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.
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.
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.
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:
Most commentators, relying on s73 (link) of the Personal Property Securities Act 2009, state that liens are not affected under the PPSA. Section 73 provides priority to liens and other security interests arising under general law or under statute (called “priority interests”) in some circumstances.
But there are some serious traps for creditors relying on liens under the new regime.
First, if a creditor is relying on a contractual lien to get paid, that creditor is going to lose out in a priority battle with a secured party holding a security agreement in respect of all assets. Section 73(1)(a) only provides for protection to an interest arising under general law or under statute, but not a lien arising by agreement. A lien created by a contract is a security agreement that under the PPSA will require perfection (by registration or otherwise).
So where a logistical services company claimed a lien under its terms of trade over goods in its possession belonging to a customer, they lost out to a receiver appointed over the customer by a bank with a prior registered all assets security agreement: see McKay v Toll Logistics (NZ) Limited (HC)  3 NZLR 700 (link); Toll Logistics (NZ) Limited v McKay (CA)  NZCA 188 (link). There is a good summary of McKay by Leigh Adams at (link).
Second, even if a creditor has a lien under statute or general law, it should be careful before taking a concurrent contractual lien. It might be argued by a secured party holding a prior registered security agreement that section 73(1) doesn’t apply, because the contractual lien supplants the general law or statutory lien that would otherwise have arisen. A solution for the lienee would be to ensure that the contractual lien on its terms specifically preserves any general law or statutory liens that may arise, and be created in addition to those liens.
Third, a liquidator or receiver who relies on a “salvage lien” arising under the principles in Re Universal Distributing Co Limited (in Liquidation) (1933) 48 CLR 171 should be careful to check that their lien is protected under s73(1). It is possible that the terms of a prior registered security agreement could purport to prohibit the grantor “creating” a salvage lien.
A salvage lien does arise under general law, however it could be expected that a receiver or liquidator may well have actual knowledge of the terms of a prior registered security agreement held by a financier.
By s73(1)(e) a lien holder who has actual knowledge that creation of a subsequent priority interest will breach the terms of a secuity agreement does not receive protection of the section. Further, the section only governs liens arising “in the ordinary course of business” – see s73(1)(b).
Now for many possessory liens arising in the ordinary course of business, the lien holder will be unaffected. Think classically of a repairer. A motor vehicle repairer engaged to fix a company vehicle might expect it to be under finance, but would not be likely to check the PPSR and obtain a copy of any prior security interests.
But for a salvage lien, the situation is more difficult. A liquidator or receiver may well know the terms of a prior ranking secuirty agreement. There could also be a tricky argument about whether a salvage lien arises “in relation to providing goods and services in the ordinary course of business”. In my view it probably does not, given that it will arise only once the grantor is insolvent and continuing to trade under the control of an insolvency practitioner. Until we know the answer by a decided case, the risk remains.
I note the same risk may confront solicitors and accountants holding a lien over a file for unpaid fees, for the same reasons.
These are potentially troubling results. If one is in a position of having actual knowledge of prior security interests, then before relying on a lien of any complexion, care must be taken to avoid loss of priority to a registered security agreement.
Thanks to Nick Anson of Minter Ellison for comments on this post (link to Nick’s profile).
One of the first posts on this blog dealt with establishing service of documents by email, tweet or facebook message (link).
Now, service of a bankruptcy notice by email has been held to be effective. The relevant case is The Council of the New South Wales Bar Association v Archer (Federal Magistrates Court, Lloyd-Jones FM, 13 February 2012)(link).
It is surprising that an individual can be served with a bankruptcy notice by email, given that the recipient who fails to comply with the notice commits an act of bankruptcy.
The decision arises out of regulation 16.01(e) of the Bankruptcy Regulations 1996 (link) which permits a document to be “sent by facsimile transmission or another mode of electronic transmission”. The Court surveyed the authorities and found none that permitted service by email. Instead the Court relied on earlier authorities dealing with facsimile transmission.
The Court dealt with a number of issues raised by email service:
The decision is consistent with Austin J’s judgment in Austar Finance Group Pty Ltd v Campbell which is referred to in my earlier post, and it will be interesting to see if superior courts follow the Archer decision.
Another question that I pondered over fish and chips at the beach these holidays was the impact of online sales on demand for bricks and mortar retail space. I am a confessed online shopping addict. With developments like Myer stores projected downsizing and mass closure of Dick Smith Electronics outlets, the outlook for the property sector doesn’t look great.
I received an excellent update (link) on the impact of online retail on the demand for property in the retail sector from James Stewart of Ferrier Hodgson a few weeks ago. James writes a monthly series of updates (link) which are well worth reading for those of you interested in the retail sector and insolvency issues in that sector.
The update made three interesting points:
On a similar note, see a recent post by my colleague Sam Hopper (link) on the impact such developments might be expected to have on rent negotiations and valuations.
