Legal Insight Issue 17

Contents:

Discretion of the SMSF Trustee

Commencement of NSW Motor Dealers' Unfair Contracts Regime

PPSA Developments

Voting Rights at Creditors' Meetings

Are you Ready for Privacy Law Changes?

Covert Recordings – Are they Legal?

The Supreme Court of Western Australia has confirmed in the case of Ioppolo & Hesford v Conti [2013] WASC 389 that, subject to the terms of the trust deed governing a self managed superannuation fund ("SMSF") and any valid binding death benefit nominations, the discretion of the trustee of a SMSF should not be fettered when it comes to distributing a deceased member's super death benefit.

The facts of the case can be briefly summarised as follows:

Background

1. By a deed dated 29 July 2002, Mr and Mrs Conti established a SMSF known as 'The Conti Superannuation Fund';
2. Mr and Mrs Conti were the only trustees and members of the fund.
3. Mrs Conti made a will in which she expressed the desire that her entitlements under the fund be applied to her children named in her will.  She specifically stated she did not want any entitlement paid to her husband Mr Conti.
4. Mrs Conti died on 5 August 2010.
5. It transpired that following the death of Mrs Conti, Mr Conti appointed a corporate trustee (of which he was the sole director and shareholder) for the fund, which subsequently determined that the monies standing in the deceased's account should be paid to Mr Conti and not to the children mentioned in the deceased's will.

The Law

It was this distribution which was the subject of a claim brought by the executors of the deceased's estate against Mr Conti.  It was argued by the executors that: Mr Conti was obliged to appoint one of the executors as trustee of the fund for it to remain a SMSF; the trustee did not exercise its discretion in a bona fide manner as required by the terms of the deed governing the fund; the Court should make an order appointing one of the executors as a trustee pursuant to s77 of the Trustee Act 1962 (WA); and there should be a review of the discretion exercised by the trustee of the fund.

The Court ultimately concluded that it was within the discretion of the trustee of the fund to pay the super death benefit from the deceased member's account to Mr Conti based on the following:

1. The Court held that s17A(4) of the Superannuation Industry (Supervision) Act 1993 (Cth) allowed the fund a grace period of 6 months from the date of the deceased's death to appoint a corporate trustee so it could remain a SMSF, which circumvented the requirement to appoint at least one of the executors as trustee in order to remain so.
2. Whilst the deed governing The Conti Superannuation Fund required the trustee to exercise its discretion in a bona fide manner, there was no evidence that was not done in this case.  Prior to exercising his discretion, Mr Conti took advice from a tax specialist.  Moreover, prior to her death, the deceased had made several non-binding and binding nominations directing that her death benefit should be paid to Mr Conti.  Despite the fact that those nominations had lapsed by the time discretion was exercised, the trustee was still entitled to have regard to them.
3. On the evidence and facts of the case, the Court was not satisfied that the trustee acted with a lack of bona fides or in any way improperly.  As such, the Court did not find it expedient under s77 of the Trustees Act 1962 (WA) to appoint one of the executors of the deceased's estate as a new trustee of the fund.
4. There are existing authorities which clearly establish discretion of a trustee will only be reviewed by a court in very limited circumstances.  The Court found there were no grounds for the review of the trustee's decision in the circumstances.

This case is a useful reminder that, subject to a valid death benefit nomination, distribution of a deceased member's super death benefit may be dealt with by the trustee of the super fund without reference to the deceased member's estate.  A trustee may, by default, elect to distribute the super death benefit to the legal personal representative of the deceased member, however, it should not be assumed that the trustee will do so.

The new Motor Dealers and Repairers Act 2013 (NSW) ("Act") passed the NSW Parliament on 21 November 2013, and received assent on 27 November 2013.

The Act consolidates the Motor Dealers Act 1974 (NSW) and the Motor Vehicle Repairs Act 1980 (NSW) into a single piece of legislation which regulates both motor dealers and motor vehicle repairers.  Relevantly for motor dealers, one of the stated objectives of the new Act is to provide protection for motor dealers against unfair contract dealings by motor vehicle manufacturers.

To that end, the NSW Civil and Administrative Tribunal (formerly, at least as to a part known as the NSW Consumer, Trader and Tenancy Tribunal) ("Tribunal") has been empowered under the Act to declare terms of contracts for the supply of motor vehicles by manufacturers to motor dealers ("Supply Contracts") unfair and to make orders for the protection of motor dealers, provided the parties attempt to resolve their disputes through mediation in the first instance.  The Act also extends this protection to motor dealers where manufacturers have engaged in unjust conduct that "occurs in connection with a supply contract and is conduct that is dishonest or unfair", or that is "authorised by an unfair term of a supply contract."

