ENFORCING RESTRAINT OF TRADE

Employers and employees need to carefully consider restraint of trade clauses in before and after entering into employment contracts after a recent decision in the Supreme Court of New South Wales ordered former business owners to pay damages in excess of $500,000 for breaching restraint of trade clauses.

The Plaintiff in the proceedings offered media and advertising services to large-scale clients, in particular in had two major clients. The business was effectively run as a family enterprise until it was acquired by a large corporation – Adorp Australia for $4 million. (‘the Company’).

As part of the transaction, David Andrews and his son Dean  (‘the Employees’) retained employment contracts, which were categorised as ‘Executive Service Agreements’. The Agreements contained inter alia, restraint of trade and non-compete clauses (‘the Employment Agreements’).

Both Employees ended their employment with the Company in July 2010, conveniently at a time when the Company had just lost the two major clients. The dire effect of losing these clients meant that the Company ceased to trade in August 2010.

The Company instituted proceedings seeking relief including but not limited to; account for profits and damages on the basis that the Employees had breached their Employment Agreements and their fiduciary duties owed to the Company.

The Company also sought relief against one the Employee’s Wife and three other companies for accessorial liability.

Whilst some of the Defendants settled with the Company, proceedings against Dean and his Wife, Danielle and Smart Retail Pty Limited (“Smart Retail”) continued.

Ultimately, the Court found that between period of employment and the period of cessation, Dean was in breach of not only his contractual duties to the Company, but to his Statutory and fiduciary duties owed to the Company as an employee under sections 182 and 183 of the Corporations Act 2001 (Cth) as a result of diverting client work to a related entity.

Further, the Court found that post employment; he had breached his non-compete and restraint provisions by undertaking work for one client.

The Court held that where an employee maintains a relationship with a significant client, then it is open for a company to protect its interests. It common practice for businesses to include restraint of trade clauses and non-compete clauses in employment contracts so as to protect their interests, provided that it complies with the Restraints of Trade Act 1976 (NSW).

What you should do?

This decision reiterates the importance of implementing and maintaining policies and procedures to protect your business and its clients. Businesses should constantly review strategies that they have adopted in order to mitigate such risks.

When approaching these issues, businesses should be minded to examining the situation from a commercial and legal perspective.

Fundamentally businesses should be aware that an employee should:

• not to act in his or her own personal interests where there is a real conflict between the pursuit of those interests and performance of duties owed to the employer;
• not to undertake engagements which involve duties which are in conflict with duties owed to the employer; and
• not to misuse the position of employment to pursue a personal gain.

Where a business owner observes fundamental breaches they are entitled to take reasonable steps to protect and enforce its interest before and after cessation of employment. This may include reducing contact with key clients and playing a more active role in the business and ultimately enforcing restraint of trade and non-compete clauses.

Find out how we can assist your business in protecting and or enforcing its rights in situations like this by contacting Steve Brown 1300 882 032 email sbrown@etiennelaw.com.

 

Beware Director Penalty Notices

IN 1993 the Taxation Administration Act 1953 introduced Director Penalty Notices (DPN). DPN’s were introduced in to assist the Commissioner of Taxation to recover certain company tax liabilities.

The idea behind DPN’s is to act as the big stick to hit directors so that directors cause their company to meet certain tax obligations or promptly place the company into liquidation or voluntary administration.

The law requires companies to withhold amounts from payments they make, such as wages to employees, and to pay those withheld amounts to the Commissioner (and to pay estimates of those amounts where applicable).

The regime of DPN’s makes directors of companies who fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner, personally liable for the amount that the company should have paid, through the imposition of a penalty.

Where the company fails to pay such amounts the directors become automatically personally liable to a penalty equal to the amount the company should have paid at the end of the day on which the company is due to meet its obligation.

However, the Commissioner must not commence proceedings to recover a director penalty until 21 days after he gives the director a written penalty notice.

A director can extinguish their personal liability by paying the debt or appointing an administrator or liquidator to the company within that 21 day notice period.

If the director does not take the appropriate steps within the 21 day period, the Commissioner may commence proceedings to recover the penalty. Certain defences are available to a director in such proceedings including:

1. If the director had an illness that prevented him or her from participating in the management of the company, or
2. If the director took all reasonable steps to ensure compliance within the notice period.

The Action Against Fraudulent Phoenix Activity proposal paper, which was released by the government for public consultation on November 14, 2009, set out a number of taxation law and corporations law options addressing fraudulent phoenix activity.

The paper concluded that the director’s ability to put-off payment of the penalty until they receive a notice, and then to avoid liability absolutely by liquidating the company, was a significant limitation on the effectiveness of the Director Penalty Notice Regime.

As a result it was considered that the law required amendment to toughen the regime.

Changes in the DPN Regime

Recently the DPN regime has been strengthened. Directors’ are now required to cause their company to comply with its liability to pay company liabilities, for PAYG payments and to pay superannuation guarantee amounts.

The amendments removed the ability for directors to extinguish their personal liability to pay penalties where the penalty has remained unpaid and unreported for more than 3 months.

