retail, usually focussing on insolvency articles.
After battling the crowds at Southland shopping centre on the weekend, James’ article on developments in the payments system gave me some hope things might improve for next year at least. It seems your smart phone may soon replace the cash register. Simply scan items as you collect them, put them in a bag in your trolley, pay at a smart terminal at the store exit and you are out of there. No registers!
The article is at the following link.
A combination of a very busy 3 months and some technical issues with my domain name markmckillopbarrister.com have kept my posts to a minimum in the past few months. The technical issues are now fixed so the link to my site should be fully functional.
With Chistmas almost upon us I will have some time to add some new material which will largely be published in the New Year.
I wanted to take this opportunity to wish everyone a safe and happy holiday season, and to plug a non professional endeavour I will be up to on Sunday, 24 March 2013.
I am doing the Melbourne Ironman Trialthlon race on that day, based at Frankston. It is a 3.8km swim, a 180km bike ride and a marathon at the finish. I hope to finish in about 13 to 14 hours. Some information about the event can be found here. I have signed up to fund raise for the Red Cross for the event. So as well as supporting my webpage you may wish to give some support to the Red Cross!
Please help them if you are able, they are a great organisation and always at the front line for any big disaster that comes along (Bushfires, Tsunami, bombings etc). And I guarantee that every donation made will help inspire me to finish.
A link to the fundraising page can be found here.
There is a well-known principle that a restraint of trade is prima facie void as contrary to public policy because it discourages competition and the restrained party from earning a living. In considering whether a restraint of trade is void at common law, a Court will consider if as a threshold matter the restraint is no more extent than is reasonably necessary to protect the interests of the employer. Usually the permitted period of restraint is fairly short and is of limited geographic extent.
Contrasting the usual situation, the Full Court of the Federal Court has recently upheld a 2 year restraint of trade clause against an executive and the co-founder of a consultancy business: see Pearson v HRX Holdings Pty Ltd  FCAFC 111. The decision of the Court [link] demonstrates that if a restraint is carefully tailored by negotiation to the specific circumstances of the employer and employee, the parties bargain over the restraint’s key features and the reasoning for the duration and geographic reach is documented, and the employee receives independent advice, then restraints in excess of what might be considered the usual “rule of thumb” can be upheld.
The appellant, Brett Pearson, was a “co-founder” of a human resources consultancy called HRX Holdings. He had established the business with Katrina Leslie in 2005. Leslie was the effective controller of the company through shares held by her family trust. Pearson had been a director and an employees of the business until his resignation in July 2011. He left to join a competitor.
Pearson was the key employee of HRX: it built the whole business around him. He was at first the only employee. By the time of his resignation, he was one of 130. Pearson was a rainmaker. The industry saw him as a leading innovator in the HR consulting field, was the primary presenter to clients and had an ability to establish and renew contacts with the senior executives of clients. He also had full access to all of HRX’s confidential information, particularly its techniques for establishing and developing client relationships.
Pearson had negotiated an employment contract with HRX that was signed in December 2005, but was effective from February 2005. The contract had been negotiated over a period of some months. The restraint clause was a particularly heavily negotiated point: both Pearson and Leslie had recognised that Pearson was the face of the business and the key person whom it was being built around. Leslie gave evidence that the restraint of Pearson post termination was one of the biggest risks for the business to be managed. Eventually they agreed that the restraint period would extend to two years (not 6 months as Pearson had first proposed). Pearson obtained advice on all aspects of the contract from his own lawyers and accountants before he signed it.
The restraint clause is set out at paragraph  of the first instance judgment (HRX Holdings Pty Ltd v Pearson  FCA 161) [link]. It included the following features relevant to the Full Court’s judgment:
At first instance, the restraint clause was upheld. Pearson appealed. There were several issues of interest in the appeal.