Section 142(1) of the Act defines a term of a supply contract as "unfair" if:

1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract,
2. it is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the terms, and
3. it would cause detriment (whether financial or otherwise) to a party if it were to be relied on.

If the Tribunal declares a term of a supply contract or a class of supply contracts to be "unfair", then the Tribunal can make an order to:

1. declare the contract(s) void, in whole or in part;
2. vary, in whole or in part, any term of the contract(s);
3. direct a party to the contract(s) to take or not to take specified actions relating to the subject matter of the contract(s) (whether or not permitted by the contract(s));
4. direct a party to the contract to pay an amount of compensation to another party to the contract; or
5. make any other consequential or ancillary orders it thinks fit.

The Tribunal has similar powers if it declares conduct by a manufacturer to be "unjust".

The apparent justification for the enactment of the unfair contract terms regime under the new Act is that it addresses a major issue relating to the contractual relationship between small motor dealers and the manufacturer or supplier of the vehicles they sell.  Stakeholders representing dealers had raised concerns that the relationship between dealers and manufacturers may be characterised by a power imbalance to the detriment of the small motor dealers, which was cited as a reason for enactment of the new Act in the Second Reading speech.

Out of concern that motor dealers would not take action under the new unfair contract terms regime for fear of reprisal borne out of such imbalance of power, the Act also allows motor industry groups to take action on behalf of a dealer or dealers about an unfair term in a contract or class of contracts.  It was reasoned that the industry or manufacturer would not be able to directly identify the dealer thereby removing the fear of reprisal.

It should be noted that the unfair contract terms regime under the new Act is retrospective in its application. Therefore, as a matter of priority, contracts between NSW motor dealers and manufacturers should be reviewed for unfairness, and revised if necessary.

The Federal Circuit Court of Australia (previously known as the Federal Magistrates' Court of Australia) has determined that a car park operator's "repairer's lien" trumps a financier's security interest in a motor vehicle.  The case is cited as NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274. 

Facts

1. In April 2009, St George Bank financed the purchase of a motor vehicle ("Vehicle") by Ms Bessalem.  Ms Bessalem defaulted under the agreement with St George.  St George's interest pursuant to the agreement was subsequently assigned to NCO Finance Australia Pty Ltd ("NCO"). 
2. On 12 August 2011, NCO's interest was registered on the Queensland Register of Encumbered Vehicles ("QREV"), which is a "transitional register" pursuant to the PPSA.  The interest was migrated from the QREV to the PPSR on 21 November 2011 (in anticipation of commencement of the PPSA).  Accordingly, NCO's interest was a "migrated transitional security interest". 
3. On 27 September 2011, the Vehicle entered a car park at Tullamarine Airport, Melbourne and was abandoned.  The car park was operated by Australian Pacific Airports (Melbourne) Pty Ltd ("Operator").  The Operator's terms included a term that it may retain possession of a vehicle until all fees are paid. 
4. Between September 2011 and the date of the hearing, over $6,000 was owed to the Operator in parking fees. 
5. NCO sought orders that the Operator deliver up the Vehicle or, in the alternative, authorisation to enter the car park and take possession of the Vehicle.  The Court dismissed NCO's application. 

Law

The Court found:

1. Both parties had a "security interest" which was enforceable against third parties pursuant to a "security agreement" and both were "transitional security interest" (as those terms are defined in the PPSA). 
2. NCO's security interest was perfected by registration on QREV, was continuously perfected thereafter and was "again perfected" by operation of the PPSA on 30 January 2012 (being the day immediately before commencement of the PPSA). 
3. The Operator's security interest was perfected when the Vehicle entered the car park on 21 September 2011 and was continuously perfected thereafter by possession. 
4. (Surprisingly in our view), as the Operator's security interest could be registered up to 1 February 2014 (sic; 31 January 2014) pursuant to the transitional provisions of the PPSA and therefore could have "the same registration time", the Operator's security interest was registered on the PPSR "at the same time as [NCO's interest]".  This was despite the fact that the Operator had not registered its interest on the PPSR.   
5. Both interests were continuously perfected "with the same registration time, being the commencement time of the PPSA", with the result that the priority dispute was determined under the applicable law before commencement of the PPSA.  [As an aside, there are various priority rules under the PPSA for determining who "wins".  If these rules do not provide a solution, the PPSA stipulates the dispute is governed by the applicable law in place before the PPSA as if the PPSA had not been enacted.]
6. The Chattel Securities Act, 1987 (Vic) ("CSA") operated with the effect that the Operator's repairer's lien (as defined in the CSA) ranked in priority to any other registered security interest, irrespective of the date of registration of any other registered security interest in the Vehicle. 

