Legal Insight Issue 15

Contents:

Amendments to the Insurance Contracts Act Pass the Senate

Former Trustee in Liquidation Entitled to Sell Trust Assets

The ACCC – A Toothy Tiger

Possession is 9/10ths of the Law!

Federal Court Orders – "Unfair Terms"

Employee Competes with Employer – Breach of Contract and Unfair Dismissal Claim

We refer to our previous articles regarding Government debate on amendments to the Insurance Contracts Act, 1984 (Cth) ("Act").  A Bill to amend the Act passed the Senate on 20 June 2013.

The substantive amendments are as follows:

1. It is a breach of the Act to fail to comply with the duty of utmost good faith;
2. Vesting ASIC with power to take action against insurers for breach of the duty of utmost good faith;
3. Extending the duty of utmost good faith to third party beneficiaries;
4. Various technical amendments in respect of the duty of utmost good faith, duty of disclosure and the insurer's obligations on renewals etc;
5. Amendments to some sections of the Act dealing with life insurance contracts;
6. Clarifying what rights third parties have against an insurer, including a right to recover directly against an insurer where the third party had a damages claim against the insured or a third party beneficiary who has died or cannot be found;
7. Vesting ASIC with powers to bring representative actions on behalf of the third party beneficiaries; and
8. Technical amendments to the subrogation provisions and the allocation of money recovered by an insurer when exercising its right of subrogation.

The proposed amendments to incorporate the "unfair terms" provisions into the Act (see our most recent article) are not included in the above Bill.  We still await the outcome of further debate surrounding these proposed amendments.

In the decision of Neeeat Holdings (In Liquidation) [2013] FCA 61 the Federal Court granted the orders sought by the Liquidator of Neeeat Holdings (In Liquidation) ("Company") and permitted him to sell trust assets.

Facts

The Company was the trustee of various trusts.  A Liquidator was appointed to the Company.  The trust deeds had different (but similar) clauses dealing with the automatic removal of the trustee in these circumstances – one of the trust deeds stipulated that upon being placed in liquidation, the trustee ceased to hold office as trustee and vested a person ("Appointor") with the power to appoint a replacement.  Replacement trustees were apparently appointed (the Court did not need to consider the validity of the appointment).  The questions ultimately decided by the Court were: could the Liquidator of the Company sell assets of the various trusts (notwithstanding the Company was no longer trustee), recover proceeds of the sales of those properties to pay Company creditors and his own costs?  The Court said yes.

Law

The essential legal points to be taken from this decision are:

1. A trustee has a right of indemnity out of trust assets and retains an equitable lien or equitable charge over the trust assets as security for this right;
2. Where a trustee is to incur a liability, it has a right of exoneration out of trust assets in respect of a prospective liability;
3. The above rights are limited to circumstances where the trustee is acting properly in its capacity as trustee and not guilty of gross negligence or breach of trust; and
4. A trustee has a right to deal with trust assets in accordance with the trust deed for the purpose of satisfying liabilities in respect of which the right of indemnity or exoneration attaches… this included the power to sell trust assets.

The Court found it was appropriate that the Liquidator's costs be paid from the proceeds as the Company's obligations to pay trust debts could only be performed by the Liquidator.  These costs were regarded as a debt properly incurred in performing its duties as a trustee.

This case is a useful reminder of the longstanding proposition that a trustee (although subsequently removed and therefore does not hold any trust assets) retains the rights set out above and removal of the trustee does not defeat these rights.

The ACCC has continued its proactive prosecution of businesses who breach the Australian Consumer Law.  Two recent cases (one freshly commenced and one recently decided) are noted below.

Taxsmart

The ACCC has commenced Federal Court proceedings (listed in August 2013 for a Scheduling Conference) against Taxsmart Group Pty Limited, Taxsmart Franchising Pty Limited, Resultsmart Pty Limited, Scott Andrews (Taxsmart's sole director) and Janine Andrews (Taxsmart's business development manager).  The ACCC has alleged they made (or aided and abetted in making) false representations or representations they did not have reasonable grounds for making and engaged in misleading or deceptive conduct in relation to job advertisements for accounting positions and Taxsmart franchises. 

These include representations that the program Taxsmart offered would satisfy the legal requirements for registration as a tax agent, graduates would attain employment for a year and would be supervised and mentored one–on-one by a registered tax agent and that Taxsmart had a reputation in the market (established offices and business clients etc.).  The ACCC is seeking declarations, injunctions, compensation orders, a disqualification order (in relation to Mr Andrews), orders for corrective notices and costs.