First, whether the breadth of the restraint was such that it was contrary to public policy. The Court upheld the decision at first instance that:
Second, in applying the principle that the restraint would be permitted if it were reasonable, the Court took relied on the following matters:
Pearson also argued that the restraint was unnecessary since confidentiality and non solicitation clauses operated post termination and that clause would protect HRX from exploitation of its confidential information by a new employer. The Court quickly demised that argument. Those clauses do not prevent the natural gravitation of clients, without solicitation, toward a key rain maker such as Pearson when he settles into a new role.
Although the case dealt with a very senior executive, it does have wider application. It emphasises the benefit of an employer carefully reasoning the extent of the restraint so that it meets the employer’s needs and doesn’t exceed them, bargaining the clause with the employee, ensuring independent advice is taken or at least an opportunity to get it is available, using a fair a degree of documentation of that process and even recording the reasoning and bargaining process within the contract itself. It also demonstrates that the external circumstances of the parties are very important, because the task of the Court is not limited to construction. The Court’s role is also assessment of whether the restraint is reasonable having regard to public policy and to the purpose of protecting the employer’s interest that is key, which is an issue of fact.
Finally, the case has application beyond employment, to sale of business and other commercial agreements containing restraint clauses where similar issues arise.
One of the enduring problems with litigation in the Magistrates Court is that costs are high compared to the value of the case. As a consequence the cost of private mediation can be prohibitive.
However, a major step to address the problem is a scheme instituted by the Court, known as the “SLEM” scheme, that can reduce the costs of a private mediator and venue to as little as $1,450.
Last week, I attended a mediation under the “SLEM” scheme for the first time.
“SLEM” stands for Single List of External Mediators. It is a list of mediators for civil matters in the Magistrates Court who are regarded as suitable as external mediators, in the alternative to a registrar or deputy registrar. Each mediator on the SLEM has agreed to limit their fee to the fixed rate of $1,100, for at least three mediations a year, to encourage access to mediation in the Magistrates Court.
In addition, where the mediator is a member of the bar, the Victorian Bar mediation centre will provide rooms for a SLEM mediation at a cost of $350, as part of the scheme.
The mediation I attended was conducted very effectively by Carey Nichols, a barrister mediator who is a member of the SLEM list. The matter settled.
For information on the scheme see the Magistrates Court website link.
A recent decision of Justice Ferguson of the Supreme Court of Victoria is worth reading by practitioners defending or making applications to set aside statutory demands under s459G of the Corporations Act 2001. The decision is Elite Catering Equipment Pty Ltd v Seroshtan  VSC 241(link), an appeal against a decision by Associate Justice Gardiner. The decision at first instance, at  VSC 194 (link),is also worth reading.
Very briefly, the creditor was a company director who was seeking to recover a loan to the company. The other two directors claimed the loan was in fact equity. There was most probably a genuine dispute about the issue, since there were no clear records at the time the advance of the money to the company to determine its nature, save for two matters: one of the other directors had signed a letter acknowledging the debt, and the Company accountant had prepared the accounts showing the amount to be a director’s loan. In both decisions the Court relied on these last two matters in deciding there was no genuine dispute.
The decisions are worth reading because, first, the Court refused the application: perhaps a rare occurrence in itself.
Second, the reasoning in the decisions illustrates that whilst the threshold for establishing a genuine dispute is low and the Court ought not try the case on its merits, nevertheless it is permitted to investigate the matter. In this case the factual basis of the application appeared at first glance to be plausible given the lack of clear evidence about the nature of the advance when first made, but required some investigation by the Court, which it was willing to do, to determine that given the later in time evidence there was no real dispute.
Third, there is a short but pithy summary about the task of the Court in determining these applications.
On appeal, Justice Ferguson stated:
The court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim. No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised. (Citations omitted).
As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice.