Some evidence of what a (slight) slowdown in urbanising China might have on the Australian mining sector shows up in BHP’s last half year ended 31 December 2011. It seems that growth on the already urbanised fringe is slowing, and moving inland (with some exceptions). The following summary from First Samuel (link) tells the tale:
BHP Billiton’s result for the half year ending 31-Dec-11 was strong in the commodities of thermal coal, petroleum and iron ore – with each showing high revenue and earnings growth. Iron ore production hit a record annualised production rate of 178m tonnes per annum, and now provides BHP with over off of its earnings.
However BHP didn’t quite reach the expected overall profit target (US$10bill+). Cost and pricing pressures impacted Aluminium’s performance, lower copper grades and industrial activity impacted Base Metals’ (copper) performance, and metallurgical coal was impacted by the Queensland flood legacy and industrial activity.
BHP expressed short term caution, given the uncertainty created by the situation in Europe. However, it highlighted that the structural drivers of industrialisation and urbanisation in the developing world underpin commodity demand in the medium to longer term.
BHP’s chart shows that the urbanisation of manufacturing capabilities that exist in coastal provinces are moving inland, extending high GDP growth across more of the country.
At some point there will be no territory left to sustain the pace of urbanisation and we will have to hope India or Africa (where many low wage manufacturing jobs are now going) takes up the slack.
Over summer at the beach I had the opportunity to read some interesting material on the Chinese economy.
The Australian economy driven in large part by demand for our raw materials by China. China is now our largest trading partner and it is the first time that the position has been held by a non western, let alone a non democratic, nation. The fact that China remains a dictatorship presents a greater degree of risk to us that our reliance on fellow minded nations in the past, in Britain and the USA.
I have sometimes wondered (as a insolvency practitioner) how likely it is for the China boom to continue, at least at a pace sufficient to keep resource prices sky-high, and the Australian economy afloat.
One of the more extreme predictions I read was in “The Coming Collapse of China”. The author, Gordon Chang, sets out a long lists of reasons why the economy in China is in trouble:
Chang predicts a slowdown (Japan style) or crash will follow. But when and how? This is what I found interesting:
Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.
This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing’s overreaction to the so-called “Jasmine” protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.
So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.
At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.
And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.
Paul Wolfowitz, former head of the World Bank, architect of US policy in the second Iraq war and expert on Asia, gave an interesting speech on the same topic (link to the video of his speech) last September in Australia. He compares the situation in 2011 to the world economy in 1900 and identifies a challenge – that is ensuring China can be integrated into the world economy as an emerging great power without sparking upheaval or war, as Germany and Japan did.
There are some easy ways to serve a company under the Corporations Act 2001*, but those methods sometimes fail for a variety of reasons. Maybe the principal place of business or registered office of the company is no longer occupied, but ASIC has not been advised of the change of address. The person serving the document might not leave it at the old address since there is no-one there to take it**.
In some cases it is not possible to serve the document again. It might be too late to do so. Alternatively, some subsequent step, like terminating a contract, might already have occurred.
However, if the documents were also emailed, it is possible in the right circumstances to rely on that fact to prove effective service.
In the case of a liquidator or administrator, if there is evidence that the liquidator or administrator received the email attaching the document and read it, that will be effective service on the company. The reason for this is not that there is a provision in the legislation allowing service by email. Rather, it is a consequence of the fact that the liquidator or administrator is the guiding mind of the company and once they know of the document, so does the company: the ordinary meaning of service is that the document comes to the attention of the intended person. The company has therefore been actually served and there is no need to rely on any deemed service provisions: see for example Austar Finance Group Pty Ltd v Campbell (2007) 25 ACLC 1834,  NSWSC 1493 per Austin J at 1841 (paras  to ).
What sort of evidence is required? According to Austin J, there must be evidence that the document came to the notice of the person to be served, and that the document was in readable form. For an email, that means that the email message was downloaded from the intended recipient’s server so that it could be read and actually came to the recipient’s attention. So the evidence could be as simple as an emailed response acknowledging receipt. Or that a printed copy of the email and attachment appears in the recipient’s file. Or it might be that a subsequent email was sent or other action taken, not in direct response, but which makes clear that the first email and document was read.
The principal has wider application than insolvency – it applies to any situation where the intended recipient (company or not) can be shown to have received and read the email. It also conceivably applies to any other forms of electronic messaging like Tweets or facebook messaging, given Austin J’s decision followed earlier cases dealing with faxes.
I note that for the purposes of personal service, Austin J was of the opinion that there had to be evidence the documents were printed, so that a hard copy was received.
*See for example s109X of the Corporations Act 2001 (Cth) and s28A of the Acts Interpretation Act 2001 (Cth). For a thorough survey of the law on serving a company, I highly recommend chapter 3 of Farid Assaf’s excellent book, Statutory Demands: Law and Practice, 1st ed, Lexis Nexis 2008. Usually a contract will also include deemed service provisions, or notice clauses, of similar effect.
**Of course if the person serving the document just left it anyway that would still be good service under s109X(1). This post is based on a real case where the document was brought back and not left at the registered office.