Over two years’ of industry debate on the issue, came to a head on 29 June 2012, when the Tax Laws Amendment (2012 Measures no. 2) Act 2012 received Royal Assent. This new legislation amends the Taxation Administration Act 1953 by:

•  Extending the Director Penalty Notice Regime to make directors personally liable for their company’s unpaid superannuation guarantee amounts;
• Ensuring that directors can not discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remain unpaid and unreported for 3 months after the due date; and
•  In some instances, making directors and their associates liable to pay PAYG withholding non-compliance tax (effectively reducing credit entitlements) where the company has failed to pay amounts withheld to the Commissioner.

Accordingly, if a payment that a director should have caused their company to pay has been outstanding for three months when a director is served with a director penalty notice, the director will no longer be able to remit that penalty by placing the company into administration or liquidation.

The director will remain personally liable to pay the amount of the penalty. The amendments also change the way the Commissioner collects tax using DPN’s. For instance, where a company fails to pay PAYG withholding amounts, the Commissioner has discretion to reduce a director’s entitlement to PAYG withholding credits which can effectively increase the amount of tax that a director will have to pay when they complete their personal tax return.

New directors will be liable to a director penalty only where they become a director after the company has failed to meet its obligation by the due date and 30 days after becoming a director, the obligation has not been met. This is an increase in the grace period for new directors from 14 days under the old regime.

The amendments allow the Commissioner to serve DPN’s by leaving a copy or posting it to the address of the director’s registered tax agent.  Consequently, the DPN does not have to come to the attention of the director before it is valid.
It is valid whether the director is aware of it or not. Similar to the service of statutory demands under section 459E of the Corporations Act, 2001.

Directors still have the same defences available and therefore will be able to avoid personal liability if they can prove that due to illness they were not involved in the management of the company or they took all reasonable steps to ensure that the company complied with its obligations in respect of PAYG withholding and superannuation guarantee amounts.

Any one who is a director must now more than ever be vigilant in ensuring that PAYG withholding and superannuation contributions are paid by the company on time.

If directors believe that the amount cannot be paid then in order to avoid any personal liability for those debts the director must place the company into administration or liquidation within three months of the due date.

New directors appointed to companies will need to quickly become familiar with the company’s accounts and take appropriate action within 30 days of their appointment if the company has outstanding PAYG withholding or superannuation contribution amounts.

The rationale of the amendments is to ensure that directors are proactive in ensuring that PAYG and superannuation payments are made rather than reactive to the receipt of a DPN by which time it could and often is too late for the Commissioner to get paid.

The penalty for inaction is for the amount that should have been paid by the company to become a personal debt of each director jointly and severally.

Directors no longer have the luxury of waiting until a director penalty notice is served on them before taking appropriate action to extinguish their personal liability in respect of the penalties.

Don’t become personally liable for your companies debt contact Steve Brown 1300 882 032 email sbrown@etiennelaw.com to get updated on the latest directors duties.

Where There Is A Will There Is A Way

In NSW, since 2005, the disposal by the Supreme Court of disputes over wills has risen by almost 60%.

This increase is due to the Law under the Family Provisions Act, requiring the Court to consider the objective intentions of the deceased as at the date of death and not the actual intentions of the deceased.

The statistics are the tip of the iceberg. The statistics below show the cases disposed of by the court. Most matters, in the vicinity of 95% of all claims, are settled either by the parties or at mediation. These are not reflected in the statistics.

The claims often irretrievably destroy family relations.

The increase can be seen to arise from the growth in blended families, with multiple children and grandchildren from second or even third marriages and defacto partners. For example, in a recent Supreme Court case 46 year old Robert Wilcox made a $1.1 million claim on his grandfather’s $5.5 million rural estate, which had been left to his mother.

Despite not having worked in agriculture since 2001, the court found he was entitled to some money and ordered he be paid $107,000 to clear a tax debt.

In the 2013 Supreme Court case, Jagoe v Maguire, John Jagoe brought a claim against the will of his late wife, who had left her $1.3 million estate to her four children from her first marriage.

The judgement by Justice Philip Hallen refers to family members abusing each other in court, bickering over a $10,000 Datsun and one beneficiary suffering mental illness attributed to “inter-family conflict and the siblings arguing”.

“Emotions during the cases were, understandably raw and painful,” he wrote.

“Hopefully, the termination of the proceedings by judgement will settle the hostility that has rocked the family since the death of the deceased.”

To avoid family disputes, planning your will thoroughly is essential. Please email sbrown@etiennelaw.com or phone 1300 832 032. For further information on Estate Planning and Wills please click here.

What Happens to your Facebook When You Die?

When one dies, property is dealt with under the terms of a Will or in default of a will by Letters of Administration (“Letters”) from the relevant Supreme Court of a State. Once the Court has granted Probate or Letters, the deceased’s Executor can deal with items of property, and in the event that all property is jointly owned (typically by a deceased and their spouse), the Executor will only need a certified Notice of Death to have the property dealt with.

In the context of a death, there remains the question of what happens with a deceased’s Facebook page.  A Facebook page with all its photo’s, communications and memories will remain.