At paragraph 42 and 43 of the first instance decision, Gardiner AsJ states;
42 The principles to be applied in assessing applications under s 459G of the Corporations Act are the subject of many authorities. The Court need only find that the plaintiff has a genuine dispute about the existence or amount of the debt. It has been said that this does not impose a particularly high standard. The grounds for alleging a dispute or an offsetting claim must not be spurious, hypothetical, illusory or misconceived. To quote from the Full Court of the Federal Court in Spencer Constructions v Aldridge, it must be “real”. In the well-known passage of McCelland CJ in Equity in Eyota v Hanave, his Honour said:
A genuine dispute connotes a plausible contention requiring investigation and raises much the same sort of considerations as a serious question to be tried arising on an application for the interlocutory injunction or extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute every statement in an affidavit, however equivocal, lacking in precision, inconsistent with the undisputed contemporary documents or other statements by the same deponent, or inherently and improbable in itself” it may not be – it may not having sufficient prima facie plausibility to merit further investigation as to its truth or a patently feeble legal argument or assertion of the facts unsupported by evidence.
While it is not a very exacting standard, on the one hand mere, assertion of a dispute or offsetting claim, mere bluster or advancing grounds which are illusory or spurious or insufficiently particularised will not suffice. The court must not enter into the merits of the dispute, but it is not crossing the line in regard to its legitimate role on these applications to consider evidence which “bears on whether or not the asserted dispute or offsetting claim is genuine”. Indeed that is its necessary function.
Mediation approaching? Care for a back-to-basics checklist beforehand? Then look at Mark McKillop's recent blog “Ten Tips about Mediation” (link below).
But first let me top up Mark’s top ten with two extras – the twin concepts of ‘BATNO’ and ‘WATNO’.
In approximately 36 A.D. a notorious persecutor of Christians was travelling from Jerusalem to Damascus. Out of the blue (literally) he was knocked to the ground, blinded by a brilliant light and asked by a booming voice “Why do you persecute me so?” The traveller repented, recovered his sight and went on to a brief but spectacular career as St Paul, arguably the most famous convert, evangelist and martyr Christianity has ever produced.
I have recently appeared at about half a dozen mediations for a liquidator regarding very similar preference claims over a period of two months. It was interesting to see how some strategies employed by us and the other parties worked. Some tips coming out of the process:
The High Court delivered judgment today in ASIC’s regarding the directors of James Hardie Industries Ltd (JHIL) (link). The Court also delivered judgment in a related appeal by the “General Counsel and Company Secretary” of JHIL at the time, Peter Shafron, against ASIC (link).
These appeals involve the infamous separation by JHIL of certain asbestos making subsidiaries that had significant exposure to asbestos related diseases. Readers may recall that JHIL represented at the time of the separation occurring that the subsidiaries had sufficient funding to cover future claims against them. It turned out they did not, by a long shot.
ASIC pursued the directors and officers of JHIL for breaches of various statutory duties arising out of the transaction. He was subject to various penalties as a result.
The decision regarding Peter Shafron is interesting because it illustrates the breadth of the statutory duties imposed on an “officer” as defined in section 9 of the Corporations Act (link). The Court has made clear that it is the actual responsibilities of the office holder and their skill set in that field that define the area within which duties of care and diligence apply.
In brief terms, Shafron was found at trial and affirmed on appeal to have breached his duties under s180(1) (link) to JHIL as its “joint General Counsel and Company Secretary”. Two breaches were the subject of the appeal. The first breach was that he failed to give the board of JHIL advice that certain information in a deed involved in implementing the separation should have been disclosed to the ASX. Second, he failed to advise the board that cash flow modelling used to estimate JHIL’s exposure did not take into account superimposed inflation of the cost of meeting medical claims (being medical costs inflation over and above the general level of price inflation), and accordingly was not an adequate guide to the required level of provisions.
Shafron argued that his alleged contraventions could not give rise to a breach of s180(1) because they arose from work he did in his capacity as General Counsel, and not in his capacity as a statutory officer. He argued that he could only be liable for a breach of his statutory responsibilities as company secretary, which he argued were generally administrative and did not involve providing legal advice. He argued that whatever duties he had as in the role of General Counsel were not within the statutory responsibilities of a company secretary.