Comment

Most of the findings in this decision are, with respect, straightforward and uncontroversial.  However, the Court's reasoning for finding that the Operator's security interest was continuously perfected and had the same registration time as NCO's security interest (despite it not being registered at all) is surprising.

The Federal Court has ordered that Administrators of a company in administration are justified in withdrawing proofs of debt lodged by a creditor for voting purposes during the administration.  The decision is cited as Strawbridge, in the matter of Retail Adventures Pty Limited (Administrators Appointed) v Retail Adventures Pty Limited (Administrators Appointed) [2013] FCA 891.

The judgment followed an application by the Administrators of Retail Adventures Pty Limited (Administrators Appointed) ("Company") for directions pursuant to sections 447A and 447D of the Corporations Act, 2001 (Cth).

Voluntary Administrations

A company may voluntarily appoint an Administrator if of the view that the company is insolvent or likely to become insolvent and an Administrator should be appointed.  The voluntary administration is designed to be a quick process to maximise the chance of the company (or at least its business) to continue in existence and, if this is not possible, to achieve a better return for creditors than if the company was immediately wound up. 

An Administrator usually convenes two meetings, the first to report to creditors (shortly after their appointment) and the second for creditors to vote on the future of the company.  At the second meeting, creditors vote on whether the company should be returned to the directors, the company should execute a deed of company arrangement ("DOCA") or a liquidator appointed and the company wound up.  Although no dividend or payment is made at the second meeting, the way creditors vote determines the future of the company (and therefore affects the dividend creditors will receive, if any).    

The Decision in Strawbridge

Messrs Strawbridge, Greig and Lombe were appointed Voluntary Administrators of the Company and its sole shareholder/parent company Retail Adventures Holdings Pty Limited ("Parent Company").  The Administrators sought directions from the Federal Court in respect of four issues.  This article deals with one of the issues only.

If a creditor (in this case the Parent Company) has agreed to not prove in competition with another creditor of the Company (in this case a landlord owed money under a lease) ("Landlord"), or make a claim or enforce a right against the Company or its property until the Landlord has been paid in full, does this prevent the Parent Company from submitting a proof of debt for voting purposes at the second meeting? 

The Federal Court said "yes".  The result was that the Parent Company (a significant creditor of the Company) could not vote at the second meeting and the future of the Company was to be decided by the creditors other than the Parent Company.

The Clause & Outcome

The Parent Company had guaranteed the Company's obligations pursuant to a lease.  The clause in issue including the following:

"The [Parent Company] may not:

…

make a claim or enforce a right against the [Company] or its property …

prove in competition with the [Landlord] if an… administrator… is appointed in respect of the [Company] or the [Company] is otherwise unable to pay its debts when they fall due."

It was not disputed that the Company was indebted to both the Parent Company and the Landlord.  Solicitors for the Landlord wrote to the Administrators asserting that the Parent Company was prevented from proving in the administration, including voting at the second meeting. 

The Court accepted that there is no distribution or dividend to creditors in an administration (and this only occurs in a liquidation or if the Company executes a DOCA, subject of course to its terms) and mere lodgement of a proof for voting purposes at the second meeting does not necessarily mean the Parent Company will vote contrary to the Landlord and therefore "in competition with" the Landlord.  However, the Judge found that given the clause included a prohibition against proving in competition in circumstances where an administrator was appointed, to give effect to the clause it must include a prohibition on lodging a proof for voting purposes (which is a necessary step in acquiring the right to vote). 

The Court also found that lodging a proof was "making a claim" and "the enforcement of a right" contrary to the first limb of the clause, because lodgement of a proof is the first step in a process of enforcing rights in respect of a debt.

Repercussions

Given the value of the Parent Company's debt (and therefore its voting power at the second meeting), the outcome in this case was significant.  Obviously each clause, agreement and contract needs to be considered in its own right.  Clauses along these lines are invariably included in standard form guarantees and indemnities, particularly those granted in favour of landlords or financiers such as major Australian banks. 

It is clearly prudent for Administrators (as part of their "standard investigations") to enquire whether any clauses along the above lines are in place when seeking Proofs of Deed for voting purposes in a Voluntary Administration.  This may be so whether or not the creditor with the benefit of same raises the issue.

Should you require advice regarding such provisions, kindly contact us. 