Nonchalant Pty Limited (In Liquidation)

On 18 June 2013, judgment was delivered (and orders made) in ACCC –v- Nonchalant Pty Limited (In Liquidation) [2013] FCA 605.  The Federal Court ordered Nonchalant (which was in liquidation) pay pecuniary penalties totalling $30,000.00 and made declarations that it made false or misleading representations and engaged in conduct that was misleading or deceptive or likely to misled or deceive.  Readers may recognise Nonchalant by its trading name, "Abel Rent A Car" ("Abel").

The Court found that Abel, through publications on its website and through print advertisements, represented that certain motor vehicles were available for hire (when they were not) and certain motor vehicles were available at stated prices (when they were not).

The interesting aspects of this case concern the fact that Abel was in liquidation, the liquidator indicated he did not intend to defend the proceedings, the ACCC sought (and obtained) leave to proceed against Abel (which was required in light of it being in liquidation) and, as Abel did not appear, the ACCC sought (and obtained) leave to proceed in the absence of Abel.

In the judgment, Justice Gordon indicated that it was appropriate to make findings, order pecuniary penalties and make declarations as "general deterrence" is an important aspect of these types of cases.

The Supreme Court of NSW (In the matter of Maiden Civil (P&E) Pty Ltd; Albarran and Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors –v- Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852) has delivered judgment in respect of a priority dispute under the Personal Property Securities Act, 2009 (Cth) ("PPSA").  The Court found that a financier could realise its security over a company (which subsequently went into liquidation) notwithstanding the security included goods "owned" by a third party which had only been leased to the company.

This article only deals with the central issue decided by the Court.  Readers should note that some technical arguments and defences were decided by the Court which are beyond the scope of this article. 

Facts

Party A ("Lessor") leased three Caterpillar machines ("Equipment") to Party B ("Lessee").  The leases were made orally, entered into before 1 February 2012 (being the "registration commencement time" of the PPSA) and were not registered on the PPSR (the Register created under the PPSA).  In May 2012, Party C ("Bank") advanced funds to the Lessee and entered into a General Security Deed ("GSD") with the Lessee.  The GSD was registered on the PPSR.  The GSD was (pre the PPSA) commonly known as a fixed and floating charge and it granted the Bank security over all the Lessee's assets, undertakings and present and after-acquired property, including the Equipment. 

In July 2012, due to the Lessee's default under the GSD, the Bank appointed receivers and managers to the Lessee.  The Lessee subsequently went into voluntary administration and then liquidation.  The substantive issue decided by the Court (and the issue covered by this article) was whether the Bank was entitled to delivery up of two of three pieces of Equipment which were in possession of other parties.  The Court found the Bank was entitled to delivery up of those items of Equipment, notwithstanding its finding that the Lessor was the "true owner" of same. 

The Court found (based on the facts) that the Lessee was the "true owner" of the third item of Equipment and therefore the Lessor's claim for that item failed for other reasons.  However, the Court indicated its findings would be equally applicable to that item if it had found it was owned by the Lessee. 

Legal Issues

The Court found:

1. Notwithstanding the Lessor was the "true owner", as it had not protected its interest under the PPSA, the Bank's GSD had priority over the Lessor's security interest.
2. The Bank trumped the Lessor on the following basis:
   1. The Lessor had entered into PPS Leases (as defined under the PPSA) and therefore had a security interest in the items of Equipment.  PPS Lease, for current purposes, is a lease for 90 days or more of goods that may or must be described by serial number.  The leases were not in writing and therefore not enforceable against third parties (although this argument was not relied on by the Bank.  The Court commented on this and noted that the security interest) had not been perfected (in this case, by registration on the PPSR);
   2. In the usual case, transitional security interests (a security interest provided by an agreement which would, if entered into after commencement of the PPSA, have been an agreement subject to the PPSA) have the benefit of temporary protection (by virtue of deemed perfection under the PPSA).  This temporary protection expires, at the latest, on 28 February 2014; 
   3. Temporary perfection of transitional security interests does not apply to all transitional security interests; 
   4. The exception in this case was for goods which were registrable but not registered on a State or Territory register before commencement of the PPSA - the Equipment was registrable under the Northern Territory Register of Interests in Motor Vehicles and Other Goods but the Lessor had not registered;
   5. Although the Lessor had a security interest in the Equipment and was the "true owner", it did not obtain the protection of temporary perfection and was therefore vulnerable to subsequent security interests, including the Bank's; and
   6. As the GSD was registered on the PPSR, the Bank (with a perfected, ie registered, security interest) took priority over the Lessor's earlier (but unperfected, i.e. unregistered) security interest.