The High Court disposed of this argument swiftly by means of the construction of s180(1). The Court held that on any reading of s180(1)(b), the duties of care and diligence on the office holder are in respect not only of the statutory responsibilities of the office, but also in respect of whatever responsibilities that particular office holder has been given or has assumed within the corporation. The High Court’s analysis is at paragraphs  to  of the judgment. In particular at para  the Court held:
…..The effect of par (b) of s 180(1) is to require analysis of what a “reasonable person” in the same position as the officer in question would do. His or her position is not adequately described unless regard is had both to the office held and to the responsibilities that the person has. Further, Mr Shafron’s submissions ignored the evident difficulty in defining, for the purposes of limiting the conduct considered, the content of “the office held” where a person is an officer by virtue of par (b)(i), (ii) or (iii) of the definition of “officer” in s 9. A construction which avoids that difficulty, and avoids a more limited operation of s 180(1) in relation to some officers than in relation to others, is to be preferred.
In this case, Mr Shafron’s responsibilities were found by both the primary judge and the Court of Appeal to have included the tendering of relevant advice (including legal advice) about disclosure requirements. As the Court of Appeal rightly said:
“A company secretary with legal background would be expected to raise issues such as potential misleading statements (in relation to the draft ASX announcement) and disclosure obligations (in relation to the DOCI) with the board. Ordinarily it might not be the same with respect to a matter such as the JHIL cash flow modelling, which required particular expertise. But Mr Shafron had a quite close involvement with the cash flow modelling, and raising the limitations of the cash flow model [based on the material Mr Shafron had obtained from Trowbridge] is by no means a legal matter for the attention of general counsel; the involvement, and raising the limitations, in our view fell within Mr Shafron’s responsibilities as company secretary.” (emphasis added)
That is, Mr Shafron’s “responsibilities within the corporation” extended to the several subjects identified. Once it was found that his responsibilities extended to those subjects, the question became whether Mr Shafron undertook those responsibilities with the requisite degree of care and diligence.
Most business people know that they should shelter their assets by keeping them out of their own name, so that if they go bankrupt, those assets are not available to the trustee in bankruptcy.
But it’s also important to make sure that the entities that control those assets are still under the individual’s direct or indirect control in the event of personal bankruptcy.
Recently a client* learned a hard lesson that was fortunately only a near miss.
He set up his interest in a business so a trustee company held it. The company was trustee of a unit trust. The only unit holders of the trustee company were he and his wife. The only shareholders of the trustee company were he and his wife. They were also the only directors.
The trustee company owned one third of a development site.
In the course of the business he and his wife had given personal guarantees over a business loan. Eventually the lender made a call on the guarantee for an amount of over $10 million. The guarantee had a very nasty clause in it (which he and his wife had not read) by which they agreed to give a mortgage over all of their real property to secure the loan.
When it became apparent that the loan may go bad, the lender placed caveats over all of the real property in the name of he and his wife which included 2 investment properties and a family home.
The client could not service the first mortgages on the family home and the investment properties, or service the business loan of which he was guarantor.
After a period the client and his wife each declared bankruptcy.
After they had declared bankruptcy, an opportunity arose to restructure the business and settle with the lender on favorable terms. The restructure required the transfer of the trustee company’s interest in the development site to a Newco.
Problem? The units in the unit trust vested in the trustee in bankruptcy of the client and his wife. They had ceased to be directors of the trustee company because they were bankrupt. And the shares in the trustee company vested in the trustee in bankruptcy. Further, the trust deed reserved the power to change trustee to the unit holders alone. (Frequently, the appointor of the trust, usually a family member, has that power, but that was not so in this case)
So the client and his wife could not cause the trustee to execute a transfer or change trustee to a new entity who could. And the trustee (ITSA) would not assist.
In the end, the client had a near miss, more through luck than anything else. It turned out that the units in the unit trust were held by he and his wife as trustees for another trust, their family trust, which fortunately was a discretionary trust. The trustee of that trust was a different company with different directors. The trustee of that trust was able to direct the trustee in bankruptcy to transfer the units to it. Then it was able to change the trustee under the provisions of the trust deed, and the new trustee could execute the transfer. Phew that was close!