As you may be aware, there have been recent changes to the privacy law landscape in Australia. Significant amendments were made to the Privacy Act 1988 (Cth) ("Act") to provide greater protection for the personal information of individuals.

The Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) ("Privacy Amendment Act") which was passed with amendments on 29 November 2012 comes into force on 12 March 2014 is a new national set of privacy laws applicable to government and non-government organisations and contains major reforms to the current Privacy Act ("New Privacy Laws").

What is covered by privacy?

The privacy laws regulate how personal information is handled. The Act defines personal information as:

"Information or an opinion (including information or an opinion forming part of a database), whether true or not, and whether recorded in a material form or not, about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion."

Who must comply with the New Privacy Laws?

Government agencies and certain private organisations (with some exceptions) have responsibilities to comply with the New Privacy Laws, they include:

1. Government agencies;
2. Non-government organisations (private businesses) and private schools with an annual turnover of greater than $3 million;
3. Credit providers (this is widely defined and includes a business that gives more than seven (7) days to its customer for payment of invoices) and credit reporting businesses; and
4. Private health service providers.

There are a few exceptions such as small business operators, registered political parties, agencies and State and Northern Territory government agencies.

However, as a way of building consumer confidence and trust, small business operators can choose to "opt-in" and therefore be subject to the NPP's (and can subsequently opt-out at any time).

What has changed?

The key changes brought about by the Privacy Amendment Act include (among other things):

1. Australian Privacy Principles (APP's)
   A new single set of privacy principles that regulate the handling of personal information by government and non-government organisations called the Australian Privacy Principles. The APP's replace the Information Privacy Principles (IPP's) that currently apply to government organisations and the National Privacy Principles (NPP's) that currently apply to non-government organisations. The APP's include a number of changes that you need to be aware of, such as:
   1. Cross-Border Disclosure
      If an Australian organisation discloses personal information to  an overseas recipient, it will be required to take 'such steps as are reasonable in the circumstances to ensure that the overseas recipient does not breach the APP's – otherwise the Australian organisation  may be liable for any privacy breaches by the overseas recipient. This will require either ensuring that an overseas recipient is subject to equivalent privacy laws in their country and/or amending contracts to ensure the Australian organisation is protected. This will be a significant concern for Australian organisations that use offshore cloud computing service providers or subcontractors / agents and the like.
   2. Direct Marketing
      APP 7 is a new direct marketing principle that applies to the activities of private organisations and restricts the way organisations use and disclose personal information for 'direct marketing' purposes. It also provides that an organisation must maintain details of the source of the personal information used for direct marketing as they may need to disclose such information upon a request by an individual. Organisations must ensure they have obtained consent from an individual before sending direct marketing material; they must also provide an individual with an option to 'opt-out' of direct marketing material in each direct marketing communication. This may mean organisations may need to review their current direct marketing processes.
      
      APP 7 does not apply to the extent that the Spam Act 2003 (Cth) (unsolicited electronic communication) or the Do Not Call Register (unsolicited telemarketing calls and faxes) apply.
2. Credit Reporting
   There are a number of changes to  the credit reporting laws which include (among other things): the introduction of civil penalties for breaches of certain credit reporting provisions;  the replacement of the term 'credit reporting agency' ("CRA") with the term 'credit reporting body' ("CRB"); new additional types of personal information permitted to be held in a credit reporting system and more time given to credit providers and CRB's to deal with a correction request than under the old Part IIIA of the Act.
3. Codes of Practice
   New codes of practice about information privacy ("APP codes") and a code of practice for credit reporting ("CR Code") and new powers have been given to the Information Commissioner to develop determinations that are in the public interest.
4. Increased Powers and Penalties
   The Privacy Commissioner will have broad jurisdiction and enhanced powers to:
   1. conduct privacy audits of government and non-government organisations;
   2. enter into enforceable undertakings; and
   3. seek penalties for serious or repeated breaches of privacy of up to $1.7 million per breach for a corporation and up to $340,000 per breach for an individual.

Privacy Complaints

Under the reform the Office of the Australian Information Commissioner ("OAIC") (which is the government agency responsible for privacy functions, information policy functions and freedom of information functions) will have the power to investigate any complaints made about any government agency or private organisation governed by the Privacy Act and seek to resolve the dispute through conciliation.

An individual may lodge a complaint with the OAIC. The OAIC also has the power to conduct a privacy audit before a complaint is made by way of an Own Motion Investigation ("OMI").

If a resolution cannot be reached through conciliation then the OAIC has the power to make a complaint determination. Both OMI and complaint determinations are published on the OAIC website.