Comment

There is nothing profound about the findings in this case as concerns the operation of the PPSA.  However, it provides a stark reminder that:

1. "True owners" of goods must take steps to protect their security interest (in this case as owner) or risk losing out in a priority dispute against third parties;
2. Whether or not a person is the "owner" of goods is irrelevant for determining priority of competing security interests in goods under the PPSA;
3. When you part with possession of goods, the person in possession has rights in those goods; they are vested with "ostensible ownership" (to coin a phrase from this judgment); and they have power to grant rights in the goods in favour of third parties.  This paragraph bears re-reading as the ramifications are significant.  All they have is possession but you have empowered them to charge, encumber, mortgage, pledge, sell or lease the goods to any number of third parties!
4. In light of the new securities law landscape (in today's economy more than ever), parties would be wise to seek appropriate advice and take adequate steps to protect their position in every instance where they part with possession of goods before receiving payment in full.

As far as we are aware, this is the first decision of the NSW Supreme Court which deals with all of the fundamental concepts of the PPSA.  We welcome the decision and expect it to be the first of many dealing with priority disputes under the PPSA.

Further to our prior article regarding the first proceedings commenced by the ACCC based exclusively on the new "unfair terms" provisions of the Australian Consumer Law, Orders have been made by the Federal Court by consent finding that four separate terms in ByteCard's (better known as NetSpeed Internet Communications) terms were "unfair".

The effect of the Orders is that these terms are void.  The objectionable terms allowed ByteCard to unilaterally vary pricing under existing contracts without the consumer being able to terminate; provided an indemnity by the consumer in favour of ByteCard in all circumstances, regardless of whether there was a breach of contract or whether the loss was caused by the consumer; and allowed ByteCard to terminate the contract unilaterally at any time with or without reason.

ByteCard was also ordered to pay a contribution towards the ACCC's costs.

We suspect that this will be the first of further cases commenced by the ACCC seeking orders in respect of "unfair terms" in "standard form contracts", particularly in light of the ACCC's report earlier this year which indicated it had unsuccessfully convinced some businesses to amend their terms.

The Fairwork Commission recently held (in Pedley –v- IPMS Pty Ltd t/as peckvonhartel [2013] FWC 4282) that an employee who solicits clients of his employer behaves in a way which is "inconsistent with continuation of [a] contract of employment".

Facts

Mr Pedley was employed by peckvonhartel ("Employer") as a senior interior designer for approximately 2 years.  During his employment the Employer allowed him to carry on a private business outside of work hours if it did not conflict with his obligations to the Employer.  On 14 January 2013, Mr Pedley sent a group email via LinkedIn referring to his personal business and suggesting he was expanding this to a full time design practice over 2013 and suggested the recipients, amongst other things, have a look at his website and social media pages and contact him if they would like to discuss any opportunities or projects.  On 15 January 2013, the Employer terminated Mr Pedley's employment effective immediately as a result of the email.  Mr Pedley made a claim for unfair dismissal.

Law

The Commission found that Mr Pedley had deliberately and actively solicited clients of the Employer for his own business and this behaviour was inconsistent with the continuation of his contract of employment and amounted to serious misconduct.  Accordingly, the Court accepted that the termination was not harsh, unjust or unreasonable, therefore was not unfair and hence Mr Pedley's claim was dismissed.

During the course of the judgment, the Commission made some interesting comments as to Mr Pedley's conduct, including:

1. The fact that Mr Pedley was allowed by the Employer to carry out private work in his own business on his own time did not operate as a waiver against the Employer from objecting to Mr Pedley, whilst employed, soliciting the Employer's clients;
2. In sending the email, Mr Pedley breached his fundamental employment obligations to the Employer in soliciting work from current clients of the Employer in breach of his obligation to put the Employer's interests before his own;
3. Mr Pedley's conduct was in breach of his duty to promote the Employer's interest ahead of his own and he was in breach of two clauses of his employment agreement (being a covenant not to carry on work which competes with the Employer, adversely affects the Employer's reputation or hinders the performance of Mr Pedley's duties and a general covenant to at all times act honestly and in a manner consistent with his employment); and
4. Although the employment agreement was vague and unclear it "goes without saying" that an employee has an obligation during employment to not solicit clients of their employer for their own business.

John Vohralik (our Consultant Director) is a mediator on the Panel of Mediators of the Office of the Franchising Mediation Adviser and is a Nationally Accredited Mediator and has expertise in consumer law and franchising disputes.