So what are the lessons of this near miss?
*The facts have been changed slightly to protect the client
Imagine this very common scenario. Before attempting to recover a debt, a creditor learns of circumstances which give rise to a genuine dispute about part of it, but there is still some undisputed part left over.
The creditor quite logically makes a demand for the undisputed part, knowing it cannot swear in a supporting affidavit that the whole of the debt is due and payable and that there is no genuine dispute as to the existence of all of the debt.
Two recent cases have ruled that a statutory demand made in these circumstances does not comply with s459E of the Corporations Act 2001 and is liable to be set aside.
The decisions cause practical difficulties for creditors attempting to recover the undisputed balance of a debt.
In Candetti, a creditor was owed $1,457,935 for crane services nett of amounts already paid. In correspondence, the debtor had disputed liability for the nett amount but had admitted that only $308,151 was payable.
Section 459E (link) governs the content of a statutory demand and among other things requires that the demand relate to a single or one or more debts that are due and payable. The existence of the debt, that it is due and undisputed must be verified by affidavit.
Justice Blue of the South Australian Supreme Court construed s459E (see paras 47 to 53 of the judgment) to require that the whole of the debt demanded must be undisputed, since the wording of s459E(1) was silent as to whether a part of a debt could be demanded. The purposive basis of the decision was that a debtor seeking to set aside the demand would not know which “part” of the debt to dispute, and would in effect have to raise a dispute as to the whole of the debt.
In the Garuda case, the Commonwealth Bank was owed USD16,650,000 by Garuda under a facility agreement, secured by a chattel mortgage over a Gulf stream aircraft and a director’s guarantee. The facility was in default.
At the time the demand was to be issued, CBA believed it had a debt claim against Garuda for USD6,896,535.05.
In related proceedings that had gone to trial between CBA and the guarantor in which judgment was pending, issues had been raised which clearly gave rise to a genuine dispute as to all but USD2,099,047.13 of that amount.
Accordingly, CBA served a demand only for USD2,099,047.13 in anticipation of a genuine dispute being raised as to the balance.
Master Sanderson of the WA Supreme Court took the view that a demand for part of a debt was valid as a matter of statutory construction. His analysis was:
 It is worth bearing in mind the nature of the statutory demand procedure. The party who claims a company is indebted to it and who says there is no genuine dispute about the debt can issue the demand. A company served with a demand has three options. It can pay the amount demanded. It can seek to have the demand set aside on the basis there is a genuine dispute between the parties, or the company has an offsetting claim greater than the amount demanded, or the company can do nothing. If the application to set aside the demand is unsuccessful or if the company does nothing a presumption of insolvency arises. The party making the demand then has a choice — it can apply to wind up the company or it can do nothing. If an application to wind up is made and the presumption of insolvency is not rebutted by the company then it would be wound up. All this is nothing more than the practical manifestation of the principle that a company which cannot pay its debts as and when they fall due is insolvent. Insolvent companies should be wound up. That is a basic principle of the law of corporate insolvency.
 Looked at in this way it does not really matter whether the demand has been made for the whole of an outstanding debt or part of it. If a company cannot pay part of a debt, that part not being disputed, it is presumed to be insolvent. So long as the amount demanded is more than $2,000 (the statutory minimum) a presumption arises. In my view, it is to unnecessarily complicate what is a simple procedure not to allow a party to claim anything other than the full amount of the debt.
 There are also practical difficulties about that approach. In this case for instance, it is difficult to see how the supporting affidavit could possibly have attested to there being no dispute as to the entire debt. Perhaps it could have been done — after all the respondent has argued [in the related proceeding] before Le Miere J it is entitled to judgment for the full amount. But any affidavit would have to in some way acknowledge the existence of a dispute. So a party in the position of the respondent would never be able to serve a statutory demand despite the fact a portion of the debt was not in dispute and despite the fact the inability of the applicant to pay that debt may mean it was insolvent and liable to be wound up.