What type of personal information is exempt?

1. Employee Records
   The obligations under the Act will not apply to an employer/ employee relationship.
2. Related Bodies Corporate
   Generally the disclosure of personal information between related bodies corporate within Australia will continue to be permitted and will not constitute a breach of the Act.

What should you do?

In anticipation of the new privacy laws and to meet the higher privacy requirements, we recommend that (if you have not already done so) you prepare your business for the changes before they come into force in March 2014. You will need to identify and assess your internal business practices that relate to the collection, use, disclosure and storage of personal information. You can prepare your business by undertaking the following steps:

1. Conducting a privacy audit to assess any gaps in current business practice;
2. Reviewing your existing privacy policy and compliance programs to ensure they are adequate to meet your new privacy law obligations;
3. Reviewing your outsourcing arrangements to third parties and overseas recipients;
4. Reviewing your internal processes including physical storage and data security;
5. Reviewing your direct marketing practices, particularly in relation to obtaining consents, and retaining sources of personal information;
6. Reviewing commercial and credit applications, particularly consents to conduct credit assessments, and the type of information disclosed to third parties;
7. Appointing a privacy officer who will be responsible for managing your privacy compliance and any privacy complaints; and
8. Consider training key staff about the new laws and how they affect your business before the new laws come into force.

The key areas of your business that may require review include the credit department in relation to credit reporting; IT in terms of information security and the marketing and business department for any contracts and marketing you undertake, such as mail outs.

How can we help?

We would be happy to assist in undertaking a review or audit of your privacy compliance program, conducting a privacy gap analysis, drafting a privacy policy or updating your existing policy (as the case may be) and providing training to key personnel to ensure your business is ready for the new laws in March.

With the phenomenon of smartphones and other like devices, a simple touch of a screen is all that is needed to discretely make an audio recording of a private conversation or a business meeting. But is a secret recording legal and is such evidence admissible in court?

In New South Wales, the Surveillance Devices Act 2007 makes it unlawful for a person to knowingly install, use or cause to be used a listening device to record or listen to a private conversation, whether or not the person making the recording is a party to the conversation. However, a significant exception applies where a "principal party" to the conversation consents to the recording and it is reasonably necessary to protect that party's lawful interests. In other states of Australia, the laws on covert surveillance by means of a listening device differ somewhat, but typically it is unlawful to do so unless at least one party to the conversation consents, if not all parties. 

New South Wales courts are bound by the Evidence Act 1995. Section 138 of the Evidence Act gives a court the discretion to disallow evidence that was improperly obtained or obtained in contravention of an Australian law, which includes covert recordings, unless it is more desirable to do so than not. For matters heard in the Fair Work Commission (such as unfair dismissal claims), since the Commission is not bound by the rules of evidence it possesses a wide discretion on the admissibility of evidence, enabling the Commission to inform itself of evidence in any way it sees fit, which may include admitting evidence of covert recordings.

Whilst the Fair Work Commission has the power to admit a covert recording into evidence, the Commission has taken a dim view of employees who make secret recordings of conversations at work. In a recent unfair dismissal case, the Commission held that the act of secretly recording a conversation with senior management amounted to a breach of trust that struck at the core of the employment relationship, and consequently, ruled out reinstatement as a remedy; see: Thomas v Newland Food Company [2013] FWC 8220 (21 October 2013). In a similar case, the Commission upheld the dismissal of an employee who had covertly recorded a discussion with his employer regarding his duties on his mobile phone; see: Thompson v John Holland Group Pty Ltd [2012] FWA 10362 (18 December 2012).

In recent times, covert recordings have proven to be increasingly popular with employees, particularly in the context of counselling, disciplinary and termination meetings. In an attempt to minimise the risk of recording devices being used covertly in the workplace, we recommend employers adopt the following strategies:

1. Advise the employee that the meeting/discussion in question will or will not be recorded, and seek verbal confirmation from the employee that they will not be using any recording device;
2. Prior to the commencement of the meeting/discussion, request that the employee switch off mobile phones and/or other similar devices;
3. Supply pen and paper to the employee, providing them with an opportunity to take notes;
4. For disciplinary meetings, the company should reasonably permit the employee to have a support person present for the express purpose of taking notes;
5. Conduct a review of your company's workplace policies, including any employees' conduct and disciplinary policy. Consider implementing a policy that specifically deals with the use of recording devices in the workplace.

For further information or advice on covert recordings or advice relating to any other employment law matters, please contact Adrian Barwick at Hugh & Associates.