Facebook has its own guidelines on what happens in the event of a person’s death, and these largely reflect the state of the law for personal property.  A Facebook page may be removed and all the data deleted at the request of a deceased’s Executor, and this requires production of the Certificate of Death and/or Grant of Probate. There is however, no Australian legislation that specifically addresses the question of such “digital assets” as Facebook.

Apart from wishing to remove a Facebook page in its entirety, an Executor may also wish to preserve the page but to close off any access to it.  The guidelines also deal with this, providing that where access is being sought to such pages, such access is strictly limited and often refused. Also a deceased’s person’s page may be “memorialised” where it cannot be logged into or changed in any way but where the page will remain and can be viewed.

There remains the question of whether Facebook’s guidelines and practices are sufficient in themselves or whether there is a need for statutory regulation.

In the USA a number of the states have or are considering introducing, legislation that will specifically deal with digital assets. In Virginia for instance an executor may obtain control over all Digital accounts, emails, social media, blogs and online text message services.

As Facebook’s guidelines currently stand there seem s no particular need for legislation in Australia. This does however beg the question of what other or similar digital assets currently exist or may come into existence in the near future.

Given that an Executor is meant to and should be, able to take control over all assets of a deceased, it would be desirable that they be specifically empowered to take over or to remove any such digital assets. This might be comprehensively dealt with by copying the legislation of Virginia or possibly and more easily with a short amendment to the State Succession legislation, that would specifically include all digital assets as property of an estate and therefore within the control of the Executor.

If you have any questions regarding wills, estate planning or probate please email jlucas@etiennelaw.com or phone 1300 882 032 for help.

David and Irena Brooks – Represent Australia in Canada

Congratulations to David and Irena Brooks on winning the Jupiters National Danceport Championship in Standard and New Vogue.

They will represent Australia at the World Dancesport Senior II Standard Championships in Vancouver Canada this November.

We are very proud of all their hard work and celebrate their wonderful success with them.

Why Planning and Consideration are Important When Writing a Will

The Supreme Court of Western Australia recently handed down its decision in the case Ioppolo & Hesford v Conti. The case illustrates the importance for will makers to take proper legal advice when dealing with their estate and assets that they have an interest in but which they do not legally control. An example of such a situation would be attempting to bequeath entitlements in a self-managed superannuation fund (SMSF) pursuant to a will. 

Background

Mrs Conti and her husband established a SMSF in 2002. Mrs Conti and her husband were the only members of the fund and Mrs Conti made a Will on 13 January 2005. Mrs Conti attempted to give her entitlements of her membership of the SMSF to her children. She specifically stated in her Will that she did not want any entitlements to be paid to her husband. By the time of her death on 5 August 2011, Mrs Conti had not made a binding written direction to the trustee of the SMSF, directing where to pay her SMSF entitlements. The sole remaining trustee of the SMSF was her husband. 

Following the death of Mrs Conti, the husband remained the sole trustee of the SMSF. Mr Conti exercised his powers under the terms of the SMSF and a new trustee company was appointed the sole trustee of the SMSF. Mr Conti was the sole shareholder and director of the new trustee company (Augusto Investments Pty Ltd). Augusto Investments Pty Ltd then resolved to pay the whole of Mrs Conti’s death benefit to Mr Conti in accordance with the rules of the SMSF. 

The executors of Mrs Conti’s estate filed proceedings with the Court seeking relief on 4 main points that:

Mr Conti was obliged to appoint one of the executors of Mrs Conti’s estate as a trustee of the SMSF;

Mr Conti – as sole remaining trustee of the SMSF – did not exercise his discretion in a bone fide manner as required by the SMSF deed;

The Executor be appointed as a trustee of the SMSF; and

The Court should review the discretion exercised by Mr Conti in his capacity as sole remaining trustee of the SMSF.

The Court held that the sole surviving trustee of the SMSF was entitled to ignore the direction contained in the Will. The Trustees not being in anyway bound by the direction in a member’s Will.  The Executors claims were dismissed.

Conclusion

The case illustrates the importance for will makers to consider all aspects of their estate planning when preparing their Will. In particular what assets they have the power to deal with in their Will and to consider what legal steps they need to take to deal with other interests such as those in SMSF’s, trusts, assets within a company, or superannuation funds controlled by retail managers. Will makers should consider seeking professional legal advice.

Etienne Lawyers in association with Davis and King

Etienne Lawyers is now associated with Davis and King.

The firm of Davis and King is now back. Ted Davis and Roddon King are now working together with Etienne Lawyers.

‘You can still pick Ted’s brain’

Etienne Lawyers (in association with Davis & King) are delighted to welcome Ted Davis and Rodon King and genuinely want you to ‘pick their brains’.

Ted is bringing his exceptional experience in Negotiation and Litigation to the Etienne Lawyers Office.

His knowledge of mining, media, property development, transport and HR are unsurpassed and you are the winners.

Rodon King, Ted’s original partner brings a wealth of experience in trade practices, airline law, transport and high quality commercial work.

Etienne Lawyers are a dynamic team who are proactive and welcome Ted and Rodon’s expertise and enthusiasm.

Why not renew the acquaintance and contact Ted or Rodon now on 1300 882 032.