 In my view, it is open to construe s 459E(1)(a) as allowing a party to serve a statutory demand for part of a single debt. This section refers to “a demand relating to a single debt”. That would be sufficiently wide to allow a demand for part of a single debt. It would do no violence to the wording of the section and would allow for a practical outcome in a case such as the present.
However, Sanderson M accepted a submission that given the national scheme of the Corporations Act, despite his own analysis, he ought to follow the earlier decision of Blue J in Candetti until overturned by a higher court.
The effect of these decisions are very troubling because a creditor who is aware of a dispute as to part of a debt seems to be unable to issue a demand for any of the debt or the undisputed part of it.
One would expect an appeal court or single judge to favour the analysis of Sanderson M in future decisions.
This is a warning to creditors (and lawyers acting for them) who don’t have direct evidence that their bankruptcy notice was taken to the post office or post box and mailed. You will probably not have effectively served your bankruptcy notice.
Where direct evidence is lacking, the Court will not infer a bankruptcy notice was actually posted just because you had a system where mail placed in an out tray was usually or even always taken to the post office or post box. There has to be direct evidence of posting.
That is the effect of a decision of Justice Collier of the Federal Court delivered last week in Mbuzi v Favell (No 2)  FCA 311 (link).
Readers will be familiar with reg 16.01(e) of the Bankruptcy Regulations (link) from my earlier post on service by email (link). That regulation allows a creditor to serve a bankruptcy notice by post.
Justice Collier’s decision is based on three simple points:
In Mbuzi the only evidence that the bankruptcy notice had been posted was oral evidence of the creditor as to his recollection of leaving the envelope containing the bankruptcy notice to be put in the mail by an unnamed secretary/receptionist in the ordinary course of business of his practice.
So what is sufficient direct evidence?
Notably, her Honour remarked that:
These remarks suggest that a system for registering outgoing mail, evidence that the notice was on the register and affidavit evidence from the person who posted the mail on the day in question, may be sufficient.
I wrote a post a month or so ago about the effect of online sales on the retail property sector (link).
One of the sources for the post was James Stewart’s Retail Postcard column.
James has just released another very interesting post (link), arising partly out of his recent appointment as receiver of the WOW SIght and Sound chain in Queensland (similar to JB Hi Fi but not as successful). The current post is not up yet but you can subscribe at that page and get it now by email.
It deals with the trouble electronics retailers are having here and in the US.
The most interesting part of the post to me was this:
Best Buy, the undisputed market leader in the USA (FY11 sales USD50b, 180,000 staff worldwide), is now the subject of considerable speculation about its future despite remaining a profitable business (FY11 net earnings USD1.1b). In fact since January 2011, Best Buy’s share price has lost over 31% of its value and the business now trades at a meagre 2.8 times earnings, making it one of the five worst-performing retail stocks in Standard & Poor’s 500 Index last year.
And recently, I was appointed Receiver and Manager over WOW Sight and Sound, the $260m Queensland-based consumer electronics retailer which just found the going too tough.
So what is the problem?
The answer is simple: Best Buy has become Amazon’s showroom.
Last week I heard the same complaint by a Chapel Street small retailer selling fashion footwear: people are coming in to try his stock for size, and then buying on the net.
To make matters worse, the manufacturers led by Apple are opening their own direct to market chains:
On top of this, the days of brand manufacturers needing retailers as their only channel to market are coming to an end.
Ten years ago, Apple did not have a retail store at all. Now it is the best specialist retailer in the world. Google, Sony, Samsung are all heading down a similar path.
While brands are increasingly becoming successful vertically integrated retailers, traditional retailers are struggling to remain great brands, particularly when they sell other people’s products.
There is no better example than Apple.
While independent consumer electronics retailers may say that Apple is great for business (because it drives foot traffic), they know that the margins they achieve on Apple products can be terrible (as low as 5%) and ultimately you cannot build a sustainable old school retail business on Apple products alone. The short answer is that Apple doesn’t need traditional retailers the way they need Apple!
So what does this mean for retailers and retail landlords? My guess is not happy days: